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In Appraisal
Shift, Lenders Gain Power and Critics
By DAVID STREITFELD
August 19, 2009
Mike Kennedy, a real estate appraiser in Monroe, N.Y., was
examining a suburban house a few years ago when he discovered five feet
of water in the basement. The mortgage broker arranging the owner’s
refinancing asked him to pretend it was not there.
Brokers, real estate agents and banks asked appraisers to do a lot of
pretending during the housing boom, pumping up values while ignoring
defects. While Mr. Kennedy says he never complied, many appraisers did,
some of them thinking they had no choice if they wanted work. A
profession that should have been a brake on the spiral in home prices
instead became a big contributor.
On May 1, a sweeping change took effect that was meant to reduce the
conflicts of interest in home appraisals while safeguarding the
independence of the people who do them.
Brokers and real estate agents can no longer order appraisals. Lenders
now control the entire process.
The Home Valuation Code of Conduct is setting off a bitter battle.
Mortgage brokers, lenders, real estate agents, regulators and
appraisers are all arguing over whether an effort to fix one problem
has created many new ones.
The agents, maintaining that the changes are effectively blocking home
sales by encouraging the use of inexperienced appraisers, are asking
Washington to suspend the code until 2011. For their part, appraisers
acknowledge that the change may have been well intentioned but contend
that it has no teeth and is undermining the economics of their
profession.
“We’ve been begging for years for enforcement of existing state and
federal laws regulating appraising,” said Mr. Kennedy, a leader in the
appraisal community. “We thought we were finally going to get that. But
the code is doing nothing except putting ethical appraisers out of
business.”
Financial change is one of the most contentious issues in Washington,
and efforts to fix even widely acknowledged problems seem stalled. The
attempt to change the appraisal system is an example of how difficult
it can be to adopt changes that are good in theory and also work in
practice — while simultaneously winning support from warring interest
groups.
“The real estate industry is incredibly complex,” said Josh Denney, a
lobbyist with the Mortgage Bankers Association. “If you take one piece
and tinker with it, it causes friction throughout the process.”
The Home Valuation Code of Conduct had an unusual origin. It was
developed by the New York attorney general, Andrew M. Cuomo, who
persuaded the big federal mortgage agencies, Fannie Mae and Freddie
Mac, to adopt it. That has effectively made it national policy.
Putting appraisals completely in the hands of lenders may sound like a
good idea in principle, because it is supposed to be lenders who are
putting their money at risk in a home loan.
But the reality is that many companies that write home loans these days
do not have much incentive to worry about the accuracy of appraisals.
That is because the companies do not keep the loans on their own books,
instead selling them to Fannie Mae or Freddie Mac.
“The code is a formula for continued problems with fraud,” said David
Callahan, a senior fellow with the public policy group Demos who has
studied appraisals. “Appraisers have been asking for a long time for a
reliable firewall between themselves and lenders, and are further from
it than ever.”
Appraisers Pressured
Before real estate prices went out of control, appraisal work was
straightforward. The appraiser examined a property inside and out,
judging it against the prices that similar properties in the
neighborhood were fetching. If the appraisal value matched the sales
price, the lender financed the loan.
As lending standards collapsed during the housing boom, appraisers were
pressured from all sides. When the appraiser did not deliver a
satisfactory price, the deal did not get done, and the broker, agent
and lender did not get their fees. Homeowners also loved inflated
appraisals, using them to take out as much as possible when they
refinanced.
“I got daily calls from lenders and brokers saying, ‘Here’s the
address. Can you get me $400,000?’ ” said Mr. Kennedy, who has been in
the business since 1993.
When he responded that it was illegal for him to supply an unsupported
value — or when he noted in his report defects that the client hoped he
would ignore, like a flooded basement — the broker or lender dropped
him for a more compliant appraiser.
Petition Notes Abuses
The honest appraisers saw that the situation was helping to drive
housing prices beyond reason. A petition they started a decade ago,
just as the long boom was getting under way, warned of “the potential
for great financial loss” to the economy if the penalties for
pressuring appraisers were not enforced. The petition also complained
that honest appraisers were being blacklisted. It drew 11,000
signatures.
Regulators and lawmakers did nothing. A rising market covered all sins.
Then the market turned, and the lawsuits began.
In late 2007, Mr. Cuomo filed suit in New York Supreme Court against
the data company First American and its subsidiary eAppraiseIT for
fraud.
EAppraiseIT is an appraisal management company, which means lenders
hire it to hire appraisers. This method, First American stressed in its
annual report, produced “unbiased valuations” that benefited “not only
the homeowner and lender, but our nation’s economy.”
Washington Mutual, based in Seattle, was the biggest client of
eAppraiseIT. (Mr. Cuomo could not sue Washington Mutual for
jurisdictional reasons.) The suit, still in court, charges that
eAppraiseIT let itself be pressured by Washington Mutual to revise
appraisals upward to match the value of deals.
