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Value judgment | New home appraisal rules rile real estate industry
Photo/Courtesy Richard Morin
Mortgage broker Richard Morin of Consumers First Mortgage in Kennebunk
Photo/David A. Rodgers
Appraiser Ed Millett of South Portland says he lost a quarter of his business as a result of HVCC
Just as federal incentives for homebuyers are beginning to breathe life into the nation’s real estate market, new appraisal rules — devised entirely outside the legislative process — are stifling home sales in Maine and across the country, frustrating just about every constituency in the real estate market.
The Home Valuation Code of Conduct, which took effect May 1, is a hot topic of conversation in real estate circles these days. A byproduct of a legal settlement among New York Attorney General Andrew Cuomo and Freddie Mac and Fannie Mae, as well as their regulator, the Federal Housing Finance Agency, the code was intended to make the appraisal process more transparent and accurate by limiting communication between loan originators and appraisers. Because Fannie and Freddie back 56% of U.S. home loans, totaling more than $5 trillion, a deal that arose in New York now has ramifications nationwide.
“They throw these appraisal requirements on, that in this market are just going to add that much more problem getting real estate appraised,” says Linda Gifford, a lobbyist for the Maine Association of Realtors. “To add this wrinkle in is just,” she pauses, “unconscionable.”
The code is designed to alleviate pressure on appraisers to hit predetermined home values, a part of the process that many blame for contributing to the housing boom and its subsequent collapse. Brokers and many lenders can’t just call up appraisers anymore, a jarring shift in standard practice that has led many to use middlemen — appraisal management companies. Based primarily out of state, the companies contract with appraisers and collect fees of often 40% of the appraisal cost, a fact largely hidden from consumers. The companies are not regulated in Maine and are largely unregulated nationwide. So, industry members in the state say, the companies tend to sign inexperienced appraisers, often from well outside the home’s area, who are willing to work for less and turn around results faster. The substandard appraisals now showing up on the market are throwing a wrench into already fragile home sales, affecting loan estimates, costing consumers who have to pay for replacement valuations and frustrating real estate agents trying to close on sales.
More than 60,000 people have signed an online petition to reconsider the rules, including about 350 from Maine, chiefly mortgage originators and Realtors. An effort is now under way in the U.S. House of Representatives to put an 18-month moratorium on HVCC. The bill, HR 3044, co-sponsored by Maine Rep. Mike Michaud, is now before the House Committee on Financial Services.
Brokering change
Mortgage broker Richard Morin recently received an appraisal for a three-bedroom ranch in Kennebunk that came in about $15,000 below the roughly $215,000 he expected. The appraiser, who was from Portland and worked for an appraisal management company, lacked what Morin calls “geographic intelligence,” or familiarity with the intricacies of a certain area’s housing market. The homeowners soon visited Morin’s office with a complaint about the appraisal report. “The photo on the cover was great,” he says, “but it was not my customer’s house.” The deal fell flat.
Morin, owner of Consumers First Mortgage in Kennebunk and vice president and legislative chair of the Maine Association of Mortgage Brokers, estimates that he pays $110 more per transaction under HVCC because he’s forced to use appraisal management companies. Multiply that by 150 transactions a year, times 300 mortgage brokers like him in Maine, and the sum rises to $4.95 million annually. Morin foots the added cost, but it’s often passed onto consumers, he says. His national affiliate, which unsuccessfully sued to delay HVCC, estimates the rules’ cost to consumers will total $2.8 billion in higher fees.
The real crime, Morin says, is that some lenders, including the one on the Kennebunk ranch deal, have formed their own appraisal management companies. They tend to be some of the country’s largest banks, the same culprits behind much of the appraisal fraud that HVCC was intended to prevent.
HVCC grew out of a 2008 settlement New York Attorney General Andrew Cuomo reached with First American Corp. of California and its subsidiary, eAppraiseIT. Seattle-based Washington Mutual, the subsidiary’s largest client, allegedly bullied eAppraiseIT into inflating home values. First American Corp. has partnered with big banks including Citigroup and Wells Fargo to form some of the country’s largest appraisal management companies. Procedural barricades may exist between the lenders and their subsidiaries, but “it sure becomes blurry after it leaves my office,” Morin says.
A section in the rules explicitly prohibits lenders from using appraisers employed by them, their affiliates or any company in which they have an ownership stake. But a subsection outlines a number of exceptions, primarily requiring that sales and loan production be kept separate from appraisals, limiting communication between the functions, and calling for outside audits or regulatory examinations.
Some smaller banks are exempt from HVCC if they can prove hardship from certain requirements, specifically segregation of loan origination and appraisal ordering. They are still required to establish safeguards that promote as much segregation as possible and prevent improper influence on appraisers, according to a spokesperson for the Federal Housing Finance Agency.
Morin and other mortgage brokers aren’t exempt, however, which amounts to discrimination of an entire segment of the market, he says. Also threatening deals is a requirement that customers receive a copy of the appraisal at least three days prior to the loan closing, or sign a waiver. The broker or lender may not even have received a copy yet, leaving them unprepared to answer questions about disappointing results, he says. Plus, banks and lenders often won’t accept HVCC-compliant appraisals on deals other competitors have declined, so consumers are stuck paying $450 for another valuation, Morin says.
