Report and Analysis: Fannie/Freddie, Cuomo Agree to Appraiser Independence
By David Brauner, Editor
For appraisers, March came in like a lion.
As winter turns to spring, appraisers have much to look forward to, as reported in the current issue of Working RE- Turning Tide? Appraiser Independence. Even with the shift to quality in the market and the multitude of new legislation aimed at appraiser independence, no one could have anticipated the landmark announcement last week in which Fannie and Freddie agreed to rein in mortgage brokers and others who exert pressure on appraisers.
The stunning capitulation by Fannie/Freddie to pressure from New York State Attorney General Andrew Cuomo, announced in a press release issued by the Office of Federal Housing Enterprise Oversight (OFHEO) (March 3, 2008), is a clear call for appraiser independence and a victory for those who stood up and shouted out against lender pressure.
The agreement has the potential to do more good for cleaning up the appraisal industry than all the other legislation/initiatives combined. Despite its promise, however, some appraisers are anxious about the unintended consequences of this independence day. No one can be certain how things will shake out but the obvious intention of the agreement and the legislation discussed in the new WRE, indicate a sea of change and offer hope for a time when being a competent and ethical appraiser is once again good for business.
You may recall the investigation AG Cuomo began in November 2007 into the appraisal practices of First American Corp. and its vendor management arm eAppraiseIT, which the complaint accuses of inflating the values of home loans under pressure from Washington Mutual Inc. All three companies deny the accusations (Premium Content – “I Told you So?” eAppraiseIT, WAMU Blow Up, Fannie, Freddie).
Fall out of the investigation included subpoenas of Fannie Mae and Freddie Mac for details about WAMU’s loans and their due diligence practices related to the appraisals. As a result of the agreement last week, Cuomo will terminate the inquiry into Fannie and Freddie.
Terms of Endearment
According to two sources at Fannie Mae the agreement is nationwide in scope and not restricted to New York banks, as some had inferred. There is a 90-day comment period with certain changes set to take effect September 1, 2008 and others January 1, 2009.
- Bans mortgage brokers from selecting appraisers.
- Prohibits lenders from using staff appraisers or appraisers working for appraisal companies they own or control.
- Institutes a Home Valuation Code of Conduct (excerpted below), which all lenders dealing with Fannie Mae and Freddie Mac will have to follow, to end “coercion, extortion, collusion” and other undo pressure on appraises.
- Establishes the Independent Valuation Protection Institute for oversight, funded by Fannie and Freddie to the tune of $24 million.
- Sets up a consumer hotline to handle complaints about questionable appraisals. The OFHEO will operate the Institute and hotline.
The mission of OFHEO is to promote housing and a strong national housing finance system by ensuring the safety and soundness of Fannie Mae and Freddie Mac.
Code of Conduct
At the heart of the agreement is the Code of Conduct (excerpted here). You can find the OFHEO press release and the entire agreement, including the Code of Conduct, at WorkingRE.com (sidebar info – OFHEO Press Release), in addition to Cuomo’s original complaint against eAppraiseIT (sidebar info – New York vs. First American). Make sure to give these documents a read, they’ll make your day.