Washington Mutual collapsed last fall, the largest bank failure in the
nation’s history.
Mr. Cuomo, convinced that the troubles with appraisals went far beyond
a single case, began an inquiry into Fannie and Freddie’s role in the
buying of fraudulent mortgages. Before that investigation could be
concluded, the two finance companies agreed they would buy mortgages
only from lenders that abided by a new code of conduct.
In its original draft, the code froze out brokers and agents and placed
severe restrictions on lenders. They were forbidden from using their
staff appraisers or an appraisal management company in which they had
more than a 20 percent interest.
The American Bankers Association and the Mortgage Bankers Association
fought the restrictions, saying they would increase costs to consumers.
The lenders also argued that Mr. Cuomo had no jurisdiction over their
federally chartered operations. Banking regulators, who saw their
authority being usurped, agreed.
The final version of the code gives much greater leeway to lenders. For
instance, lenders can hire their own appraisers if they “recognize”
that complaints will be forwarded to regulators.
The appraisal world was stunned. Dave Biggers, the chief executive of A
La Mode, a maker of software for appraisers, said, “It’s like telling
me I can steal as long as I ‘recognize’ that complaints will be
directed to the police.”
Benjamin Lawsky, a special assistant to Mr. Cuomo, defended the revised
version. “Our goal was always for the code to eliminate the causes of
appraisal inflation while minimizing any disruptive impact on the
industry,” he said. “We believe we accomplished this.”
Since national lenders cannot maintain lists of appraisers in every
community, they long ago began outsourcing the process to the
management companies, who had claimed about 30 percent of the market
before the code took effect. Now that the lenders are the ones ordering
all the appraisals, the management companies are expanding their share.
Real estate groups say the management companies, with the competition
from brokers and agents eliminated, are now trying to fatten their
profit margins by hiring appraisers as cheaply as possible.
These inexperienced appraisers, often traveling many miles to a market
they do not know well, are scuttling legitimate deals, the agents
claim. This argument has resonated in Congress, where 55 legislators
have sponsored a bill calling for an 18-month moratorium on the code.
Appraisal management companies and lenders say the agents’ charges are
not true.
“We’re an easy scapegoat,” said Donald Blanchard, chief compliance
officer of Lender Processing Services Inc., which works with 20,000
appraisers. “We’ve yet to see any quantifiable proof as to the problems
that management companies are supposedly causing.”
The real source of trouble for independent appraisers, he suggested, is
not the code but a changing economy.
“Appraisers want to go back to the way it used to be,” Mr. Blanchard
said. “But it’s good business for us to demand more for less.”
Fees Decline
Terry and Andrea Hartlieb, longtime appraisers in Fort Collins, Colo.,
miss the old days.
Instead of developing relationships with brokers and agents, the
Hartliebs must wait for a lender or appraisal management company to
call. A year ago, they would make $350 for an appraisal that would take
about five hours. Now the management companies offer as little as half
that. The couple has laid off four appraisers who used to work for them.
One recent call was about a complex property that would take additional
time. Mr. Hartlieb asked for a bigger fee. The response: “We can get it
done faster and for less elsewhere.”
Mrs. Hartlieb said, “Buying a house is the largest expense of your
life. Don’t you want the best professional advice about its value, not
the cheapest?”
Appraisers might be earning less, but consumers are being asked to pay
more. The cost of an appraisal is now about $500, up from $400,
appraisers say, because of the management companies’ share.
Moreover, if the goal of the code is to lessen pressure on appraisers,
it is not clear that is happening.
A memo from U.S. Bancorp, which is based in Minneapolis, was posted
recently on Appraisers’ Forum, an online discussion group. The memo
bluntly urged the lender’s appraisers to “try and get the value we need
the first time.” (A U.S. Bancorp spokeswoman said the memo was “not an
official document.”)
In an online poll of 2,250 appraisers by Working RE magazine, half the
respondents said they sometimes felt that management companies were
ordering them to come up with a value that would make the deal work.
Banks and appraisal management companies say appraisers can be
hypersensitive. “To some appraisers, the fact that we call you and ask
a question is pressure,” said Mr. Blanchard of Lender Processing
Services.
Under the code, the role of deciding what is pressure is assigned to a
new entity called the Independent Valuation Protection Institute. If
appraiser complaints are deemed valid, the institute is supposed to
forward them to regulators.
Seventeen months after it was announced, the institute has no staff and
no appraiser complaint hotline. All that exists is a single Web page.
Mr. Callahan, who wrote about the trouble with appraisals during the
boom, is dismayed that the problem cannot be fixed even during the bust.
“Appraisers play a key role in keeping real estate transactions
honest,” he said. “But we as a society have done very little to support
them and ensure their independence.”