Revised Appraisal Code Generates Conflict

A revised code of conduct for appraisals at twin mortgage finance giants Fannie Mae (FNM) and Freddie Mac (FRE) is generating a fair amount of criticism from independent appraisers, who say the new code will effectively force them to work for appraisal management companies. In a brief statement released last week by the Federal Housing Finance Authority, the GSE regulator said that it had finalized a revised Home Valuation Code of Conduct; the new code’s implementation date was pushed back to May 2009, rather than the original Jan. 2008 date. The original HVCC was agreed to in March by the GSEs and the then-OFHEO (now FHFA), after negotiating with New York Attorney General Andrew Cuomo, who had threatened to sue both GSEs over alleged fraudulent appraisals. The code essentially requires that appraisers are selected and assigned on a blind basis via independent, third-party platforms — a requirement that independent appraisers say remains unchanged in the new language of the code. An argument over fees, quality Independent appraisers have argued since before the original HVCC was introduced that the use of appraisal management companies, or AMCs, risks the quality of an appraisal by cutting into fees. The revised code has done little to quell such discontent, and if anything, has pushed this debate to the forefront of the settlement services industry. “The revised code accomplishes exactly the ‘firewall’ that it originally intended,” said Michael Tarabotto, a state-certified residential appraiser and owner of California Appraisal Solutions Corp. “The ‘new standards’ of how appraisals will be managed is precisely what forces the hand of originators of all stripes into the arms of third-party appraisal management companies. There was never an explicit mandate to use AMCs, per se, only the explicit language that originators could not order the appraisal themselves. What is the alternative, then?” Tarabotto contends that the use of AMCs will force appraisers to take an unreasonable hit on fees, or push them to move into non-lending related work. In all likelihood, however, appraisers of all stripes are already feeling a revenue pinch, as the nation’s real estate market has fallen off of a cliff during the past 12 months and order volumes have tanked. “The code is bad medicine for what was ultimately an origination problem,” Tarabotto told HousingWire’s Kelly Curran in an interview for HousingWire Magazine. Jeff Shurman, executive director at the Title/Appraisal Vendor Management Assoc., sees things differently. “There is no question that negotiating with an AMC can be viewed as a classic take-it-or-leave-it business proposition — the appraiser usually being the one on the take-or-leave end of the deal,” he wrote in a recent position paper on the association’s web site. “Yet to portray appraisers, as critics often do, as being somehow forced to work for ‘unethically low fees’ is a mischaracterization. “AMCs would rather an appraiser decline to work with them then to invest all the time and expense in conducting due-diligence on an arrangement that won’t work for either party,” he said. Shurman had been a vocal critic of the original code, suggesting its language was too vague in defining an “appraisal management company” and “vendor management company.” That loose language had led Freddie Mac to issue a bulletin in the middle of last year that effectively prohibited lenders from obtaining appraisals from AMCs. The revised code removes such vagaries and puts AMCs clearly in the driver seat of much of the appraisal business, most industry sources suggested. Tarabotto agreed, saying that AMCs were the “clear and obvious winners in this [revised] agreement.” By giving the AMCs more control, brokers appear set to effectively lose some power to manage the mortgage transaction — an outcome that the National Association of Mortgage Brokers said is a misdirected effort to reform appraisals. “This agreement will increase costs to consumers and remove thousands of small business competitors from the marketplace,” said NAMB President Marc Savitt in a statement. “This will create a severe disadvantage to small business mortgage brokers, and prevent them from engaging competitively in the mortgage marketplace.” Savitt suggested that the NAMB might sue in an effort to prevent the new code from being enacted. “The National Association of Mortgage Brokers intends to consult with our legal advisors and to take appropriate legal action if necessary,” he said. Write to Paul Jackson at [email protected]. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.