Tuesday, August 18, 2009

WSJ - Unintended Consequences of HVCC

The Wall Street Journal has another article about the real estate market, appraisers and the Home Valuation Code of Conduct (HVCC). It's an interesting take with more tales of woe with a couple of interesting observations.

Reappraising Home Appraisers

After being blamed for helping to inflate home values during the housing boom, the appraisal business is again coming under fire. Squeezed by a drop in fees, some appraisers are compensating by driving long distances to handle more assignments.

Their wanderings are raising questions about whether they know enough about the neighborhoods to accurately assess the value of homes—which has implications for both home buyers and owners.

Bob Blake, a flight-test engineer who lives in Palm Beach Gardens, Fla., was shocked when an appraiser who traveled 44 miles from Port St. Lucie, Fla., valued his home at $228,000 in late May. Mr. Blake's mortgage broker, Skip McDonough, protested to the appraisal-management company, Nations Valuation Services Inc., that the appraiser had failed to look at comparable homes. Eventually, Nations sent another appraiser, who valued the home at $295,000. The dispute delayed Mr. Blake's refinancing by more than six weeks.

A spokesman for Nations Valuation declined to discuss the details of the appraisals but said, "We feel we handled it properly."

NOTE: Nations Valuation Service has posted their "commitment" to the HVCC. However, Appraiser Active does not find a "self-certification" or seal. Dang!

The WSJ goes on to give their interpretation of why appraisals are completed for a mortgage finance transaction:

Appraisals are supposed to shield home buyers from paying too much and lenders from overestimating the value of collateral. If appraisals come in too high, buyers may overpay, making defaults more likely. If they are too low, it becomes hard to sell or refinance homes. Many real-estate agents and builders say that the pendulum has swung too far toward caution, and that lowball appraisals threaten to snuff out any recovery in the housing market.
It's a nice interpretation, but a common misconception. The regulatory scheme for real estate appraisers adopted by the United States Congress in 1989 was in response to the collapse of the Savings and Loan industry. The purpose of the federal legislation is to protect federally regulated financial institutions, not individual home purchasers or borrowers.

Appraisals are completed for the benefit of the client and intended users. Rarely, in the case of an appraisal completed for a real estate purchase or refinance transaction, is the borrower named as an intended user.

The debate over appraisals is inflamed by a natural tension: Real-estate agents and mortgage brokers, who need to complete transactions to collect their fees, are unhappy when an appraiser nixes the sale price. But it also suggests that there may be unintended consequences to an attempt by New York Attorney General Andrew Cuomo to reform the appraisal business.
"Many appraisers are struggling to survive on the fees paid by the AMCs," says Bill Garber, a spokesman for the Appraisal Institute, a trade group based in Chicago. Appraisers are being asked to work faster even as their fees are cut, and that conflicts with the goal of getting reliable appraisals, he says.

Appraisal-management companies deny they are squeezing appraisers too hard. A spokesman for banking giant Wells Fargo & Co., which owns an AMC, says it "has invested substantial time and resources in the quality control of the valuation process to, among other things, ensure that individual appraisers have relevant knowledge of the markets and properties they review." A spokeswoman for Mr. Cuomo says the new code is working well and helping protect appraisers from pressure to inflate estimates.

The pile of appraisals generated by AMC Independent Contractor appraisers accumulating on the floor by my desk proves otherwise. The complaints about non-geographic competent appraisers pouring in to regulatory agencies provides even more evidence that the non-regulated, Big Bank Owned AMCs and Andrew Cuomo are blowing smoke.

In fact, within my collection is an "appraisal" generated by an individual contracted by RELS, the Wells Fargo affiliated AMC. Along with the "appraisal", the borrower provided a copy of the Automated Valuation Model (AVM) generated value estimate produced by RELS. The AVM was crap, and the "appraisal" mysteriously provided an opinion of value that mirrored the AVM estimate. The Wells Fargo claim that "that individual appraisers have relevant knowledge of the markets and properties they review."? The property was in Pinellas County, Florida. The "appraiser" is based in Ft. Myers, Florida. That's 120 miles away!

Here's more:

Sometimes appraisers are called on to express opinions on the values of faraway homes without even seeing them. LandSafe, an appraisal unit of Bank of America Corp., in May assigned Jane Price, an appraiser in Dallas, to review another appraiser's estimate of a home in Cathedral City, Calif. Ms. Price didn't visit the neighborhood in question, but her review cited nearby homes she used to determine comparable value.
I'll bet Ms. Price has no idea where in tarnation Cathedral City, California is, and that she does not have a license or certification to appraise in California. How does this protect the federally regulated financial institutions, never mind Fannie Mae and Feddie Mac. Is it any wonder the GSEs are in their current mess?

Go ahead and read the whole thing. By the way, it's 1320 miles from Dallas to Cathedral City.