Over the last few weeks, I’ve had some time to go back and read the landmark agreement NY Attorney General Andrew Cuomo struck with Fannie Mae, Freddie Mac and OFHEO a few weeks ago. Designed to prevent brokers from ordering appraisals and lenders from having an ownership interest in an appraisal company, I’ll readily admit that I was one of the first to hail the move.
Although it’s clearly an improvement over the current system, I still think it doesn’t fully address the systemic issues that have plagued this side of the industry.
Mary Ellen Godin of the Record-Journal wrote an interesting story a few days ago (”Appraisers: Pressure to inflate inflates“):
An appraiser who works for Robert Claremont was sent to a house in Stratford and the real estate agent wouldn’t let her enter.
“The agent told her she needed to call the lender,” Claremont said. “I told her that is nonsense.”
The lender then called Claremont and said he had an appraiser who could put a $405,000 value on the house, and he found another one who could deliver $410,000.But if Claremont’s appraiser could bring it home at $415,000, the real estate agent would allow her into the house and she had the job. Claremont was outraged.
“This is really about your commission,” Claremont told the lender. “You are conspiring.”
Since July, Claremont has tracked more than 100 requests asking him to violate his ethics. He plays a message still on his answering machine from a broker saying, “I’m looking for someone who knows how to maximize value without getting into trouble.”
Another lender in a home equity loan application wanted him to remove a notation stating that the home had been on the market within the last 12 months.
“Had I caved under that pressure, I’ve committed fraud,” Claremont said. “The bank could have come after me. This is out of control. The buyer has no idea this is going on.”
Stories like this one are nothing new. While this agreement will clearly hamstring the broker’s ability to influence appraisers, there’s nothing in it that prevents a lender from exerting pressure onto an appraiser to hit a targeted value. Let’s break down the provision. Article 4 clearly spells out that anyone who is in sales, or reports to someone in charge of sales, can’t be involved in managing the appraisal ordering process. Which makes sense, on the surface.
But if the powers to be at a mortgage company want to seek out appraisers who will work the system to their benefit, there’s nothing stopping them. Read the language. In typical government fashion, it’s left just enough wiggle room to allow any unethical lender to go charging through like a bull on steroids.
Yes, there’s supposed to be a hotline that will field anonymous calls from appraisers who are being harassed but I don’t think it will have a significant impact. Most people in this business haven’t been around long enough to remember that out of the RTC days came the development of state commissions who were responsible for holding appraisers accountable when complaints were filed against them — a great idea on paper, that has since proven to be largely ineffective.
This idea is even less effective in pratice, since lenders are supposed to manage the hotline. When you think about it, this may be the most foolish part of the entire provision. If you, as a lender, are going to work over an appraiser, how effective do you suppose your hotline system will be at policing yourself? Are you kidding me?
Godin continues:
The pressure on appraisers to omit information, make fraudulent claims or set higher values has prompted state Rep. John Harkins, R-Stratford, to sponsor a bill penalizing appraisers who allow themselves to be influenced by anyone who benefits from a real estate transaction.
“Because of the mortgage mess, there is an examination of the process that has resulted in several different actions,” said John Brenan, director of research and technical issues for the Appraisal Foundation, an agency appointed by Congress. “Why have an appraisal if you can steer it to what you want.”
Now, don’t get me wrong. Appraisers should be held accountable for their actions –- no question about it.
But when a guy who only makes $350 per appraisal is constantly pushed to perform or threatened to get blackballed, the industry has put him in a no-win situation. Feed your family or compromise your ethics, you make the choice. To threaten punishment without addressing the root cause of the problem is a shortsighted solution. There’s a reason over 10,000 appraisers signed an on-line petition asking — no pleading — for significant changes to be enacted. The process is broken and susceptible to manipulation, even with the positive changes that seem likely to come from the recent agreement.
The only way I can see to prevent the abuse described above is to develop a system similar to the one used by the Veterans Adminstration. Until the appraisal can be ordered so that the selection process is random and rotating, this issue will persist.
