Blamed For Home Sale Delays, Appraisal Rules Could Change

• Kathleen Doler
• On 6:10 pm EDT, Thursday October 29, 2009

Home value boils down to what a buyer's willing and able to pay -- and what an appraiser says the property is worth. But big changes to the appraisal process are sparking industry outrage.

Rule changes kicked in this spring that are meant to improve appraiser independence and appraisal accuracy, especially in housing markets with price declines. But some claim the rules are raising appraisal costs, making it harder to get an accurate appraisal and delaying closings.

The National Association of Realtors is lobbying Congress for an 18-month moratorium on a part of the recent rule changes called the Home Valuation Code of Conduct. It makes lenders submitting loans for Fannie Mae (NYSE:FNM - News) and Freddie Mac (NYSE:FRE - News) backing ensure that appraisals are managed independently of loan originations. Meanwhile, a congressional committee this month passed an amendment to sunset the HVCC.

The HVCC gave appraisal management companies more power over the appraisal business. Appraisers and others say that power is being abused.

"Something is blocking the timely closure of home purchases and the big culprit is appraisal management companies," said NAR President Charles McMillan. He says AMCs often assign out-of-town appraisers who don't know the area, which leads to "untrustworthy" appraisals and some that are "just plain wrong."

Calls For Change

The Appraisal Institute doesn't support NAR's call for a moratorium, but is asking states to regulate AMCs.

To fix the HVCC's problems and have time to study implementation of other code provisions, "we are calling for a moratorium," McMillan said. The call is in the form of H.R. 3044, a bill referred to the House Committee on Financial Services.

It's not the only bill in play. This month the same committee passed the Consumer Financial Protection Agency Act (HR 3126) with an amendment that would end the existing rules as soon as a better version is drawn up.

The HVCC has "increased costs to consumers" and "significantly hindered a consumer's ability to obtain legitimate and reliable appraisals," says the Web site of California Republican Rep. Gary Miller, who introduced the amendment.

In July, the NAR surveyed its members and found that 30% of Realtors and 37% of appraisers believe a "severe decrease" in appraisal quality has resulted from the HVCC.

The HVCC came about after New York Attorney General Andrew Cuomo filed a lawsuit against First American (NYSE:FAF - News) and its eAppraiseIT unit. The suit alleges the unit's loan staff at its largest client, Washington Mutual, pressured appraisers to inflate home values. As part of the suit, Cuomo subpoenaed Fannie and Freddie. But he halted this action after the two agreed to institute the HVCC.

The Federal Housing Administration is also tightening its appraisal rules. Starting this month, it requires appraisers to be certified rather than just licensed. And starting next year, lenders making FHA loans must disclose on HUD1 forms how much homebuyers are paying AMCs and how much is being paid to appraisers.

How Prices Get Hit

Some of the ire around appraisal rule changes is over the question of what a home is really worth. One change this spring by Fannie, Freddie, FHA and Veterans Affairs requires appraisers to fill out a "market conditions" form to analyze median prices for comparable properties, over a variety of time periods. Appraisers complain that AMCs and other appraisers misuse this rule, devaluing homes by relying too heavily on foreclosure sales.

Some appraisers are using foreclosures as comps, when they're "not aware of the internal condition of the foreclosed homes," said David Crowe, chief economist at the National Association of Home Builders.

Undervaluing properties is just one side of the problem. A rushed appraiser, unable to do research, can overvalue a home by using a comp that includes unreported sales incentives, such as seller-paid closing costs.

"AMCs are looking to get an appraisal done for the lowest fee, and the client's risk is not their primary motivation," said North Lake Tahoe, Calif., appraiser Kevin McDermott.

Affiliation At Issue

NAR says lenders should be prohibited from using appraisals from AMCs in which lenders or their affiliates maintain an ownership stake. Both Bank of America (NYSE:BAC - News) and Wells Fargo (NYSE:WFC - News) own AMCs and use them to manage their appraisals.

States are enacting new laws to regulate AMCs. California legislation passed this month requires AMCs, starting next year, to register with a state appraisal office that will enforce standards. Similar legislation has passed in Arkansas, Louisiana, Nevada, New Mexico and Utah.

Appraisers used to charge $300 to $500 or more for an appraisal, depending on the region and size of the home. But appraisers across the country report that AMCs are trying to pay them $175 to $250 and then mark the appraisal cost up to $500 or $600. AMCs also are requiring appraisers to turn around appraisals in 48 hours or less.

The emphasis should be on "hiring qualified and well-compensated appraisers," not tight deadlines and cut-rate fees, said Bill Garber, director of government and external relations at the Appraisal Institute.

Industry Thins Out

Anecdotal evidence and statistics show brain drain from the profession. The Appraisal Institute says its research shows a 2.4% drop in the number of appraisers across the U.S. from December 2008 to September 2009. Illinois expects a 10% to 15% drop in appraisers for 2009.

Jeffery Hall had been doing appraisals in Northern California since 1986, but is quitting. "I choose to work for more than minimum wage," he said.

Bank of America spokeswoman Jumana Bauwens said LandSafe, BofA's wholly owned AMC, pays appraisers "in line with the industry, and appraisers accept jobs with full knowledge of the amount."

Smaller AMCs complain they can't compete with big firms that have insider relationships with their lender-owners.

Yet, new AMCs have emerged and grown as a result of the HVCC. Patrick McEvoy, an appraiser since 1985, bought First National Appraisal Management in Hicksville, N.Y, in January.

It is managing appraisals across the U.S. for credit unions and small banks. "We charge roughly $100 management fee per appraisal," he said. He says he pays appraisers reasonable and appropriate fees.

Buzz up!