(Update 3: added Freddie Mac; OFHEO comments; Cuomo comments)
A landmark agreement by Fannie Mae and Freddie Mac with New York Attorney General Andrew Cuomo will force some big changes to the way appraisals are processed in the mortgage industry. The agreement, which hit a snag last week, was finalized Monday morning and will eliminate broker-ordered appraisals and reduce the use of appraisals prepared in-house or through captive appraisal management companies in underwriting mortgages.
“With this agreement, Fannie Mae and Freddie Mac have become leaders in transforming the mortgage industry,” said Cuomo. “Now national banks have a clear choice: immediately adopt the new code and clean up appraisal fraud in the mortgage industry or stop doing business with Fannie Mae and Freddie Mac – it is that simple.”
As part of the deal, Cuomo’s office will terminate its inquiry into both Fannie and Freddie. The GSEs had been subpoenaed in November 2007 as part of an ongoing complaint by Cuomo’s office against appraisal practices at the First American Corporation.
“We are pleased to work with regulators to do our part to ensure sound, accurate, independent and reliable appraisals,” Fannie Mae general counsel Beth Wilkinson said, who said the agreement was key to “a well functioning market.”
Both GSEs said they will adopt a new set of appraisal regulations, called the Home Valuation Protection Code, that establish requirements governing appraisal selection, solicitation, compensation, conflicts of interest and corporate independence.
“Accurate, independent appraisals are very important to ensuring the safety and soundness of Fannie Mae, Freddie Mac and the mortgage market,” said OFHEO director James Lockhart. “These agreements build upon existing federal and state laws and regulations to further strengthen the single-family home appraisal process.”
Fannie and Freddie will adopt the new code immediately, and make appropriate changes to their Sellers Guides to reflect the code. Beginning January 1, 2009, both will require that lenders represent and warrant that appraisals prepared in connection with mortgage loans originated on or after that date conform to the code.
Both GSEs will also fund the creation of an Independent Valuation Protection Institute. The Institute will monitor and study the area of home valuations, and will establish a hotline for consumers to contact if they believe the appraisal process has been tainted or if they believe they have been harmed by appraisal fraud. Appraisers also will be able to contact the Institute if they believe their independence has been threatened in any way.
“Our lender guide has always stated that lenders must buy back the loans that do not meet our standards and requirements, and the new Code reinforces our standards,” Wilkinson said. “We will continue to work with the New York State Attorney General and other regulators to support the highest lending standards for the market and homebuyers.”
The news is likely to be cheered by many, but one group of businesses is now facing extinction: the large appraisal shops that brokered out orders to their own network of appraisers.
“There are some large appraisal brokerages that just went out of business,” said one source, who asked that her name not be used.
“Today’s agreement with Fannie Mae and Freddie Mac begins to set right what had gone so horribly wrong in the mortgage industry – rampant appraisal fraud,” said Cuomo. “The integrity of our mortgage system depends on independent appraisals.
“Again and again our industry-wide investigation found that banks were putting pressure on appraisers to drive up the value of loans just to make a quick buck. We believe the new standards, and the new independent monitor agreed to today, can begin to erase this problem from the industry.”
a lot of appraisers are going to go out of business due to this!
This is a major step in the right direction. 25+ years of experience at the origination level of the industry where all the “stuff happens” tells me this is a good first step. Truth be told though this is only a small piece of the fraud pie. As a senior line underwriter for many years I can without equivocation say that fraud in origination occurrs at the highest levels, precaution and safety tossed to the winds for the sake of meeting production goals. “A 4% loss” was required on total annual production in order to support maximum production levels. Programs are written at the highest levels of every company that encourages fraud. Underwriting standards gave way like the ground during an earthquake in order to acheive increase in production over last years business.
But unless efforts such as this are made it will not change. The next thing that should occur is the elevation of Human underwriting (Yes I need a job, been unemployed since my company - the 7th largest non subprime Mortgage Banker in the nation went under to Chpt. 11 in August of 2007) and the immeditate elimination of the reliance on algorithms like FICO Scores and such as primary determining factors for loan qualifications. The adoption of thses methods was under the conclusion that their predictive value was near fool proof., that a borrower at a certain level would unlikely default due to the many factors used in the determination of their score. I can not tell you how many deals I looked at and said they should never be done only to be overridden by branch management and corporate managers that fell back on those scores. All the loans currently in default were all qualified on these scores.
Appraisers will need to go through continuing education and should also be required to go through a certain number of hours every year under review by a senior appraiser duly certified and independent of the industry.
If the industry does not get a grip on the ethics of doing honest business then the system will never recover.
Hazzaa! to AG Cuomo!
I am curious…what does this mean for the independant appraiser who is not affiliated with an appraisal management company or an in-house appraiser?
What about the individuals who have their own client base who have been using that appraiser for years and that appraiser has no record of ever being un-ethical? Is it fair to punish to entire lot….much less ruin their careers?
What can be done about this….this will create a huge ripple….huge!!
JC
As a mortgage broker,former loan processor, and new realtor, I feel that the realtors are not getting punished by their HUGE part in the fraud. Many realtors required 1 percent for their referrals, forcing mortgage brokers to charge higher rates to get the realtor’s business. Then the realtors and mortgage brokers would force the appraiser to arrive at their value. As a mortgage broker that accepted my appraiser’s honest assessments, I lost a lot of bad business, thank God. I know I don’t have to buy back ANY loans.
