FHA Adopts Pro-Borrower Consumer Standards

by Peter G. Miller
September 21st, 2009

Since May there’s been a debate within the real estate industry regarding whether or not it’s okay to pressure lenders to come up with the “right” appraisal number — you known, the magic number that will make the deal work, assure lender fees and not mess too much with loan officer profits. And if that means a buyer overpays for a property, well, is that really such a big deal….

Fannie Mae and Freddie Mac adopted the Home Valuation Code of Conduct last May and the real estate industry has been mooing since then. It will take longer to do appraissals, they claim, but they never quite say why many people need to close a real estate transaction in just a few days. There are not as many qualified appraisers, they say, not mentioning that under HVCC apprasiers must actually be state licensed or certified under the program.

What critics don’t say is that lenders under HVCC cannot pressure appraisers to come up with a target valuation. They can’t delay payment to an appraiser. They can’t threaten to withhold future business.

Oh, an appraisers employed by or working for lenders can’t be used.

“Historically,” says HUD, the “FHA prohibited mortgagees from accepting appraisal reports completed by an appraiser selected, retained or compensated, in any manner by real estate agents. To ensure appraiser independence, FHA-approved lenders are now prohibited from accepting appraisals prepared by FHA Roster appraisers who are selected, retained or compensated in any manner by a mortgage broker or any member of a lender’s staff who is compensated on a commission basis tied to the successful completion of a loan.”

Imagine, for example, you buy a property from a home builder. The home builder has an FHA mortgage affiliate. An appraiser hired by the affiliate values the property. Out of a million times, how often do you think the appraiser will say the property is over-valued? And still be employed?

The real reason the HVCC is being opposed is not that appraisals will be delayed, it’s that they’ll be right. And if they’re right it means some potential FHA buyers will not close their transactions because they will realize they’re over-paying. When those transactions fail it also means that lenders, brokers, lawyers and tax collectors won’t get their money.

The real estate industry would like to see HVCC delayed 18 months — after which, just a guess, they would like to see it delayed another 18 months.

But now the FHA has come and said they not only like the HVCC, starting January 1st FHA appraisers will essentially have to meet HVCC standards. And since about a third of all loans go through the FHA, it means the HVCC will remain in place to protect the public.

Those who read this blog know that we sometimes flog the FHA when it wanders off course and at the same time we also praise them when they get something right. This is one of those cases where the FHA is very right and they ought to be congratulated for standing up to an assortment of industry groups and lobbyists — and for standing with the public.

By getting appraisals right the FHA is assuring that properties are correctly valued and thus reducing marketplace risk — protecting both home buyers and the FHA reserve funds. Isn’t that what it should be doing?

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This entry was posted on Monday, September 21st, 2009 at 2:17 am and is filed under . You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.

One Response to “FHA Adopts Pro-Borrower Consumer Standards”

  1. Cameron Hoffman Says:

    Since “Appraisal Management Companies (AMC’s)” are taking up to 40% of the total appraisal fee, and are not being regulated to ensure that their appraisers are licensed and competent, we are seeing unlicensed and inexperienced individuals performing property inspections with grave data entry errors. These inferior appraisals are then being “signed-off” by other parties that NEVER INSPECTED THE PROPERTY and are creating unnecessary financial hardship for buyers and sellers.
    With mortgage loans being denied due to inaccurate appraisals, borrowers are being forced to apply with other lenders who in turn have to charge the consumer ANOTHER APPRAISAL FEE to proceed with the transaction. This vicious cycle can go on endlessly costing well intended clients a great deal of money and time.
    Under HVCC, no one involved in the transaction is allowed to communicate these major issues (EVEN LICENSED LOAN ORIGINATORS) directly to their appraisers. So countless real estate transactions that would have otherwise closed are now failing, resulting in continued property devaluation and offering NO stimulus to our economy with the exception of the unregulated AMC’s who are making unjustified profits at the expense of home loan applicants and licensed, qualified appraisers.
    Licensed appraisers have legal and ethical standards in place already. The emphasis should be on making appraisers abide by these, rather than frustrating the ordering and communication process. This well intended legislation is severely misguided.

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