Home Valuation Code of Conduct
I. No employee, director, officer, or agent of the lender, or any other third party acting as joint venture partner, independent contractor, appraisal management company, or partner on behalf of the lender, shall influence or attempt to influence the development, reporting, result, or review of an appraisal through coercion, extortion, collusion, compensation, instruction, inducement, intimidation, bribery, or in any other manner including but not limited to:
- withholding or threatening to withhold timely payment for an appraisal report;
- expressly or impliedly promising future business, promotions, or increased compensation for an appraiser;
- conditioning the ordering of an appraisal report or the payment of an appraisal fee or salary or bonus on the opinion, conclusion, or valuation to be reached, or on a preliminary estimate requested from an appraiser;
- requesting that an appraiser provide an estimated, predetermined, or desired valuation in an appraisal report, or provide estimated values or comparable sales at any time prior to the appraiser’s completion of an appraisal report;
- providing to an appraiser an anticipated, estimated, encouraged, or desired value for a subject property or a proposed or target amount to be loaned to the borrower, except that a copy of the sales contract for purchase transactions may be provided;
- providing to an appraiser, appraisal management company, or any entity or person related to the appraiser or appraisal management company, stock or other financial or non-financial benefits;
- allowing the removal of an appraiser from a list of qualified appraisers used by any entity, without prior written notice to such appraiser, which notice shall include written evidence of the appraiser’s illegal conduct, a violation of the Uniform Standards of Professional Appraisal Practice (USPAP) or state licensing standards, substandard performance, or otherwise improper or unprofessional behavior;
- ordering, obtaining, using, or paying for a second or subsequent appraisal or automated valuation model in connection with a mortgage financing transaction unless there is a reasonable basis to believe that the initial appraisal was flawed or tainted and such basis is clearly and appropriately noted in the loan file, or unless such appraisal or automated valuation model is done pursuant to a bona fide pre- or post-funding appraisal review or quality control process;
- or any other act or practice that impairs or attempts to impair an appraiser’s independence, objectivity, or impartiality.
The Code continues, “Nothing in this section shall be construed as prohibiting the lender (or any third party acting on behalf of the lender) from requesting that an appraiser (i) provide additional information or explanation about the basis for a valuation, or (ii) correct objective factual errors in an appraisal report.”
Some appraisers are anxious about the unintended consequences of the agreement. Many expect business to be redirected to appraiser management companies (AMCs) as mortgage brokers are removed from the process. (Which is ironic, as Cuomo’s original beef is with AMC eAppraiseIT.) Some appraisers distain working for middle-man AMCs because of the cut-rate fees they demand through a “bidding” system, which appraisers complain ignores competency and quality in search of fast and cheap. Appraisers fear the result may be less pressure and less money, as they are forced to compete for low-ball fees.
To be fair, some appraisers, who can operate on tighter margins, embrace the lower-fee AMC trade off for the promise of steady work and no-hassle payment. Many also report less pressure over value from these companies. (Library – Making Money with AMCs)
Along with the further commoditization of appraising, many fear the removal of entrepreneurial control. Los Angeles, Calif. appraiser Phil Kantorovich is among them. Kantorovich worries the changes will take the control of his business out of his hands. “Ninety-eight percent of my clients are mortgage brokers. I like being able to control my workflow, to be able to pick up the phone and generate business when I’m slow or to turn down business from a broker if I feel pressure,” said Kantorovich. “I do not want to wait around for some national company to send me work. This agreement forces a change in my business model from me having control of my destiny to some national company I’ve never worked with controlling my business.”
“I do not think that national companies will solve the problem,” Kantorovich continued. “Hold the brokers along with the appraisers accountable. If a broker keeps making bad loans for any reason, they should be reprimanded just like appraisers are held accountable.”
Brokers Push Back
Predictably, mortgage brokers are not happy with the agreement. The Executive Vice President of the National Association of Mortgage Brokers (NAMB) Roy DeLoach issued the following statement: “These agreements amount to a de facto regulatory action by OFHEO which avoids the appropriate process. The law provides for a process to implement regulatory and policy changes such as those contemplated and specified in these agreements. These agreements will increase costs to consumers by removing thousands of small business competitors from the marketplace. They will create a severe disadvantage to small business mortgage brokers, and prevent them from engaging competitively in the mortgage marketplace. NAMB is committed to serving the public and promoting the interests of consumers. As always, we are ready to work with these agencies to achieve the objective of eliminating appraisal fraud without disrupting the marketplace or hurting consumers. As it stands now, the National Association of Mortgage Brokers intends to consult with our legal advisors and to take appropriate legal action if necessary.”
Appraiser off the Hook
In other news, the suit against appraiser Pamela Crowley for alleged misstatements on her site (MortgageFraudWatchList.org) was dropped by eAppraiseIT. You can read the original complaint against Crowley at WorkingRE.com (sidebar – eAppraiseIT vs. Pamela Crowley).
This spring, even the most cynical appraisers have something to smile about.