Affordable Housing Institute : US

You’ve got to try harder

In the aftermath of the subprime meltdown, fingers are being pointed every which way, among them at the appraisal community, which led to a systemic change brought about by new York’s aggressive Attorney General, Andrew Cuomo, who pressured the GSEs into an agreement about which I recently posted:

[The Home Valuation Code of Conduct (HVCC), which applies to mortgages placed via Fannie Mae and Freddie Mac, bars loan officers, mortgage brokers or real-estate agents from any role in selecting appraisers.]

This has encouraged lenders to outsource the selection to appraisal-management companies, or AMCs, which take a sizable cut of the appraisal fee.

This is value-chain re-engineering. If the link between commissioner and appraiser is too cozy, then it’s necessary to add a link. Adding a link adds costs. The first-order systemic response is simple:

As a result, appraisers are under pressure to “do it faster, do it cheaper,” said Bill Garber, a spokesman for the Appraisal Institute, a trade group.

It takes all the cycle-time shrinking you can do just to stay ahead of the workload

Faster, cheaper leads to an easy second prediction:

With costs cut, we have the second-order reaction – adverse selection by quality. Premium providers are pushed out of the business.

Now, to judge by this Banker & Tradesman article, that prediction is already coming true:

Mortgage brokers and appraisers predicted headaches and worse with the advent of the new appraisal rules that hit the mortgage business on May 1, and now they say that’s just what they’ve found – with a few extra aggravations thrown in.

As if you haven’t got enough to worry about

Appraisers say it’s just as they feared:

Under the new Home Valuation Code of Conduct:

[1] They’re making less for each job

[2] Consumers are paying more

[3] For an inferior appraisal.

Outcome 1 was self-evident; outcome 2 was the inevitable corollary.

Appraisers are also complaining appraisal management companies take a chunk out of their fees as payment for arranging the assignment.

What about the third, inferior quality? Two weeks ago I extracted this risible quote:

Funny, by George

Jeff Schurman, executive director of the Title/Appraisal Vendor Management Association, said AMCs typically take about 40% of the fees and appraisers get the rest.

Two-fifths isn’t exorbitant, but it’s not minuscule either.

Mr. Schurman said he has seen no evidence that AMCs’ practices lead to lower quality.

At that I laughed out loud. “The head of an association that takes 40% of another’s fees said he has seen no evidence that cutting what’s paid for actual work leads to lower quality.”

A four-year-old child could make it out!
Quick, get me a four-year-old child, I can’t make head or tail of it

More significant for consumers are these disruptions in the value chain:

Don’t break the value chain; use the Force

Meanwhile, brokers can’t easily make good on locked-in interest rates because new rules gum up the application process, said David Black, president of First New England Mortgage in Newton.

Also, brokers now often struggle to transfer appraisals between lenders, leaving them unable to easily transfer the application to a more favorable lender.

“We could keep banks honest,” he said. “If we can’t get our job done, we’ll disappear.”

This argument is intriguing. Mortgage brokers can shop for different lenders, and if they can take a single appraisal to multiple lenders, they can get better apples-to-apples price comparison.

When mortgage brokers ordered the appraisals, they could take those numbers to a variety of lenders, ideally shopping around for the best terms on behalf of the borrower.

This leaves unanswered the challenging question of who the mortgage broker actually works for, about which readers may be forgiven for being skeptical.

The National Association of Mortgage Brokers, which tried to prevent the rules from taking effect, is now urging brokers to direct their uproar toward The Federal Housing Finance Agency and other organizations.

No namby-pamby lobbyists these!

NAMB has also succeeded in persuading two representatives to introduce HR 3044, legislation proposing an 18-month moratorium on HVCC.

But that fight truly began last year, when FHFA announced that Fannie Mae and Freddie Mac would not back mortgages in which brokers had contact with appraisers, and issued the new code to prevent that.

As I posted previously, contact between an interested and a disinterested party isn’t necessarily improper; it may be the lifeblood of accuracy.

Avoid impermissible contact, okay?

At my for-profit company, we do valuations of complex structured interests. After making our initial data request, which includes a comprehensive checklist of information we think relevant, we also invite our customers to provide any information they think worthwhile for us to know. Unless the circumstances are unusual, we also give our customers a chance to look at and comment upon our draft, and to provide additional evidence. This creates an intellectual argumentation, where the client is advocate for its view of the right value, and we are judge and jury of what we think is the right value.

