New appraisal rules lack enforcement

Introduction

Nine days before new rules radically changing the appraisal industry are set to take effect, appraisers, lenders and real estate agents are asking the same question — who will enforce them?

The rules, intended to prevent lenders from pressuring appraisers to falsely inflate housing values to justify higher mortgages, would ban loan originators from communicating directly with appraisers. The new rules would thus carve out a bigger role for appraisal management firms, which serve as middlemen between lenders and appraisers.

The Home Valuation Code of Conduct, or HVCC, scheduled to go into effect May 1, was part of an agreement that arose from New York Attorney General Andrew Cuomo’s investigation of the appraisal industry — an investigation that included mortgage giants Fannie Mae and Freddie Mac. The HVCC would apply to any loan that could be purchased by Fannie or Freddie.

On Monday, the National Association of Realtors wrote to Cuomo, the heads of Fannie and Freddie, and the Federal Housing Finance Agency asking for a one-year delay in implementation of the agreement, noting several potential problems: the rules may increase appraisal costs for consumers; lenders have not finished the process of complying with the upcoming rules; and many state legislatures are working to regulate appraisal management companies.

Perhaps most significant, the letter notes the lack of a clear enforcement policy. “The HVCC does not clearly delineate which agency or organization will be responsible for enforcement of all or part of the agreement,” wrote Charles McMillan, president of the National Association of Realtors. “There are multiple stakeholders affected by the agreement and none have clear responsibility to see that it is enforced. There is no accountability if there is no organization for enforcement.”

The HVCC is meant to stop lender pressure on appraisers to “hit the numbers,” which industry experts say pumped air into the housing bubble by fraudulently inflating the values of homes.

In response to a recent Center investigation of pressure put on the appraisal industry, dozens of appraisers said they think the new rules will make the problem worse. Many claimed appraisal management companies — the big winners under the new rules — were some of the most unscrupulous players.

As part of the original agreement, Fannie Mae and Freddie Mac agreed to pay $24 million to set up an “Independent Valuation Protection Institute” to field appraiser complaints about pressure to inflate values and police the rules. But the institute is not yet functioning, and its fate is unclear.

Pamela Crowley, a former appraiser who runs the Mortgage Fraud Watch List website, said that lack of clear lines of enforcement leaves appraisers out in the cold. “There is not a damn thing we can do about it,” she said. “We have nowhere to go. Nobody we can report anything to. We’ve just been thrown under the bus.”

A Freddie Mac spokesman declined to comment on how his organization would enforce the rules. A Fannie Mae representative did not immediately return calls for comment. Andrew Cuomo’s office has failed to respond to repeated requests by the Center for comment on the HVCC.