Admittedly, I don’t know one originator who likes the VA appraisal process (including myself) because it’s cumbersome and time consuming. The service from VA appraisers is notoriously slow and to make such a change could set the industry service levels back to the days of the stone age.
But something tells me that if such a system were enacted nevertheless, the industry would figure out a way to manage it more effectively.
Note: Richard Bitner is the author of Greed, Fraud and Ignorance: A Subprime Insider’s Look at the Mortgage Collapse, and has appeared on CNBC and in Newsweek, among other media outlets. As a 14-year veteran of the mortgage industry, he spent five years as the President of Kellner Mortgage Investments, a subprime mortgage company. In addition, he was a Director for GMAC Residential Funding and the National Training Manager for GE Capital Mortgage Insurance (Genworth Financial).
With all do respect, this agreement goes way too far but in the wrong direction. It’s punitive to appraisers with bonafide ethical restraint while letting the hookers (read brokers) off the hook for the pressure they exerted. How the hell does this make any sense?
Why should reputable appraisers be relegated AMC monkeys because the Fed and state regulators lacked the will to get to the root of the problem? When everyone and their mother became a “loan consultant” or Realtor (read hooker, again), it should have been clear that investors (the madams) were pumping waaaay too much money into the system.
Of course, the reason “name your number” rose to fame was because of the “opportunists” that entered the appraisal business DURING the boom. What else could be expected from low barrier-to-entry set by “self-funded” state regulating agencies? From initial applications fee’s to license upgrade fee’s, to this fee, that fee…it was a money maker! Where is the real incentive to prosecute and “lose” members (read funding) under this model?
The industry in general (brokerage, appraisal, realty) is completely effen backwards and the AG agreement amounts to nothing more than sweeping dog s*** under rug.
First of all, Mr., Mrs., Miss Oh Please,
Sorry in advance, but I think your generalization is painting all of us Ho’s with a pretty broad brush, and you’re letting your Appraisal Compatriots off a little lightly with the descriptor of “Opportunists”. That’s a little disingenuous.
Truth be told, when you lie down with dogs you get fleas. It doesn’t matter what breed you are, a dog is a dog. In commerce, you make a decision. You’re going to do it right, or you’re not. You surrender, or you don’t. You select who you will do business with. If you are not technically sound, or don’t have the people skills to command a sustainable market share, then you don’t have a business and you should be looking at doing something else with your day.
That said, I do have some questions:
1) What did Cuomo have on the GSE’s that made them seem to roll over without even a whimper? Were Mudd and his Freddie Buddy Client #’s 10 & 11?
2) How will any reputable Independent Appraisers even begin to have anything that resembles a business if they have to sit by the fax waiting for their random order of the week?
3) If this process devolves into a national system like we were subjected to in 2000 where an “unnamed” lender ordered all appraisals directly through LSI (which we nicknamed LSD, (Is that an AMC Monkey?)), then the whole business is going to get so fragmented that it will fall in on itself. Get ready for 90 day + escrows?
Although I lament what has happened, and the price we all are paying, the Cuomos and other “Champions of the People” have always done a pretty piss poor job of doing anything but furthering their careers in “Public Service”. The sad part is that we absolutely know that the crooks will have the systems gamed before the ink is dry on the rule book. They don’t care what the rules are, never did, never will. T’was ever thus.
Sorry, got the year wrong in # 3 above. It was 1991-92, during S&L Maddness.
What a clueless fool! What makes him or anybody think that the appraisers, mortgage originators and Realturds that have been ignoring the rules that have been in effect for years are suddenly going to start following these rules??? The key to stopping appraisal fraud is to do more quality control and enforcement when “professionals” violate the rules. Nail some people’s *sses to the wall and make some examples out of them and you solve the problem right there.
This guy wants to use VA’s system to order appraisals?? The only VA appraisers in our area are a bunch of numnuts who are pain in the butts to work with and doing VA appraisals are the only way they can get any business.
And by the way, if you notice the new code of conduct lets the Realturds off scott free. The biggest source of appraisal pressure, by far, is from Realtors who don’t want to have their commission jepardized by the minor fact that the house isn’t worth what the customer is buying it for.
