A shift of regulations intended to prevent lending companies from influencing — or worse, inflating — home values during the appraisal process nearly put an entire industry of people out of work during the worst economic downturn since the Great Depression,
according to industry experts.
But what happened to independent home appraisers is a topic that almost no one talks about outside the real estate industry.
After a parade of subprime home loans and shoddy lending practices by mortgage lenders brought the real estate market to its knees, the real estate-appraisal process was targeted in an effort to protect consumers.
As a result, experts say many qualified, independent home appraisers became innocent bystanders.
Prompted by allegations that Washington Mutual had pressured appraisers to inflate the value of homes that came in too low, New York State Attorney General Andrew Cuomo accused the Seattle-based lender of engaging in a scheme to influence the outcome of appraisals.
Cuomo accused WaMu’s subsidiary, First American, a home-appraisal company, with “caving to pressure” to use a list of appraisers who inflated the values of thousands of homes.
On behalf of New York, Cuomo filed suit against First American at the end of 2007, just as the overheated real estate market was beginning to show the first signs of a crack developing.
Subsequently, the Securities and Exchange Commission conducted inquiries. A host of new regulatory practices were issued by the Federal Housing Finance Agency, and Washington Mutual was later seized by the Office of Thrift Supervision and acquired by J.P. Morgan.
As the New York suit began to work its way through the court system and the crack in the real estate market split wide open, the Federal Housing Finance Agency introduced the Home Valuation Code of Conduct, or HVCC, in May 2009 to prohibit lenders and third
parties from influencing appraisals.
While the HVCC code did not specifically restrict independent home appraisers from being used, it did impose several restrictions on the appraisal process.
Appraisal-management companies, or AMCs, which had long existed, proliferated under the HVCC code, according to Ken Chitester, director of communications for the Appraisal Institute in Chicago.
The usage of AMCs became the trend — whether were they needed or not, Chitester said.
The institute, which represents more than 25 percent of all licensed appraisers in this country, is the industry’s largest with 25,000 members, according to Chitester. Among its members are appraisers who either own, or work for, an AMC.
The AMCs served as “middle men” in the real estate-transaction process with the intent of providing unbiased home appraisals.
Regulators were attempting to put a firewall in place between lenders and appraisers to protect consumers, Chitester said.
Appraisers, Realtors and a mortgage consultant interviewed by The Signal saw little to no connection between home appraisers and either the real estate crash or the mortgage lending market fiasco.
“In my 29 years of being a Realtor, I have never known an appraiser to ‘do a favor’ for a Realtor, seller or buyer,” said Sam Heller, a local real estate agent with ReMax.
Local experts said the new regulations resulted in poorer quality appraisals in many cases.
Appraisers themselves, now dependent on the AMCs for continued income, said they didn’t want to submit appraisals the AMCs deemed to be overinflated.
Also, Realtors and appraisers alike complain that in the year following implementation of the HVCC rules, appraisers were often brought in from outlying areas by the AMCs to appraise homes.
Unfamiliar with the local market or not experienced enough to conduct a proper appraisal, these appraisers’ reports nearly always resulted in a lower home value than was merited in the market, sources said.
Meanwhile, experienced appraisers could no longer afford to train the up-and-coming appraisers.
“It was an absolute mess,” said Fred Arnold, certified mortgage consultant for American Family Funding in Stevenson Ranch.
Independent home appraisers interviewed by The Signal said they were forced to register with the AMCs if they wanted to continue doing appraisals. Lenders just weren’t contacting them anymore.
All of the appraisers said they lost most of their income.
Prior to the explosion of AMCs, independent appraisers charged fees ranging from $350 to $500 based on the size of a home and the amount of time required to do a proper evaluation.
Once the AMCs played a primary role, those companies charged similar fees. In turn, the AMCs paid the appraisers they hired a percentage of the fee collected.
On average, appraisers were earning 60-percent less on appraisals than they had been prior to the HVCC.
In most cases, they are now paid only a flat fee regardless of how much time is required, resulting in some appraisers not being as diligent as they should be.
And the appraisers need to triple their work load to achieve their previous earning levels.
“I did an appraisal on a 7,500-square-foot home,” said appraiser Rex Robinson, of Agua Dulce. “I asked for an extra $100 because it was a lot of work to cover a home that size. The AMC said ‘no.’”
