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).