Year-after-year the largest lenders in the country push for regulations to stack the deck against hometown mortgage companies. Usually the tactics take the form of sweeping Real Estate Settlement and Procedures Act (RESPA) reforms that are disguised as consumer protection rules but apply only to mortgage brokers while loan originators for lenders remain unchecked and legally unlicensed. The latest cash cow for the Big Banks at the expense of consumers, mortgage brokers and residential property appraisers is the new Home Valuation Code of Conduct (HVCC) policy. How could something that sounds so righteous be so unjust? While it is important to ensure that home appraisals are high quality and accurate, the new policy has prompted the opposite result.
As of May 1, 2009, Fannie Mae and Freddie Mac are no longer purchasing loans from lenders using "appraisal reports completed by an appraiser selected, retained, or compensated in any manner by any third party." Lenders may only accept appraisal reports from a pre-approved list of appraisers or unregulated Appraisal Management Companies (AMC's). In one fell swoop this regulation has put countless independent real estate appraisers out of business. Instead of appraisals being supplied by professionally licensed appraisers operating in local markets values are now determined by unlicensed and inexperienced paper pushers on behalf of AMC's. The AMC's keep up to 40% of the appraisal fee, and guess who gets to have ownership in the Appraisal Management Companies? The Big Banks themselves!
On May 1st CNBC reported "that it puts good solid appraisers out of business, complicates the loan process for mortgage brokers, and inevitably hurts consumers." The Wall Street Journal on June 9th proclaimed that "Appraisals are becoming one of the biggest obstacles for Americans trying to sell their homes, refinance their mortgages or tap into home-equity credit lines."
Here are some typical scenarios being reported that have resulted in higher costs, less choices, and difficulty in borrowing:
- If a borrower applies for a mortgage and pays for an appraisal from an AMC they will not only pay considerably more for the appraisal but it is only valid if you get your loan from that lender. If the borrower finds better terms with another lender they are required to purchase another appraisal. Prior to this regulation the mortgage broker would order the appraisal from a local professional and all lenders would utilize that appraisal and retain the right to review the findings.
- Because the property inspectors for the AMC's are receiving only a percentage of the appraisal fee they are reluctant to spend extra time or effort resolving any underwriting inquiries regarding the property value. Compounding the problem is that the substandard appraisals being conducted by the AMC's generate excessive underwriting conditions that are atypical with accurate value determinations conducted by licensed local appraisers. This has unreasonably drawn out the loan process and in many cases borrowers have been denied financing due to inaccurate appraisals.
- Prior to the implementation of the HVCC mortgage brokers would typically speak to an appraiser to prior to a borrower paying for an appraisal to ascertain whether the value might be too low to support a mortgage. Now, it's cash up front then roll the dice.
Ironically, the HVCC arose out of a lawsuit involving one of the nation's largest mortgage lenders accused of conspiring to inflate real estate appraisals. Over-regulation has once again taken the place of enforcement, leaving consumers and small businesses to pick up the tab. Somehow Big Banks have convinced Government that the fox is the best minder of the chicken coop.