If it isn’t broken
“I could say that this new system was needed to clean up the lending market,” Heller said. “Although it sounds good, it is not true.”
Experts said the new codes basically cut off any communication between the parties in a real estate transaction to avoid influencing an appraised home price.
But Chitester said the HVCC was widely misunderstood. It never said parties couldn’t communicate.
Indeed, the code did allow lenders to speak with appraisers to ask for additional information about the basis of a valuation.
An updated code states, “Parties are prohibited from having any substantive communications with an appraiser or appraisal-management company as it relates to having an impact on valuation.” But it does not prohibit all communication.
“Lenders used to be able to call me because I’d lived in Agua Dulce for 15 years, and most people were aware that I knew the area well. I had the most knowledge,” said Robinson.
But that changed after the new regulations took effect.
Today’s lenders may avoid speaking to an appraiser, mortgage broker or Realtor out of concern about the appearance of impropriety.
Appraisers who spent years building a client base on good business relationships and solid appraisals said they were forced out of business literally overnight while the businesses they built up were turned over to the AMCs.
But local industry professionals said California consumers were already protected against biased appraisals.
“Appraisals were already monitored for fairness before the HVCC code went into effect,” said Robinson.
The California State Office of Real Estate Appraisers licensed appraisers and monitored any problems by reviewing and addressing complaints submitted to the office.
Under new regulations recently adopted by Freddie Mac and Fannie Mae, all states are now required to put licensing boards in place. It’s unclear whether there are any operating standards that all boards must follow to ensure uniform regulation.
The changes were not necessary, industry professionals say. They were just a big smoke-and-mirrors act by regulators so they could say they were trying to crack down on fraud, Heller said.
“The AMCs weren’t regulated by anyone for the past two years,” Arnold said.
But there is a consumer element to this, Chitester said. If the law is not properly implemented, ultimately, consumers could be the big losers.
“It’s very important that the most competent, most experienced and most qualified appraiser is hired to perform a valuation of a home,” said Chitester. “Consumers deserve the most reliable, credible opinion that they can get — whether they’re buying or selling.”
Out of work
Whether mortgage lenders stopped hiring appraisers directly because they became skittish about being subject to scrutiny of their home-appraisal process is anyone’s guess.
But the explosion of AMCs essentially drove independent home appraisers out of business overnight, experts said.
Chitester confirmed there is a lot of frustration expressed by appraisers.
The HVCC regulations were set to expire by the end of 2010 and were only intended to buy time to clean up the lending practices and mortgage loan mess.
But in October 2010, the regulations became permanent when they were adopted by Freddie Mac and Fannie Mae and renamed the Appraiser Independence Requirements.
Whether lenders ever go back to the old business model remains to be seen.
Ilyce Glink of CBSMoneyWatch.com wrote a recent article titled “5 New Rules of Real Estate,” In the 20-odd years that she has been writing about real estate, there has never been a better
time to buy a home. Why?
Glink listed factors like 30-year fixed-rate mortgages available for less than 5 percent. Recently, the 30-year rate hit 4.6 percent. If you want a 15-year mortgage, you can (for now) still get it for less than 4 percent, she said. These are astounding rates.
As Robert Fogel, a Nobel prize-winning economist from the University of Chicago, recently told me, it’s like borrowing for free. That’s how it feels to me, too. When Glink and her husband bought their first home in 1989, their interest rate was 11.75 percent,
At this point, it seems everyone wants the real estate market to get better. Realtors are selling a fraction of the homes they once were, taking a huge hit in income. Builders (at least, those that are still in business) are selling about one-eighth as many
homes as they were selling in 2005. Appraisers continue to take some of the blame for the housing crisis, for over-appraising property in the boom years and under-appraising it now. Realtors say that more than 75 percent of the homes sales that fall apart
do so because the appraisal comes in so far below the contract price that a deal can’t be worked out. And homeowners are desperate for the housing market to rebound — especially the more than 25 percent who are underwater with their homes — so they can refinance
or sell their homes and move on with their lives.