@ OldMLB - That’s Mister to you, buddy.
Don’t take offence to my broad brush, I really like Ho’s. I’m all for the “Ho-Appraiser” relationship. Surely there could be no reputable appraisers without reputable brokers (semi-ho’s, or ho-lites) to do business with. And that’s the problem.
This agreement relinquishes Ho-lites and Appraiser-Geeks to the will of the almighty AMC “Pimp” high above. WTF is that all about???
Answer me this:
1. Did AMC’s improve the quality of mortgage output in recent years?
No. I’ll agree it fit the “originate and distribute” model to a T with criminal turn-times pressures, that inevitably resulted in s*** for quality.
2. When did “price” pressure become a better alternative to “value” pressure?
“Hard-core” Ho’s shop appraisers for value. AMC’s rape appraisers in fees. Both practices feed on the lowest denominator of the valuation space. But if review panels were staffed with truly qualified review appraisers with LOCAL knowledge, value pressure wouldn’t matter. Price pressure will drive the good seed from the business. Trust me.
So - if the AMC model is bad for quality, yet this agreement was miraculously reached, then I have no choice but concur with you that Mudd was in the pooper - no pun intended.
Mr. Please,
It seems incomprehensible that the GSE’s can believe that some centralized entity could produce better product than reputable Appraisal Pro’s who KNOW THE LOCAL MARKET, as you state. Its even moreincomprehensible that they would be bullied by Coumo who couldn’t adjust a comp on a good day and has no practical knowlege of how the business really works. Clint calls the situation as it really is. Even HUD gave up appraisal assignment eons ago, and you’ll notice FHA loans are exempt from this draconian “solution”. And Clint also has another valid point in stating that the Realtor community is the force that turned every loan into a fricki’n horserace. Get me my commission fast fast fast! Everbody qualifies or there’s never another referral. No pressure there is there?
When we were using the lender (Prudential Home Mortgage) that forced us to use LSD we were not allowed to know when the appraisal was ordered, scheduled, site visit completed, and had no recourse if the appraisal was obviously a sub par job. We actually resorted to having the client try to get a card from the Appraiser that showed up, or just happen to be there to observe. The guys that appeared looked to be fellows on HB-1 Visas, if you know what I mean. They were obviously not pros. I was able to coax one into a conversation and found out they were paid $100 per appraisal. We were paying $300. Why did we send loans there? A 1 year ARM, Start rate/Qual rate 3.00%, No negative, 2/5 caps. I wish I had that product today!
OldMLB – You’re absolutely right. It IS totally incomprehensible that the GSE’s — or anyone with an IQ higher than 1 — would think a centralized model works. But that’s exactly what the agreement stips. Whether it’s a mainframe ordering HUB or a bunch of competitive mini-HUBs (e.g. Landsafe), it will amount to turn-time pressure on the weakest members of the community with no choice but to participate because they haven’t the skills to write narrative, litigation, or for any other avenue of the business. I’ve read the agreement over and over again, and anyway you slice it, it’s a checkmate in favor of AMC’s – end of story.
As for the HB-1 Visa group. The saying is true; “you get what you pay for”, especially in valuation. At $100, or anything other than a real independents fee, expect low level form-fillers to take charge of the lending sector and increase investor risk. AMC’s after all are profit takers just like the pimps they “protect”. Landsafe and others will decouple from their parents and continue to operate. This agreement is GOOD for them and BAD for independent appraisers who’ve never worked for them.
The message in the agreement is simple: “appraiser independence” is more important than “appraiser competency” or lender due diligence. Firewall the appraisers from the brothel and lenders/investors won’t want to have to maintain review panels to shield them from their own, or hire the best out there to get it right.
