Easing into the New, Stricter Rules for Appraisals
In most cases, so much is riding on appraisals that they become sources of considerable concern and frustration for homebuilders and prospective buyers and sellers if they don’t meet expectations for thoroughness, precision, expertise, and/or fairness.
That was one of the motivations for the Home Valuation Code of Conduct, announced in 2008 by Freddie Mac and Fannie Mae, and enacted in May 2009. By preventing mortgage brokers, Realtors, and loan-production staffers from selecting appraisers, the HVCC was designed to allow appraisers to do their work with a greater degree of independence. The HVCC, which applied only to appraisals for loans that would be sold to Fannie or Freddie, also established compensation standards for appraisers.
One consequence of the code’s enactment, however, has been that appraisal management companies (AMCs) are often hired to act as intermediaries between brokers and appraisers, and the quality of appraisals has suffered, some parties complain, because expedience has come to play a bigger role than expertise when AMCs, rather than lenders or brokers, assign appraisers to jobs. Appraisers have complained, meanwhile, that some AMCs were paying far less than the customary rate for each job.
Tighter rein on potential conflicts of interest
Compensation and appraiser independence are two key issues addressed with yet more force and broader coverage by a new appraisal rule: Title XIV of HR 4173, the Dodd-Frank Wall Street Reform and Consumer Protection Act. Last week, the Board of Governors of the Federal Reserve System announced an “interim final rule” – essentially a provisional version of Title XIV that, as mandated by the new law, is open to public comment for 60 days after the rule is published in the Federal Register. The rule becomes mandatory beginning April 1.
On its website, the Board of Governors cites the following rule prohibitions and requirements:
– Prohibits coercion and other similar actions designed to cause appraisers to base the appraised value of properties on factors other than their independent judgment;
– Prohibits appraisers and appraisal management companies hired by lenders from having financial or other interests in the properties or the credit transactions;
– Prohibits creditors from extending credit based on appraisals if they know beforehand of violations involving appraiser coercion or conflicts of interest, unless the creditors determine that the values of the properties are not materially misstated;
– Requires that creditors or settlement service providers that have information about appraiser misconduct file reports with the appropriate state licensing authorities; and
– Requires the payment of reasonable and customary compensation to appraisers who are not employees of the creditors or of the appraisal management companies hired by the creditors.
As noted in a MarketWatch story posted this week, penalties for noncompliance are fairly stringent, including fines of as much as $10,000 a day for the first violation and $20,000 a day for subsequent violations. The appraisal industry is awaiting more clarity on how those penalties will be imposed, Griff Straw, president of Solidifi, an appraisal management company, told MarketWatch.
Thumbs up from NAHB
The National Association of Realtors says it “urged the Federal Reserve to implement regulations to address appraisal portability,” supports allowing brokers to communicate with appraisers, and has submitted comments to the Federal Reserve on “the definition of an appraisal management company, the definition of appraiser, conflicts of interest, prohibited acts, and the consideration of appraisal designations.”
For its part, the National Association of Home Builders says it welcomes whatever clarification can be achieved in the home valuation process, particularly as it applies to new homes and especially those with amenities or performance features that add significantly to construction costs but are unusual or anomalous in the surrounding area.
If a new home is evaluated without consideration of appropriate comparables, Joe Robson, NAHB’s immediate past chairman noted in a recent association news release, the resulting appraisal not only can undermine the financial viability of a project, it can adversely affect an entire neighborhood. (Ask green-home builders about the comparables problem – they’ll give you an earful.) The interim rule, fortunately, does allow builders to ask an appraiser to consider additional information about a property and additional comparables.
“Many appraisers do not understand the impact of new code requirements, new green building practices, and other aspects of new construction that add value to a home,” Robson said. “It is particularly important that homebuilders be allowed to provide appraisers with information to assist in appraising new construction.”