Dan Marchiando's Mortgage News Blog

There has been a fair amount of change and new legislation over the past 6 years affecting the appraisal process for residential properties. Some have had a noticeable impact on borrowers, and some are fairly benign or insignificant.

The biggest changes that have occurred, have happened in the process that is used to order residential appraisal reports. Prior to the real estate and mortgage melt down, loan officers usually ordered their client’s appraisals directly from their local and trusted appraisers. However, a few large banks outsourced the ordering to middlemen called Appraisal Management Companies (AMC).  In New York in 2008, the N.Y. Attorney General sued an appraisal management company (AMC) used by the now defunct lender Washington Mutual, for manipulating and potentially inflating appraisal values. This legal action ended up affecting the whole appraisal process over the entire U.S.   Shortly thereafter in 2009, a joint set of rules called the Home Valuation Code of Conduct (HVCC) were temporarily put into place by the huge mortgage giants Fannie Mae and Freddie Mac, in conjunction with their government regulator, the FHFA. With these new rules, lenders were required to use a middleman AMC to order their appraisals, in spite of the fact that an AMC was implicated in the New York scandal (I know, it sounds fishy to me too). The HVCC drove business to appraisal management companies, which were designed to be independent third parties, uninfluenced by mortgage lenders. The majority of the loans being originated then, and now in 2014, were being underwritten to Fannie Mae and Freddie Mac guidelines, so they could be sold off to the mortgage giants. Therefore, mortgage lenders (banks and mortgage banks) started requiring everyone to place all their appraisal orders with an approved AMC, who then contracts with an appraiser to perform the work on behalf of the lender and borrower, adding a layer of cost to the borrower. All of this is due to a few “bad apples” in a state far from California, and involving a lender no longer in existence. Around the same time in 2009 the Federal Reserve used its powers to enact temporary Appraisal Independence Rules with similar requirements. In 2010 the HVCC was refined into a new set of similar rules called Appraiser Independence Requirements (AIR). And later still in 2010, with the passage of the Dodd-Frank Reform Act, the Appraisal Independence Rules were made into more permanent U.S. law, with some minor tweaks. The latest rules no longer require the use of an AMC if the independence rules are followed properly, but lenders have universally stuck with using AMCs for their own convenience. And many lenders have also invested in or created financial partnerships with AMCs that they are now probably reluctant to give up. They do have to disclose these financial relationships to borrowers when loans are made, but borrowers have no ability to choose the AMC or appraiser that does the appraisal.

As I said above, this recent switch to the use of Appraisal Management Companies (AMCs) has added a layer of cost onto borrower's appraisal costs. Initially AMCs tried to hold the line on the cost to borrowers by just cutting the amount of the appraisal fee that went to the appraiser. This caused many experienced and veteran appraisers to push back. And many newer, less-experienced, and out-of-town appraisers filled the void, and for a while appraisal quality seemed to decline. And of course home values had also plunged as a result of the Recession, so there were certainly a lot of people unhappy about appraisals during this time period. The industry seems to have adjusted somewhat to the changes, and now appraisal fees have increased, appraisers are getting a little more for their work, and appraisal quality seems to have improved.

Another more minor change brought about by the Dodd-Frank Reform Act was a requirement that borrowers be given a copy of their appraisal, either electronically or on paper, at least 3 days prior to the closing of their loan. Previously existing law only required that borrowers be notified that they had a legal right to request a copy (in writing) of their appraisal. The idea behind this newer rule, was that it would give the borrower a little time to dispute the quality or value of the appraisal. Where our brokerage practice is concerned, this law provides no real extra protection, because we have always provided a copy of the appraisal to our clients immediately after it becomes available, without the client having to request a copy in writing. And we always review the appraisal for accuracy and discuss the appraisal with our clients, and advocate for our clients to challenge the results of the appraisal if necessary,.

If you have any questions about current appraisal rules, please don't hesitate to give me a call or shoot me an email--I'm happy to help and I'm never too busy for your questions. And as always,  I greatly appreciate your referral of friends and family.

Thanks for your interest,

Dan Marchiando, your California Mortgage Broker and Loan Officer.