Home > Blogs > Lee Walsh > Lee Walsh's Mortgage Blog

The Home Valuation Code of Conduct – will not help!

By Lee Walsh

Mortgage and Lending with SecurityNational Mortgage

March 04, 2008 10:55 PM

It has missed the mark.

missedT

The N.Y. Attorney General made Fannie and Freddie roll over and agree to sweeping changes in the way mortgage appraisals are ordered. The agreement completely isolates the appraiser form the real estate agent and the mortgage broker. By agreeing with N.Y. both Fannie and Freddie avoid threatened investigation and legal action.

How much business will this affect? According to the National Assoc. of Mortgage Brokers (NAMB) Mortgage brokers account for more than 50% of all originations. So the short answer is this new agreement will affect the industry in a tremendous way.

How will this affect our day to day business? The jury is still out on this but it already raises a few important questions. The agencies and the lenders will now be forced to create and manage some type of approved list. There will be big questions about who will collect the appraisal fees. Will the practice of the payment made at “the door” directly to the appraiser be eliminated by this new agreement? I think it will. It looks like the ability for the borrower to pay the appraiser directly is now gone. Will the wholesale lenders try to hold the broker accountable for collection problems created by bad checks form borrowers? The current agreements in place between a wholesale lender and a broker would put this liability on the broker.

Currently a broker has the ability to compare different wholesale lenders to get the best program for the borrower. The appraisal will now be ordered by the wholesale lender. If the broker will be prohibited from the appraisal ordering process this will eliminate the portability of an appraisal making it very difficult and costly to change lenders. Wholesale lenders will love this.

Is the unethical practice of attempting to influence a valuation by an appraiser limited to mortgage brokers? The simple answer is no. Loan officers who work for retail lenders can commit the same dumb acts that brokers do. How you are licensed has nothing to do with it.

Is it improper to discuss with an appraiser the estimated value or the value you need to make the loan work? The new agreement also addresses this issue. I think it depends on the reason a loan officer would discuss the value. Over the years I have had many conversations with appraisers about the value of the subject property. The reason was not to attempt to sway the determination of value it was to avoid a costly appraisal if there was not a chance of getting the value need to make the loan. These discussions help me understand my market better. This was a courtesy that the appraiser extended.

Will this hurt the mortgage broker community? I think it will harm borrowers more that it will broker. The cost of an appraisal will increase because of the additional burden placed on everyone involved, and it will greatly restrict a broker’s ability to shop a loan package for the best terms for the borrower. It also creates another bureaucracy that will oversee the new appraisal process. Putting up a wall between the mortgage broker, the real estate agent, and the appraiser is not the answer.

Comments(17)

Comment

Show All Comments

Sort:

Steven Odierno

Mahwah, NJ

NJ Mortgage & Marketing Professional

Hi Lee - The new "code" may have missed the mark, but you threw a bullseye. This is nothing more than politics at it worst - big business cuts a deal with the government to avoid further investigation, and the small businesses (like ours) are hung out to dry. Who exactly is this code made to help? Along with your very well organized list of concerns, I would like to add expediency? What the method of payment and lack of broker advocacy for speed on behalf of the client do to the turnaround time of an appraisal?

Mar 05, 2008 03:53 AM

Todd Clark - Retired

eXp Realty LLC - Tigard, OR

Principle Broker Oregon

I also see this delaying the process for you getting loans done! It sometimes takes weeks as it is to get an appraisal done, imagine having to wait for someone that you have no contract with to order it!

