A Response to “New FHA Appraisal Standards Take Effect”

I recently penned this response to Peter Miller’s post “New FHA Appraisal Standards Take Effect”, and I thought I’d reprint it here with a link to his original article.  Peter’s excellent blog FHALoanPros keeps a close eye on FHA legislation and changes in FHA lending practices and often provides good statistical data on FHA lending.

In this particular article, Peter notes the effective adoption by HUD of the HVCC appraisal rules that now prohibit loan originators from selecting appraisers.  He writes from the regulators’ viewpoint that advocates this separation in the belief that it will “allow borrowers to get a better shot at a fair valuation of their property”.  While in theory this sounds reasonable, in practice the cure is worse than the disease.  Here are my comments:

Even if one believed that the mortgage world was coming to an end with this new rule, it would take a few weeks for its effects to be felt by buyers. And I don’t think any of us feel that. After all, we’ve been dealing with this HVCC processon conventional loans for awhile now already. What we do feel and see is that this new procedure has empowered and unriched a new “middle man” in the process–the Appraisal Management Companies (AMC), often just subsidiaries of the big banks themselves.

Granted, the old appraisal system allowed unethical mortgage originators to coerce weak or desperate appraisers with threats of non-payment or withholding of future business, but there were already good systems in place for appraisals to be reviewed and for appraisers themselves to be monitored and removed from list of “approved appraisers”. These rules could have been strengthened. But at the same time that the HVCC process was brought to life, we witnessed the disappearance of “approved appraiser” lists and the easing of the requirements by HUD to become an FHA appraiser. How does that make sense?

Now we have a mortgage analogue to “managed care” in the health industry, a new tier of companies who raise the costs to borrowers, reduce the fees to the providers who do the actual work, and redistribute the difference as profit to themselves. That has been reflected in several ways anithetical to the notion of helping the consumer who wants to know the real value of what they are buying.

First, less experienced and out-of-the-area appraisers are often the only ones who will accept the reduced fees paid by the AMCs. These fees are often half of what appraisers used to earn. Recently, an agent told me she had met such an appraiser at the property. He was late because he couldn’t find the town and then walked up to the house barefoot and smelling as though he hadn’t showered in several days. I am told that the appraisal code requires an appraiser to be familiar with the area in which he is conducting an appraisal. Someone from out of the area may not understand the differences between neighborhoods, even if they eventually can find the town. And when paid half of their normal fee at a time when regulations require more work, few appraisers will put the time and effort into researching and understanding a home’s true value. They put as little effort in as possible and use the low end of the value range to cover themselves.

Second, despite this separation of originator from appraiser, the banks do not trust the outcome. One would think that if this process truly met its objective of creating greater accuracy and objectivity, the banks would embrace the results. Instead, they appear more nervous than ever. Most appraisals seem to then require “desk reviews” or “field reviews” at an additional cost. So, the consumers pays more for each appraisal and often has to pay for multiple appraisals. Additionally, the banks still run AVMs (automated valuation methods..think Zillow) in the background. When these inferior computer valuation tools yield a lower value that the actual appraisals, banks will still often use those value, despite the acknowledged quality discrepancy. This kills deals and costs consumers money.

The time required to deal with all of this is certainly another cost issue to consumers. Escrows are frequently delayed, per diem fees incurred, interest rate locks blown….all at a cost to the consumer who has not in fact received a more reliable opinion of value.

I am an advocate of good regulation. Without it, the invisible hand of self-interest often leads not to promotion of the public interest or transformation of greed into social good but simply to cheating. But this is an example of bad legislation and unintended consequences. There are better ways to fix the appraisal problem.