Editor's note: This is the final column in a three-part series in HomesSaturday on factors leading to a rise in mortgage denials.
Previous articles in this series described an epidemic of late-stage mortgage loan rejections that impose high costs on people. These rejections can be traced in good part to a decline in the quality of appraisals, which in turn has been aggravated by dysfunctional regulation.
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The Home Valuation Code of Conduct has stimulated growth of appraisal management companies (AMCs), which intermediate between appraisers and lenders for the purpose of preventing lenders from influencing appraisal outcomes. The result has been lower fees paid to appraisers, increased workloads, and deterioration in the quality of appraisals.
Deterioration has been aggravated by the spread of AMCs owned wholly or partly by larger lenders, who share the profits extracted from the hides of both appraisers and borrowers.
• Lenders should pay appraisal fees
Lenders ordering appraisals from a company in which they have a financial interest in effect receive a piece of the appraisal fee paid by borrowers they subsequently reject. This absurdity would be eliminated by requiring lenders to pay appraisal fees, which could then be passed on to borrowers in origination charges -- except when the loan is rejected. In that event, the loss becomes the lender's rather than the borrower's, which is as it should be.
Requiring lenders to pay appraisal fees would induce them to catch ineligible borrowers earlier in the process. This would sharply reduce the number of borrowers who incur needless expense and delay when they are rejected later in the process based on inadequate appraisals.
This is not a radical proposal; on the contrary, charging a price that covers all of the seller's costs, plus a profit, is the standard way of doing business. When you buy an automobile, you aren't required to buy the tires separately from a tire vendor selected by your car dealer.
The home mortgage market is unique in requiring borrowers to pay for services required by lenders, with the lenders designating the acceptable service providers. This arrangement has always been a source of abuse, and regulations designed to control the abuse rather than eliminate it have never been successful. The abuse can be eliminated by requiring lenders to pay for the services they require.
• Appraisal management companies should be ineligible for affiliated business arrangement status.
Unfortunately, requiring lenders to pay for appraisals will not eliminate the market distortions associated with lender referrals to AMCs in which they have a financial interest. The financial incentive to direct appraisals to AMCs from which they receive a partial payback will remain, notwithstanding the adverse impact on appraisal quality. The way to eliminate it is to make AMCs ineligible for designation as affiliated business arrangements.
Where lenders have no financial stake in AMCs, they will select AMCs that have appraisers in the locality of the subject property, and that pay their appraisers well. Lenders become a force for good appraisals. Lenders with an ownership interest in AMCs are a force for bad appraisals.
• What borrowers can do in the meantime
When the home valuation code was instituted in 2009, it included a provision for an Independent Valuation Protection Institute, funded by Fannie Mae and Freddie Mac, which among other functions would provide "a hotline number and email address … for consumers to contact if they believe the appraisal process has been tainted or if they have been affected by appraisal fraud." But this independent institute has never been implemented.
While borrowers are on their own, they are not helpless. They have information about the value of their property, or access to people with such information, that the appraiser may not have.
I recently corresponded with a person who had suffered a late-stage rejection based on an appraisal that placed heavy weight on the recent sale of an almost-identical house across the street at a very low price. That transaction, however, was within a family and involved a "gift of equity" where the buyer sold for a price well below true value with the difference comprising a gift. The consumer knew this, but the appraiser did not.
On my suggestion, she provided evidence of the gift of equity to the lender who had rejected her application. The lender ordered a new appraisal, on the basis of which the loan went through.
Another possible basis for an appeal is where the appraiser is not located within the area and may not know the local market. The appraisal report, which you have a right to receive, will show the company and the appraiser's address.
Don't waste time trying to educate the appraiser; he is already thinking about his next assignment. Your recourse is to the lender. Lenders don't like to reject loans because it means forgoing a profit they otherwise would make, so they are receptive to facts that undermine the credibility of the appraisal that forced them to reject the loan. But tears won't do it, just facts.
• Contact Jack Guttentag via his website at mtgprofessor.com.
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