The Following Article is from the Winter 2010 Newsletter
Could the controversial appraisal system strong armed nationwide by the New York Attorney General with political aspiration — and now tied to lowball property valuations, busted home sale transactions and higher fees to consumers — be on its way out? It just might be. Under a bipartisan amendment approved Oct. 22 by the House Financial Services Committee, the “Home Valuation Code of Conduct” would be terminated early in the existence of a proposed new Consumer Financial Protection Agency.
This controversial Valuation Code impacting appraisals ordered by banks and mortgage brokers has wrought major distress upon home buyers, sellers and refinancers. The code has created job security for poorly qualified appraisers bidding “low-ball” appraisal fees for the independent third party appraisal management companies established to take away the choice by banks and mortgage brokers who traditionally sought out the reputable local market appraisal firms.
The amendment would require the agency’s director to replace the code with an improved set of rules developed through regular administrative procedures. Though virtually no one disagrees with the goal of appraiser independence, critics say the code went overboard and created its own set of problems. According to home builders, real estate agents and consumers who signed protest petitions, the code has encouraged many lenders to use appraisal management companies, some of them owned by or affiliated with the lenders themselves. Those management companies, in turn, often pay appraisers much less than their standard fees but hit home buyers and refinancers with full charges or higher at closing. The appraisers who are willing to work for rock-bottom fees tend to be less experienced and more likely to accept assignments far from their geographic areas of competence The National Association of Realtors and the National Association of Home Builders have conducted member surveys that found that the appraisal system often produces valuations below the agreed-upon price in sales contracts, causing delays and disputes among sellers and buyers.
Mortgage brokers and local bankers complain that the code has cut them out of their traditional role of choosing qualified local appraisers and has forced some loan applicants to pay for multiple appraisals. When applicants are quoted an unacceptable interest rate or the application is rejected by one lender, other lenders often won’t accept the original appraisal. In other words, appraisals under the code no longer are “portable” as they had been traditionally, when brokers could send consumers’ application files to multiple lenders using a single appraisal. The net effect is that we now have a dysfunctional system that’s holding back the housing recovery. Incompetent, low appraisals not only hurt individualsales, but depress property values in entire neighborhoods unfairly.
The amendment that would terminate the code still has a long way to go before becoming reality. Legislation creating the Consumer Financial Protection Agency itself faces an uphill battle. Though the House Financial Services Committee bill has the strong endorsement of President Obama and could pass the full House as part of a larger regulatory reform package, its future is uncertain in the Senate, where big banks and mortgage companies are massing forces against it. What happens if the consumer agency bill falters? Housing groups will still lobby for the 18-month moratorium. Congress has now sent a clear message: “Your appraisal code is not acceptable.”
Joseph Levy is the Owner of Affiliated Capital Resources, a mortgage banking firm in Santa Monica, CA. Mr. Levy received his MBA Degree in Real Estate Investment Finance from University of Connecticut.