Viewpoint: Possible Change to the Appraisal Process - Atta Boy Cuomo!
It’s not official yet, but it looks like New York Attorney General Andrew Cuomo may be close to taking the first, in what will hopefully be a series of much needed steps, to fix the systemic issues plaguing the appraisal industry. Ever since he announced that the state of New York was suing Washington Mutual and eAppraisal for what he described as a collusive effort to sign off on overvalued appraisals, the pressure to make changes to the appraisal process have been enormous. When Cuomo’s office subpoenaed Fannie Mae and Freddie Mac records as part of an expanding inquiry into the practices of the industry last November, it was clear the AG was a man on a mission. He appears to be close to getting his way. Under the terms of a deal in the final stages of negotiation, Fannie Mae and Freddie Mac would require their mortgage lending partners to not have formal ties with the home appraisers. This means no in-house appraisers and no ownership interest in an appraisal firm. The second half of this deal is squarely aimed at the back of Washington Mutual. Although it’s difficult to blame the GSEs for the actions employed by individual lenders, Cuomo used his leverage as New York’s top law enforcement official to address the problem head on. Let me say for the record, nicely done. To be certain, this in no way solves the wealth of issues that plague the appraisal industry. Having spent five years as the owner of a wholesale lender, one who relied on the in-house appraisal division of one of my largest investors to verify (e.g. appraisal reviews) the legitimacy of the original broker-ordered appraisals, there is no way for a lender/investor to remain completely subjective while owning or having an ownership interest in an appraisal company. We don’t let investment banks own a rating agency; why should a lender own the one piece of the lending equation that requires -- no, demands -- complete neutrality. I know the argument from the lenders' side. When used correctly and allowed to function autonomously, an in-house appraisal division can serve as a vital part of the diligence process. Well, given the mess we’ve gotten ourselves into, it’s pretty clear that didn’t work very well did it? I don’t fault the GSEs on this particular issue. But I do applaud Cuomo for taking a step, albeit a small one, towards fixing the problem. It doesn’t do anything to address non-agency loans (which some day will make a comeback) but it’s a start. If the agreement is struck, it may very well become the gold standard for how the appraisal process is managed. In the sea of never-ending bad news accompanying our housing market, it's nice to see somebody in the government take a positive step that a) actually makes sense and b) doesn’t cost the rest of us money. The question is whether Congress has the stones to truly fix the appraisal industry by implementing a system that is modeled after the VA -- place your order through a central agency or group and have the appraisal be randomly assigned. There’s no way to pick the appraiser and no way to influence them to jack up the value. It goes against the basic fundamental tenets of free enterprise, which, when last I checked, has never been high on the top of anyone’s list, but it’s the only way to fix the problem. No, I’m not holding my breath and since my oxygen tank is running low, I won’t start now. But alas, there’s always hope. New York has the chutzpah to at least take a swing at the problem. Let’s see if anybody else does. There’s a reason over 10,000 appraisers recently signed a petition and sent it to Washington pleading for a solution to the pressure they face to hit targeted values. The system is broken and until the ability to influence appraisers is completely removed, it will stay that way. Note: Richard Bitner is the author of Greed, Fraud and Ignorance: A Subprime Insider's Look at the Mortgage Collapse. 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).