Legislated Requirements to the Rescue?

Hobbs believes that the information found in appraisal reports has greatly improved. However, in the rush to the flawed system, he also believes that lawmakers went too far, in some respects, in regulating the appraisal business.

“There are a lot of really good people in the profession, but some of the structural changes have impacted the appraisal profession, which has also impacted appraisers and the appraisals they write,” Hobbs says.

One change is in the amount (and scrutiny) of the information now required in appraisal reports.  More detailed information was also supposed to be there 10 years ago, but loan officers weren’t looking for it. In some instances, they were so sloppy as to check only for presales and a value before approving the loan, Hobbs remembers. Now, the process has gone in the other direction. Appraisal reports are reviewed multiple times for minute discrepancies.

Another defining change to come out of the market crash was the Home Valuation Code of Conduct (HVCC). That policy, adopted by Fannie Mae and the Federal Housing Finance Agency in 2009, raised a firewall between loan officers and appraisers in an attempt to put an end to appraisal manipulation; the HVCC guidelines prohibit loan officers from influencing the appraisal process and forbid any contact between them and appraisers.

Instead of interacting directly with appraisers, lenders now have to use appraisal management companies (AMCs) to arrange a property appraisal. The AMC decides which appraiser to send to a property, ensuring that the loan officer will have no contact with the appraiser. In contrast, mortgage underwriters who do not have a direct relationship with the loan can still select a particular appraiser for a particular property.

The theory behind the policy is that if loan officers do not have any contact with the appraisers, they can’t exert pressure on them to overvalue a property, thus protecting the housing industry from the artificial price inflation that played a role in the housing crash. While the HVCC rules offered protection from the abuses that had occurred, they also created many unintended consequences. For instance, they eliminated “positive time adjustments,” which an appraiser would make to account for discrepancies in time between the property being sold and its comps. If the market had appreciated since a home’s comp was sold, the appraiser would make a positive time adjustment to reflect that market appreciation. Without that tool, though, appraisers can use only the data that is available to them when valuing a property.

Chuck Johnson, the vice president of sales at PHH Home Loans, has found that most mortgage companies are either working with their own appraisal management desk, where their employees deal directly with appraisers as vendors, or they use an AMC. Johnson believes that while the additional step has required some adjustments, most in the lending community have adjusted to the shift. He sees a lack of quality inventory as the main source of frustrations with appraisers.

“There are disappointments now when people are trying to refinance and they don’t have the value in the property to do it, because some homes in their neighborhood were in short sale,” Johnson says. “The appraisers have to take those types of things into consideration.

“The hardest part for consumers to understand,” Johnson continues, “is that we’re still in a recovering economy. Houses are starting to appreciate, but we haven’t seen a great deal of appreciation. We still have a lot of houses that are sitting in foreclosure and short sale. There’s not a lot of inventory on the market, and the purchase business hasn’t picked up enough yet to have a multitude of comparables for appraisers to use on purchase transactions.”

The regulations, and the appraisal industry’s efforts to adapt to them, caused some severe tensions between Realtors and appraisers. In March 2013, the National Association of Realtors reported that 29 percent of Realtors were having problems with appraisals, per its Realtor Confidence Index survey. Additionally, 10 percent reported that their appraisal difficulties resulted in a lower negotiated sales price, and almost 10 percent reported contract failures. More than 18 months later, in Oct. 2014, appraisal issues were reported as accounting for only 2 percent of failed transactions.

Increased oversight and closer scrutiny of appraisers has helped lower those numbers. Turning in a bad appraisal, Hobbs says, can result in a formal complaint, during which peers review the appraiser’s work and determine whether any corrective action is necessary. Even if the appraiser is found to do generally good work, the fact that the review took place goes on their permanent record makes lenders wary. As a result, many appraisers are now extremely cautious and conservative with their reports.

“The problem is the fact a case was brought against you, and because there was any finding at all means it immediately goes on your permanent record,” Hobbs says. “Banks will literally stop working with you because of that. A bad appraisal could end an appraiser’s career, and appraisers are very aware of how quickly careers can end.”