Such contact also allows influence to be brought to bear:

Make up your own mind

Previously, brokers order the appraisal before submitting the loan application to the lender – and often, critics say, those brokers would pressure appraisers to come back with higher valuations.

Get it?

Naturally that pressure will be applied, and the expert has to be intellectually and morally tough:

For this tension to yield improved (more accurate, more thoughtful) results, we as valuation experts have to be strong enough to repel improper suggestions and to resist flimsy or unsubstantiated argumentation.

Evidently, many appraisers were suspected of being weaklings.

And proud of it!

Now the appraisal comes through the lender, and critics say if consumers want to shop around, they’ll have to order a new appraisal for each lender they try out.

Ironically, the cozy relationship of in-house commissioned appraisals – being proposed as a reform – is among the sins of which Countrywide’s Angelo Mozilo was accused.

“There’s a real competitive issue here,’ said Stephen Sousa, executive vice president of the Massachusetts Board of Real Estate Appraisers.

Hoping to put your financial house in order

The lender who ordered the first appraisal has to certify it in order to pass it along to another lender, Sousa said, and it’s doubtful lenders will want to shoulder the liability – with no potential reward – that comes with certifying an appraisal for a loan they’re not going to make.

Absolutely right. Why should I take a risk that helps you make money I’m not going to?

“On top of that, other lenders don’t want to accept the other guy’s appraisal anyway, and will request another – at hundreds of dollars of cost to the consumer.”

“That was one competitive advantage [for brokers]: We could take the loan to a new lender,” Black said. “Now we can’t do that.”

A valid point.

Another in the list of complaints: The new code prevents brokers from successfully locking in borrowers at lower rates, says Richard Shapiro, principal of Asset Mortgage Group in Natick.

Because the appraisal is completely out of the mortgage brokers’ hands and another layer of management is inserted in the process, everything just takes longer and 30-day lock-ins are likely to expire before the application is complete.

This, by contrast, strikes me as simply growing pains. Give the system time and it’ll get faster.

Longer lock-ins are possible, but are more expensive to the consumer.

Any growing value chain is inherently less efficient until it achieves stabilization and scale.

Many appraisers were upset that their work was being shuttled through appraisal management companies because the new system broke professional ties they’d established with brokers, who would refer them to jobs in their area. Now management companies just cast around for whoever will do the job cheaply and quickly, they say.

What’s quality worth? Does it compensate for cozy relationships?

We’re not cozy, it just looks that way

Sousa said his organization sent out a survey on the new code that – so far – has 55% of appraisers saying the number of assignments they’ve received has declined, and 39% said their assignments have decreased more than 10% since HVCC kicked in on May 1.

Foolish statistic; all appraisals are probably down.

What is the future of these regulations? The HVCC is a set of guidelines laid out by Fannie and Freddie, not legislation; David Bunton, president of Appraisal Institute, speculates the HVCC is merely “placeholder” rules that will be swept away in the spate of new regulations coming out of Washington.

We saw above that the NAMB got legislation introduced requesting an 18-month delay – but that’s a long, long way from it becoming law.

Others aren’t as optimistic.

“The longer it’s in place, the more it becomes entrenched,” Sousa said.

Think you can shoot down that legislation, boys?

He’s right; HVCC is here to stay.

Lenders are spending time and money to engineer the new processes, and would kick up a fuss if someone suggested change. Chris Kelley, sales manager at First New England Mortgage, noted that the mortgage brokers’ Washington lobby can’t match the powerful banking machine in place.

And with all due quivering respect to the mighty banking machine versus the plucky mortgage broker machine, the case for repealing HVCC is far from proven. Certainly the value-chain problems cited above are relevant, but they sound transitional, and by the time Congress gets around to considering whether to suspend the HVCC, the system will probably be operating more efficiently.

Still, the brokers keep hoping:

Shapiro theorized that they’d need a politician or well-connected lobbyist to get fired up on their behalf: “I’m just hoping that the right big shot gets their loan all screwed up because of this and says, ‘Why are we even doing it?’”

It’s more fun than being depressed

E-mail: lschreier@thewarrengroup.com

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