Appraisers were - and still are - a part of the issue

From BusinessWeek, Real Estate January 18, 2009:

Real Estate Appraisers Face Big Changes

Following claims that appraisers rubber-stamped inflated home prices, new rules are coming that will attempt to make them more independent

By Christopher Palmeri

The appraisal industry has justifiably come under fire for its role in the great housing bust. Property appraisals, required by lenders before a loan is made, are supposed to provide an independent assessment of the home's value. But during the boom, appraisers routinely signed off on a doubling or tripling of home values, sometimes racked up in just a matter of months. Investment properties were appraised at prices that made no investment sense. And homeowners were charged a pretty penny for what often amounted to rubber-stamp service.

Now the industry is about to undergo a shakeup. On Jan. 9, Fannie Mae (FNM) and Freddie Mac (FRE) announced revisions to their Home Valuation Code of Conduct. Starting on May 1, lenders that want to sell their loans to the two industry behemoths must follow the new guidelines. Mortgage brokers and Realtors are no longer able to choose appraisers. They will be selected by lenders, which are not allowed to influence appraisers by withholding payments or promising future work. If lenders have in-house appraisers, the bank's loan-origination department is not allowed to influence their valuation decisions or supervise their work.

The changes follow an agreement reached last year between Fannie, Freddie, the New York State Attorney General's Office, which was investigating the appraisal industry, and the Office of Federal Housing Enterprise Oversight, which oversees Fannie and Freddie. The new rules only apply to loans bought by or guaranteed by Fannie and Freddie. Lenders who operate independently of those channels do not have to follow them. But since Fannie and Freddie buy or guarantee a huge share of all U.S. mortgages, the changes should have wide application.

Countrywide Sued over Seattle Appraisal

Typical of the complaints about appraisers' bubble-era behavior are those spelled out in a lawsuit filed on Jan. 12 in the U.S. District Court for the Western District of Washington by Carrol and Gregory Clark. The suit, which seeks class-action status, claims that Countrywide Home Loans and its in-house appraisal arm, LandSafe, inflated home valuations during the boom so Countrywide could make more loans and sell them on Wall Street.

The lawsuit claims that when the Clarks refinanced their Seattle home for $350,000 in February 2007, they were required to use the Countrywide affiliate for the appraisal. It says they paid $410, double what LandSafe actually paid an outside appraiser to do the work. The suit further claims that outside appraisers who didn't come up with high home values were denied future work from the lender.

Countrywide was acquired by Bank of America (BAC) in July 2008. Asked for a response, Bank of America spokeswoman Shirley Norton said, "We have not been served yet, but based on what we have heard about this suit we believe it is without merit."

A lot of appraisers aren't happy about the looming changes. In a poll conducted on Jan. 16 by the Appraisal Institute trade group, 60% of appraisers said the code was unlikely to change the quality of appraisals. The 600 or so survey participants also said the biggest problem in the industry wasn't pressure from clients, but poorly trained appraisers.

Fear of Appraisal Management Companies

Gerhard Morell, an appraiser with Northern Colorado Valuations, said during a conference call organized by the appraisal institute that many independent appraisers depend on referrals from mortgage brokers for work. "Historically, we've gone about our business by creating relationships that now look like they will be cut off," he said.

Others in the industry fear that appraisers will be forced to turn to one of the 200 or so appraisal management companies that are becoming a larger force in the business. These companies handle appraisals on behalf of lenders, but often negotiate steep discounts from the appraisers they hire.

"Appraisers feel management companies pay too little—$175 per job," said Kenneth Harney, a syndicated columnist and managing director of the National Real Estate Development Center, an industry training firm. "The turnaround times imposed are unacceptably short. Many of the most experienced appraisers feel this will drive them out of residential work to be replaced by less-experienced appraisers. That's not better from a consumer perspective."

But Joseph Stott, who supervises appraisals at the State Bank of Southern Utah, said the code will force his bank to place its appraisers under more scrutiny.

"We're going to be more restrictive of who we put on our approved list," he said. "Those who have been sloppy or lax because of a relationship they have with a certain loan officer will be gone. It's a step in the right direction."

Palmeri is a senior correspondent in BusinessWeek's Los Angeles bureau.