Mar 15, 2008 05:30 PM

Anonymous

Chris Matthews

HVCC - The NY Attorney General in his own words "BELIEVES" a private investigation of Fannie Mae has discovered wide spread inflated appraisal values. The source of the inflated values are corrupt appraisers and mortgage brokers. The last time I checked mortgage brokers don't apply their signature as the primary or review appraiser. If the investigation found fraudulent appraisals why aren't the offenders being prosecuted? If the investigation found mortgage broker bribery why aren't the offenders being prosecuted? Isn't the NY Attorney General responsible for prosecuting criminals. What every happened to the phrase "innocent until proven guilty". The new code will allow the so-called corrupt appraiser and so-called corrupt mortgage broker to continue doing "indirect" business. Sounds like the NY Attorney General is more interested in making a name for himself than carrying out the duties of his office "PROSECUTION". With every new crisis in America elected and appointed officials broad stoke the public with new feel good codes / laws. I for one say enforce existing law. If an industry has wide spread corruption what better way to rid the bad element than prosecution. The back room closed door process in which this agreement has been struck is further suspicious. Apply the smell test. STINKS! Contact congress and oversight committees. I trust if nothing else the arrogance of congress will play a role in shutting down this one man show. The consequences will have far reaching negative consumer impact.

Mar 31, 2008 10:01 AM

Anonymous

Laurie Egan, Certified Residential Appraiser

Thanks for your blog, Lee. I've been studying this issue intently since March 3rd and I'm in complete agreement with you. The idea of protecting appraiser independence is fantastic, but the agreement between the NY AG and the GSEs is not the answer. I hope you and your readers will all take the time to send your comments to Fannie Mae and Freddie Mac before the April 30th deadline.

Apr 01, 2008 09:54 AM

Richard Sweum

1st Security Bank - Everett, WA

When you take the application of this "code of conduct" to its natural conclusion, the borrower is hurt. The Wholesale lender owns the appraisal. Will they make the broker, borrower pay for this appraisal up front? If not, they will surely build in the expected losses into the rates/prices for those rates that the brokers have access to.

The consumers are not going to benefit from this. I'm am not a broker, this is a disaster for our industry.

Apr 01, 2008 10:27 AM

Anonymous

Tim Goessman

As an old time Florida Appraiser I can tell you this; HVCC is a proposal that is broad sweeping and has some good ideas in theory. One of the authors is actually a Florida Appraiser. But what has happened here in the current tidal wave of proposed legislation certain "special interest" groups have became involved. Big banking is very interested in that if all appraisers have to align themselves with managament companies, regardless if the banks own a 20% stake or not, they now can control hundreds of appraisers at a time by dictating the conditions of the appraisal assignment (limiting date of sale of comparables, dictating declining markets, limiting comparable search critieria) and in effect forcing the appraiser to determine "liquidation value" rather than the FNMA/FHLMC definition of "market value". An added bonus is that all appraisal reports sent through a managment company will be "stripped" of their data and fed into a large data base that lenders can use immediately as a review tool but more importantly as an origination valuation of assests tool in the future. Currently this practice of stripping, or lifting, the appraisers data from submitted reports is common place and the FNC is selling this data they have collected over the years back to banks and even some appraisers ! Remember the FNC has a large member controlling their activities , The Appraisal Institute. If anyone remembers it was these folks (SRA and MAI's) that were charged with the overvaluing of assests that led to the S & L bailout in the 80's and this is what led to State Certification back then. Institute appraisers lost a lot of business over the last 18 years but now have figured out a way to create some new income streams. So they are not opposed to aligning themselves with big banking and the current slanted legislation. Managment companines also put banks (and other lending institutions) in compliance with FIRREA Title XI that they largley ignored for years and the cost of maintaining this regulation is passed on to the managment companies who in turn pass it on to the individual appraisers. Most managment companies charge a fee to the appraiser for each assignment accepted. So who gets whacked on this deal right off the bat...the independent appraisers. Who benefits is banks and lending institutions who will in effect dictate the valuation process and data collectors and data sellers. Where is the appraiser independence in that ? Before appraisers choose who they wanted to accept business from based on there conmfort level with that broker. Now that is not an option.

