Ok, let’s get one thing straight. I’m a title insurance professional attempting to blog about the appraisal process of lenders. At the bottom of this article, there is an area for you to submit comments, anonymous or not. So if I get a fact wrong, please make a comment. Do realize, you are not reading the Wall Street Journal - here goes.
Ok, let’s get one thing straight. I’m a title insurance professional attempting to blog about the appraisal process of lenders. At the bottom of this article, there is an area for you to submit comments, anonymous or not. So if I get a fact wrong, please make a comment. Do realize, you are not reading the Wall Street Journal - here goes.
A plan by Fannie, Freddie, the Office of Federal Housing Enterprise Oversight and New York Attorney General Andrew Cuomo to establish new appraisal standards called the Home Valuation Code of Conduct (“HVCC”), is causing a ruckus in the lending community. I’m told that many local Wisconsin lenders have already adopted in-house standards to thwart inflated home appraisals and that HVCC is not needed.
Here’s the issue from what I understand. When a homeowner needs a mortgage, the lender reviews an appraisal to determine the value of the home. The appraisal is completed by a licensed appraiser who is hired by the lender or its broker. The value established by the appraiser is a key component to making the loan. If the appraisal comes in a few thousand dollars off of the anticipated value, the lender may deny the loan. The HVCC supposedly reduces the lender’s ability to influence the appraiser’s decision. Apparently, the promise of repeat business to an appraiser could influence the appraiser’s willingness to adjust the appraisal the few thousand dollars needed to make the loan. And this influence is being blamed for assisting with the current housing/lending/credit crises.
So, Cuomo’s plan is to take the hiring of the appraiser out of the lender’s control. How far out of the lenders control? HVCC prevents lender employees and brokers who are involved in the origination of the loan from choosing the appraiser, which is the standard practice now. The new plan would require lenders to outsource the appraisal process to some other entity. Fannie Mae and Freddie Mac would spend $24 million over five years to create and staff an "independent valuation protection institute" to monitor appraisal standards and provide a complaint hotline for appraisers and consumers. Sounds great, doesn’t it?
I spoke to four local Wisconsin lenders, all which will remain nameless since this is a blog and I’m not a real journalist, and asked them how they currently handle appraisals. Their policies are below and seem very reasonable. Perhaps Mr. Cuomo should take a look at how the good ole state of Wisconsin handles real estate lending.
Lender #1: This lender removed the loan officer from the process years ago to comply with guidance it received from the Office of Thrift Supervision. The bank’s processors order the appraisal on a rotating basis from an approved list. The loan officers have no communication with the appraisers.
Lender #2: The loan officers still order appraisals based on trust established with this lender’s management team. Many of this lender’s loan officers are “certified lenders” and can render an underwriting decision and are instructed to not influence the appraiser. This lender’s relationship with its mortgage insurance company remains strong and the insurer has not asked this lender to change its current process.
Lender #3: A year ago this lender changed its procedure to comply with some new appraisal regulations. It went from allowing the loan officer to select the appraiser to implementing an appraiser roster that is rotated by the operations manager who assigns the appraiser even before the file is processed. This lender admits that it receives complaints from both the loan officer and the borrowers who claim that they feel the appraisers are sometimes too conservative. The bank’s management stands by its process yet is sometimes willing to give the borrower the option to have a 2nd appraisal completed by a different appraiser on the approved list. To further stiffen its standards, this bank is rolling out a new process that does not supply an estimated value to the appraiser, which this lender hopes will give the appraiser a completely unbiased opinion of the value
Lender #4: this lender is ordering on a random, rotating basis. The lender’s management team has no complaints from loan officers except for one – not all appraisers work at the same speed. Obviously the loan officers (and the borrower) would benefit from ordering an appraisal from the quickest appraiser since the closing would occur sooner. This lender supplies a copy of the offer to purchase to the appraisers. On refinance loans the lender tells the appraiser what the borrower thinks the home is worth. The only communication between the loan officer and the appraiser happens when the appraisal comes up short.
And then there’s the case of a recent closing this author attended in which two appraisal fees were shown on the HUD. Naturally, I asked the lender if there was an oversight or if there were really two appraisals performed. I pondered if this lender was taking an ultra-conservative approach by hiring two appraisers and basing the value on the average. I was completely wrong. When I spoke to the loan officer, he stated that the first appraisal came in about $19,000 short of the desired number so he ordered the second appraisal which hit the magic number.
Back to the HVCC. John Dugan, the US Comptroller of the Currency says the proposed rules would violate federal law and could have a negative impact on the mortgage industry by raising lenders' costs of making mortgages and increase the cost of home loans for borrowers without strengthening consumer protections.