The topic is one of the most contentious issues dominating the appraisal industry today.
Pressure to overstate a property’s value or condition was reported by 55 percent of appraisers who participated in the 2003 “National Appraisal Survey” from October Research. The pressure was most likely to come from a mortgage broker or loan officer.

The Center for Responsible Appraisal and Valuations (CRAV) has issued a compliance white paper — “Residential Mortgage Originators, Securitizers, AMCs and the Mortgage Broker” — that aims to clarify responsibilities for lenders involved in real estate-related financial transactions, including the use of mortgage brokers.

The paper criticizes mortgage brokers and discusses lender liability with the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) in those markets where brokers play a large role. It also connects the fiduciary responsibilities of lenders’ boards of directors to the appraisal process — an area CRAV describes as an outright failure on the part of many lenders.

“They’re hoping to insulate themselves through appraisal management companies, either affiliated or non-affiliated. There needs to be a clear and sure compliance function from the board of directors to the front line of originators,” said David Berenbaum, executive vice president for the National Community Reinvestment Coalition (NCRC).

A lack of enforcement
Lender/broker pressure and the risk of overvaluation is at the heart of CRAV’s mission. The organization was founded in response to complaints from borrowers about overvalued appraisals. FIRREA clearly addresses the problem, but enforcement has been minimal, according to Berenbaum.

CRAV appears to have taken to heart feedback from the Title/Appraisal Vendor Management Association (TAVMA), which issued a letter in April saying it would not support CRAV’s voluntary mediation and arbitration initiative for handling cases of reported pressure. In that letter, TAVMA argued that the industry would be better served through enforcement of existing laws rather than taking on new initiatives (see the “Vendor management community weighs in” sidebar for more on TAVMA and CRAV).

“If we had meaningful enforcement at both a state and federal level of existing law, this may not be happening as widespread as it is,” Berenbaum said.

In its white paper, CRAV reiterates the importance of separating appraisal management functions from loan production functions. It said lenders have incorrectly viewed the appraisal process as a production task rather than a compliance function.

“The system, unfortunately, has entered a laissez-faire situation where the market operates the way it does, regulators and others are turning a blind eye and the role of valuation as a compliance function has been minimized,” Berenbaum said. “There is no reason why appraisal professionals, consumers or lenders should be willing to accept that.”
Since the white paper was issued, CRAV has received more than 50 e-mails from appraisers sharing stories that demonstrate how common pressure has become.

The problem could get worse. As the mortgage industry faces rising interest rates, the market will deal with opposing forces, according to Berenbaum. First, brokers will have less business coming through the door and might be more inclined to pressure appraisers to close more deals. On the other hand, with more interest-only (IO) and option-ARM loans, concern over defaults will grow, and lenders dealing with lower volumes will work to make sure the loans they get are high-quality. Appraisers will be caught between those two groups.

Call to action
The industry’s counterattack on appraiser pressure will take several routes, according to Berenbaum, including stronger legislation and regulatory guidance, as well as litigation.
First, as the trend escalates, lawmakers will ask why regulators didn’t act sooner to stop the problem. As a result, regulators will look more closely at the pressure question, which is already occurring to some degree.

Last year, for example, a joint statement by the Office of the Comptroller of the Currency, Board of Governors of the General Reserve System, Federal Deposit Insurance Corp., Office of Thrift Supervision and the National Credit Union Administration affirmed that originators and appraisers are to remain at arms-length.

Also, because more lenders are starting to view pressure as a compliance issue, the industry can expect more Ameriquest-like lawsuits filed by appraisers and consumers against lenders that don’t meet FIRREA requirements.

“(CRAV) has tried to convince lenders to accept our code of conduct and best practices, and it’s unfortunate that many have been stalling or allowing existing

processes to work in the marketplace,” Berenbaum said. “If we can’t do a market correction through best practices, we’ll have to turn to statutory and regulatory change, as well as litigation as a necessary policy tool. Due to the extent of the problem, I know that’s coming.”

Federally insured financial institutions must comply with FIRREA and the Federal Deposit Insurance Corp. Improvement Act of 1991 (FDICIA). Both address appraisal practices and spell out guidelines, and several models have emerged for how lenders can comply with the rules (see the “How to comply” sidebar).

However, many lenders are not adhering to the rules, CRAV said. For example, banks are supposed to ensure the person ordering and performing appraisals or choosing the appraisal management company (AMC) is independent of the transaction.

“This is one area where many banks are not complying with the regulation,” the white paper reads. “Except for financial institutions with independent appraisal departments or credit risk staff dedicated to ordering and reviewing appraisals or funneling appraisal requests through an appraisal management company, lenders and their staffs continue to directly order appraisals.”

CRAV cited a late-2003 interagency statement reminding banks of the need for independence in their appraisal programs. Individuals independent of the loan production area should oversee appraiser selection, it said.

Backlash against brokers
Regulations also state that mortgage brokers can’t order, manage, review or control the appraisal — an intermediary (such as an AMC) must separate the broker from the appraiser.

Again, the entity managing the appraisal — whether a broker or AMC — can’t have an interest in the transaction. For example, an AMC might be owned by a title/settlement services company or its parent company. In this case, the broker would have to ensure that the related title/settlement company was not used.

The NCRC recently conducted several “mystery shops” to perform fair-lending tests of brokers. CRAV said that a high number of brokers being audited told shoppers they knew appraisers who could ensure the deal’s success because they knew “how to get value out of homes.”

“Particularly with regard to brokers in the marketplace — considering that they have approximately 70 percent of the market — that self-selection issue is a major stumbling block,” Berenbaum said.

The principles of payment
How appraisers are paid for their work also falls under FIRREA. CRAV pointed out that if brokers or correspondent lenders use a “non-interested” third party such as an AMC or the credit quality staff of the lender making or buying the loan, the appraisal can be ordered by that party.

T-R-O-U-B-L-E
However, trouble can arise when the appraiser is paid directly by the borrower via a check.
For example, if that check bounces, does the broker/lender take responsibility for payment of consideration to appraiser?

If not, CRAV said, an argument could be made that the contract was between the borrower and appraiser — a problem under FIRREA, which prohibits contractual relationship between the two.

As a remedy, CRAV suggests that the contract between the broker or correspondent and the lender or third-party company, as well as the contract between the appraiser and the lender or third-party company, should specify that the appraiser’s payment does not depend on the borrower completing the payment.
According to CRAV, the best option is for borrowers to direct payment to the broker or correspondent lender.
If the payment is not to them, then to the final lender or third-party company (AMC) and not the appraiser.
Upcoming insight into pressure
Valuation Review will share the first results of its next National Appraiser Survey later this year.
A large portion of the study will deal with pressure — how pervasive the problem is, where the industry is succeeding in fighting it and what the future holds. Stay tuned for continuing coverage of this crucial topic.