My New Blog

By James R. Hagerty

Two years after New York Attorney General Andrew Cuomo set out to reform home appraisals, that effort is still a work in progress that stirs strong passions among appraisers, lenders and real estate agents.

Government-backed mortgage investors Fannie Mae and Freddie Mac will set up a complaint procedure for people who believe home appraisals have been done improperly, the companies’ regulator, the Federal Housing Finance Agency, said Thursday.

The plan falls short of an agreement reached between the companies and Mr. Cuomo in March 2008. That agreement created a code of conduct for appraisers and required Fannie and Freddie to establish and fund what was to be called the Independent Valuation Protection Institute.

Under the agreement, Fannie and Freddie were to provide $24 million over five years to fund the institute. Aside from handling complaints and coordinating with state and federal regulators, the institute would have had the power to propose amendments to the code.

But the Federal Housing Finance Agency said in a letter to Mr. Cuomo this week that it couldn’t justify having Fannie and Freddie fund such an institute “in light of the billions of dollars in taxpayer funds” the companies have absorbed to cover heavy losses related to mortgage defaults. A spokesman for Mr. Cuomo said: “We understand the FHFA director’s position” on funding.

In early 2008, Mr. Cuomo threatened lawsuits against Fannie and Freddie for allegedly failing to make sure appraisers were protected from pressure to fudge their estimates in a way that would allow dubious loans to be made. He and many others argued that inflated appraisals helped pump up the housing bubble and facilitated fraudulent lending.

To avert litigation, Fannie and Freddie agreed with Mr. Cuomo on the code, which took effect in May 2009. Because Fannie and Freddie buy or guarantee the bulk of all home loans, the code has become the national standard for most home appraisals. The Federal Housing Administration, which insures loans, has adopted similar standards.

Many appraisers say the code has caused a drop in income for appraisers and hurt quality. As we’ve reported, some appraisers have tried to make up for declining fees by doing more assignments, some of them outside of the areas they know best.

But the FHFA said Thursday that the code has improved the quality of appraisals and reduced fraud.

The regulator said Fannie and Freddie will create a standardized complaint form and a way to submit complaints via the Internet within the next few weeks. Fannie and Freddie also are to refer cases of impropriety to state regulatory officials and identify “patterns and practices suggestive of fraud.”

The Appraisal Institute, a trade group for appraisers, said it was disappointed that “a fully funded” valuation institute won’t be created. The appraisal group said Fannie and Freddie should “do more than simply make referrals” to regulators. “We hope Fannie and Freddie will take aggressive action against loan sellers that violate the code and fail to obtain credible appraisals by competent appraisers,” the group said. It added that the code “can and should be improved.”

A spokesman for the National Association of Realtors said setting up a complaint process is “a good beginning” but that doing so without creating the institute falls short of the Realtors’ wishes.

The code bars loan officers, mortgage brokers or real-estate agents from any role in selecting appraisers. Bank employees who aren’t involved in loan production — and thus not dependent on commissions from completed loans — can order appraisals. But many lenders chose to comply with the code by outsourcing the selection of appraisers to appraisal management companies, or AMCs. AMCs take a sizable cut of the appraisal fee, sometimes 30% or more. Appraisers say AMCs pay them as little as $175 to $250 per assignment, compared with the $350 or more that many get when they work directly for a lender.

Mr. Cuomo effectively made an end run around Congress and federal regulators in establishing the code via an agreement with Fannie and Freddie. But Washington has since joined the debate. The Federal Reserve has adopted new rules, effective in October 2009, under the Truth in Lending Act that ban lenders and mortgage brokers from “coercing” appraisers to misstate a home’s value.

In December, the House of Representatives passed financial-regulatory legislation that could undo some of Mr. Cuomo’s work. The House bill would require a new regulator to create rules shielding appraisers from pressure to fudge their estimates. It also would allow mortgage brokers to order appraisals, subject to certain restrictions, and specify that lenders and their agents must “compensate appraisers at a rate this is customary and reasonable.” The Senate now is considering similar proposals as part of legislation to overhaul financial regulation.

Under the agreement between Mr. Cuomo, the FHFA, Fannie and Freddie that created the code, Fannie and Freddie no longer are bound by most of the terms after Nov. 1 of this year. That means Fannie and Freddie will be free to make changes in the appraisal requirements they impose on lenders, but they don’t seem likely to junk the whole code. “The code has been fairly successful,” an FHFA official said recently, but there may be ways to improve it and those will be examined in the months ahead.