I know you’ve heard me and others talking about the Home Valuation Protection Code to be adopted by Fannie Mae and Freddie Mac January 1, 2009. They’ve invited comments from any interested parties, and I’ve been mulling this over for weeks. For today’s blog, I’m simply going to review the Code as I read it and point out the major shortcomings. In my next blog I will tell you how I would solve them.
The purpose of the code is to make appraisers truly independent. It lays out a very specific plan for keeping the party ordering the appraisal at arms’ length from the appraiser himself. It also makes sure than anyone with any stake in the outcome of the appraisal has no say in who does it.
As proposed, these guidelines (though with honorable intent) will hurt the entire system, from appraisers, to mortgage professionals and ultimately home borrowers. First, it derails the entire existing system. While solving some of the transparency and independence issues, it does not eliminate them. Influencing an appraiser can still happen under the HVPC as it is currently written. As it stands now, the majority of appraisal orders will have to go through one of several AMC’s very similar to those accused of fraud in the past. Eliminating the good will and business relationships between honest appraisers and honest mortgage brokers/lenders does not eliminate the independence issues that the HVPC attempts to solve.
Secondly, dissolving the relationships between appraisers and lenders may help keep appraisers independent, but fewer quality appraisers will be available. The proposed system where appraisers take orders only through AMCs, will lead to the financial collapse of most current appraisers, who will find their fees cannibalized by the management companies (sometimes by as much as 60% of the fee goes to the AMC.) Utilizing less experienced, price cutting appraisers will lead to poor quality appraisal reports.
We all agree something needs to be done. Appraisals should be requested without coercion or threats and they should be performed by well trained, skilled and fairly compensated appraisers.
Here is my suggestion. Enforce the Existing Laws!
Next week—how to do it.