Just When the Public Thought it was Safe to Buy Houses Again…

Appraisal issues will affect more purchase transactions after May 1, 2009.

Homebuyers looking for deals on foreclosed homes will face another challenge after May 1, 2009 when new appraisal ordering guidelines will be required by FNMA and FHLMC.

In response to inflated appraisals contributing to the housing crisis, mortgage brokers will no longer be allowed to have any contact with appraisers and instead will have to order appraisals though Appraisal Management Companies or banks.

I anticipate numerous challenges and problems including, the approval process taking longer and increased costs to consumers as they'll be forced to pay for appraisals they can't use.

The "pendulum" did swing too far in the direction of inflated values, but is now swinging too far in the conservative direction.

Let me share an example with you to illustrate:

A homebuyer recently applied with us for a mortgage on a home purchase transaction.  The home was an average three bedroom, single-family home that happened to be a foreclosure.  The buyer had a sales contract on it for a modest amount in the $60,000 range.   They thought they were getting a pretty good deal on it as it had sold a few years ago for over $120,000.

Upon applying with us for their mortgage, we ordered an appraisal on the property from an appraisal company we've done business with for several years.  The appraised value came in a couple of thousand dollars above the sales price.  We submitted the appraisal with the application package to a wholesale lender - and that was when the fun began.

After 10 business days in underwriting (approvals take a lot longer than they used to), the underwriter returned a suspense on the application due to the value of the property being "questionable".  Because of previous issues with fraud and rapid depreciation, most underwriting departments now use sophisticated computer programmed Auto-Valuation Modeling systems (AVM's) to estimate property values.  Zillow is a popular consumer version of these types of programs, but since it's free, it pales in comparison as to accuracy.

The system used by the underwriter had come back with a lower value exceeding the tolerance allowed when compared with the appraised value.  The underwriter's company had a policy regarding situations like this - they would reject our client's application for "unacceptable collateral" or we could order a review appraisal from a list of THEIR approved appraisers for an addition $300.  They didn't allow the appraiser we originally contracted to defend his value or allow any other options.

Our client's options at that point were 1) allowing us to submit their application to a different company and start the process all over again, putting their closing date in jeopardy or 2) paying the additional $300 and continuing the process with the current company.  They chose to pay the additional $300 and move forward with the current company.

A week later the review appraisal came in with a value well under the purchase price.  We were allowed no contact with the review appraiser and were not allowed to see a copy of the review appraisal.  In discussing the situation with the underwriter, we were told that foreclosed properties were used as comparables to determine the value of the review appraisal.  When we pointed out that the original appraisal had better comparables, we were told that because there were so many foreclosures in the city of Hazel Park, the review appraiser was justified in using them as comparables.  Our client's application was then rejected.

Now before anyone jumps on their soapbox and tries to point out that our clients would have been better served going to a bank rather than a mortgage broker, I'd like to share one more bit of information - we sent our client's application to the same lender that OWNED the foreclosed property they had bought.  The same lender who had set the sales price of the property and negotiated the terms of the purchase contract through the real estate agent they'd hired to represent them.  We had done this deliberately to avoid potential appraisal issues as we were well aware of the foreclosure comparables issue in Hazel Park.  We even pointed this out to the underwriter, all to no avail.

Our client's story did end well as we sent their application to a nonbank company where the appraised value turned out to be a non-issue.  We didn't meet the closing date on their purchase contract, but their real estate agent was able to get a 10 day extension for no cost.  Our client though, did have to pay an extra $300 for a useless review appraisal.

Starting May 1^st, 2009, stories like this will take place more frequently. 

FNMA will implement its "Home Valuation Code of Conduct", that no longer allows mortgage brokers anywhere in the country, to directly order appraisals.  

The Code of Conduct was triggered by a lawsuit brought against an Appraisal Management Company (AMC) by the New York Attorney General, Andrew Cuomo in 2007.  The lawsuit involved appraisals ordered by Washington Mutual (WAMU), a Savings & Loan BANK.

"The lawsuit, announced on November 1, 2007, detailed a scheme in numerous e-mails showing First American and eAppraiseIT caved to pressure from Washington Mutual to use appraisers who provided inflated appraisals on homes. E-mails also show that executives at First American and eAppraiseIT knew their behavior was illegal, but intentionally broke the law to secure future business with Washington Mutual. Between April 2006 and October 2007, eAppraiseIT provided over 250,000 appraisals for Washington Mutual. "

What's even more interesting is that January 7, 2009 FNMA announced an amended Code of Conduct that allows BANKS like WAMU (now owned by Chase Bank) to own AMC's and still use their own internal appraisal staffs!  

"In-house appraisers: A lender may now rely on appraisals performed by a lender's in-house appraisal staff if they meet the specific requirements outlined in section IV.B (1)-(8) of the revised Code.

Appraisal management companies: The lender's ownership of or affiliation with an appraisal management company is no longer restricted. However, any appraisal management company that provides the lender with an appraisal must adopt written policies and procedures implementing the revised Code."

Hello!  Can you smell major bribery, oops, I mean lobbying here?  A BANK got caught, but banks don't get penalized? 

This is another perfect example of our government "protecting the consumer" but in reality doing nothing more than requiring more paperwork.  The ONLY net effect the Code of Conduct will have is to penalize mortgage brokers.  For banks, it'll be business as usual.  First American & eAppraiseIT weren't even penalized.  How's all that for justice?                                         

Mortgage brokers will adapt and continue to provide value to their clients.  We've been testing Zillow values against actual appraisals for several months.  We're also looking into accessing the more advanced computerized auto-valuations modeling systems, but will have to charge for this.  We're doing all this for the benefit of our clients so they don't waste $300 on useless appraisals - whether for purchase or refinance transactions. 

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Drew Sygit is President of The Lending Edge and holds mortgage industry designations CMPS, CMC, CRMS, CMLO, CALO, has an MBA and is an approved industry instructor.  He's spoken for HUD, has written numerous articles and is a mortgage industry advocate for loan originator licensing and consumer education.  He can be reached at 248-356-3739, dsygit@TheLendingEdge.com  or read his blog:  http://drewsmortgagenews.blogspot.com.