The appraisal profession experienced some dramatic exogenous events during the mortgage crisis that exposed cracks in the foundation of its entire “raison d’etre”.
The Home Valuation Code of Conduct (HVCC) was many things to different stakeholders. To some, it offered relief from untenable pressure from loan production to inflate values. To the government-sponsored enterprises, it was tremendously humiliating and, as well as exposing themselves to potential criminal penalties. To some real estate agents, it was unacceptable that they could no longer steer their deals to their favorite appraiser.
And to loan production, well, the earth was rocked off its axis, in an instance. For a New York minute, appraisal land enjoyed the comforts of the new “no pressure zone”. It was hard to even recognize or appreciate as simultaneously mortgage transactions came to a screeching halt. HVCC was sunsetted and appraisal independence tenets live on in Dodd Frank and in Fannie Mae and Freddie Mac Appraisal Independence Requirements (AIR) policies.
All of that seems like a dream. According to the most recent Appraisal Buzz survey 60% of appraisers report they are still experiencing pressure to alter their appraisal reports for nefarious reasons. In a separate survey, 20% of lenders reported that they allow loan officers to select their appraiser. One can only hope and pray that this is not a willful disregard for the law but an ignorance of the law. Many AMCs report that lenders allow their brokers to nominate an appraiser to be on a panel and then select from a list of AMCs as though this “shell game” actually has someone fooled.
Having just concluded a Collateral Risk Network meeting where we had Dr. Leonard Nakamura and Dr. Hamilton Fout both in separate studies prove conclusively that for as long as studies have been performed on appraisals, about 40 years, appraisers are subject to bias. HVCC was but an inconsequential blip on a graph, just a New York minute.
Some conclude, based on the facts, that we must move to AVMs because after all, algorithms are unbiased. That my friends is “jumping the shark”; a complete fallacy. Human beings write algorithms. Vendors own AVMS. They are capitalists. They make money when their models get a “hit”.
What is the answer? I would propose that rather than having regulators hostile to the appraisal profession that we actually fix the problem. It really isn’t that difficult to design at all. The challenge is in finding the political will to actually solve the problem. Proper oversight, “skin in the game”, personal accountability…whatever you want to call it, we need it.
When bank regulators don’t hold lenders accountable for appraisal quality, who they engage, allowing third parties to violate independence, they are undermining the appraisal process. When state regulators are reluctant to regulate AMCs and appraisers and uphold the public trust, they are paving the way for the next crisis.
When FHFA enables bad behavior when they fail to:
– Facilitate complaints from appraisers in the field to report independence violations
– Don’t audit the GSEs and transparently report AIR violations
– Support policies to promote honest appraisers
– Transparently remove known bad actors
When collectively we place downward pressure on fees we are diminishing the role of the only independent party to a real estate transaction. This will not end well. We have seen this movie before and we know how it ends.
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