Enacting rules to curb abuses that arose during a housing bubble, but which don't take effect until the succeeding financial crisis, can easily do more harm than good. This is the case with new rules requiring that property appraisals be insulated from pressures exerted by any of the parties with a financial interest in an appraised value. Those parties are primarily lenders, mortgage brokers and real estate agents.
Appraisals are informed judgments regarding the value of specific properties. They are not perfect because appraisers must work with incomplete information. Further, appraisers are subject to bias, especially when less-than-complete information is available to them.
During periods of rising house prices, such as 2000 to 2006, many appraisers erred on the upside because they were part of a community that expected further price increases. This tendency was sometimes reinforced by pressures exerted by lenders, real estate agents and mortgage brokers. None of them wanted to see deals torpedoed by appraisals below the prices buyers had agreed to pay.
In late 2007, New York Attorney General Andrew M. Cuomo sued the appraisal subsidiary of title insurer First American for allegedly conspiring with Washington Mutual, a major mortgage lender at the time, to inflate appraisals. Because WaMu sold a large portion of its mortgages to Fannie Mae and Freddie Mac, Cuomo embarrassed the agencies into issuing a Home Valuation Code of Conduct, or HVCC. The code declared that the agencies would purchase only mortgages supported by an "independent" appraisal.
The objective of HVCC was to insulate the appraisal process from influence by any of the parties with an interest in the outcome. Mortgage brokers and real estate agents could no longer order appraisals, and lenders had to obtain appraisals in some manner that prevented them from exercising any control.
The problem with this well-intentioned rule is that it was issued in December 2008, to become effective May 1 of this year, squarely in the middle of the worst housing market since the 1930s. With house prices declining, the upward bias in appraisals that had prevailed during the bubble morphed into a downward bias. Many deals are not getting done because appraisals are coming in too low, and the HVCC is seriously aggravating the problem.
To protect themselves from liability, most lenders are ordering appraisals from appraisal management companies, which act as intermediaries between lender and appraiser. The appraisal management company selects and pays the appraiser, receives and evaluates the appraisal, and passes it to the lender, which has no direct contact with the appraiser.
Because the management companies operate nationally but do not have appraisers everywhere, more appraisals are being done by people who are not familiar with the local market. Appraisers working for management companies are also paid less per appraisal than independents, which may induce them to invest less time. Less knowledge by appraisers means more scope for bias, and in a declining-price market, the prevailing bias is toward lower values.
Intermediation by appraisal management companies also lengthens the period required to complete purchase transactions. People involved in the process tell me that it can add an extra week. In an increasing number of cases, the paperwork doesn't get done by the due date specified in the contract or before the buyer's mortgage lock expires, potentially derailing the transaction.
The objective of the HVCC was to prevent pressure being imposed on appraisers to raise values. But the code also prevents the loan officers, mortgage brokers and real estate agents who work with borrowers from pressuring appraisers to get work finished in time to meet a deadline. Further, they can no longer keep their clients informed about the status of an appraisal because they are no longer in the loop.
Loan officers, brokers and real estate agents used to have access to informal value opinions from the appraisers with whom they worked. Such opinions allowed them to abort house purchases and refinances that clearly would not fly because of inadequate property value. With this source of information now unavailable, deals that previously would have been screened out early are now going through the system, only to be rejected later, imposing needless costs on everyone involved.
The HVCC has also pretty much eliminated the ability of a borrower to use the same appraisal with multiple lenders. Before the code, mortgage brokers could use one appraisal with any of the wholesale lenders with which they dealt, and lenders sometimes accepted appraisals ordered by others. Today, brokers are out of it and lenders using appraisal management companies will not accept appraisals ordered by other lenders because they cannot be sure that the other lenders are following the HVCC rules. The upshot is that borrowers often have to pay for more than one appraisal.
In sum, the HVCC "cure" for the appraisal problem of overvaluation has been implemented in a market in which the problem has become undervaluation, and the code is making that problem much worse. It should be scrapped. When markets return to normal, there will be time to reconsider how appraisals can be made independent without disrupting business relationships that have served borrowers well.
No comments:
Post a Comment