Mortgage Brokers Fight to Change Appraisal Rules

The Wall Street Journal
Fri, 18 Jun 2010
By Jessica Holzer

The mortgage-broker and real-estate industries are pushing to get a measure that would kill new home-appraisal rules inserted into legislation to overhaul financial-sector regulation.

The Home Valuation Code of Conduct, adopted in May 2009 to ensure appraisers' independence, bars mortgage brokers and bank-loan officers from selecting appraisers. The brokers and Realtors complain the rules have produced low-ball appraisals that have blown up deals, while appraisers say the change has hurt appraisal quality.


Mortgage lenders, on the other hand, are trying to fend off the measure. Several major lenders own or have a stake in companies that have seen a surge in business as a result of the new rules. "We're going to try all we can to keep it out," said John A. Courson , the Mortgage Bankers Association's president and chief executive officer.

Inflated appraisals were widely blamed for helping to fuel the sharp run-up in home prices during the past decade. Before adoption of the new standards, appraisals were typically ordered directly by loan officers or mortgage brokers who worked regularly with the same local appraisers.

Lenders contend that the new standards have ensured that appraisers aren't pressured by loan officers to make the appraisal match the contract price, which would increase chances of getting the mortgage loan approved.

The Code of Conduct was adopted last spring by Fannie Mae and Freddie Mac, the government controlled mortgage giants, in settling a New York state attorney general's probe of their appraisal standards.

Realtors and mortgage brokers succeeded in getting language inserted into the House-passed financial-regulation bill to end the new protocols. The measure would direct federal regulators to craft an improved set of rules.

The language, however, didn't make it into the most recent draft being used as a basis for House and Senate negotiations. Lawmakers are expected to turn their attention to the appraisal rules and other mortgage provisions next week.

The new system has been a boon to vendors that specialize in farming out appraisal requests to a network of in-house and independent appraisers. Critics argue that these middlemen have pushed appraisers to do more work in less time, resulting in a cram-down in fees across the industry that is hurting the quality of work.

Appraisers have seen their fees slashed by 60%, according to Bill Garber, chief federal lobbyist for the Appraisal Institute, the industry's main trade group. Mr. Garber contends that a new mortgage-broker licensing law and a myriad of state laws passed in the wake of the housing bust are sufficient to discourage collusion between brokers and appraisers.

"There's now a layer of oversight that didn't exist prior to the Home Valuation Code of Conduct that I think we can build from," he said.

National Association of Mortgage Brokers CEO Roy DeLoach contends that out-of-town appraisers hired by vendors are eating away at homeowner equity through home valuations that aren't credible: "It's basically hollowing out the equity in communities whether you intend to sell or not."

Many of the largest U.S. mortgage lenders, including J.P. Morgan & Co. and Citigroup, own or have stakes in the middleman companies, known as appraisal-management companies.Steve O'Connor, senior vice president of government affairs at the Mortgage Bankers Association, argued that it was sound policy to have a fire wall between the appraiser and the loan underwriter.

His group supports federal oversight of appraisal-management companies. But it also is pushing to cap any fees charged to the companies to fund the regulator at $5,000 annually.

Mortgage lenders are also fighting language in the financial-regulation overhaul bill that would require disclosure to home buyers regarding the share of the appraisal's cost that is going to the appraisal-management company.