There’s no reason you shouldn’t buy a home now and take advantage of super-low prices, historically low mortgage interest rates, and a significant supply of homes on the market. But to be successful in today’s real estate market, you need to understand that
the game has changed. R.I.P. to the big pricing jumps of the past. If you want to buy a house, you have to have enough income to support the mortgage. Now that every borrower has to have a job and some sort of down payment, and the only basic loan types available
are 30-year and 15-year fixed-rate mortgages, you won’t be able to leverage up with your mortgage, and housing prices should remain far more steady. In short — buy now, but don’t expect a huge pop in home prices. It isn’t going to happen.
Most home buyers don’t have enough cash in their pocket to purchase a home without a mortgage. But, lenders are extremely risk-averse at the moment — so they don’t want to approve a mortgage application unless you have an extremely good FICO score (preferably
700 or higher, and at least 760 to get the best rates); you have plenty of cash in the bank (for your down payment, closing costs and a healthy cash reserve); you don’t have anything weird or amiss in your financial data. Which is to say: They only want you
if you don’t really need them. You’ll also need to make sure the property appraises at or above the contracted price and the neighborhood is steady (without too many foreclosures).
Sure, there are amazing short sales and foreclosures out there. To find them, you’ll have to hire a great Realtor who really knows what he or she is doing and can help you navigate a tricky and frustrating negotiation cycle. Short sales and foreclosures
are often damaged properties that will require sometimes tens of thousands of dollars (or more) in deferred maintenance, rebuilding or renovating. Your Realtor can help you determine the condition with inspection options that you may not be aware of. Instead,
you might want to consider property where the seller has equity and needs to sell, but is confronted with a neighborhood full of foreclosures. The seller will have to price the home to compete with foreclosures. You may find a property that’s in better shape
and will, in all likelihood, require a lot less maintenance, renovation and upkeep.
Somewhere along the way, ordinary civilians got the idea that there were massive profits to be made in real estate, if only they could flip the properties fast enough. The problem with that strategy became apparent when the real estate market crashed. But
now is an amazing time to buy investment property. Purchase a foreclosure or two (or up to 10, if you can find the financing), and focus on how much income you can get each month. Whether you’re buying as an investor or plan to live in the property, you’ll
need a 7- to 10-year plan in order to make sure you won’t lose money after factoring in the costs of sale. So come up with a long-term plan that will let you rake in money ... while the rest of the real estate market catches up.
If you need some consultation about your real estate plans, buying, selling or investing, always talk to a local Realtor who can help you understand today’s market in your location.
CoreLogic (CLGX: 16.90
+0.24%) added technology provider a la mode as an appraisal administrator to achieve compliance with the government-sponsored enterprise's Uniform Mortgage Data Program.
CoreLogic uses its ValuEdge platform to connect to a la mode's Mercury Network, a nationwide list of appraisers and vendors, and generates every appraisal in both PDF and XML formats. Under the UMDP, all appraisals must be submitted via
"This relationship gives our clients a huge advantage with accurate, expert collateral valuations that are in compliance with the evolving regulations and GSE requirements," said Wes McDaniel, chief appraiser for CoreLogic Valuation Services.
Jennifer Miller, executive vice president of products for a la mode agreed.
"CoreLogic has a progressive approach to quality assurance and data compliance that serves their clients very well," Miller said.
In early May,
Fannie Mae and Freddie Mac instated Oklahoma City-based a la mode as an appraisal submission platform for the UMDP and the Uniform Collateral Data Portal.
Veros Real Estate Solutions is the only technology provider of these services, but companies can connect to these platforms through a la mode.
Written by Jonathan Dienhart and Ken Lee
Housing remains stuck in the doldrums even with extremely low mortgage rates and despite some improvement in private payroll employment. Part of the reason for this disconnect is the slew of foreclosures and bank-owned properties which are still flooding
the housing market. Defaults are expected to reach new record-highs this year which have buyers holding out for better deals and traditional home-sellers battling low-ball offers from banks. The aggressive pricing on distressed properties is undercutting
individual home sellers and new home builders alike, and wreaking havoc on local housing markets. According to data from
Housing IntelligencePro, both new home activity and regular resale activity made up a smaller portion of total closing activity
compared to the first three months of last year (and every quarter since).
Nationally, bank-owned real estate closings accounted for almost 32% of all settlements in the first quarter, a figure which has been steadily increasing over the last year. Regular resales still made up the biggest chunk of settlement activity, about 60%,
while the languishing new home market accounted for the remaining 8.5% or so of closing activity in the first quarter. That means REO sales volume was more than three times higher than new home closings. New home share has been cut in half since peak times,
whereas regular resale share has decline by about one-fourth. The continued rise in REO sales is not likely to abate any time soon, foreclosure rates are still elevated and according to some estimates, may increase this year.
