Today the lender orders the appraisal on a loan transaction. Looks like change is on the horizon since this setup is being blamed for inflated home values, fraud and to a degree one of the reasons for the mess we’re in. The issue is also murky because many mortgage companies also own appraisal houses. Also, since the appraiser doesn’t get paid until the loan is closed they are often under pressure to get the “right” answer! They system appears to be in need of a fix according to the Attorney General in New York and today we have an agreement that could have far reaching consequences for how the loan transaction flows.
Fannie Mae (FNM) and Freddie Mac (FRE) reached an agreement with New York Attorney General Andrew Cuomo to only purchase loans that meet new standards designed to ensure independent, reliable appraisals.
Included would be no longer buying mortgages in which the brokers selected appraisers or when lenders used “in-house” staff appraisers or appraisal- management companies they own or control.
Cuomo said the mortgage giants also have agreed to create an independent organization to implement and monitor the new appraisal standards to be funded with $24 million from Fannie and Freddie. Their regulator - the Office of Federal Housing Enterprise Oversight - also has agreed to the creation of the independent institute, to be called the Independent Valuation Protection Institute. The institute will report to the attorney general’s office and Ofheo on a biannual basis.
The moves, which will be effective Jan. 1, come amid wide sentiment that inflated appraisals have been an important contributor to the mortgage crisis.
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on Mar 3rd, 2008 at 8:06 pm
Shailesh,
I heard about this change when I was in the office today. I have two questions that I hope you can answer.
1. Is it true that closings may take 30-45 days longer with this new scenario.
2. Will buyers (who are paying for the appraisal) be able to get a copy?
Thanks for any and all your insights!
on Mar 3rd, 2008 at 9:30 pm
Interesting. Dru brings up some great questions. Mortgage brokers often use preferred appraisers who can quickly get the appraisal done. I would think this could delay the process. When I worked in Arizona, we would have appraisals come in below the offer price all the time. I have never seen this in California. The appraisals always come in at the offer price. Clearly that can’t be an independent and accurate appraisal.
on Mar 5th, 2008 at 6:22 am
Dru,
Great questions. I don’t have specifics on this whole thing since it is still evolving and nothing is set in stone.
1. I don’t think this will add that much time to the process. I would think the new approach may be along the lines of what VA currently does. Once a loan is set up as a VA then the loan processor/underwriter orders the appraisal with a VA assigned appraiser. Neither the loan officer or real estate agent is allowed to speak with the appraiser. The process hasn’t slowed down because of this.
2. The borrower is entitled to a copy of the appraisal, absolutely. I don’t see that changing any time soon. Under the current system the borrower signs a disclosure which states that they are entitled to a copy of the appraisal.
Ginger,
Mortgage brokers tend to use appraisals who can “get things done”. And there are those who abuse this and get in trouble for it. I guess things are a bit different in California, but in Arizona I’ve had appraisals come in below but early on in the business I was always stunned by how the appraisal always came in at the purchase price. It was surreal and quite interesting. Things are different these days and the appraisers I work with don’ t hesitate to let us know that the house won’t appraise.