Another victim in this is John Q Public and the Realtors. We have not heard much from the Realtors on this proposal but I think they will be well aware when their listing goes under contract and its time for the appraisal to be done. The banks orders the appraisal assignment from the "blind rotating list of BANK APPROVED apraisers and some appraiser from two or three counties away comes to do there appraisal. Unfamiliar with the market and no geographic competence. Realtors will be upset. The appraisal comes back at the lenders preffered guidelines and an appraised value somewhere near that lquidation number is delivered. Deal blows up, refinance goes from conforming to non conforming, maybe to a new category of "elevated risk". But don't be unhappy the lender will still make the loan just a more favorable rate and term (considering the increased risk). Yeah...borrower from the feds at 2%, lend to the public at 8% or 9% and of course the mortgage broker will be limited in their payout. YES this works great for the banks.

As usual, the public, the appraisers, the realtors, the mortgage brokers all lose. Most likely careers. For the public, most won't qualify with the decresed home equity position or maybe can't afford the rate. More foreclosures created. This is why the Alabama Real Estate Appraisal Board has already said "absolutely not" to these regulatory changes. I home the other boards follow suit, NAMB, NAR and maybe the consumer Protection Agency !

MAKE YOU OPIONS HEARD !!

Apr 10, 2008 06:22 AM

Benjamin Smith

Apex Appraisals & Consulting - Powder Springs, GA

Atlanta Area Appraiser

I have been on the fence with this issue. I believe the agreement has very good intentions but it is far from a solution. While I agree with some parts of your post and the comments from others, I also respectfully disagree with some as well.

"Is it improper to discuss with an appraiser the estimated value or the value you need to make the loan work?" This is a very grey area because it is very close to violation of appraiser ethics. The appraiser is not allowed to accept any assignment which payment is contingent upon arriving at a predetermined value, direction of value, or any conclusions which favor any party to the transaction. So by communicating an estimated value or needed value, it becomes implied that it is a target number for the appraiser to obtain which becomes a violation of ethics, and in some states including GA, the law. What you have stated as a courtesy extended by the appraiser, was originally viewed as a business decision, but it was soon expected and abused. This is what the agreement was trying to eliminate.

The good news is that, if approved, the IVPI proposal will eliminate the portablity issue. It proposes that an ordering system be put into place similar to the VA's TAS system which will select appraisers based on quality ratings and geographic competence. And it will include new guidelines that allow appraisers to identify the client as "any Fannie/Freddie approved lender" similar to the VA. According to the agreement, the brokers are not prohibited from ordering the appraisal but from selecting the appraiser. So a broker could order the appraisal through this system and still be able to shop different lenders.

Apr 10, 2008 11:52 AM

Lee Walsh

SecurityNational Mortgage - Lake Mary, FL

Executive Talent Scout for Mortgage Professionals

Benjamin,

Thanks for your comments.. I understand your point about the concern for attempts to control the outcome of an appraisal. It has been abused by all sides. On paper your right. But as an originator the ability to communicate with the appraiser has real value. An appraisal is more of an art than a science. If it was a science the AVM would put you out of work. Being assigned an appraiser based on a rotation system and not the experience and reputation of the appraiser scares the $#%^ out of me. It one of the main reason I do not like to work on VA loans.

Also there are times when an originator needs the appraisal before deciding on an investor.

To me the cure does not fit the disease. Following this logic borrowers should be assigned a loan officer based on a lottery because in the past some loan officers abused the system.

This entire process is being forced upon us because fannie and freddie want to avoid further digging into the transgression by the state of New York.

The better cure for the problem would be to enforce the existing laws and put the loan officers, borrowers, agents, and appraisers who are guilty in jail and take away the "professionals" ability to continue in our respective industries. That is not going to happen. Because of this settlement agreement many guilty people will continue in there careers looking for the next opportunity to bend the rules.

I'm beginning to feel like we are in an Ayn Rand novel.

Please don't allow my frustration about this issue to overshadow my thanks for your post.

