New FHA Appraisal Standards Take Effect
February 16th, 2010
Related FHA Stories
- HUD Tightens Appraisal Standards
- New Private Appraisal Rules Follow FHA Standards
- Will New Appraisal Standards Stick?
- FHA Adopts Pro-Borrower Consumer Standards
- FHA Mortgages & Inflated Appraisals
Story Tools
Here it is the 16th of February and the world has not ended.
This is likely a surprise to some folks because yesterday the dreaded and new FHA mortgage appraisal rules went into effect, rules which will merely allow borrowers to get a better shot at a fair valuation of their property.
According to the Coester Appraisal Group in Gaithersburg, MD, the new FHA guidelines will create an array of new requirements for lenders:
___Prohibits Loan Production Staff or anyone compensated with the closing of a loan from ordering an appraisal for both Conventional and FHA.
___ FHA Stresses “Absolute lines of independence.”
___ Lenders will get sanctioned if appraiser’s names is not correct in FHA Connection. Appraisal on report must be the same in Connection
___ Requires timely Payment to appraisers (net 30).
___ Lets the appraiser enjoy the freedom from any person to Provide ANY Estimate of value on the appraisal request verbally or e-mail.
___ Establishes the Appraiser Independence Hot-line.
___ Provides appraiser written notice of a removal from a list or for any reduction of work.
___ Forbids lenders from ordering a second appraisal without putting both in the loan file.
___ Prohibits “appraiser shopping” where lenders order more appraisals to assure the highest possible value for the property and/or the least number of deficiencies and/or repairs.
The Cuomo Case
The new standards were worked out in a settlement between New York State Attorney General Andrew Cuomo and Fannie Mae and Freddie Mac in March 2008. Something called the Home Valuation Code of Conduct (HVCC) was created.
This settlement was instantly challenged by federal regulators because it was NOT a settlement between them and Cuomo. In other words, the traditional monopoly over national mortgage affairs was broken.
How do federal bureaucrats have total control of mortgages made by national banks and their mortgage subsidiaries regardless of state and local laws? They claim authority based on the National Bank Act — of 1864.
Amazingly enough, Cuomo challenged the absolute right of federal regulators to control the mortgage lending process, took his case to the Supreme Court and won. Now, for the first time, you will see state attorney generals suing national banks over their mortgage policies and practices.
And this, of course, is the point: You never saw federal regulators protecting the public interest. If they had we would not have had a mortgage meltdown.
Here’s the clearest possible example: under the Home Ownership and Equity Protection Act of 1994 (HOEPA), the Federal Reserve can stop “unfair and deceptive acts or practices.”
So why are the new appraisal rules such a bother to lenders? Under the old system if appraisers came in with the “wrong” valuation they might find their payment delayed or that the lender had located other, more, er, flexible, appraisers. Now the the government is saying hands off appraisers and that’s great for FHA mortgage borrowers who need to know the real value of the properties they’re buying.
- |
- |
-
- |
This entry was posted on Tuesday, February 16th, 2010 at 2:48 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.
Listen to FHA Loan Pros columnist Peter Miller on American Public Radio: 
RSS Feed
February 16th, 2010 at 9:50 am
Even if one believed that the mortgage world was coming to and end with this new rule, it would take a few weeks for its effects to be felt by buyers. And I don’t think any of us feel that. After all, we’ve been dealing with this HVCC processon conventional loans for awhile now already. What we do feel and see is that this new procedure has empowered and unriched a new “middle man” in the process–the Appraisal Management Companies (AMC), often just subsidiaries of the big banks themselves.
Granted, the old appraisal system allowed unethical mortgage originators to coerce weak or desperate appraisers with threats of non-payment or withholding of future business, but there were already good systems in place for appraisals to be reviewed, appraisers themselves to be monitored and removed from list of “approved appraisers”. These could have been strengthened. But at the same time that the HVCC process was brought to life, we watched the disappearance of “approved appraiser” lists and the easing of the requirements by HUD to become an FHA appraiser. How does that make sense?
Now we have a mortgage analogue to “managed care” in the health industry, a new tier of companies who raise the costs to borrowers, reduce the fees to the providers who do the actual work, and redistribute the difference as profit to themselves. That has been reflected in several ways anithetical to the notion of helping the consumer who wants to know the real value of what they are buying.
First, less experienced and out-of-the-area appraisers are often the only ones who will accept the reduced fees paid by the AMCs. These fees are often half of what appraisers used to earn. Recently, an agent told me she had met such an appraiser at the property. He was late because he couldn’t find the town and then walked up to the house barefoot and smelling as though he hadn’t showered in several days. I am told that the appraisal code requires an appraiser to be familiar with the area in which he is conducting an appraisal. Someone from out of the area may not understand the differences between neighborhoods, even if they eventually can find the town. And when paid half of their normal fee at a time when regulations require more work, few appraisers will put the time and effort into researching and understanding a home’s true value. They put as little effort in as possible and use the low end of the value range to cover themselves.
Second, despite this separation of originator from appraiser, the banks do not trust the outcome. One would think that if this process truly met its objective of creating greater accuracy and objectivity, the banks would embrace the results. Instead, they appear more nervous than ever. Most appraisals seem to then require “desk reviews” or “field reviews” at an additional cost. So, the consumers pays more for each appraisal and often has to pay for multiple appraisals. Additionally, the banks still run AVMs (automated valuation methods..think Zillow) in the background. When these inferior computer valuation tools yield a lower value that the actual appraisals, banks will still often use those value, despite the acknowledged quality discrepancy. This kills deals and costs consumers money.
The time required to deal with all of this is certainly another cost issue to consumers. Escrows are frequently delayed, per diem fees incurred, interest rate locks blown….all at a cost to the consumer who has not in fact received a more reliable opinion of value.
I am an advocate of good regulation. Without it, the invisible hand of self-interest often leads not to promotion of the public interest or transformation of greed into social good but simply to cheating. But this is an example of bad legislation and unintended consequences. There are better ways to fix the appraisal problem.