A common practice in the US is for mortgage brokers to choose an appraiser as part of the mortgage deal. The result was, to many at the Mortgage Bankers Association annual conference in San Francisco this past October, predictable.
“There’s a vast range of appraiser quality,” said Wayne Pugh, president of the Appraisal Institute, in a talk entitled Appraisal Compliance/Appraiser Independence: More Important than Ever. “It’s very sad what I see out there today,” he said.
His comments seemed to accurately reflect the sentiment in the US mortgage industry, as there remains plenty of suspicion in the marketplace about the accuracy and quality of appraisals, said Robert Dorsey, executive vice president of data and analytics at mortgage technology company FNC.
Dorsey added that while it was difficult to judge the quality of an appraisal completed a few years previous, he had noted more cases of poor appraisals across the board. Surprisingly, some property appraisals he had viewed didn’t include what would be considered a basic requirement – a reference to MLS data.
David Hurt, senior vice president, business development at data management and risk firm First American Corelogic, described the culture as one in which appraisers found it “hard to say no”. Ambitious production targets, fraud and a lack of due-diligence helped fuel excessively high valuations, he said. The Canadian market, however, isn’t without its own problems.
“It’s an issue in Canada, no question, just not as much a one as it is in the US,” said George Maurice, president of the Appraisal Institute of Canada, adding that appraisers in the US faced various pressures from both brokers and home owners/buyers, which were, in turn, compounded, making it difficult to get a true picture of a property’s worth.
Loren Cooke, vice president, sales and marketing at Solidifi, an appraisal management company in Canada and the US, agrees.
“Canada hasn’t gotten to that same point yet that the US has reached,” he said. “In the US they are no longer taking an appraiser’s word for it – they’re actually asking them to prove it.”
CMP spoke to executives at various Canadian lending institutes, and while no one could recall a specific problem due to a false property valuation, the trend does seem to be moving towards using appraisal management companies (AMCs) who would provide randomly generated lists of appraisers for brokers to choose from. And just like how zero-down, 40-year mortgages in Canada went to the wayside in reaction to the US situation, the move to AMCs seems more a precautionary move.
“We are proactively moving towards processes that mitigate risk, both for brokers and the company, particularly during unstable times when home values are being impacted significantly by the economy,” said George Hugh, vice president of broker lending services at ING Direct. “This underwriting practice is something that we believe is going to be adopted by other lending institutions.”
Code of Conduct
As early as March 2008 in the US, Freddie Mac announced it was joining with the New York State Attorney General and the Office of Federal Housing Enterprise Oversight (OFHEO) to introduce the Home Valuation Code of Conduct (HVCC). The HVCC was due to be introduced this month (although reports suggested it would be delayed at least a few months due to the unforeseen events in October) and was aimed at removing many of the pressures placed on appraisers.
“No employee, director, officer, or agent of the lender, or any other third party acting as joint venture partner, independent contractor, appraisal management company, or partner on behalf of the lender, shall influence or attempt to influence the development, reporting, result, or review of an appraisal through coercion, extortion, collusion, compensation, instruction, inducement, intimidation, bribery, or in any other manner….”
The HVCC then goes on to explain in much detail various interpretations of coercion, such as promising future business or increased compensation to an appraiser, or even giving an appraiser a desired value for the property at hand.
Perhaps the most significant change would be the creation of the Independent Valuation Institute, known simply as the “Institute”, headed by a board of directors from various fields and funded by Fannie Mae and Freddie Mac. The Institute would be responsible for proposing amendments to the HVCC as well as mediating complaints, and may be affiliated with an existing academic, professional and/or industry association. Good news for the Appraisal Institute, the American Society of Appraisers or NAIFA, who, for all intents and purposes, could be tapped to help form the Institute.
The problem with this solution though, said Steven Coull, executive director and director of education at the Canadian National Association of Real Estate Appraisers (CNAREA), is that government regulation was what caused the US problem in the first place.
In the US the federal government set a minimum standard then decided to leave licensing up to individual states, but the problem is that the states don’t have a lot of money, he said.
“Without money they can’t afford the policing, so essentially there isn’t any, which is why the appraiser quality varies so much.”
He adds that the system in Canada, which is largely self-regulated by certifying associations AIC and CNAREA (there is provincial regulation in only Alberta, Nova Scotia and New Brunswick), is far superior. “It’s completely market-driven,” he says.
“The banks want insurance, designation and policing, so that’s what they get. That is much better than the government deciding what is good for the industry.” And as far as the cost of effectively policing appraisers, while government coffers can dry up, the associations have steady in flows of money from membership fees and education, he said.
“Appraisers are much more self-regulated in Canada,” added AIC’s Maurice. “An initiative like that would be redundant here because our financial institutions had more regulations and policing in the first place.”
What it really comes down to though, suggested Cooke, is that lending companies should be watching it. It is their money after all, so who better to watch it and ensure that it is based on solid valuations? This would explain the precautious move some lenders are making in hiring AMCs to randomly generate appraisers for brokers to choose from.
One executive at a lender, who wished to remain anonymous, told CMP that “some of these guys have been doing business together for years, so if the numbers have to be fudged it’s a lot easier for a broker to ask an appraiser to meet a certain price. With an independent company picking the appraiser there is a lot less room for error”.
In essence, through market forces alone, the Canadian system is removing potential bias from the appraiser selection process, all without the government intervention that’s happening in the US.
“Before it was all about how much and how fast,” said Cooke. “Now it’s more about how good is the appraiser and, in turn, the appraisal?”
Asked if he could see something similar to the HVCC coming to Canada, Cooke said that he couldn’t. “What I can see though is
some sort of legislation that demands highquality appraisals.”
While the upside of AMCs is that a barrier is put between the applicant and the appraiser, the downside is that there is now an additional pressure on the appraiser, said Maurice.
“For instance, AIC appraisers have to follow a certain standard, while the AMCs may not require those same standards,” he said. “So now in the appraiser’s mind, they have to do things – necessary things as far as sound appraisals go– that the AMCs don’t even require.”
Before long, the AMCs will be setting standards, rather than the certifying bodies. Coull adds that while the government does set some guidelines through the CMHC, CDIC and a few different government departments, the fact that the appraisal organizations are responsible for regulating themselves is far more superior than federal regulation for the simple fact that it doesn’t cost taxpayers anything.
Besides, “it’s almost impossible for the government to control,” he said. “What it really comes down to is the appraiser being a scrupulous person and saying ‘I don’t care what you want, this is what it’s worth’ ”.
Now the big question remains: Can the Canadian market continue to exercise caution and show the scruples that got it this far? CMP