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New Rules Governing Appraisals

Posted by Nancy Comenitz on Saturday, July 11th, 2009 at 4:54pm.

On May First The Home Valuation Code of Conduct went into effect for loans to be purchased or guaranteed by Fannie Mae and Freddie Mac that are not jumbo loans. The code grew out of a lawsuit by New York Attorney General Andrew Cuomo alleging that an appraisal management firm allowed lender Washington Mutual to hand-pick appraisers.

The code has prohibited mortgage brokers originating loans to be purchased by Freddie or Fannie from ordering appraisals directly. It also required loan officers working for banks and other lenders to delegate the process of ordering appraisals to other in-house staff or go through an appraisal management company.

The code does not require that lenders such as banks use appraisal management firms; they are still allowed to hire independent appraisers. But independent mortgage brokers who originate loans on behalf of lenders must use lender-approved appraisal management companies. That requirement has given appraisal management companies an increased role in the process.

The National Association of Realtors (NAR) states that "our members are reporting that the appraisal management companies are giving appraisers assignments in areas where they lack geographic competency". "For a variety of reasons, appraisers may feel compelled to take these assignments."

Many lenders also prefer to use appraisal management companies over independent appraisers to avoid the risk that they will run into compliance issues, reported Mortgage Banking Association Chairman David Kittle. As a result, he said, appraisers affiliated with management companies have been "inundated with work" at the expense of independent appraisers. Nationwide appraisal management companies "may not be as aware of valuation trends particular to a neighborhood as a local appraiser", Kittie said.

The National Association of Realtors called for a moratorium on the Home Valuation Code of Conduct stating it is causing too many fault valuations that are hampering the home selling process. Stories of appraisal problems have been "snowballing across the county. Lenders are using appraisers who are unfamiliar with the neighborhood, or who compare traditional homes with distressed and discounted sales", NAR chief economist Lawrence Yun said.

Rep. Travid Childers and Rep. Gary Miller have co-sponsoring a bill that would impose an 18-month moratorium on the Home Valuation Code of Conduct. It has been referred to the House Committee on Financial Services.