PS. 80% of my business is NON-lender based. I can grow that 20% IF this kicks in (I’m not convinced the agreement will stick)…
See link for expanded discussion over at WorkingRE:
Reactions and Remedies: Fannie/Freddie Cuomo Agreement
http://www.workingre.com/workingre/reactions-and-remedies.html
Excerpt from WorkingRE… (Sorry PJ, only trying to add to the discussion here)
[…] Nothing Set in Stone
According to New York appraiser Ken Rossman, not even Cuomo’s office is sure what the consequences of the agreement will be. Rossman says he received a call late last week from a Deputy Chief Trial Counsel from the AG’s office in response to a comment letter he submitted (find the letter at WorkingRE.com sidebar - Fannie/Cuomo-Agreement Readers Respond). “The individual I spoke to, who had a hand in drafting the HVCC, said she didn’t understand why AMCs are being considered the only possible solution by many appraisers. I came away from the conversation feeling that the NY AG’s office is deeply committed to solving this problem in such a way that will be fair and serve the public trust. It is imperative that appraisers get their comments and suggestions delivered ASAP before anything is cast in stone.”
Speaking Out
Most of the industry believes that this agreement is not in the best interests of consumers (or lenders) and certainly not in the best interests of appraisers. “Reversing the momentum created by this agreement will take an overwhelming flood of responses from appraisers at all levels of the profession,” Austin says. “Organizations, state appraisal boards and individual appraisers must converge in a unified voice to urge Attorney General Andrew Cuomo and the GSEs (Fannie and Freddie) to rethink the unintended consequences of the initial draft of the HVCC. We should urge adoption of a less radical version of the agreement before implementation occurs.”
What Appraisers Say
Below is a small sampling of reader feedback to our initial coverage (Premium Content- Fannie/Freddie, Cuomo Agree). More comments sent to WRE, including the letter written and submitted to the various agencies by New York appraiser Ken Rossman, are posted on WorkingRE.com (sidebar - Fannie/Cuomo-Agreement Readers Respond). These may help to clarify your thoughts when providing feedback. As noted, there are still many questions unanswered.
>> “Mr. Kantorovich (quoted in the first story) is accurate in his assessment of the Cuomo deal. Pressure on appraisers will not be eliminated but shifted from the brokers to the AMCs. Quality will suffer further as AMCs require an eight-hour turnaround time and they preset appointments. It is ironic that the investigation began with WAMU and eAppraiseIT and not with brokers but that the results of this deal will benefit WAMU and eAppraiseIT.” - Keith M. Kazanjian, KMK Landmark Appraisals
Good News/Questions
>> “Our opinion is that it is past time for this policy to be put into place. It appears from today’s housing market that the fraud and collusion involved in past transactions are the reason for many of today’s problems.” Jon De Nooy, De Nooy Appraisal Inc.
More on AMCs
>> “I think that Kantorovich’s comments are echoed by all of us in fear of having to deal with appraisal management companies. My experience with the AMCs is terrible. I was doing appraisals, full fee for (a major lender) until they went with an AMC. The AMC offered me $250 to do the same appraisal that I was getting $400 for without them. I turned them down and had to do some very aggressive marketing to replace them. My loss of business in that period of time was well over $20,000. I don’t want to lose control of my business and take a financial loss so that some AMC can increase their profits for doing absolutely nothing!
“There has to be another way for all of this to work. Maybe if banks and mortgage brokers should be licensed like appraisers are, and attend the same USPAP classes like we do and stand to be disciplined like we do, then maybe our present system might work. I think Cuomo’s appraiser independence agreement should be called the ‘Appraiser’s Loss of Freedom Act!’ - Jim Meeker, Northwest Home Appraisals […]
I am a real estate appraiser and I have given a lot of thought to the pressure that is exerted on us to hit values. The best solution to the problem that I have thought of is for the federal government to inact much harder standards in acquiring a real estate appraising license or certification. These standards would need to be very high and fees would need to be high as well.
By making the barrier to entry into the appraising profession high, it would slowly cause the number of appraisers out there to go down and the demand for the services of each appraiser to go way up. This would not only cause fees to go up, but it would also give appraisers much more power in telling brokers and lenders no when they try to exert pressure on them. Why give in to a broker to hit a value when you have clients banging your door down to do more work. “Oh, you want me to hit $200,000 for you? No thank you, I have plenty of work. Find someone else!”
I think something like this in conjunction with several other simple changes would really make this industry much better.