Changes to the appraisal process and how it impacts the borrower

I almost didn’t post this given it is a bit aged however, if you haven’t done a loan recently, or ever, it’s still relevant so I decided to post it after all, so here goes.

I wanted to make everyone aware of some very important and fairly recent changes that are taking place in the lending industry, about appraisals, that affects all of us in different ways and also the impact I have personally seen due to these changes.

Starting back on May 1 of 2009, most every lender in the country started using an outside appraisal ordering company called an Appraisal Management Company or AMC, for all Fannie Mae and Freddie Mac loans. The AMC’s role is to remove any ‘undue’ influence on the value of a property, that a lender, Realtor, or borrower may have on the value a home being  as collateral in financing a home purchase or refinance.

This new law, is a result of a lawsuit brought against Washington Mutual by the state Attorney General of New York. Washington Mutual was alleged to have systematically pressured appraisers to elevate home values at the risk of these same appraisers losing valuable future business from Washington Mutual if they didn’t comply. The practice was likely more widespread than in just New York state but probably not as widespread as it has been made out to be in the media reports. So Congress decide to act and they passed HVCC or Home Valuation Code of Conduct Act to address this issue for the future.

What this means is borrowers/homebuyers will now have to pay “up front” for appraisals. Lenders of Fannie Mae and Freddie Mac loans now have to comply and be in compliance on all appraisal which now requires borrowers to authorize a payment method before ordering the appraisal. The authorization is then submitted to the “outside” service or AMC, who then randomly selects an approved appraiser from within their network of appraisers (with AMC’s, like the one I use, it’s a bit less random because the appraiser pool that an appraiser is selected from, is made up of appraisers that have been referred into the pool by either myself or one my colleagues, so we have an expectation that our pool has competent appraisers in it, and I am sure some others AMC’s feel the same as we do in this regard).

Lenders are not allowed to have any direct interaction with the appraiser, and borrowers and Realtors are only allowed to provide access to the property.  When I order an appraisal and interact with the AMC, I use a web-based system that allows us to share info, order the appraisal , and then download the appraisal, once it is completed.  It actually works pretty well.

From what I have experienced to date, the result of these changes have been higher appraisal costs, longer time frames to get the appraisal back to the lender, and lower home values (in some cases), which can sometimes lead to problems in financing for the customer.

These changes are very new to the industry, about 8 months now, and as a whole, will still take some time for everyone to get used to, but while not everyone is happy with the changes, the intent of the new law is good for the industry, it’s just that the borrower is being burdened with it’s cost.

As of this writing, there is still talk of HVCC being repealed. When and if  it does. I will have an update immediately.