PrintPrintThe Home Valuation Code of Conduct, which took effect in May, is meant to add integrity to the mortgage lending process. It requires a layer of separation between appraisers and loan officers, which some banks say is a good business practice. But real estate agents, appraisers and mortgage brokers have complaints.
By Ashley Fletcher Frampton
aframpton@scbiznews.com
Originally published Sept. 14, 2009
Mat Surles has been appraising homes in the tri-county area for years. Though his state license allows him to appraise homes throughout South Carolina, Surles said he sticks to the three counties he knows.
Other parts of the state have different real estate trends, he said, and houses with different features. Like basements.
“I get sweats when I go in a house and there’s a basement in it. I don’t even know what a basement is,” Surles joked, noting that few basements exist near sea level.
But since May, when a new federal regulation went into effect, some in the real estate industry say it’s become more common for appraisers to travel from other parts of the state to assign values to Charleston homes. Agents and appraisers tell stories of appraisers from Columbia and farther calling to ask for directions to Seabrook Island and I’On, and sometimes producing appraisal reports that reflect their unfamiliarity with the local market.
It’s one of several complaints about the new regulation, called the Home Valuation Code of Conduct. The code was meant to add integrity to the mortgage lending process through requirement of a layer of separation between appraisers and loan officers.
To keep the relationship at arm’s length, appraisal jobs go through a bidding process in some cases — and the winner doesn’t necessarily have to be local.
Real pressures
The idea behind the new rules is to eliminate the opportunity for loan officers to pressure appraisers to inflate home values to make deals work.
Joe Kavanagh, an appraiser in North Charleston, said it wasn’t uncommon during the real estate boom for mortgage brokers or lenders to ask for an appraisal job and say, “I need $200,000” as the value.
Kavanagh said the subtext was that the appraiser needed to hit that target if he or she wanted business from the broker or lender again — or even to get paid for the original job. He blames that practice, along with risky lending, for the housing market’s collapse.
“Those pressures were real,” Surles said. “A lot of people would not fall to those pressures. A lot did.”
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The Home Valuation Code of Conduct came from a 2008 accord between the New York Attorney General’s Office and Fannie Mae and Freddie Mac. The rules have a nationwide reach because they apply to all conventional single-family home loans sold to the two mortgage enterprises.
Since the code took effect May 1, lenders must use a third party to hire appraisers. Some use a separate in-house department or a rotation system. Others, especially larger banks, use outside appraisal management companies to bid out jobs — and that’s where much of the controversy lies.
Appraisers’ concerns
An appraisal management company “is designed to get the quickest turnaround for the cheapest price, which does not seem logical when you want to get someone who knows what they are doing,” said Karl Finklestein, a principal at Atlantic Appraisals in Charleston.
He and other local appraisers say some management companies cut appraisers’ rates by as much as half without passing the savings on to borrowers, and, at the same time, demand quicker turnaround times. Fast and cheap, they say, doesn’t always result in a good job.
Some companies award jobs to the lowest bidders, even if they’re not local or the most qualified, appraisers say.
If the lowest bidder comes from Orangeburg, for example, he or she might not know the local market well enough to choose good comparables, said Finklestein, who also is government relations chair for the state chapter of the Appraisal Institute.
A thorough appraisal often requires calls to the real estate agents involved in recent nearby sales to find out more, he said. Knowing when to question the details — instead of just pulling the data from the multiple listing service — is especially important in today’s market.
“If you’re from out of town, you’ve burned up an hour each way,” Finklestein said. “How much time are you going to put into it?”
Local appraisers aren’t critical of all management companies. Kavanagh and Finklestein say they accept work through some of the companies, just not those that emphasize low rates over quality.
Other concerns
Herb Koger, a real estate broker with Keller Williams Charleston Islands, said he’s seen out-of-town appraisers submit values that seem off for his listings and for those of other agents in his office.
In the past, if an appraisal came in surprisingly high or low, an agent might ask the lender to get another opinion. But now, because of the new appraisal rules, Koger said banks won’t do that.
Koger said questionable appraisals affect more than a single property.
He gave the example of an appraisal for a home in West Ashley that seemed unreasonably low — it was $19,000 lower than the contract price. The sellers agreed to the lower price because they needed to get rid of the house, but Koger said that sale will have a ripple effect.
“The sale of that property is going to really hurt, I think, the other sales that might be forthcoming in that area,” he said.
Koger, who is the legislative chair for the Charleston Trident Association of Realtors, said local agents are joining the National Association of Realtors’ push to have Congress impose an 18-month moratorium on the new rules. One goal is to allow states time to regulate appraisal management companies.
The National Association of Mortgage Brokers is another industry group fighting for a moratorium. The group says the new code increases costs for borrowers.
Gary Harwyn, president of Daniel Island Mortgage, said that, since the appraisal code took effect, most lenders are requiring that their appraisals be ordered through their own management companies, even though the code allows appraisals to be transferred from one lender to another. Multiple appraisals means multiple fees for borrowers shopping for the best loan terms, Harwyn said.
He said the use of appraisal management companies can lengthen the time before a closing, which translates to a higher interest rate.
“Instead of 30-day rate lock, I might have to do a 45-day rate lock. ... The longer the wait, the higher the rate,” Harwyn said.
Good business practice
Despite the complaints, banks say the rules make sense, especially in an era of cautious lending.
First Federal of Charleston is using a rotation system for appraisers, not an outsourced management company. But First Federal put that system in place more than a year before the federal rules took effect, said Todd Huss, vice president of residential lending.
“We already had that in place because it was a good business practice,” Huss said.
The bank created the system about 18 months ago amid talk in the industry of new safeguards in the lending process.
Huss said First Federal has a list of approved, trusted appraisers for each of the major markets in which it operates. A bank employee who is not affiliated with the loan origination will order appraisals using the rotation. Huss said the bank would not call on an out-of-market appraiser for a local job.
Bank of America uses an appraisal management company called LandSafe, which the bank owns.
Spokesman Rick Simon said Bank of America also was using that company before the new code took effect, though he said the code increased the separation between loan originators and appraisers. Now, for example, mortgage brokers cannot order an appraisal directly for a loan that Bank of America underwrites.
Simon said LandSafe operates independently of Bank of America. He said the bank has a vested interest in making sure appraisals are independent and done right. After all, he said, the appraisal is not done for the buyer and seller, but for the lender and secondary market investors.
“They have no reason to want to see a loan that’s not quality,” Simon said. “The independence of that appraisal is most important to them.”
Simon said LandSafe does not award jobs to the lowest bidder. The company has a set fee and a list of appraisers who are pre-approved based on certain qualifications.
LandSafe will send a job assignment to multiple appraisers who are qualified to work where a property is located, and it will then award the job to the first responder, Simon said. But he said the job could be given to someone outside of a given metro area, as long as the appraiser is considered qualified and knowledgeable about the market.
“If I live within 100 miles of Charleston, I probably know the Charleston market,” he said.
Reach Ashley Fletcher Frampton at 843-849-3129.
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