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.

I’m glad the newspaper industry reported the difficulties the new Home Valuation Code of Conduct has created for home buyers, home owners, real estate professionals and mortgage professionals. 

http://bit.ly/3oE9JL 

The article reconfirms all the speculation I had about the new Appraisal Management Companies and HVCC.  The law was the brain child of NY Attorney General Andrew Cuomo.  It was drafted to make sure lenders didn’t have any undo influence on appraisers, forcing them to inflate home values.  It has absolutely worked.  We currently have absolutely zero contact with the appraisers who do the work, instead we have to contact an appraisal management company who then outsources the work to a “local” appraiser.

The law has had a huge impact on the real estate industry, from purchases to refinances.  Since all real estate is local it is necessary to have an appraiser who is local and has a deep knowledge of the area.  However, because appraisers have had their fees cut significantly, they have to seek out work far and wide and do it quickly to make the money they used to make.  You would think that if the appraisers have had their fees cut that fees for appraisals would be reduced.  Unfortunately, no.  The costs for appraisals has risen at least $50 per appraisal and sometimes more since HVCC was implemented.  The management company pockets a portion of the cost and gives the appraiser a fixed price, which is sometimes negotiated but most of the time a take it or leave price.

The problem lies in the fact that appraisers must now do twice the work in order to make a similar amount of money and many times travel outside of their market.  They are forced to get the appraisals back in quickly, so the quality of research suffers.  We have an investor that used to only accept appraisals from approved appraisers.  The reasoning behind this was that if they found they received shoddy work frequently or the appraiser didn’t have enough experience they couldn’t fully trust the appraisals received, so they established clear cut criteria for approval.  With the AMCs and HVCC, they have to accept the fact that appraisals may come from their list of denied appraisers but they have to accept them anyway.

While this law was well-intentioned, the implementation was rushed and ineffective.  When we first went to this process, rate locks were lost, appraisals came in 40k under value and many times the AMCs were so inundated with calls and complaints that you couldn’t get through to them.  Unfortunately for a lot of borrowers, they lost out on the chance to refinance because while they knew the value of their house decreased, the appraisal management company put the nail in the coffin by sending back an appraisal that was well below any normal depreciation for a market.  Since appraisers needed to go to other markets that they may not have been the most familiar with, they used short sales and foreclosures as comparables that significantly reduced the value of our clients home and never made any adjustments to the distress of those situations.

So far HVCC has cost borrowers more, killed deals for realtors, made it more difficult to take advantage of historically low rates, and reduced the quality of work.  If you are in the real estate industry click on the link at the right side of the page for the HVCC Petition and contact your United States House of Representatives member to implore them to sponsor HR 3044.  If you are homeowner affected by the new appraisal guidelines, sign the petition and contact your representative.

The last 2 years have seen monumental shifts in the mortgage industry, with loan officers moving their borrowers from sub-prime mortgages to FHA mortgages, elimination of stated income loans and general tightening of guidelines.  That is just the tip of the iceberg.  Within the past four months, massive changes to the mortgage industry have not only slowed the lending process, but may have also eroded over $1.7 Trillion in homeowners’ equity (From ThinkBigWorkSmall.com daily email). 

The first change has to do with the appraisals completed on homes.  The new guidance by the Federal Housing Finance Administration, called the Home Valuation Code of Conduct, removes the loan originator, Realtor, and even the borrower from the appraisal process to prevent “undue influence” on the appraiser if the loan is to be sold to Fannie Mae or Freddie Mac.  These mortgages, known as conventional loans, were previously the majority of all mortgages closed.  The loan originator or loan processor used to order the appraisal and collect the appraisal fee once the borrower had committed to the transaction. 

Now, loan officers may not engage highly qualified appraisers despite superior turnaround time (usually 2 or 3 days), higher quality of report and more specialized local knowledge.  The new regulation requires loan officers to submit their conventional mortgage (not FHA mortgage) appraisal request to the lender’s queue, and have the borrower put down a credit card deposit towards an undetermined appraisal fee.  The queue will determine which unregulated, unlicensed and uncertified Appraisal Management Company gets the order.  That appraisal management company will then send the orders to appraisers on their panels based on an undisclosed algorithm.  This may be something as simple as the lowest appraisal fee (the management company gets the keep the difference); acceptable  turn times… some up to two weeks; or whomever responds most quickly to the Appraisal Management Company email at whatever fee the management company decides to pay.  The appraisal is the cornerstone of any mortgage transaction.  A document of this importance should not be prepared by the lowest bidder.

My customers have had appraisers drive over 100 miles to complete an inspection, when there are many qualified appraisers who are just a few miles away.  How can someone from over 100 miles away have knowledge of the local market?  Can they really be an expert in the local market?  The appraiser is not allowed to speak to the loan officer, Realtors involved in the transaction, or the homeowners to get any pertinent information that can assist them in determining value.  The appraiser may not know that the house across the street sold at a lower than normal value because the couple living there split up and just wanted to get their money out.  That useful piece of information does not appear in the listing service, but would be material to the determination of whether that sale was representative of the current market conditions.

The second major change is a Regulation known as the Mortgage Disclosure Improvement Act (MDIA) and Housing & Economic Recovery Act (HERA).  This act has added additional time to the mortgage origination process.  The loan officer is not permitted to collect any fees (other than the credit report fee) from the borrower at the time of application.  In fact, the lender has to wait for at least 3 business days beyond the borrower’s receipt of the Good Faith Estimate and Truth-in-Lending form to collect an appraisal fee.  So, for example, if I were to take your application and give you disclosures today, Thursday, I could not collect your appraisal fee until the following Tuesday.  Had we locked an interest rate for 30 days, we would have just burned through 5 days of that lock just waiting to collect your appraisal fee and start the process.  If the APR (annual percentage rate) changes more than 0.125%, the lender will need to prepare another Truth-in-Lending disclosure and provide it to the borrower no later than 3 business days prior to closing.  If you were planning on closing your mortgage on the 30th, but can’t do so until the 2nd of the month, the change in prepaid interest may be just large enough to trigger the new disclosure and waiting period.  If you change loan programs, lock your rate, or decide to put more or less down on your home, the new disclosure period may start again as well. 

So next time you speak to a loan officer, and they are telling you that it may take 45 days or more to close your mortgage, you know why.  Please be patient and understanding.