Home appraisals still fraught with uncertainty despite new code of conduct
The recently launched system is intended to provide more honest valuations. But the use of third-party appraisal management companies has led to complaints.

By Lew Sichelman (lsichelman@aol.com), Los Angeles Times, 05/09/10
http://www.latimes.com/business/la-fi-lew-20100509,0,1809396.story

Little known outside the housing industry — and little understood inside the business — the Home Valuation Code of Conduct (HVCC) was supposed to result in better, more honest appraisals. But a year after it was put in place there is still a question of whether home buyers are getting their money's worth.

Real estate professionals, home builders, mortgage brokers and even some appraisers themselves complain that lenders are using appraisers who lack experience, sometimes travel great distances to divine values in unfamiliar jurisdictions or base their determinations on sales that are not similar to the property they are appraising.

Negotiated by New York Atty. Gen. Andrew Cuomo with Fannie Mae and Freddie Mac, the two government-sponsored secondary-mortgage-market institutions that help keep the money flowing to primary lenders, the code effectively blocks anyone who has a financial stake in a transaction from pressuring the appraiser to "hit the number" necessary for the lender to approve the loan.

That's a laudable goal that everyone agrees was long overdue. But the antagonists say their issues aren't with the HVCC itself but how the lending community has implemented it.

Instead of erecting their own firewalls between real estate agents and loan brokers on one side and appraisers and underwriters on the other, most lenders have turned the appraisal-ordering task over to third-party appraisal management companies. And, not surprisingly, the AMCs say the complaints are way overblown.

The Title Appraisal Vendor Management Assn., the trade group for AMCs, says that on average its member appraisers travel only short distances and have 15 years of experience. And the AMCs maintain that they use only licensed and certified appraisers who, under industry standards, must refuse assignments in unfamiliar markets.

On first blush, buyers and sellers may not think they have a role in this fight. But they do. Buyers need to know they are not overpaying for a property, and sellers, at least in the current down market, sometimes have to come to grips with the possibility that the old homestead isn't worth as much as they think it is. So if an appraisal isn't accurate, both sides suffer.

To some extent, agents, brokers and builders have to get real, too. AMCs aren't going away. The HVCC is now firmly embedded in the mortgage-approval system, and the market is what it is.

At the same time, though, their complaints have some validity, which raises the question of what to do if you have some reason to doubt the value an appraiser ascribes to your house.

For starters, if you or your agent believes the appraiser has violated the standards of his or her profession or is downright incompetent, by all means, report him — to his company, to your state licensing agency and even to the police or FBI if you think he may be involved in some type of fraud. Each has a procedure for filing complaints.

If you think the valuation has come in way too low, you need to appeal, but with as much finesse as possible. Realize that if the lender orders the appraiser to take a second look, it's like telling him he was wrong the first time.

Of course, you can always ask for a second opinion from another appraiser. But you'll have to pay for that one, too. Moreover, to stand any chance of winning your point, the second valuation must be more than 5% higher than the first. Anything less is considered an acceptable difference.

Besides, even if the second appraisal is far above the first, it's the lender, not you, who gets to pick the appraisal on which the loan is based.

Although it may seem as though the cards are stacked against the customer, you can even the playing field by suggesting the appraiser assigned by the lender erred and requesting that he be asked to take a second look. And you can do some of the homework on your own searching out "comparables" that the appraiser may have missed the first time around. Cast the net widely by finding newly built homes and those marketed by agents who are not Multiple Listing Service members.

Remember, though, that you are not just looking for sales in the same general neighborhood. You want at least two, but preferably three, of the same style (ranch to ranch, for example, not ranch to two-story colonial), size and features. Also, sales should be no more than 6 months old and the more recent the better.

Look at the comps cited by the appraiser. Although the appraiser is required to go inside the property, he does not have to do that with the comps upon which he bases his valuation. More often than not his knowledge of them is based entirely on their description in the MLS or the public land records.

If a comp or two was sold at foreclosure, you have to make sure that the previous owners didn't gut them. Properties that have been mistreated not only sell for less, but they are also hardly similar to well maintained houses. However, the appraiser won't know that unless he gets inside.

The trick here is to find as many differences as possible in your favor, differences the appraiser may not have known about or failed to consider.

READER COMMENTS:

CynthiaHamilton said:

Unfortunately, this article has missed some important factors.   First, the HVCC came about as a result of a lawsuit that Andrew Cuomo filed against Wamu and eAppraiseIt, an AMC, for them colluding to pressure appraisers on value and also to change values on appraisals.  Yes, that was a bank colluding with an AMC.  So the solution to that was to have banks hire AMCs, which is what started the problem in the first place.

Second, the HVCC does NOT require banks to use AMCs, they could create a firewall in their own company just as you mentioned.  However, running that department is a cost center and banks prefer to make a profit.  Which leads to the third problem.

