Mortgage bankers are concerned about the recent code that was established for appraisals on conforming loans and are calling for either elimination of the code or more industry input, further clarifications and other changes before it is implemented. Of concern is the additional cost to implement provisions of the code and the liability of lenders for activities outside their control.
In a letter Wednesday to Office of Federal Housing Enterprise Oversight Director James B. Lockhart III, Freddie Mac Chairman and Chief Executive Officer Richard F. Syron, and Fannie Mae Chairman and Chief Executive Officer Daniel H. Mudd, the Mortgage Bankers Association called for the three entities to abandon their cooperation agreements reached in March with New York State Attorney General Andrew Cuomo to overhaul the conforming appraisal process.
Those agreements called for adherence to a new home valuation protection code starting next year.
"MBA strongly suggests the agreements and related Home Valuation Code of Conduct be withdrawn," the trade group said in yesterday's letter. "If they are not withdrawn, then MBA believes they must be modified to reflect MBA's concerns for safety and soundness, as well as operational and procedural complications."
MBA criticized the lack of industry input despite the impact on mortgage bankers. OFHEO's participation in the issuance of the code triggered formal procedural requirements mandated by the APA, which requires government agencies to publish a notice of proposed rulemaking, solicit and consider public comments and publish a final regulation that explains the basis and purpose of the regulation, and the agency's consideration of public comments. The comments of all interested parties must be considered.
Mortgage brokers agreed with mortgage bankers on this point.
"These agreements amount to a de facto regulatory action by OFHEO which avoids the appropriate process," Roy DeLoach, executive vice president of the National Association of Mortgage Brokers, said in a statement shortly after the code was announced in March. "The law provides for a process to implement regulatory and policy changes such as those contemplated and specified in these agreements."
Among provisions in the code, brokers and originators are prohibited from choosing or communicating with appraisers, and lenders are not allowed to use in-house appraisers. In addition, appraisers cannot be pressured to reach values through the promise of more business or the threat of losing business.
But MBA noted that while borrowers, real estate agents, mortgage brokers and commissioned employees of lenders can place significant pressure on appraisers, "lenders as lenders or their affiliates" do not present the same policy concerns. The group explained that bad appraisals ultimately lead to losses for lenders, regardless if they are performed in-house or by an outside appraiser with little capital to make good on defaults caused by faulty appraisals. Therefore, lenders have a strong incentive to ensure quality appraisals.
MBA said that prohibiting in-house appraisals would continue to leave appraisers subject to coercion by borrowers and real estate agents and still hold the lender liable. In addition, while in-house appraisers are subject to lenders' regulatory oversight -- outside appraisers aren't subject to the same oversight, have limited accountability and have comparatively little or no capital or net worth requirements.
Another issue raised by MBA was the significant cost involved for institutions that restructure from in-house appraising and implement changes required under the code. The additional costs and liability could wind up costing borrowers more and leave mortgage bankers and government-sponsored enterprises with additional capital needs at a time of "unprecedented liquidity concerns."
NAMB noted consumer costs will rise as a result of thousands of mortgage brokers being eliminated from the marketplace because they cannot order appraisals directly.
Concerns were raised by MBA that the code would conflict with the Financial Institutions Reform, Recovery and Enforcement Act of 1989 and the Home Owners Equity Protection Act.
MBA also warned that the ability of one state regulator to initiate an agreement that would impact all states would set a bad precedent.
The Washington, D.C.-based association warned that a hotline required by the code might wind up being used by consumers to inquire about the valuation of the property rather than abuses in the appraisal process.
MBA recommended that automated valuation models be excluded from the code and quality control requirements.
The prohibition of a second appraisal in the code conflicts with some lenders' practice of obtaining a second appraisal on high-value properties -- which may fall within the jumbo-conforming limits temporarily raised through the end of this year, according to yesterday's letter.
Other concerns outlined in the letter included the lack of clarification of prohibited retaliation; conflicts between quality control procedures required by the code and required by federal regulators; the degree of reporting required by the code; the lack of safe harbor for institutions required to report illegal or unethical conduct by appraisers; the date of termination for the code's provisions versus the termination of the institute; clarification of whether appraisers may be provided with some data from sales contracts; clarification that it is ok for lenders to perform in-house appraisals for servicing functions; and the uncertainty of privacy protections on data lenders are required to report.
MBA also expressed concern about the ability to fund a required institute that will serve as a national registry for appraisal fraud, misconduct and violations of the Uniform Standards of Professional Appraisal Practice; adequate governance for the institute; conflicts of interest within the institute; and the ability of the institute to determine property values.
NAMB warned in its March statement that it intends to consult with legal advisors and take appropriate legal action if necessary.
Conforming Appraisal Overhaul
In an effort to curb the use of inflated appraisals, sweeping changes have been made to residential appraisal requirements on conforming mortgages. Among the changes is the prohibition of appraisals ordered by mortgage brokers and loan originators.
Brokers May Fight New Appraisal Requirements
Mortgage brokers are threatening to file legal action in response to new appraisal guidelines on conforming mortgages.