John M. Lee: New Rules for Appraisals

In a response to the housing and the foreclosure crisis that our economy is facing, the New York Attorney General's Office (NYAG) last year started an investigation into the area of appraisal practices because it felt appraisers might have been inflating home values to satisfy lending underwriting criteria; thus their actions could be partly to blame for the high number of foreclosures occurring throughout the country.

The final result of the investigation was an agreement developed between the NYAG, Fannie Mae and Freddie Mac.

Fannie Mae was created in 1938 in the aftermath of the Great Depression by the U.S. government and was privatized 30 years later. In 1970, the government formed its sibling and competitor Freddie Mac. Its function is to buy mortgages from lenders, pooling them into bonds and selling them to investors to provide liquidity to the mortgage market.

Fannie and Freddie, as they are commonly called, do not directly make loans, but they exert enormous influence over the banking industry by issuing detailed standards for the loans they will purchase. Lenders must conform to the requirements or they will not be able to sell their loans to Fannie and Freddie.

With most private investors out of the market, nearly 70 percent of U.S. mortgages made in the first half of this year went through Fannie or Freddie, up from about 33 percent just a few years ago.

The agreement reached between the NYAG, Fannie and Freddie is known as the Home Valuation Code of Conduct (HVCC), which dictates certain practices lenders must follow with respect to appraisals on loans they intend to sell to Fannie or Freddie. The intended purpose is to insulate the appraisal process from undue influences by placing tight controls and restrictions on the ordering of the appraisal, as well as guidelines for communicating with the appraiser during the process.

This code, which became effective on May 1 of this year, prohibits practices that may influence or attempt to influence an appraiser's opinion of a home's value. For example, the code requires lenders to order appraisals themselves, rather than accept any appraisal completed by an appraiser who was chosen, hired, or paid by a mortgage broker.

Since implementation, this has created many problems in the real estate sales process. We have seen a whole new layer of appraisal management companies set up shop with the purpose of assigning appraisals to appraisers who bid on the jobs. They act as a middleman and keep a portion of the fees.

Appraisers are complaining that they are not being paid enough as these new companies keep part of their profits. As well, consumers are being charged higher fees with worse results and delays in the appraisals.

Because of the way this is structured, appraisers who are not familiar with our properties are often coming into the area and not using the correct data to assign values to our homes. This is leading to mistakes and causing delays in the loan process. I have even heard in one case, where an appraiser from Southern California flew up to the Bay Area on Friday, did 10 appraisals, and went home. This was an extreme incident, but it is unqualified appraisers like this who do not know the area or property values who are causing major problems in our loan process, thus delaying the issuance of loans to purchase properties.

We have complained to the National Association of Realtors so they can lobby Congress to do something about this problem. Hopefully, they will be able to correct the unintended consequences of the HVCC.

In the meantime, expect frustration and delays when obtaining a loan during the buying process and allow yourself extra time to complete the transaction.

Last Month's Column
Speaking of unintended consequences, my column last month regarding Supervisor Eric Mar's proposal to include families with children as a "protected class" under the San Francisco Rent Control Ordinance generated many phone calls and e-mails opposing this measure.

The question we need to ask Supervisor Mar is why he is proposing legislation that only benefits a confirmed 18 parties per year while negatively affecting all other tenants and property owners in the City?

If you oppose this proposal, please call Mar's office at (415) 554-7410 or send him an e-mail him at eric.l.mar@sfgov.org.

John M. Lee was recently elected president of the San Francisco Association of Realtors. For real estate questions, call him at (415) 447-6231 or send an e-mail to johnlee@isellsf.com.