The largest AMCs are OWNED by the banks.  The fox is guarding the henhouse. Not only that, but often the borrowers are charged upwards of $750 for an appraisal on a simple single family house, and the appraiser is often paid only $250 or less, and many times only $175.  The normal appraisal fee for that kind of appraisal is $350 - $400, depending on the location.  In too many cases, the jobs are assigned based solely on which appraiser will take the lowest fee.  And the banks are making money on the back end of this deal, and not disclosing this to the borrower.

And finally, not only do the appraisers not get paid enough to pay for the services they need to do their job right (MLS, county records, gas to the site, software, and E&O insurance, etc.), but they are often expected to complete the report within 24 hours of the inspection.  That means that there isn't time to verify the sales with the agents (critical to determining if there were seller credits, problems with the property, etc.), or to do in-depth research on how the market is acting, or just doing a good job on picking comparables. I reveiw many appraisals where the work was sloppy, with errors, sometimes negligence so great as to put the person's license in jeopardy if someone were to turn them in.  Much of this is caused by the low fees and the quick turn around times.  Yes, the appraisers shouldn't accept the work if they can't do the job, but too many are facing the choice of feeding their children or making a stand.  The AMCs have no problem cutting you off if you don't comply.  

Appraisers have been put in a no-win situation, all so the banks can continue to make money off of bad loans and take half of our fees as a thank you for putting good appraisers out of business.  See http://appraisersforum.com/showthread.php?t=126687&highlight=puzzle if you want a full explanation as to how it all happened.

...

I did forget 1 thing - the only way the AMC model works is by having the appraisers work as independent contractors.  But the amount of control that the AMC exerts over the appraiser amounts to making appraisers de facto employees.  If the AMCs actually had to treat appraisers as employees, i.e. pay minimum wage, driving expenses, MLS, E&O, health insurance etc., the AMCs would go under fast. I'm really surprised that someone hasn't filed a complaint (SS-8 Determination of Worker Status)  yet with the IRS - it can shut down a company with the resulting back taxes due and penalties.

The AMCs micromanage every step of the appraisal, from requiring frequent updates on their website and daily, sometimes hourly, faxes, emails and phone calls looking for status.  Then there are the ridiculous 'stips' requests to change or add data to the appraisal that is not necessary, and sometimes the illegal requests to change value.  The AMCs have a strong lobby and stronger owners, and have been able so far to get away with this so far. I don't work for the AMCs so I don't have a case to file with the IRS, but someone needs to let the IRS in on the secret - there is no way that the AMCs could last if they actually had to pay for the services they demand and receive.

Cynthia Hamilton, JD, Cert. Res. Appraiser

bayappraiser said:

AMCs make their profit on the spread on the fee they charge the lender and the price they pay the appraiser. Standard operating procedure for the AMC is to go 'dialing for appraisers' to see who has the lowest fee in your area. A good idea if appraisals were widgets - a horrible idea when engaging a professional where cheap means lowest competency.

TAVMA's statements that their AMC members use appraisers with an average of 15-years experience is un verified. For all we know 99% of their members engage appraisers with 1-year experience and 1% to those with 29-years experience for a 1-5year experience (unweighted) average. The reports I've seen from the major AMCs who are TAVMA members is without a doubt the worst quality work I've ever seen, but what would you expect when you seek out the lowest cost appraiser for the area.

Some of the smaller AMCs do a good job using experienced appraiser but they seem to be in the minority and filling a niche with smaller lenders. All of the big AMCs, who are TAVMA members, have been an absolute disaster for the appraisal profession. If you don't do it fast enough or cheap enough you may be cut off from future assignments. Fast and cheap equals low quality in any profession and most all AMCs are all about fast and cheap as it nets them the most profit.

I would also like to point out that when you see the appraisal fee on your HUD-1 closing statement, only a portion goes to the actual appraiser in most instances. The HUD-1 was initiated to protect consumers from 'padded' or 'add on' fees but somehow the banking lobby has been successful in getting HUD to look the other way when it comes to appraisal fees. This lack of transparency is bad for consumers as they as commonly charged for steak and get hamburger.

Greenback said:

Brokers are no better than AMCs and AMCs are no better than Brokers, selecting the real estate appraiser. I urge the general public to retain or select their own Independent Real Estate Appraiser. It's so much safer and more accountable. 

HomeownersOfTexas said:

Let’s hope someone investigates the role big builders had in the appraisal industry rules and operation. Our paper, “Texas Homebuilding and the Global Financial Collapse” shows their role in the Great Recession. Washington has been doing the bidding of the homebuilding industry for decades, pushing “The American Dream” of homeownership, establishing HUD, removing builder accountability, etc. They may be the real culprits, and not the banks or Wall Street, because it was vertically-integrated volume builders with their own mortgage companies that taught banks and mortgage companies the art of predatory lending as a way of selling more homes. They banks followed suit in order to compete with the unregulated homebuilding industry. See http://www.homeownersoftexas.org/collapse.pdf