The Home Valuation Code of Conduct requires communications between lenders and appraisers to take place through third parties, through HVCC-specific software or through non-loan related employees.
The reform’s impact is unknown, but local appraisers are developing strategies to deal with a scenario in which a new middle man is created: the appraisal management company.
Matt George, immediate past president of the Colorado chapter of the Appraisal Institute and owner of Eagle Appraisals, said the law will have a stultifying affect on his profession.
“The HVCC will drastically change the way appraisers interact with lenders,” he said. “There can be no communication regarding value …. The appraiser can talk about the process, but not value. The intent of the HVCC is to create complete appraiser independence. If the lender chooses to ignore the law, there are strict fines and penalties.”
Loan production staff, including processors, will not be able to order appraisals – only “correspondent companies” or those that actually “own the loan” may have internal firewalls that allow non-production employees to place orders.
Mortgage brokers will no longer be able to order appraisals unless they work through approved electronic ordering software or through a third party.
“For appraisers like me who mostly do appraisals for loan purposes, the reality is that free enterprise will be gone,” George said. “I’ve spent 35 years building relationships with lender clients. Effective May 1, 2009, all that goes away.”
In place of working directly with brokers, most end-investors – large underwriters like Flagstar, Liberty, Franklin or BB&T – are already set up to order their appraisals through national appraisal management companies, George said.
“The root of the problem with most AMCs is that most don’t pay the appraisers what they’re worth,” he said. “Some charge the consumer $375, and pay the appraiser $225,” he said, adding that the difference of $150 becomes “a lender’s fee” rather than part of the appraisal fee. “And 90 percent of all residential appraisals ordered are based on loan business.”
Like George, Bill Park of Park & Associates Appraisals, sees tough days ahead, especially for younger or less experienced appraisers who hoped to build their business the old-fashioned way – through personal relationships.
“My business today is primarily commercial rather than residential, so the new law doesn’t affect me as directly,” he said. “Right now I’m working on SDS pipeline appraisals for the city. They’ll keep us busy for a while. There are more than 400 landowners in El Paso and Pueblo counties that will be affected. Most appraisers do residential work, but I’ve taken a different route, getting advanced designations and serving on VA and FHA panels. I also do some litigation work.”
But Park worries that up-and-comers in the business who don’t specialize will be forced to sign up with AMCs, or rely on faceless lender-appraiser software and accept lower fees.
“They’ll be making about half of what they would have made in the past,” he said.
Springs Appraisals’ Mike Luoma has logged seven years in the industry and was mentored by Park.
“At Bill’s urging, I’m going after my MAI (Member of the Appraisal Institute) designation, and I’ve taken a class in new appraisal software that some lenders are using to comply with HVCC,” he said.
But Luoma already has encountered challenges.
Through the Colorado Association of Real Estate Appraisers, he tried to sign up for work with Ent Federal Credit Union, but because the company uses an appraisal management company, he was unsuccessful.
“Their (the AMC) interviewer told me they’d call, but I’ve gotten no response,” Luoma said, adding that it’s impossible to market oneself to such companies. “They call you if they need someone.”
He sees the use of a middle-man company as counter-productive in many cases. According to the Appraisal Institute, about 20,000 appraisers left the industry last year, and the exodus is expected to continue at the same rate for the recession’s duration.
“Thanks to the banking crisis, we’re being scrutinized 10 times more today than in the past by the underwriters,” he said. “I wish they had scrutinized the (subprime) borrowers as much as they do my reports.”