Housing data has been choppy thus far in 2011; a month up and then a month down with no real conviction either direction. A notable lack of improvement seems to be the overriding theme. New home sales have now increased incrementally for two straight months,
albeit from all-time record lows that were set in February. Existing home sales and housing starts both declined in April after increasing in March. The next few months don’t look encouraging, with Pending Home Sales down substantially in today’s data release
from NAR. The private sector job market has been improving slightly and mortgage rates are near all-time lows but consumer confidence, especially when it comes to housing, is still weak.
In broader economic news, weaker economic data and re-emerging concerns of the Eurozone debt situation has hampered equities so far in May. First-time jobless claims remained above the key 400,000 level for the entire month which suggests labor market conditions
may soften once again. Revised GDP figures this morning showed the economy growing at a lackluster 1.8% for the first quarter based on weak consumer spending.
Preliminary estimates for first quarter gross domestic product were unchanged from advance estimates. The U.S. economy grew 1.8% during the first quarter which is weaker than the 3.1% pace in the fourth quarter. This is the slowest pace of growth since the
second quarter of last year. However, this marks the seventh straight quarter that the U.S. economy has expanded. A drop in consumer spending was offset by an increase in business spending which caused preliminary estimates to remain unchanged from the first
The Leading Economic Indicator index declined in April to a reading of 114.0 which is a 0.30 point decrease from March levels. This is the first month since June 2010 that the leading index has recorded a monthly decline. Leading economic indicators had recorded
nine straight months of increases before April. A jump in initial unemployment claims along with noticeable declines in vendor performance, building permits, and manufacturers’ orders for capital goods were amongst the biggest drags last month. April's slight
decline in leading economic indicators suggests that economic growth will slow in the months ahead.
First-time unemployment claims increased by 10,000 to a seasonally-adjusted 424,000 in the week ended May 21st from an upwardly revised figure of 414,000 last week. Jobless claims had declined in the two weeks previous to this past week’s increase. This is
the seventh straight week that initial jobless claims have remained above the 400,000 level. These elevated levels in first-time jobless claims will make it difficult for continued improvement in the U.S. labor market.
The new and existing home markets moved in opposite directions last month. New home sales continued to rebound from historically low levels in April while resale activity declined slightly. Inventory in the new home market also improved to its most manageable
levels in almost 5 years while existing home inventory continued to rise as sellers continue to list their homes for Spring home-buying season.
New home sales in April rebounded 7.3% from the previous month to a seasonally-adjusted annual rate of 323,000 units. After hitting an all-time low in February, new home sales have now increased for two consecutive months. New home sales in the previous three
months were also revised higher by 7,000 units. New home sales are still down 23.1% from the 420,000 units in April 2010 and are 4.2% lower than the April 2009 figure of 337,000 units. However, it is important to keep in mind that sales activity last year
was inflated by the federal homebuyer tax credit.
Increased demand helped keep new home prices steady last month. In April, median new home prices increased to $217,900 from a March figure of $214,500. Although this is the highest median new home prices have been since January, they remain at historically
low levels. Median new home prices are up 4.6% from this time last year but 0.6% lower than they were this time two years ago. This is the first month new home prices have recorded a year-over-year gain since January.
Revisions to new home price data caused new home affordability figures to be revised higher in the beginning of the year. The new home affordability ratio increased for three straight months to begin 2011 before declining in April. The new home affordability
ratio declined to 58.9% from 59.6% in the previous month. An increase in median new home prices were the cause of the decline in affordability last month as mortgage rates remained unchanged. New home affordability remains at historically high levels.
New home inventory levels reached new all-time record lows last month. In April, new home inventories declined from the previous month to 174,000 units on a non-seasonally adjusted basis compared to 181,000 units in March. New home inventory has now recorded
44 straight months of declines and has not recorded a monthly increase since May 2007. New home inventory on a seasonally-adjusted basis declined to 175,000 units in April from a March figure of 180,000 units. Months of inventory dropped in April due to
the continued decline in new home inventory levels along with an increase in sales activity. Seasonally adjusted months of new home inventory fell to 6.5 months in April from 7.2 months in March. This is the least months of new home inventory on the market
since June 2006.