Apr 11, 2008 12:15 PM

Anonymous

Tim Goessman

Yes some parts of the code are well intended and much needed. I can tell you that an appraiser CAN BY LAW AND USPAP discuss with a loan officer or mortgage broker a particular market description, trend, grouping of comparables, conformity to the market, almost anything prior to an appraisal assignment except the appraiser cannot ACCEPT AN ASSIGNMENT BASED ON A PREARANGED, AGREEMENT, OR PREDETERMINED VALUE OR RANGE OF VALUES IN FAVOR OF THE CLIENT. In most cases this is a number that is higher than typical market evidence however, sometimes it is LOWER. Take for instance some appraisals done for legal issues (divorce, seperation of assests) or tax implications. It is helpfull to have some discussion with the loan orignators prior to the assignment to inform them of any market forces that could affect value, appraisal fees, complexity of report and turnaround times expected as well as the appraisers geographic knowledge of a particular market. This protects the public when all discussions are ethical and open. Remember USPAP was created to promote and protect the trust of the public. We already have the FIRREA Title XI laws that were enacted after the last crisis. We need to enforce these rather than create a whole new regualtory nightmare.

As far as the "Art vs Science" old myth. Take a look at your state appraisers board discipline numbers. Florida has revoked more than 600 licenses and sanctioned hundreds more. They are averaging 30 discipline cases per meeting. I think if you talk to some appraisers who are currently doing some Federal or State prison time (yes there are many across the country) they will tell you it wasn't because of "bad art". As a reviewer and experienced expert witness who has testified many times in open court, if you are an appraiser heading before a judge or the real estate appraisal board you better leave your "artwork' at home.

AVM valuation works about as well as automated desktop underwriting. It takes the common sense out of a lending descision. They have been proven over and over again they cannot accurately value real estate. They have no eyes or ears and are (as were meant to be) a statistical tool to be used in conjuction with real live underwriting. Unfortunately, the need for speed and institutional greed factors justified use of this tool to replace highly paid underwritiers (seen as nothing more than overhead) as well as the appraiser (seen as just another hoop to jump through). Back in the heyday 2055 "drive by", "exterior only no value needed" reports and appraisal waivers were plentifull. Loans closed in 15 days, banks made fees, commision sales people saw their incomes rise. Financial stocks soared. Looking back at the "bubble" now lets ask this question; How is the typical, normal homeowner doing today ? Was their trust in the system truly protected ?

Apr 12, 2008 04:35 AM

Lee Walsh

SecurityNational Mortgage - Lake Mary, FL

Executive Talent Scout for Mortgage Professionals

Tim, I agree that the existing laws IF ENFORCED could deal with the problem and more laws only make the politician feel better.

I don't think you understand my Art comment... if only data were involved the AVM would work - it takes knowledge and experience to decide which comps to use or not use and how to adjust for the differences. That to me is an art - not a science. If you were on the other end of the system you would understand this better.

Anyone who has had their vehicle worked on by a bad mechanic with years of experience would get my meaning.

Thanks for the post... why haven't you joined AR.. you posted 2 times here as a non-member.

Apr 16, 2008 01:23 AM

Anonymous

Sorry Lee,

My fingers are "posted" to the bone and I am simply out of opinions. It seems everyone has a different take on this issue and I must admit almost all are correct. At this point it all seems like speculation. I spend to much time on the computer as is.

Although I was offered to join an Appraisal Managment Company this week. They are, I guess, in full compliance and represent some very large lending institutions. Unfortunately, I cannot work $10 and hour which is about what these folks are mandatting. $200 for a full report, or a quadraplex for $350......Oh and maximum time allowed to complete 5 days including day of order. The worst part is the verbage the appraiser must sign that states "no discussion of the appraisal fee or communication concerning fees to made with the borrower or lender". I later found out this is common practice. Charge the borrower or lender $500, pay the appraiser $200 and the rest is profit margin. Protection of the public trust comes at a price.

Apr 22, 2008 12:40 PM

#11

Lee Walsh

SecurityNational Mortgage - Lake Mary, FL

Executive Talent Scout for Mortgage Professionals

Thanks for the post.. (insert name).. Thanks for pointing out that gem we all will be saddled with. This practice has been going on for while. The appraisal review companies have always marked up the cost to the maximum the market will bear while paying the appraiser below market for the work. Unfortunately this will now be the rule if this is not stopped.

