Who Should Profit From Home Appraisals?

Who Should Profit From Home Appraisals?

May 2, 2008

By JAMES R. HAGERTY – Wall Street Journal

A debate over plans to overhaul the U.S. home-appraisal business is raising a tricky question: Who should profit from appraisals?

The plan, spearheaded by New York Attorney General Andrew Cuomo, is aimed at protecting consumers, lenders and investors from inflated estimates of home values — an abuse that has contributed to the surge in mortgage defaults.

Mr. Cuomo earlier this year threatened to sue government-sponsored mortgage investors Fannie Mae and Freddie Mac for allegedly failing to make sure appraisers were protected from pressure to fudge their estimates. In early March, to avoid a legal fight, Fannie and Freddie agreed with Mr. Cuomo on an appraisal code of conduct due to take effect Jan. 1. Because Fannie and Freddie buy or guarantee the bulk of all home loans, lenders will have to follow that code, making it a de facto national standard — established without input from Congress or federal banking regulators.

Almost everyone agrees new rules are needed to ensure appraisers don’t feel pressure to juice their numbers so homes can be financed and sold. But the debate is bringing to the surface resentments in the appraisal industry over how revenue from appraisals is divvied up.

Consumers seeking a mortgage loan typically are required by lenders to pay $300 to $500 for an appraisal of the property that would back the loan. In many cases, much of that fee never reaches the appraiser. Instead, a big cut goes to appraisal-management companies, known as AMCs, which assign work to appraisers and manage the process on behalf of lenders.

The AMCs often are owned by title insurers or other companies that provide services needed to purchase a home. Some AMCs are owned partly or entirely by large lenders, which have turned the appraisal process into a profit center for themselves. Countrywide Financial Corp., the nation’s biggest home-mortgage lender by loan volume, reported $173 million of revenue from appraisals in 2007.

The AMCs keep a big share of the fees consumers pay, typically at least 30% and sometimes more than half, appraisers and AMC executives say. The AMCs say they provide a valuable service by maintaining networks of local appraisers and controlling quality. “The AMCs pay market rate” to local appraisers, says Jeff Schurman, executive director of the Title/Appraisal Vendor Management Association, a trade group.

But many appraisers say the AMCs don’t pay them enough to do quality work. “I’m not willing to work for those cheap wages,” says Sara Schwarzentraub, who owns Inter-State Appraisal Service in La Mesa, Calif. “When they make it a profit center on our backs, it’s just not a good situation.” She and other appraisers say quality suffers because it is mainly the less-experienced appraisers who accept work from AMCs — a point vigorously denied by those companies.

The planned code of conduct would bar lenders and their representatives from prodding appraisers to inflate their estimates. Bank employees involved in making loans wouldn’t be allowed to choose appraisers. Lenders couldn’t make loans on the basis of appraisals from their own employees or from other companies they control. Thus, big lenders like Countrywide would have to sell their appraisal-management businesses. The code also would bar lenders from using appraisals ordered by mortgage brokers.

The Appraisal Institute and three other trade groups representing appraisers want the code revised so mortgage brokers can still hire appraisers. The appraiser groups said in a paper released this week that brokers have been “a prime culprit of appraiser coercion and intimidation for many years.” But the appraiser groups said tighter regulation can keep the brokers in line. Appraisers tend to get much higher pay when they are hired by brokers than when they work for AMCs.

Roy DeLoach, executive vice president of the National Association of Mortgage Brokers, a trade group, said the appraisal industry should “drum out” appraisers who “turn in falsified work.”

In recent days, trade groups representing banks, mortgage brokers, title insurers and appraisers have submitted letters to Fannie and Freddie seeking major changes in the plan. Mr. Cuomo, who would have to endorse any changes, has promised to consider the suggestions.

• The News: An appraisal code of conduct is being designed to avoid inflated home estimates.
• As Proposed: Bank employees would be barred from choosing appraisers, and lenders from using appraisals ordered by mortgage brokers.
• The Rub: Lenders like Countrywide wouldn’t be able to run appraisal-management businesses, as they do now.


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