Existing home sales in April eased slightly after last month’s gains. Resale activity declined 0.8% from the previous month to a seasonally-adjusted annual rate of 5.05 million units. Existing home sales were down 12.9% from April of last year which marks
the third straight month that resales have recorded year-over-year declines. However, these comparisons may be a bit exaggerated since demand was artificially driven by the federal homebuyer tax credit last year. Pending home sales declined 11.6% in April,
suggesting little improvements in the coming months.
Median existing home prices in April increased to $163,700 from $159,800 in March. This is the second straight month that home prices have increased. Existing home prices had reached their lowest levels in nine years in February before rebounding in the past
couple of months. The median price for an existing home is down 5% from April of last year which marks the fifth consecutive month that home prices have recorded year-over-year declines.
Higher home prices continued to push affordability lower in April. The existing home affordability ratio declined for the third straight month after reaching all-time record highs in January. The existing home affordability currently stands at 69.8% in April
compared to 70.6% in March and 66.4% in the same year-ago period.
Inventory jumped in April as the market prepared for the busy home-buying season. The number of existing homes for sales increased 9.9% from the previous month to 3.87 million units. This is the third straight month that existing home inventory has increased.
A slowdown in sales pace along with the increase in inventory units pushed months of existing home inventory up to 9.2 months which is the highest it has been since November.
U.S. residential construction activity in April dropped 10.6% from the previous month to a seasonally-adjusted annual rate of 523,000 units. Single-family housing starts fell 5.1% to a seasonally-adjusted annual rate of 394,000 units while multi-family building
activity dropped 24.1% to a seasonally adjusted annual rate of 129,000 units. The drop in construction activity in what is typically the busiest time of the year for the housing market suggests that conditions will remain sluggish for quite some time.
Building permits decline 4.0% from the previous month in April to a seasonally-adjusted annual rate of 551,000 units. Most of the declines were attributed to weakness in the multi-family segment while single-family building permits eased just 1.8% from last
month to a seasonally-adjusted annual rate of 385,000 units. The slowdown in permit issuances also points to less construction activity in the months ahead.
Homebuilder confidence in May was unchanged from the previous month while remaining at historically low levels. The National Association of Homebuilders' housing market index for May stayed at a reading of 16.
National average mortgage declined from the previous week to 4.60% in the latest Primary Mortgage Market Survey released weekly by Freddie Mac on May 26th. This is the sixth consecutive week that rates have declined. Rates are at their lowest levels since
the first week of December. The 30-year fixed-rate mortgage has averaged below 5.0% for 14 consecutive weeks.
In the week ending May 20th, the MBA’s seasonally-adjusted purchase index increased 1.48% from the previous week and was up 3.07% compared to the same time last year. This is the first time since May of last year that purchase mortgage applications have recorded
a year-over-year gain. Record-low mortgage rates have helped support both refinance and purchase activity in recent weeks.
Google the phrase “HVCC Nightmare” and you’ll return over a hundred web pages discussing the horrible legislation passed in April 2009 governing how appraisals are to be conducted in the
mortgage business. For those who aren’t familiar with this legislation and how it impacts the lending process, here’s a quick overview:
At initial glance, these points seem fairly reasonable. I can appreciate the intent of this legislation and the need to rein in mortgage industry abuses. However, having been personally involved in numerous transactions since the new rules were enacted,
it does feel like the pendulum now has swung too far in the other direction.
This topic is fresh in my mind because I’m working at the moment with a new investor who just received the appraisal back on his first investment property. He is buying the house for approximately $81,000 and the appraisal just came back at $81,000. With
other properties in the area selling in the $100,000 range, he was disappointed and wondering why the appraisal wasn’t higher. Unfortunately, under the current system, the appraiser usually has a copy of the sales contract and is simply determining if the
sale price is justified – not necessarily determining true market value for the property. In this example, it’s a good bet if the sales price had been set at $95,000 the appraisal would have mysteriously come in at $95,000!
In light of the continuing high rate of foreclosures, and the mandated HVCC compliance, I’m usually satisfied when the third party appraiser doesn’t completely botch an appraisal! Talk to any real estate investor who has been buying and selling property
over the last two years and chances are he’ll have a story or two about how a horrible appraisal killed a deal.
