Housing appraisers pushing for reform

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by Catherine Reagor -

The Arizona Republic

(edited)

Home appraisers are expected - and trusted - to provide honest and accurate reports on a property's value for the buyer, seller and lender. Appraisals are the first link in the chain of decisions and agreements that result in a mortgage and the stated value of a home.

When the housing market crashed, inflated appraisals were a factor, especially in connection to mortgage-fraud schemes that artificially inflated home prices and made the fall in values all that much steeper. Appraisers were often among the culprits. Inexperienced appraisers who write up inaccurate valuations are also a problem, but allegations of fraud are behind most complaints.

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Appraisers

Home appraisers are hired as independent contractors to provide a neutral assessment of a property's value based on comparable sales, market conditions

and a detailed inspection of the home. When a home is purchased or refinanced, an appraisal is required by the lender to determine the home's fair value.

Loans are now typically made for no more than 95 percent of a home's value. Deals fall through when homes are valued below negotiated sales prices. Appraisers physically inspect a home, noting any renovations or damage. Most appraisers have building, real-estate or lending backgrounds. The work can include pulling out a tape measure to check the square footage of a room, climbing on a roof to look at an air-conditioner, squeezing into a crawl space to check for mold or termites.

After checking out a property, even taking pictures, an appraiser then researches the neighborhood's comparative home values, checking on prices paid in recent sales. The information is compiled in a report that includes the appraiser's approximate value for the home.

Most appraisers are paid a flat fee and rely on a high volume of business. Fees used to average about $500 for a residential appraisal in Phoenix. Fees now are about half that because of changes in the industry.

Appraisers aren't usually paid until the work is done. In the wake of the housing crash, many appraisers have had to fight for their fees with homeowners or mortgage firms unhappy about low valuations.

To become a certified appraiser in Arizona, 150 hours of state-approved education and 2,000 hours of experience working for a veteran appraiser are required. An appraiser also must pass an exam and a fingerprint background check.

Some of Arizona's home-appraisal problems are due to honest but inexperienced appraisers not doing full reports. The result is inaccurate valuations based on incomplete information. But a lot of the industry's problems stem from appraisers who intentionally ignored important market information - such as comparable sales or foreclosures in the neighborhood - to close a sale. The result in those cases misled lenders and muddled the comparable prices for the entire neighborhood.

Julie Friess has been a Sedona appraiser for 22 years and is part of the Coalition of Arizona Appraisers working to strengthen state regulation of the profession. "A few years ago," she said, "we had an appraiser whose motto was he could 'hit any number' needed to close a deal with his appraisals, and he was getting a lot of business. He shouldn't have had a license because he hadn't completed the requirements. We couldn't even get his licensed pulled."

Federal changes

In May, a national code adopted by the biggest lenders went into effect, restricting who can order a home appraisal. Called the Home Valuation Code of Conduct, or HVCC, the code was drafted to combat inflated home valuations and has stirred a lot of controversy in the real-estate industry.

The history of HVCC dates back to 2007 when New York Attorney General Andrew Cuomo filed a lawsuit alleging fraud against First American's appraisal division. The suit alleged that First American allowed Washington Mutual to pick appraisers known to inflate values. New York's actions came right after Ohio's attorney general sued 10 firms on claims of appraisal fraud based on the discovery of faxed "order forms" used by lenders and brokers to ask appraisers in advance for a specific value on a property.

Cuomo recruited appraisers from across the country, including Friess, to help craft a rule to protect appraisers from being pushed to produce inflated property valuations. HVCC bars loan offices, real-estate agents or mortgage brokers

from selecting appraisers for their clients. Now, only lenders can pick appraisers.

Cuomo's office pushed mortgage giants Fannie Mae and Freddie Mac to adopt the code. Since the two government organizations now provide most of the nation's mortgage financing, the code has become a national standard.

Many mortgage brokers were upset about the law because it takes them out of part of the process and could deter some deals in an already-down market. But others are learning to deal with it.

"Initially, I was against HVCC, but I have actually come to embrace this process," said Kurt Pogoloff, a mortgage banker with Phoenix-based Classic Mortgage Solutions. "For reputable loan officers, it allows us to focus on client service without being blamed for a low value, choosing a bad appraiser, and having parties to the transaction begging us to have the appraiser reconsider the property's valuation."

Appraisers have not been happy with HVCC. Most lenders now outsource their appraiser selection to appraisal-management companies, or AMCs, which typically pay appraisers $175 to $200 per assignment. That is half what most Arizona appraisers were making before HVCC.

Some experienced appraisers have left the industry because of the lower fees.

Drue Bates was a Valley appraiser for more than 20 years before he recently closed his business because of the lower fees. Now he's an appraisal-fraud investigator for Fannie Mae in Phoenix. "AMCs were a good idea on paper," he said, "in that they were intended to insulate appraisers from the abuses that have historically been associated with appraisers' relationship with mortgage brokers."

But he said it's not a fair system because the AMCs still collect full appraisal fees of $400 and higher from the lenders and borrowers for each appraisal and then keep half of what the appraiser used to receive.

Federal legislation to tighten regulation of financial institutions

, which has an appraisal section that could counteract some of the unpopular effects of HVCC, passed the House on Friday.

Some homebuyers and sellers are also unhappy with the HVCC process. They say AMCs hire appraisers who aren't always familiar with the area, which results in low valuations.

"The appraisers were part of the problem when the housing market was booming by appraising homes above value and collecting their fees," said Bob Lightner, who is trying to sell his home in Anthem. "Now that the housing market has declined, the appraisers are keeping selling prices low by appraising homes below value. Appraisers from various states, such as California and Texas, or from non-local areas use comps that are not relevant to the sale and then reduce their appraisals because of the market decline."

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