A 25-year veteran of the business, Morin says he’s argued with appraisers, with a clear conscience, on behalf of consumers. He also recently called one of his appraisers to conduct a home inspection that had to be completed within a week, while his customer was in town. He received the report within a couple of days. “If we use the HVCC policy, I can’t make that call,” Morin says.
Appraisers’ apprise
Ed Millett of Millett Appraisal Co. in South Portland estimates he’s lost 25% of his business since HVCC passed in May. Millett, who’s been in the business since 1972, hasn’t signed with an appraisal management company, which would gobble up 40% of his typical $400 appraisal fee. The companies also pay only every 30 to 60 days and require quick turnaround times. “I’m not going to drive to Hollis or some place like that for $240,” he says. Millett has heard stories of appraisers from Bangor working jobs in Portland and Cape Elizabeth, or places like Higgins Beach near Scarborough. “You can go one street away and the value changes,” he says. “I have a hard enough time doing it myself. Imagine someone from Bangor who’s never seen the ocean.”
The consensus among appraisers is that HVCC is bad for both business and consumers, he says. “There are some mortgage companies that probably took advantage of the system a number of years ago,” Millett says. “I wouldn’t work for a mortgage company that asked me to come up with a number.”
Karen McGoldrick, who owns McGoldrick Appraisal Services in Standish, has lost 70% of her business in the wake of HVCC, and is making less now than when she started 19 years ago. “All the relationships that I fostered for years are now a moot point,” she says. “They cannot order appraisals from me.” Her former lenders are calling her with horror stories about problematic appraisals.
McGoldrick refuses to sign with an appraisal management company and says many qualified appraisers have made the same choice. Because lenders often have ownership stakes in the companies, the fees they collect amount to kickbacks, a clear violation of the Uniform Standards of Professional Appraisal Practice, she says. Since May, McGoldrick has received no conventional appraisal requests, only Federal Housing Administration jobs, which don’t fall under HVCC purview, and some private work. “They’re supposed to be helping the homeowners,” she says. “They’re crucifying the homeowner and a lot of other people.”
Bob Strong of Property Valuation Services of Freeport lost more than half of his clients to appraisal management companies, but he bit the bullet and signed on to work for them. Some are better than others, he says. “We’ve been building our client base for years, and basically overnight our client base changed from people we could call to 800 numbers,” Strong says. Rates are still low and Maine is at the peak of its home-buying season, so HVCC’s real effects will be felt in the fall, Strong says. Not all appraisers — about 790 are licensed and/or certified in Maine — oppose the new rules, however. Lenders have never pressured him to come up with a number, but Strong says he wouldn’t be surprised if it happened to other appraisers.
The Appraisal Institute, a national trade group, wants to rework HVCC rather than scrap it by way of the moratorium, according to President Jim Amorin. “The intent of the Home Valuation Code of Conduct was very good,” he says, specifically relieving pressure on appraisers to hit target values. “Do we think that there are some things about the code that could be tweaked to make it better? Absolutely.” The group is pushing for greater regulation and disclosure of appraisal management company practices, and reintroduction, with oversight, of mortgage brokers into the process. “The mortgage brokers have become the pariah in all this,” Amorin says.
HVCC’s future
A recent survey by the National Association of Realtors found that 69% of Realtors in Maine reported having to wait longer for completed appraisals since May 1, HVCC’s effective date. About 34% said the delays led to lost sales, while 74% said appraisal quality had decreased and 71% of Maine Realtors reported that the use of out-of-area appraisers has risen since HVCC.
May home sales in the state climbed to 877 from 610 in April, but any effect on sales from HVCC may not show up until June or July. The May total reflects closings reported that month, many of which were under contract and being appraised in April, before the code became effective.
The national association is lobbying hard for the 18-month moratorium, leading the president to cancel a scheduled June 30 town hall event in Portland to deal with the resulting problems, says lobbyist Gifford of the Maine Association of Realtors. “It blindsided all of us,” she says. Appraisers can no longer contact Realtors to get comparable home sales, and Maine’s industry is paying the price for fraud that occurred elsewhere, she says. One member told her of a deal he was trying to close recently on a condo at Sugarloaf. The appraiser came from Lincoln, 150 miles away, and had never been to Sugarloaf or had assessed the value of a condo, Gifford says. “You end up with an appraiser coming in who doesn’t know the area, and that’s a huge disadvantage.”
Positive feedback on HVCC is hard to come by both locally and nationally. In a December press release from the Federal Housing Finance Agency, the most recent public statement it’s issued about the code, Director James Lockhart said, “The code strikes a balance of assuring enhanced protections for appraisers while maintaining lender ability to address unprofessional appraisal practices and to perform quality controls on appraisals received.” Easing pressure on appraisers to come up with predetermined values is easy to agree with, but just how to do so is a tough call. As appraiser Ed Millett in South Portland says of HVCC, “It’s good intentions but a bad implementation and bad concept.”
Jackie Farwell, Mainebiz staff reporter, can be reached at jfarwell@mainebiz.biz.
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