Appraiser controversy will be decided in 2009

A recent real estate news story highlighted a new and controversial rule on appraisers that Fannie Mae and Freddie Mac will adopt later this year. It's shaping up to be one of real estate's surprise hot potato issues for 2009: Who chooses appraisers when houses are sold and financed? Given the huge amount of inflated and fraudulent appraisals that have contributed to the current mortgage crisis, that's a key question.

Just before Christmas, Fannie Mae and Freddie Mac announced their adoption of a revised version of their controversial settlement with New York attorney general Andrew Cuomo. The original version, agreed to last spring, created a strict set of guidelines regulating appraisals on all mortgages purchased or guaranteed by the two companies. But already Fannie's and Freddie's new "home valuation code" is drawing controversy, and may well end up as an issue for Congress or the federal courts to resolve.

Why? Tops on the list: Mortgage brokers -- who still account for a significant percentage of new home loan originations -- are totally banned from selecting appraisers. Realtors are also specifically forbidden from having any say or influence over the choice of an appraiser on a sale transaction.

Well, you might ask: Since appraisers in the past have often complained about pressure from loan brokers and realty agents to "hit the number" -- that is, turn in valuations high enough to allow transactions to go to closing -- aren't they happy about the new prohibitions? They are not!
Many local appraisers have built up long-standing, legitimate relationships with brokers, small lenders and Realtors as sources of assignments. Under Fannie's and Freddie's new rules, they fear, the mortgage business will shift away from local brokers to large national lenders, who'll use big "appraisal management companies" to handle home valuations. Those management companies, according to a joint statement issued by the four largest appraiser trade groups, are not regulated at the state or federal levels, and "place appraisal quality last," while refusing to compensate experienced appraisers fairly.

The new rules aren't scheduled to take effect until May 1. That leaves plenty of time for appraisers, brokers, Realtors and others to rally their supporters on Capitol Hill. And you can bet they will. Reform has to start somewhere and it seems hard to choose where to start sometimes. We have had a “you lie and I’ll swear to it” game going on in real estate for far too long; whether it be agents misrepresenting properties or sleazy mortgage brokers being in cahoots with dishonest appraisers. At the top of that food chain we’ve had banks with little or no management supervision of lax loan practices; which were more interested in “monetarizing” packages of mortgage loans, rather than making sure that they were making good loans.

We can expect lots of “don’t gore my ox” pushback from whatever groups gets singled out for regulatory attention. Any time you see groups that are not regulated, whether by state or federal laws or rules, you have an obvious place were abuse and fraud can take place; however, as the recent Bernie Madoff Wall Street case proves, even regulated industries don’t provide real protection, especially if their enforcement budgets have been gutted, as has been the case under the Bush White House. The new President can provide more protection for all Americans AND take a bite out of unemployment by just putting back the budget necessary to police the things that most Americans assume were being policed – the stock markets, foods, drugs, imported goods and lots more. The rules and regulations already exist in most cases; they just aren’t being enforced because there’s no budget for regulators. Let’s hope that changes.