New Rule Seeks to Boost Quality of Appraisals

Does anyone remember that Sopranos subplot, where Tony “coaxed” an appraiser into making bogus appraisals as part of a real estate scam?

As it turns out, this wasn’t much of a stretch from the actual system of appraisals, which apparently have long been viewed as a perfunctory part of the mortgage process. This was especially true during the buildup of the real estate bubble, when the role of the appraiser was basically to rubber-stamp the price that buyer and seller settled on.

This system came to a semi-official (there is essentially a one-year grace period) end on May 1, when Fannie Mae and Freddie Mac signed the Home Valuation Code of Conduct [HVCC]. In a nutshell, “The Home Valuation Code of Conduct seeks to eliminate appraisal-rigging by prohibiting mortgage brokers from hiring their own appraisers, and by encouraging banks to accept anonymous appraisals arranged by a third party.” On the plus side, this rule will theoretically protect homeowners, lenders from unfairness. Homeowners, for example, are now more likely to receive an unbiased appraisal- one that is free of outside interference. In fact, “Fannie and Freddie have begun requiring all appraisers to complete an extra ‘market condition’ report that includes detailed statistical analyses of local sales and pricing trends above and beyond the regular appraisal data.”

In this way, they will be prevented (i.e. denied a mortgage) from vastly overpaying for a house. Appraisers should also get a fresh start, a break from “brokers, loan officers and bank supervisors pressuring them to hit the value in the sales contract, regardless of a home’s condition.” On some level it will also protect the lenders (from themselves, you could say) by making it less likely that they will originate a mortgage that’s not certain to be repaid, and hence protect the integrity of the system.

As with any rule change, there are bound to detractors, and the list of alleged flaws in HVCC is lengthy. “The biggest problem is that banks are allowed to own the appraisal-management companies they use.” In this aspect, the new system won’t differ much from the old one, in which the pretense of separation between bank and appraiser was used to mask flagrant bid-rigging. This is according to a recent series of class-action lawsuits.

For other critics, the use of appraisal management companies represents the core of the problem, and certainly not the solution. That appraisals must now be completed anonymously means that reputation is now worthless. Appraisers will see their trade become a commodity, and will have to compete on price, rather than quality. Moreover, since any cost savings will be absorbed by the management company, the homeowner won’t reap any benefit. Offered one appraiser,  “It’s going to make it much more expensive for consumers…And if they decide they want to go to another lender — say, because something happens with the loan — they have to pay for another appraisal.”

Maybe the old system wasn’t so bad; after all, everyone got they wanted.  “A house is only worth what someone will pay for it, no more and no less. So in the case of a sale, why does the appraised value not always equal the sale price? Put another way, what assessment should carry more weight than a buyers willingness to buy a house for that price?” One commenter on a newspaper message board asked rhetorically. In a society where everyone pays cash, who could disagree? When the system is used cynically for speculative purposes and most properties are financed, however, I think a reality check will do everyone good.