The appraisal process needs re-appraising

Back before the financial crisis of 2008, banks and brokers were able to use whichever appraisers they wanted. They decided which ones to use, and the compensation for those services was decided between the two parties.

It wasn’t until late 2008 that then New York Attorney General and now Governor Andrew Cuomo pressed Fannie Mae and Freddie Mac to buy only mortgages that had originated from a third-party AMC, or appraisal management company. They called this change HVCC, or the Home Valuation Code of Conduct. Why was this put in place? Well, Cuomo’s office found out that Washington Mutual, which was absorbed by Chase in 2008, was telling the appraisal companies it worked with what the appraised values were going to be when they were ordering the appraisals. If the appraisal companies resisted the input, they were threatened with losing the account, so many complied. This drove home values higher and higher.

Cuomo pushed Fannie and Freddie to come up with this third-party AMC to receive orders from brokers and bankers, and then they would pick an appraiser from a rotating list. Bankers and brokers could not speak to the appraiser for fear of influencing the value. If an originator was caught speaking to an appraiser, disciplinary action would be taken against the originator.

The average price of an appraisal was approximately $350-$400 prior to the crisis in 2008, and the average price of an appraisal today remains $350-$400. However, the difference is that before the crackdown an appraiser would keep 80 to 100 percent of that income. Under these new regulations, they now receive roughly half of that amount and the AMC receives the other half.

In the past, the appraisers would send an invoice after the appraisal was completed. Now AMCs are paid upfront via credit card before the appraisal is even scheduled.

Cuomo’s idea was good because he wanted to stop these abuses in appraisals, but what was supposed to be something limited to New York or a specific company now became a regulation that would affect the way appraisals were ordered and performed throughout the entire country.

This was the perfect storm, and it added to the decline in the housing market. Appraisers are now being paid 40 to 60 percent less than before, and they do not have any incentive to come in at the highest and best value. Why is this? If an appraiser on a rotation list was found to be too aggressive, he or she could be removed after several reviews. Appraisers came in with conservative values because they were concerned with losing their livelihoods. Even if there was not a concern about being removed, if an appraisal came in too aggressive for an AMC or underwriter, the appraiser was questioned and had to go back and spend more time explaining himself, all for far less compensation than before. So a lot of them made sure the values they arrived at would not be questioned.

This process was supposed to help the consumer, but it has hurt them. How did this all happen? Well, in the past, myself (and many others in the mortgage business) would talk to appraisers beforehand to see if the needed value for a transaction was attainable. No appraiser could tell you for sure until the appraisal was completed, but they could let you know ahead of time if you were in the ballpark. If the value was something the appraiser thought was unattainable, we would not even order the appraisal–saving the customer money, and moving on to the next deal.

In the current market environment, we have 30 percent of all loans taken declined because of low values on appraisal. This wastes the customer’s money because they have to pay in full for the appraisal before it is even completed. The HVCC regulation has expired, but lenders are keeping the AMCs going because they now are making money on appraisals, whether or not the deal actually closes.

This restriction added to declining values in an already tough market and should be changed. What was going on prior to 2008 with Washington Mutual and other companies was horrible, but honest originators like me and many of my colleagues should no longer have to pay the price for someone else’s bad practices.

Please send any questions, comments or complaints to ron@ronmortgage.com. You also can call me at 773-557-1000, ext. 15.