IMPENDING APPRAISAL LAW

In the fraud infested recent past of the mortgage industry there have been plenty of appraisers who have inflated values and were responsible for creating a lot of the problems we are having today. There has been plenty of talk of creating a system that would make the appraisals less controlled by the loan originators and I saw an article that has done just that.

In New York, (and I guess it is only in New York) Fannie Mae and Freddie Mac have signed a settlement with New York Attorney General Andrew Cuomo which implements new appraisal standards which go into effect in Jan. 2009. It says basically that anyone selling loans to Fannie or Freddie can’t use in house or affiliated appraisal firms which Cuomo suggests are pressured into hitting the value by the institutions. Countywide for one owns their own appraisal firm as I recall. Mr. Cuomo said the settlement will transform appraisal practices by state and federally regulated banks that had pressured appraisers to inflate appraisals.

It also requires lenders on brokered loans to certify that the mortgage broker did not select the appraiser. I am a bit confused here, if the originating lender can't pick the appraiser then who does. I guess that suggests that the lender who is closing the loan must select the appraiser or God forbid maybe some government agency appraisal system is set up.

"Now national banks have a clear choice: immediately adopt the new code and clean up fraud in the mortgage industry or stop doing business with Fannie Mae and Freddie Mac," Mr. Cuomo said.

"For the banking regulators, this is kind of tough to swallow because the practices that they had permitted are prohibited by this agreement," mortgage banking consultant Howard Glaser said.

When I was in the banking business a while back, (what a nightmare) the regulators wanted appraisers chosen on a completely random basis to keep there from being any pressure put on the appraiser by the lender or the loan officer. At that time it was suggested that banks should choose the appraiser from a random list. On the surface this does not sound like a bad idea but it does not address the quality of the appraisal itself or service levels competitive pricing etc. No doubt there are a lot of appraisers who don't mind inflating values but that could still happen in any plan. I fear, however, the reality of this is too allow to many appraisers the ability to control the market rather than the market controlling the market. The market has always existed with a borrower and seller agreeing on the price of the home and that set the market value. Appraisals were ordered so the lender would feel comfortable with the amount of loan given. Appraisers always were aware of the value and did not try to jeopardize the deal if the sales price hit in a comfortable range of value. There have always been those appraisers who thought they were smarter than or above the market and should set the values themselves regardless of what the buyer and seller wanted. These guys are as dangerous in my opinion today as those who would inflate the value.

If the law that was agreed to in New York is not administered properly and then is duplicated in other states I fear it will just worsen the problem of deflating values and that is just what we don’t need.

Honest lenders should be able to hire honest appraisers and those appraisers should regulate themselves and be professional in their practices. If they don't want to loose their independence they better get busy.

This one will be interesting to watch for sure.

More to come

Lonny