New loan-approval steps creating controversy
May 6, 2009
There’s a lot of anger in the home-loan industry right now over a new regulation that is described as trading one slave master for a new and worse one.
On May 1, the Home Valuation Code of Conduct (HVCC) took effect eliminating the relationships that existed between mortgage lenders and home appraisers.
The HVCC came out of New York Attorney General Andrew Cuomo’s investigation of Washington Mutual. Accusations were made that lenders and appraisers in bed with one another were generating inaccurate and sometimes unrealistic appraisals contributing to the housing crisis.
Fannie May and Freddie Mac have decreed that they will only purchase loans that have abided by HVCC. This is basically an industry-wide mandate because they buy the majority of mortgages.
HVCC creates a firewall between the two by forcing a third party usually appraisal management companies to oversee appraisals.
In the past, some appraisers were able to fully support themselves with business from a small handful of lenders. But there was an unspoken necessity to provide appraisals the lenders approved of to maintain those business relationships.
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Local appraiser Sean Railton, owner of Real Estate Appraisal Service, said a lender could put pressure on an appraiser to deliver an expected value. It was uncommon in Park City, but it did happen and now that risk is gone, he said.
Lenders make a request for an appraisal to a third party and are notified when it is completed. No communication between the appraisers and loan originators is possible.
While the idea behind HVCC seems sound, lenders and appraisers alike are furious over the changes because the third party function adds cost to the client, delays the process, makes appeals difficult and costs appraisers a portion of their fees.
Railton said the change won’t affect him much because he hasn’t worked directly with lenders for a while and has a list of appraisal management companies he likes. But some management companies set ridiculous restrictions especially those out of state who don’t understand the eccentricities of the Park City market.
"It’s good for the industry, and bad for it," he said.
Salt Lake City appraiser Allen Larsen is familiar with many appraisers who say it is terrible for the industry.
He has colleagues who built up business relationships for decades who have had those torn away from them, he said.
It’s akin to a sales person having their oldest clients taken away.
Now appraisers are at the mercy of management companies who are farming out their services and making guarantees they’ll hold appraisers to, he explained.
Management companies might guarantee a one- or two-day turnaround, forcing an appraiser to perform on a deadline instead of taking their time to do their job right, he said.
They might guarantee a job get done for half price, cutting the appraiser’s fee in half. In the worst-case scenario, he’s heard a management company will charge the normal amount for the job, and then pass on a third of that to the person doing the actual work and keep two-thirds or half as their cut, Larsen said.
Larsen knows all this because fellow appraisers in Utah have told him. He’s orchestrating an email service for appraisers at the address firstname.lastname@example.org .
Right now he’s conducting a survey among members of his profession to see if there is interest in forming a professional association to lobby against the changes or at least protect themselves against the abuses of management companies, he said.
According to one count, 111 appraisers attended a meeting organized by Sam Ung, Matt Frentheway, Jon Whitlock and Larsen.
Railton attended said half of those handed over cash to fund the effort.
"My personal opinion is that the status quo was better than what we have right now," Larsen said. "It’s nice to have some insulation, but at the cost of them taking half your profit is not the answer."
Larsen said it’s only substituting one work master for another telling you to work harder, faster, better and for less money.
"I guarantee they’ll end up with a bigger problem than they started with because they aren’t allowing enough time to do the job adequately. There will be another big meltdown down the road," he said.
Rich Miller with Intermountain Mortgage in Park City said he’s not happy that HVCC is going to cost the consumer more.
The old way also allowed lenders to shop around for appraisers who weren’t busy and could get a job done faster. Now lenders have no way of following up on an appraisal to find out when it will be in.
Also, they can no longer give the business to the local appraisers.
"We like to keep the business with people who live and work in town here, and now you can’t do that," he said.
The whole situation was created by unscrupulous lenders, but what they were doing was mortgage fraud anyway, he said. If anyone was suspicious of an appraisal in the old system, there were checks and balances in place to punish offenders.
Walt Chudleigh with Summit Appraisal agrees. The middle man will only raise costs and delay the process while forcing appraisers to perform tasks on "physically impossible" deadlines. The checks and balances in place were effective.
"There were a lot of people willing to turn (appraisers) in if a fraudulent job was found," he said.
If inaccurate information is presented or used by an appraiser, the old process allowed that to be resolved quickly, said Ron Field with Mountain Express Mortgage. He ordered an appraisal two weeks ago and hasn’t heard anything back yet.
Field said these could all be kinks that get worked out and HVCC could be better in the long run. But for now, it’s a hassle.
"It now makes us way behind the eight ball in getting the loan approved," Field said.
Neil Jensen, area manager for appraisal management company Rels Valuation, agreed that any regulation coming from the government has problems.
"Certainly this process isn’t perfect either," he said.
But having appraisers relying on lenders for their livelihood was "the root of the economic mess we’re in today," he said.
Jensen doesn’t see how management companies can play a larger role in the industry without adversely affecting the profits available to appraisers.
"I don’t know how a company can be in the marketplace and be competitive and do what others are doing without having dramatic impact on the business line," he said.