Truth is, with real estate values all over the place and appraisers disincentivized to work hard for an honest appraisal, most appraisals aren’t worth the paper they’re written on. In fact, I’ve seen appraisals vary as much as 50% on the same property! One
appraiser may choose to use good retail comparable sales while another appraiser chooses to use only foreclosure comparables to value a property. Who can say who’s right? This industry has become so subjective that it’s really evolved into one person’s opinion
At the end of the day, investors need to do their own homework to determine whether or not an investment property makes sense. I personally don’t care what an appraisal says; the appraisal in most cases is just a means to an end. I’m going to conduct my
own due diligence to determine what I believe a property is worth (or will be worth at some point in the future). If the cash flow from the property fits into my investing strategy and there is good potential for long term equity gain, I’ll likely move ahead
with the purchase regardless of one appraiser’s opinion of value.
WASHINGTON - If the audience's response during a special session on mortgage credit at the National Association of Realtors' midyear legislative meetings is any indication, appraisals are still a big issue for front-line realty agents.
When a question was raised about valuations, it drew a collective groan from Realtors who packed a ballroom at the Marriott Wardman Park Hotel here last week. And when NAR President Ron Phipps, the president of Phipps Realty in Warwick, R.I., framed their
problem, the crowd burst into applause.
Agents, of course, would like more customers. So would lenders. But to hear the realty folks tell it, many of the deals they've managed to put together during these tough economic times are falling apart because of faulty appraisals.
Appraisals "are a very raw nerve for us," Phipps said. Lenders sometimes require six, seven, eight, even nine "comparables" when three used to do just fine, he noted.
Phipps said "those of us in the field" understand why the valuation process had to be reengineered. But as it is now, he added, "the process no longer respects the ebb and flow" of the marketplace.
"We need common sense, not just transparency," he said. "No one size always fits all; there can't always be a direct match."
The panelists included David Stevens, the former Federal Housing Administration commissioner who now is president of the Mortgage Bankers Association; Cara Heiden, co-president for Wells Fargo Home Mortgage; and Doug Jones, consumer sales and institutional
mortgage services executive at Bank of America Home Loans. They were largely sympathetic to the Realtors' plight, but they didn't offer any answers.
Stevens said lenders "care" that houses are appraised correctly, just as Realtors do, so "we struggle with this collectively." But he pushed another hot button with realty professionals when he noted that it violates appraisal standards when someone who
works in a distant territory is assigned to value a property in a market with which he is not familiar. That point drew another big cheer, an indication that "traveling" is still an issue.
Martin Eakes, chief executive of the Self-Help Credit Union in North Carolina and co-CEO of the Center for Responsible Lending, drew a round of applause when he suggested that banks, servicers and investors should be barred from having any ownership interest
in an appraisal or an appraisal management company.
"It's not just about the independence of the process," Eakes said, pointing out that owners make money every time they order and reorder an appraisal. "Common sense tells you that this is a conflict of interest."
The symposium on mortgage liquidity - ensuring a steady flow of capital to creditworthy buyers is "our No. 1 priority," said Phipps - also touched on whether underwriters have overcompensated for poor decisions that led to the mortgage market debacle.
On that point, Heiden did nothing to appease the NAR's 1 million members when she said it's not that the underwriting pendulum has swung too far, but that buyers "are just too intimidated" now.
Underwriters "had to get back to rock-solid underwriting, and they have," she said. But would-be buyers "have heard how tight [the market] is, so they are not venturing forth."
Fannie Mae President Michael Williams probably didn't mollify realty agents, either, when he said his troubled company is "pretty comfortable" at the moment with credit quality. "Over time, we can look at where we might have overcompensated," Williams said.
But for now, he suggested that creditworthy buyers who have been nudged aside because of larger down-payment requirements and other underwriting changes turn to state and local housing initiatives for help.
Former New Orleans Mayor Marc Morial, now the president of the National Urban League, agreed with Stevens that underwriting is a complicated issue. But he warned lenders not to allow the "technicalities of risk and pricing to lead to retreat back into the
20th century. "What is not complicated is the value of homeownership as the centerpiece of the American dream," Morial said. "We cannot allow the discussion to become so confusing that we forget that ownership is an aspiration for many Americans. People need
to be housed."