Big brawl brewing over appraisal regulation decision

Nation's Housing

May 11, 2008|By KEN HARNEY

A major legal brawl is breaking out over how homes are appraised, at what cost and by whom. The outcome could directly affect the price you pay for your next piece of real estate, and the amount of mortgage money you can obtain.

The fight centers on an unusual agreement reached in March among Fannie Mae, Freddie Mac, their federal regulator and New York Attorney General Andrew M. Cuomo. The agreement took the form of an out-of-court settlement under which Cuomo terminated an investigation of the mortgage finance giants' appraisal practices in exchange for their adoption of a far-reaching "home valuation code of conduct" covering all loans they purchase or securitize.

The code, which is scheduled to take effect Jan. 1, would shake up the entire appraisal system:

Mortgage brokers, who originate roughly 60 percent of all new loans, no longer would be allowed to select or pay appraisers. That could force some mortgage shoppers to pay for multiple appraisals rather than just one.

In-house appraisers at banks and mortgage firms no longer would be permitted to do appraisals for loans to be funded by their organizations.

Lenders would not be able to use appraisals generated by management companies -- firms that contract with networks of appraisers nationwide -- if they have a significant financial stake in the management company.

Under the agreement, Fannie and Freddie would spend $24 million over the next five years to create and staff a new "independent valuation protection institute" to monitor appraisal standards and provide a complaint hot line for appraisers and consumers.

What's the big problem here, you might ask? Inflated appraisals -- often involving either pressure by loan officers or fraudulent collusion by appraisers themselves -- played a role in at least some of the mess we're seeing in many housing markets.

Prodding Fannie and Freddie to undertake appraisal reform sounds like a good idea, right? But critics say: not if you look hard at the details.

When the two mortgage companies and Cuomo recently asked for public and industry comment on the settlement, they were inundated with often-angry responses.

Who's not happy? Major financial and banking trade groups, for starters. In a joint letter, eight groups, including the American Bankers Association, Mortgage Bankers Association and the Consumer Mortgage Coalition, called the whole idea "bad policy" and demanded that Fannie's and Freddie's federal regulator withdraw its support for the agreement, which would effectively kill it.

In their witheringly critical comment letter, the groups said the settlement, sanctioned by the Office of Federal Housing Enterprise Oversight (OFHEO), violated multiple federal statutes and permits a single state -- New York -- "to unlawfully exercise authority that resides exclusively in the federal government."

Fannie, Freddie and thousands of banks and thrift institutions are federally regulated, and cannot be ordered to change key loan underwriting procedures by a state government, the groups argued. By "forcing the dismissal of thousands of highly-skilled appraisal professionals because they are employed by" banks would "wipe out millions of dollars of investments" along with jobs now held by competent professionals.

Five national appraisal organizations agreed and said that mortgage brokers should not be prohibited from hiring independent appraisers because the current system -- if strengthened by greater use of review appraisals to double-check accuracy -- works efficiently for consumers and the mortgage industry as well.

The National Association of Mortgage Brokers said that removing them from the appraisal equation would force buyers to pay more for appraisals and spend more time on applications.

Other critics said that the Fannie-Freddie plan opened the door to greater use of low-cost appraisal substitutes such as automated valuation models (AVMs) -- computer-driven estimates that be can far off the mark -- in place of on-site valuations by professional appraisers.

Where is all this headed and why should you care? Fannie, Freddie and Cuomo say they will look at the critiques and make modifications if necessary. But federally regulated banks and mortgage companies are so angry that they are likely to challenge the legality of the entire settlement in court.

In the end, after all the smoke clears, there's a shot at an improved, consensus appraisal system: much tougher penalties for lenders who pressure appraisers, much tougher penalties for appraisers who give in, and more accurate appraisals for the consumers who pay for them.

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