How Well Do the New Rules Protect Lenders, Consumers, and Appraisers?
We are very excited and proud that the following article “How Well Do the New Rules Protect Lenders, Consumers and Appraisers?” was published in the California Mortgage Bankers Association Spring 2016 California Mortgage Finance News. Check it out below!
The role of the Appraisal Management Company (AMC) was originally created to stand as a protective firewall between lenders and appraisers. It was instituted to prevent any type of influence on appraisers when completing their market evaluation on a property. AMC’s have existed since the 1960’s but not in the numbers they do today; of course, business volumes have grown over that time period. In the depth of the recent housing market crash, new guidelines were put in place in order to further separate any parties with financial interest in a mortgage loan from the appraisal process. Today, AMC’s are legally required to work relentlessly with lenders and appraisers to maintain compliance on appraisal orders, and lenders have new responsibilities for third-party vendors. This means appraisers have to stay on top of the report and ensure quality control is maintained in order to deliver an accurate and bias-free report. The housing market has improved significantly for a variety of reasons since these new rules and guidelines have been put into effect, and now the lenders, brokers, loan officers or anyone involved from profiting from a loan, have had their influence reduced in the appraisal process.
Despite all of the safeguards that have been put in place, I think there is more we can do, both to protect the expectations of the borrower and the interests of lenders and their partner AMCs. Within the purchase transaction process, there is a potential disconnect between lenders and AMCs that the Uniform Standards of Professional Appraisal Practice (USPAP) and the new Appraiser Independence Rules (AIR) under the Home Valuation Code of Conduce (HVCC). On one hand, regulators have created more distance between lender and appraiser to ensure an unbiased and accurate report. However, because the purchase price of the home is included in the appraisal report, this means the appraiser will be aware of that price. Despite their independence, I’ve found that when appraisal reports on purchase transactions are completed, the appraiser will often appraise the home in the exact amount as stated on the purchase price. Since it is truly the free market that “sets” the price for a home, it makes sense for the home to appraise at or near that price as well. However, when that appraisal does not equal the sale price, I fear many borrowers are in for a rude awakening at closing. For example, let’s say the purchase price is stated to be at $242K but the appraised value of the home is, in fact, $2-5K above or below that price. That really isn’t a dramatic difference; however, it concerns me that for many appraisers who do not list the property exactly as the listing price, lenders or brokers will return the report to the appraiser to look it over again and complete rebuttals, and make revisions on reported adjustments.
If the appraised value is indeed lower than the sale price, this can be more than just a wrench in the process. In most cases, a typical mortgage firm will lend based on the appraised (lower) value. Therefore, the difference in sales price and appraised value will now mean that the borrower will need to come in with the extra funds to close the loan. For example, let’s say that the loan was approved at 85% of the sales price but the appraisal report comes in low. Since the loan has already been approved at 85%, and assuming the seller refuses to negotiate and sell for lower, the borrower now needs to pay the extra difference in value and sales price. In this way the system can punish the borrower needlessly and puts the appraiser in an awkward position. As one of the many AMCs that takes pride in following all the rules of compliance and guidelines, I know that when appraisers are given the target value on purchase contracts and are asked to revisit the report and make changes, many will feel second-guessed and sense some level of pressure to hit that price. On the other hand, in such situations, I’m sure lenders feel pressure to elevate the LTV to meet the updated valuation. While the new rules and guidelines are a major improvement, I believe change is necessary. Like you, I’m sure that you agree that the system, as is, needs to be reformed.
So what can be done? How can we protect the independence of appraisers and still serve both lender and borrower? While I don’t have a specific solution, I think our industry is going to need to readdress the appraisal relationship in the coming years to make sure that a) lenders get an accurate and unbiased report on the property they are lending on, and b) AMC’s and their appraiser partners need the independence to provide quality service. I’m hoping this can serve as a starting point for our industry to begin discussing a problem that needs to be addressed.
Having this conversation is one of the main reasons I’m a member of the California MBA, and why I encourage folks in our industry to join and be active in their mortgage banking trade associations. It does us no good to grumble in private; only by constructively working together and advocating for our companies through partner groups like the California MBA can we move forward and serve the next generation of homeowners.
We would love to hear your comments and input in the comments section below!