It is important to note that it is just not the appraiser that is involved here. I have personally reported to the Georgia Department of Banking about several brokers in the area about fraudulent deals. A broker here in Georgia creates documents about a valid debt and submits it to the bureau level to get it erased from the report to obtain a higher score, (charging a fee to the buyer) gets them into a home and earns 10 +/- points for this and not even all of it is recorded on the HUD statement.
Secondly the same broker requires realtor’s to pay a percentage so that they will close the deal. The broker then has his brother do the appraisal at the number he wants taking pictures of “possible” upgrades done to a home, just not the one being bought. This is included into the home loan file thats submitted to the underwriter.
The appraiser makes the buyer pay for the fees at the door and the broker still puts it in the HUD statement and collects that fee from the borrower at the closing table. He is a real tricker to a bait and switch - he even goes to threatens the borrower that if they don’t close on the home he will sue for origination. Borrowers don’t know that they have the right to go with whom ever they want and not have to be sued.
Several current and former employees have reported this practice to the state but they are not willing to do anything about this.
I currently work for them (have NO CHOICE) jobs are far and between right now. I have contacted officials to come in and see if they can help correct this however, they wont due to cash (and lots of it) being given to the investigator to keep quite.
I am a former employee of GreenPointe (Capitol One) and I have stacks of fraud on my desk just hoping that someone will look into this and offer some help.
Can anyone comment on the next steps to try and take?
Thanks
Georgia Broker.
A Federal Judge ruled last week that a reasonable person would not find that Fannie Mae had violated SEC regulations if and when it recorded false information to its general ledger.
See Department of Labor CASE NO: 2007-SOX-00047
Once again, you are missing the picture. Yes there may be some appraisers that have been “bought”, however the majority are honest. The problem lies with the lenders lieing, falsifying documents and continuing to do so today. The fault of all these foreclosures lies with people refinancing and spending their equity on new cars, big screen tv’s and vacations. Lenders have lied about bank verifications, owner occupied residences and continue to think of ways to get around all the new rules to qualify people for homes they cannot afford. Lenders have closed their doors only to reopen around the corner with a new name or skip the state to I’m sure another skeme. These are the people that need to be hunted down and prosecuted. The government should not be bailing any of these losers out as they deserve to lose their homes, as they should have never qualified for them in the first place.
HVCC - Appraisal Fraud & The New Code - The NY Attorney General in his own words “BELIEVES” a private investigation of Fannie / Freddie has discovered wide spread inflated appraisal values. The source of the inflated values are corrupt appraisers and mortgage brokers. The last time I checked mortgage brokers don’t apply their signature as the primary or review appraiser. If the investigation found fraudulent appraisals why aren’t the offenders being prosecuted? If the investigation found bribery why aren’t the offenders being prosecuted? Isn’t the NY Attorney General responsible for prosecuting criminals. What every happened to the phrase “Innocent until proven guilty”. The new code will allow the so-called corrupt appraiser and so-called corrupt mortgage broker to continue doing “indirect” business. Sounds like the NY Attorney General is more interested in making a name for himself than carrying out the duties of his office “PROSECUTION”. With every new crisis in America why do our elected and appointed officials broad stoke us with new feel good laws. I for one say enforce existing law. If an industry has wide spread corruption what better way to rid the bad element than prosecution. The back room closed door process in which this agreement has been struck is further suspicious. Apply the smell test. STINKS!
In a climate of fraudulent lending, out of control foreclosure rates, and questionable real estate practice, sometimes your only fair and balanced reporter is the appraiser. My job is to be the eyes of the lender. There is a basis of ethics followed by anyone in a position of professional practice, including appraisers. At no time is the public led to believe that the appraiser was anything less than a professional within their field, and with the education and practice we receive, we are entitled to that label. With HVCC regulations as written, this virtually eliminates the integrity of the independent appraiser in the eyes of the public. The public trust should be foremost in the minds of the appraisal industry. Most of us have worked very hard to assure that trust. We consider our profession to be the front line of the real estate business, and the public can be assured that the valuation they receive is an accurate picture of truth within the data, not a bought and paid for number. Our concern lies with a proposal regulated under governmental control. If this blind legislation passes, the HVCC has gone on to silence yet another public voice with the independent appraiser.
HVCC is bad for consumers, appraisers, brokers and agents in its current form. Sign the petition to request consideration of the mistakes that are contained in the existing form of HVCC at http://www.petitiononline.com/mod_perl/signed.cgi?hvcc
I have also written about more reasons outlining why HVCC needs to be changed: http://brokerscience.com/hvcc/hvcc/
This is going to put a lot of us out of business. If we have do deal with the HVCC as is, our fees are going to go down, our number of orders are going to go down. We are honest and legit…. why do we deserve to be punished for what some crooked lenders and a few crooked appraisers have done? Don’t we have USPAP to keep appraisers in check anyway? Shouldn’t these bad appraisers already be being prosecuted if they have performed fraudulent appraisals? The hammer should be falling on the lenders, not the appraisers… we, most of the time, are the few honest folks in the whole real estate industry.