The Wrong Kind of Appraisal Fix – Part 1

Of all the proposals to "fix" the mortgage industry that are floating about, perhaps the worst is one that was hammered out – and I use the term in its most direct meaning – between the Attorney General of New York and mortgage giants FannieMae and FreddieMac.  It will turn the entire appraisal industry on its head.  It's an incredibly stupid move.

Here is a little background.  A fundamental tenant of the appraisal process is the market value determined by the appraiser ought to be based upon a logical analysis of the facts. In fact, the rules the govern appraisers was created by The Appraisal Foundation. The rules are known as The Uniform Standards of Professional Appraisal Practice. At its core, the process is supposed to be independent with appraisers able to do their work without influence or pressure. The Foundation also helps the States create licensing standards.

Large lenders like the big banks and S&Ls typically had their own appraisal departments. Most of these lenders were doing loans for their own portfolio so if there was pressure put on the appraisers, it would have been to come in with "conservative" – read "lower" – values.

In addition there is a huge body of independent appraisers and it was from this group brokers like me chose appraisers. I think that this system has worked well and I have a collected a stable of reliable appraisers throughout the State of California.

But all appraisers are not created equal.  There are good ones and bad ones. The best are responsive, thorough, and their work holds up under scrutiny, such as an appraisal review. On the other hand, some are, first by reason of experience, just not very good. In fact, I can recall some disasters when we have had to use some doufus appraiser that has been forced upon us by one of the mega-lenders.

One development that started a few years ago it the creating of what are known as "appraisal management [you have to use that term loosely] companies."  There is no doubt that a lender would not know about appraisers in every community in which it might need an appraisal done. So companies like First American set up shop as central clearing houses. It would make arrangements with appraisers all across the country so that when a lender ordered an appraisal, it would be farmed out to a local appraiser in that area. They would also, theoretically, offer a quality control function to assure quality.

Well things can go wrong in that process. The New York State Attorney General, Andrew Cuomo, found that Washington Mutual, one of the nation’s largest lenders, put undue, and perhaps illegal, pressure on First American, allegedly forcing them to raise appraised values. But he has no jurisdiction over Federal chartered lenders like WaMu who is supervised by the Office of Thrift Supervision.  So, unable to nail the real culprit, he looked for someone to blame and found most of the rest of the industry.

Independence is important, no doubt, but it is important that the people who know about mortgages, not a bunch of lawyers, make decisions about the future of the industry. Between USPAP and state licensing, there are plenty of rules on the books. Someone just needs to enforce them, and it's not Mr. Cuomo. 

There are times when we have had to use "appraisal management companies." It hasn't been fun.  They take 40% of the fee for doing NOTHING!!!!! The appraiser gets 60%. 

Does this improve loan quality? No. Does it make the process more efficient? No. Does it reduce costs to consumers? No. Is appraisal quality going to go up? No. In fact, many good appraisers will just leave the industry rather than take a 40% pay cut. Who will be left? You can figure that one out.

So why are FannieMae and FreddieMac about to cave in to this stupid idea? You would have to chalk it up to political pressure.  But it sure isn't going help consumers.