In the original version of the home-valuation standards that Fannie Mae and Freddie Mac agreed to adopt under a March deal with New York Attorney General Andrew Cuomo, lenders faced sweeping change, including a requirement that they divest themselves of appraisal-management subsidiaries.
As revised, the effective mandate will be quite different.
Indeed, the altered standards are expected to accelerate the use of appraisal-management companies of some kind, whether or not they are owned by the lender.
"You're creating a situation where a lender is going to have to order a lot of appraisals from an AMC," said Jonathan Miller, the president and chief executive officer of the New York appraisal firm Miller Samuel.
The revised version of the code was disclosed last week. It will let lenders use valuations made by an employee or subsidiary so long as the appraisal function is kept at arm's length from the sales force.
"This will permit lenders and others to use their existing appraiser independence and quality-control practices rather than mandate structural reorganization," Michael Carrier, an associate vice president at the Mortgage Bankers Association, said recently.
Beginning May 1, Fannie and Freddie will not buy or guarantee loans that do not comply with the code. (The date was postponed from the original version's Jan. 1.) Since the two government-sponsored enterprises are among the few remaining secondary-market buyers, the code will effectively apply industrywide.
The revised code retains the original version's ban on appraisals ordered by mortgage brokers. This might sound like good news for appraisers, who have long complained about pressure from lenders and brokers to inflate valuations so that loans will go through.
However, several appraisers said Monday that, as revised, the code would worsen a different problem. Many appraisers argue that management companies put too much emphasis on minimizing costs and turnaround times for valuations, at the expense of quality.
Since local salespeople could no longer order appraisals, these appraisers reasoned, lenders would have to use some kind of appraisal management company, either one they owned or a third party.
"This would further commoditize appraisers and is counterproductive to solving the problem of collateral valuation," said Richard Maloy, the chairman of the government relations committee at the Appraisal Institute trade group in Washington.
There are "safety issues" when a mortgage lender uses an appraisal management company "as a profit center that is held captive," he said.
Calls to Cuomo's office and to the Title/Appraisal Vendor Management Association were not returned by press time. Fannie, Freddie and the Federal Housing Finance Agency (FHFA), which placed the two GSEs in conservatorship in September, declined to comment.
In a statement posted on his Web site two days before Christmas, Cuomo said the revised version of the code "preserves the core goals of ensuring appraiser independence and eliminating systemic conflicts of interest. It also incorporates common-sense suggestions of industry participants that increase flexibility and efficiency."
James Lockhart, the director of the FHFA, said in a press release issued later the same day that the revised code "strikes a balance of assuring enhanced protections for appraisers while maintaining lender ability to address unprofessional appraisal practices and to perform quality controls on appraisals received."
Miller said, "Appraisal-management companies are subject to the same pressure as mortgage brokers; only there's actually more at stake. They're almost more vulnerable" because most of the companies depend heavily on a few lender clients.
R. Wayne Pugh, the president of the Appraisal Institute, said that, if a standard appraisal fee is $300, then an appraisal management company will charge that amount but hire an appraiser who has less experience and will do the work for "significantly less."
"The consumer suffers because they're not necessarily getting the best appraisers in their market area," he said.
The agreement on appraisals stemmed from an investigation that Cuomo began in November into the appraisal practices at First American Corp. in Santa Ana, Calif., and its eAppraiseIT unit, which he accused of inflating homes' values under pressure from Washington Mutual. Cuomo asked Fannie and Freddie to supply details about Wamu's loans and its due diligence practices related to appraisals.
Maloy said Cuomo and the FHFA may have agreed to "back away from the original" agreement because many large banks have in-house appraisal departments or affiliated appraisal companies.
Separating those employees, who also have retirement and healthcare plans, "would have created quite an upheaval."
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