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Center Secondary Market
The secondary mortgage market, including
the GSE's, buyers, insurers and rating agencies have, perhaps,
the largest single stake in the problems caused by valuation
abuse. As indicated within the center study (www.responsibleappraisal.com
), the integrity, safety and soundness of the financial system
and real estate markets has been compromised by the industries
failure to abide by the letter and intent of FIRREA regarding
independence and effectiveness of valuations.
The list of abuses is long and unsettling.
Most, however, result in over valuation of collateral. For
the past 13 years, the real estate market has experienced
an almost uniquely consistent rise in property values, driven
by historically low rates and other investment market phenomena.
This has covered up the results of over valuation to date.
At some time, however, unless we stop these improper practices,
the market will flatten and depreciate for a period of time.
If interest rates escalate, particularly with the plethora
of adjustable rate mortgages, it might cause a rash of defaults.
If the equity that consumers believe is in their homes, does
not exist, due to inflated valuations of the near past, they
will allow homes to foreclose and begin a spiral effect that
has been seen in the late 1970s, mid and late 1980s and early
1990s both regionally and/or nationally. The same is true
in an economic downturn or recession.
Unlike any time in the past, however,
the current amount of leverage created by home equity lending,
will exacerbate the escalation.
If we quickly, however, insure that valuations
are done in an accurate, independent and compliant fashion,
the severity of that downward spiral can be positively impacted
to provide a "soft landing".
Beyond impending crises similar to the
savings and loan debacle of the eighties, improper valuations
have resulted in an overstatement of collateral values that
impacts the financial statements of all concerned. Loss reserves
have been understated, earnings overstated, capital requirements
flaunted and the assets and net worth of many institutions
overstated as well.
The Center for Responsible
Appraisals and Valuations
The center has created a Code of Conduct,
within voluntary compliance agreements for industry participants,
that reinforces the federal and state laws, rules, regulations
and guidelines and gives signatories a means of Alternative
Dispute Resolution (ADR) when they claim that they have been
harmed by a breach of that code. By becoming an center signatory,
a wide range of industry participants agree to that Code of
Conduct and to the alternative dispute resolution method that
has been created through the American Arbitration Association
(AAA). That method offers claimants an online, quick and inexpensive
means of reaching voluntary resolution with a respondent.
Where necessary, specialized mediators will be chosen to assist
in the settlement of disputes online and by phone in an inexpensive
and time efficient manner. Finally, if all efforts fail, the
parties can choose to have a more formal arbitration of the
dispute, under modified commercial guidelines of the AAA.
The Code of Conduct, as contained within
Signatory agreements, is simple. All industry participants
must comply with FIRREA and its guidelines, as well as all
Federal and State laws, rules and guidelines. No one can improperly
influence a valuation. Improper influence is generally defined
as any act that will likely have the result of creating a
valuation that is other than the most accurate reflection
of fair market value. Further, no one can improperly retaliate
against anyone that refuses to give in to improper influence.
As there are always situations where
lenders, real estate agents, other third party referral sources,
appraisal management companies and appraisers, in good faith,
disagree with value conclusions; the center has been created
to give them a means of having an impartial expert review
the valuation and render an opinion of the appropriate valuation
or steps that should be taken to create one. Appraisers, under
USPAP, do not have to accept the center's conclusions or recommendations,
but, then, a lender would fairly consider that in determining
future business. This allows lenders the ability to influence
an opinion of value in a proper manner and protects them against
claims of Improper Influence or retaliation when an appraiser
has refused to comply with the independent review.
The center, through its board of advisors
and other industry participants will create best practices
to create accurate and compliant valuations as well as to
audit a lender's system to insure that such practices are
being followed. Certification levels will be created that
lenders, if they desire, can reach to assure best practices.
On certain loans that are considered
"high risk" in terms of credit and risk profiles,
signatory lenders agree to use "best efforts" to
use center signatory appraisers and management companies for
appraisals.
Appraisal management firms must qualify
to become signatories by a much higher standard of practice
and audit requirement.
Secondary Market Signatories
As the roles of various Secondary Market
participants are each different, the Code of Conduct and agreements
will be equally so. It is the intention of the center to convene
a national conference of Scondary Market participants to develop
methods by which they can assist the center in creating an
environment of safe, sound and compliant mortgage lending.
Among those methods would include:
- Publicly supporting the center effort
- Greater audit and review standards
for loans sold and purchased in the secondary market
- More effective pre-purchase review
methods and standards
- Earlier and greater enforcement of
representation and warranties
- Pricing and pool insurance premium
level differences for compliant center lenders
To
Find Out More click here or call us at 866-244-9708
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