Apr 22, 2008 02:57 PM

Anonymous

Jonathan Simpson

I suggest everyone read the following on Appraisalscoop... Weigh in on these changes. They seem to address these issues.

a la mode's Chief Counsel Translates The HVCC Issues - Proposes Changes!

Apr 25, 2008 04:12 AM

#13

Lee Walsh

SecurityNational Mortgage - Lake Mary, FL

Executive Talent Scout for Mortgage Professionals

I have to admit I not sure if the legal counsel or the CEO for a software company really understands the pain the hvcc issue will cause. Although they have missed the mark on some things they do have some good suggestions.

Again no one is really focused on the real problem. How was the new set of rules created?

It was an a agreement between the state of N.Y. and the agencies that was forced on fannie and freddie in order to stop state criminal attorneys from investigating the agencies.

So it was basically proposed and drafted by criminal attorneys that know zero about the industries they are harming.

The fight against this should be addressed by the mortgage, real estate and appraisal trade groups not a software company.

If you are a mortgage broker please see this message from the NAMB

--------

Apr 25, 2008 07:38 AM

Anonymous

Heidi

Great posts! I thought my business partner and I were the only ones thinking these things!

Does anyone know how we are to be placed on this revolving "list", who will be the one to approve appraisers to be placed on said list and how frequently our names are to "come up". We've worked for years to establish exceptional service and relationships with our clients - they trust us - we trust them (not to ask us to push value, etc.). I hate to see this occupation that I like(d) so very much be so torn apart. Nor do I care for my efforts of establishing a clientele to be thrawrted.

Aug 23, 2008 08:03 AM

#15

Anonymous

Dana Bain (President - Premiere Mortgage Services Inc.)

Law Firm Investigates Claims that Bank of America Profits from Undisclosed Home-Appraisal Mark-ups

January 22, 2009

http://www.hbsslaw.com/BOA_release;jsessionid=avvHlxBY8fK8

https://www.namb.org/Forms.asp?MODE=NEW&Forms_FormTypeID=-24

Jan 28, 2009 04:15 PM

#16

Melissa Cochran

Hunt-Miller Insurance Agency - Macon, GA

Does everyone realize that it was a BANK not a BROKER that spurred the home valuation code of conduct? Also, the RELS system instigated by a leading lender in the mortgage industry has (or maybe had now) a class action lawsuit going on and have now withdrawn their supposedly head start compliance system to the HVCOC, allowing broker ordered appraisals --- this is as of today 3/3/09? Another lender specializing in obtaining 100% of their business from their broker partnerships is holding on until the end to try to comply with this wordy, costly, and to them unnecessary act of interference...because in their opinion and mine...the underwriter that is not part of the broker company and most often isn't part of the lender's company (contract underwriter) strictly underwrites the appraisal and stips it according to the posted guidelines. The company that orders the appraisals is the company that the appraisers send the appraisal invoice to... the orderer is the owner of the appraisal, the borrower isn't justified in receiving an appraisal prior to closing if the appraisal is not paid for before closing... just how is this going to work? Why would our valued appraisers sign up to be on a list that will take half or more of their appraisal fee? How is this not a start of a monopoly? Have you seen the appraiser rotation list that lenders are putting into place? I've seen one, and the appraisers that have signed up are not the cream of the crop--- and do you really expect to have the grade A appraisers that can get work through their own merrit and have their own clients to sign up on a rotation? This is also stating that if the appraisal isn't up to par, you cannot order another one, from a different appraiser. Doesn't the bank/lender underwriters have final say into scrutinizing/underwriting appraisals? If you are a broker, your little local appraiser(s) that knows the area are generally the best to perform the local appraisals, they also have done most of the work in the area and have the comps on hand. Why couldn't we comply by just changing our appraisal order forms on our mortgage software (mine is Calyx) that complies with the HVCOC act? BETTER YET... give the national registry of appraisers access to a hotline to phone or email complaints regarding incorrigible practices and punish just those that are violating the act. Remove the bad apples so that the good apples don't rot beside them.

Mar 03, 2009 08:09 AM