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Who Picks the Appraiser?
Another Change in the Real Estate World

March 2008

Nash & Lodge PLLP
By: Stephen J. Nash
nash@nashandlodge.com

Another change in the real estate world was announced on March 3, 2008. As of January 1, 2009, single-family mortgage loans (except government-insured loans) originated and delivered to Fannie Mae or Freddie Mac will be prohibited from choosing or communicating with appraisers.

This change results from an agreement between New York Attorney General Andrew M. Cuomo and Fannie Mae and Freddie Mac whereby Fannie and Freddie agreed to not buy loans that do not meet the "Home Value Protection Code" ("HVP Code"). The goal of the HVP Code, in this case, is to lessen the possibility of inflated appraisals. Fannie Mae and Freddie Mac purchase roughly 60 percent of all home loans originated in the United States.

The HVP Code provides the following:

a. Lenders are no longer allowed to order appraisals;

b. Lenders can't have "in-house" appraisers conduct initials;

c. Lenders can't control or own their own appraisal management company ("AMC");

d. Lenders can't own more than 20% of any AMC;

e. A new institute will be created to field complaints from appraisers who believe that they are being pressured to "hit a number" and will protect them from retaliation; and

f. The new institute will establish a consumer hotline to field complaints about appraisal fraud or code violations.

This is one of the first of many regulations, laws and policies that will change as a result of the real estate implosion. The US Congress has a number of proposals working their way through the system. The Minnesota Legislature is considering several proposals. HUD, the Minnesota Department of Commerce, the Minnesota Attorney General's Office and other regulatory agencies have all ratcheted up their enforcement actions and/or are proposing new standards.

All of these changes will affect the marketplace. Some real estate professionals will be better off, while others will be substantially hurt. Some of the changes will be effective, many will not. Some of the changes will be effective in achieving their intended goals, while others may actually prove counter productive. The bottom line is all real estate professionals will have to deal with them and figure out how they will be affected.

In the case of the Home Value Protection Code, the jury is out on whether it will help independent appraisers or if it will kill them, if it will result in less pressure on appraisers to "hit a number" or if it will result in more pressure. Some believe that it will push lenders towards automated appraisals. Does that really benefit borrowers? It would certainly hurt appraisers. Others believe that they will simply hire AMC's who will in turn hire the independent appraiser. The AMC will, arguably, reduce what is paid to the appraiser because they control the business and need to carve out a profit for themselves (we now have a middleman). In addition, the AMC will feel the pressure to deliver to their lender the numbers it desires which will cause them to pressure the appraiser to "hit the number" or they won't hire them in the future. If the new code results in a further lowering of rates paid to appraisers, who will become an appraiser, how committed will they be and will we lose all of the good ones?

Will it happen that way? I don't know, but the mere fact that something is created with good intentions does not mean that it will achieve its goals or that it won't have unintended and adverse consequences.

NOTICE:

The foregoing is not intended to constitute legal advice for any specific circumstance, but is intended to reflect broadly applicable principles, under Minnesota law, relevant to a typical situation. Each set of facts and each contract is, or can be unique; the unique facts and specific language of the contract may require a different legal analysis and may result in a different outcome. Before proceeding in reliance upon this or any other general description of law, consult with an attorney competent in the field of practice relevant to your situation.