The credit crunch is making everything harder, interest rates more expensive, lenders much stricter and loans harder to come by. With this credit crunch comes the Home Valuation Code of Conduct, a new Fannie Mae and Freddie Mac rule that will be implemented in January 2009, restricting mortgage brokers or real estate agents from directly ordering appraisal reports (in cases where the loan will be sold to Fannie Mae or Freddie Mac). Since most loans are sold on the secondary market to Fannie and Freddie, this will pretty much apply across the board and I’m sure will become a standard practice.
Currently, when you purchase or refinance a property, the mortgage broker (or sometimes the real estate agent) directly orders the appraisal report from one of his or her appraisers and the appraisal is completed in the broker’s name. Come January, a broker or agent will no longer be allowed to order it; instead a third party (specifically an Appraisal Management Company) will appraise property.
What this Code intends:
- To decrease mortgage fraud and appraiser coercion or influence
- To completely neutralize the appraisal process itself (i.e. the broker or agent cannot tell the appraiser that to make a certain deal work, a certain value must be attained)
- To not artificially inflate home prices due to an appraiser trying to bring value in
I certainly agree with what the Code is ultimately trying to accomplish: a means for battling a troubled and overly-inflated housing market. And of course this is a backlash against the easy days of lending and against unscrupulous lenders and appraisers.
What I don’t like about this Code is that:
- The cost of getting a loan will increase because appraisal costs will increase
- Loans will take longer to close because we’ll be at the mercy of these Appraisal Management Companies, in regards to their turnaround times and staffing. By not having a direct relationship with a particular appraiser, we’ll be unable to ask for rushes (or at least getting rush requests accommodated without having to pay extra for them)
- Because of longer appraisal turnaround times, borrowers will be more susceptible to interest rate market changes over a longer period of time (45 day Close of Escrow periods may become the standard, not 30 day COEs)
- If a lender requires a change or amendment to the appraisal (often a slight typo or oversight), the Appraisal Management Company will take a few days to turn that change around, causing further delays to closing
- There will no longer be free comp searches done by appraisers to find out a range of value that your home can go for and to see if a refinance may even be a viable option
- It will put our independent, hard-working, ethical appraisers out of a job
Does the long-term benefit outweigh the short-term cost? Probably… especially if it does provide a standard for home prices and assuring that we won’t have over-inflated prices. But it will also make the whole home purchase process more expensive, in a time when many people may opt for short-term relief. As an ethical broker who hires ethical appraisers, I’m personally not too happy about this, but I also understand where the proponents are coming from. Any thoughts out there?
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See an update on this post here
I wonder if an appraiser hired by the lender (as opposed to the mortgage broker) might be under some pressure to underestimate the value of a property to minimize risk to the lender.
Nice looking blog, by the way! I also use wordpress.
Thanks Jeff, great point! Lenders are also disallowed from ordering appraisals with this new FannieMae rule. Appraisal Management Companies are neutral, 3rd party organizations without any ties to lenders or brokers, so they serve to give true market value, without intention to overestimate for the sake of making a deal work (broker/borrower) OR to underestimate for the sake of taking on additional risk (lender).
Who’s an example of a Appraisal Management Company? Are there enough of these sorts of businesses to accommodate the new demand on this neutral service?
Honestly, I’ve never used an AMC; I’ve always ordered my appraisals from independent appraisers. I googled AMC and plenty came up, so I don’t think there’s any concern about over-demand and under-supply, especially during this market. My guess is that many of our independent appraisers will now hang their licenses with AMCs and work for them.
Appraisal Management companies are asking ALL appraisors to take a cut in pay. The appraisal is still costing $350.00 but the management company is now getting $100 or more. So the appraisor who spends his gas, time, effort, e&o, etc etc is making substanially less money and being scrutinized twice as much. Management companies are paid also, only if the deal goes through, so its still commission and incentive based. AMC’s are just a middle man who does nothing but get in the way and take other peoples hard earned dollar.
once the appraisal is ordered & completed through the AMC, does it get delivered directly to the lender or broker? what if needed or wanted to switch lenders – what happens to appraisal? Who pays the AMC for appraisal and when? thanks in advance for any answers…..
Hi Scott, great question. Unfortunately, I don’t have an answer. There hasn’t been much communication about this new rule, except to say that it’s going to happen. What I’m *hearing* most recently is that the lender will order it through the AMC. AMCs don’t have a relationship with the borrowers, so I’m sure they would charge the appraisal fee upfront to be paid directly by the borrower (as opposed to what I do, where I have the appraiser invoice me and then I charge it back to the borrower at close of escrow).
If the appraisal is in the lender’s name, this will be extremely bad for borrowers because if their loan ends up being moved to a different lender because the initial lender denied the loan or if I move the loan to get my client a better interest rate, then the borrower may have to incur a new appraisal fee. Or the AMC will charge to change the name, as long as the initial lender agrees to release the appraisal.
I truly don’t have any solid answers, this is speculation. But I will definitely update my blog as I learn more. Feel free to email me directly if you have a specific concern you’re mulling over. Thanks Scott!
So if the management companies do win this battle and everyone is getting paid a fraction of what the appraisal fee is, what companies or appraisers will train the next wave of appriasers for this industry? That is how I got started back in the day, by someone that took there time and a cut of the appriasal fee to train me. So in essence the trainers will really be a rare commodity. A skilled appraiser splitting the fee with not only the AMC but with the apprentice. Good luck with that one. :-/
Good point, Marty. I don’t want to see my appraisers out of work, so I’m recommending that they contact AMCs and find a way to get contracted by them. I won’t be able to order appraisals directly through them, but at least they won’t be out of a job in that sense. And that’s what I think AMCs are doing – just contracting existing appraisers, but scrutinizing their work before the underwriter scrutinizes their work. Regardless, there is a cost of doing business and the AMC will charge for that, so appraisers end up making less. Not sure what that will mean for entry-level appraisers trying to get into the business…
Not only appraiser trainers be a rare commodity; appraisers will be a rare commodity (and soon). Overhead for an appraisal company with MLS working out of your house roughly equals $150 per job. AMCs are currently paying between $150 & $200 per job. Not only do they want the profit…they’re asking for the appraiser’s labor cost as well.
It won’t last long because it’s impossible to work for free. We’ve been appraising homes since 1992 but have decided to close our doors until AMCs are forced out of business and the 1004MC disappears.
Best of luck to the idiots who stay in and work for free.
I found your blog on google and read a few of your other posts. I just added you to my Google News Reader. Keep up the good work. Look forward to reading more from you in the future.