Appraisers Regulated out of Commission
A shift of regulations intended to prevent lending companies from influencing — or worse, inflating — home values during the appraisal process nearly put an entire industry of people out of work during the worst economic downturn since the Great Depression, according to industry experts.
But what happened to independent home appraisers is a topic that almost no one talks about outside the real estate industry.
After a parade of subprime home loans and shoddy lending practices by mortgage lenders brought the real estate market to its knees, the real estate-appraisal process was targeted in an effort to protect consumers.
As a result, experts say many qualified, independent home appraisers became innocent bystanders.
Prompted by allegations that Washington Mutual had pressured appraisers to inflate the value of homes that came in too low, New York State Attorney General Andrew Cuomo accused the Seattle-based lender of engaging in a scheme to influence the outcome of appraisals.
Cuomo accused WaMu’s subsidiary, First American, a home-appraisal company, with “caving to pressure” to use a list of appraisers who inflated the values of thousands of homes.
On behalf of New York, Cuomo filed suit against First American at the end of 2007, just as the overheated real estate market was beginning to show the first signs of a crack developing.
Subsequently, the Securities and Exchange Commission conducted inquiries. A host of new regulatory practices were issued by the Federal Housing Finance Agency, and Washington Mutual was later seized by the Office of Thrift Supervision and acquired by J.P. Morgan.
As the New York suit began to work its way through the court system and the crack in the real estate market split wide open, the Federal Housing Finance Agency introduced the Home Valuation Code of Conduct, or HVCC, in May 2009 to prohibit lenders and third parties from influencing appraisals.
While the HVCC code did not specifically restrict independent home appraisers from being used, it did impose several restrictions on the appraisal process.
Appraisal-management companies, or AMCs, which had long existed, proliferated under the HVCC code, according to Ken Chitester, director of communications for the Appraisal Institute in Chicago.
The usage of AMCs became the trend — whether were they needed or not, Chitester said.
The institute, which represents more than 25 percent of all licensed appraisers in this country, is the industry’s largest with 25,000 members, according to Chitester. Among its members are appraisers who either own, or work for, an AMC.
The AMCs served as “middle men” in the real estate-transaction process with the intent of providing unbiased home appraisals.
Regulators were attempting to put a firewall in place between lenders and appraisers to protect consumers, Chitester said.
Appraisers, Realtors and a mortgage consultant interviewed by The Signal saw little to no connection between home appraisers and either the real estate crash or the mortgage lending market fiasco.
“In my 29 years of being a Realtor, I have never known an appraiser to ‘do a favor’ for a Realtor, seller or buyer,” said Sam Heller, a local real estate agent with ReMax.
Local experts said the new regulations resulted in poorer quality appraisals in many cases.
Appraisers themselves, now dependent on the AMCs for continued income, said they didn’t want to submit appraisals the AMCs deemed to be overinflated.
Also, Realtors and appraisers alike complain that in the year following implementation of the HVCC rules, appraisers were often brought in from outlying areas by the AMCs to appraise homes.
Unfamiliar with the local market or not experienced enough to conduct a proper appraisal, these appraisers’ reports nearly always resulted in a lower home value than was merited in the market, sources said.
Meanwhile, experienced appraisers could no longer afford to train the up-and-coming appraisers.
“It was an absolute mess,” said Fred Arnold, certified mortgage consultant for American Family Funding in Stevenson Ranch.
Independent home appraisers interviewed by The Signal said they were forced to register with the AMCs if they wanted to continue doing appraisals. Lenders just weren’t contacting them anymore.
All of the appraisers said they lost most of their income.
Prior to the explosion of AMCs, independent appraisers charged fees ranging from $350 to $500 based on the size of a home and the amount of time required to do a proper evaluation.
Once the AMCs played a primary role, those companies charged similar fees. In turn, the AMCs paid the appraisers they hired a percentage of the fee collected.
On average, appraisers were earning 60-percent less on appraisals than they had been prior to the HVCC.
In most cases, they are now paid only a flat fee regardless of how much time is required, resulting in some appraisers not being as diligent as they should be.
And the appraisers need to triple their work load to achieve their previous earning levels.
“I did an appraisal on a 7,500-square-foot home,” said appraiser Rex Robinson, of Agua Dulce. “I asked for an extra $100 because it was a lot of work to cover a home that size. The AMC said ‘no.’”
“I could say that this new system was needed to clean up the lending market,” Heller said. “Although it sounds good, it is not true.”
Experts said the new codes basically cut off any communication between the parties in a real estate transaction to avoid influencing an appraised home price.
But Chitester said the HVCC was widely misunderstood. It never said parties couldn’t communicate.
Indeed, the code did allow lenders to speak with appraisers to ask for additional information about the basis of a valuation.
An updated code states, “Parties are prohibited from having any substantive communications with an appraiser or appraisal-management company as it relates to having an impact on valuation.” But it does not prohibit all communication.
“Lenders used to be able to call me because I’d lived in Agua Dulce for 15 years, and most people were aware that I knew the area well. I had the most knowledge,” said Robinson.
But that changed after the new regulations took effect.
Today’s lenders may avoid speaking to an appraiser, mortgage broker or Realtor out of concern about the appearance of impropriety.
Appraisers who spent years building a client base on good business relationships and solid appraisals said they were forced out of business literally overnight while the businesses they built up were turned over to the AMCs.
But local industry professionals said California consumers were already protected against biased appraisals.
“Appraisals were already monitored for fairness before the HVCC code went into effect,” said Robinson.
The California State Office of Real Estate Appraisers licensed appraisers and monitored any problems by reviewing and addressing complaints submitted to the office.
Under new regulations recently adopted by Freddie Mac and Fannie Mae, all states are now required to put licensing boards in place. It’s unclear whether there are any operating standards that all boards must follow to ensure uniform regulation.
The changes were not necessary, industry professionals say. They were just a big smoke-and-mirrors act by regulators so they could say they were trying to crack down on fraud, Heller said.
“The AMCs weren’t regulated by anyone for the past two years,” Arnold said.
But there is a consumer element to this, Chitester said. If the law is not properly implemented, ultimately, consumers could be the big losers.
“It’s very important that the most competent, most experienced and most qualified appraiser is hired to perform a valuation of a home,” said Chitester. “Consumers deserve the most reliable, credible opinion that they can get — whether they’re buying or selling.”
Out of work
Whether mortgage lenders stopped hiring appraisers directly because they became skittish about being subject to scrutiny of their home-appraisal process is anyone’s guess.
But the explosion of AMCs essentially drove independent home appraisers out of business overnight, experts said. Chitester confirmed there is a lot of frustration expressed by appraisers.
The HVCC regulations were set to expire by the end of 2010 and were only intended to buy time to clean up the lending practices and mortgage loan mess.
But in October 2010, the regulations became permanent when they were adopted by Freddie Mac and Fannie Mae and renamed the Appraiser Independence Requirements.
Whether lenders ever go back to the old business model remains to be seen.