HUD Appraisal Independence: Is the AMC Working

Back on September 18, 2009, HUD issued Mortgagee Letter 2009-28 declaring a new Independence Day! Well, it actually set new guidelines and procedures for Appraiser Independence for FHA Insured Mortgages. The new procedure, while not being an exact mirror of the Home Valuation Code of Conduct or HVCC, holds many similarities and many in the lending industry commonly refer to the HUD program still as HVCC.

HVCC was the law of the land for Conventional loans originated for sale to FNMA and FHLMC starting May of 2009. What the HVCC requirements basically did was to require brokers to order appraisals through lenders utilizing Appraisal Management Companies instead of directly with individual appraisers. The thought process was that appraisers would be much more free to bring in an "honest" value if they did not feel pressured by brokers and other sales people whose incomes depended on loans closing and therefore, certain values on appraisals so the loans would not fall out.

Sounds reasonable enough, right? After all, many people seemed to think that appraisers were forced to bring in values higher than properties were actually worth for fear of losing assignments and subsequently lenders were lending more money on homes than they should be as a result. So having Appraiser Independence sounds like it would be a good thing...or does it?!

It was apparent that the legislation for the change that was introduced by New York Attorney General, Andrew Cuomo that was designed to mitigate fraud in the valuation process of lending was off to a rocky start very early on. The program that severed communication with the appraiser sounded logical, but it created an extra layer of bureaucracy, increased costs and processing times, decreased customer service, created much more potential for miscommunication and delays which cost some borrowers thousands of dollars as lock periods were missed and they were forced to re-lock loans at higher rates and fees.

And the worst part of it all is that most sources did not report any increase in the consistency or the quality of the appraisals being completed under the new guidelines. So far, Appraiser Independence on the regular or forward mortgages did not appear to be gaining anything for lenders and it is really hurting borrowers.

In fact, appraisers were now being given assignments from Appraisal Management Companies (AMC) who, under FNMA guidelines, cannot charge the borrower extra fees for their services. Since the AMC cannot charge the borrower, they cut into the income that the appraiser used to make on the appraisals he/she performed. Now instead of an appraiser charging $375 to $425 for an appraisal and making $375 to $425, the homeowner is often being charged $450 or more, the appraiser is often being paid $200 or less and the AMC pockets the rest!

What you get are disgruntled appraisers and many of the best with years of experience are now either refusing any assignments that are not completely "cookie cutter" deals that they can't complete in an hour or two, or you get inexperienced rookies who are absolutely unfamiliar with the area in which the property is located and the only reason they got the assignment is they were the first to respond to a blasted email that went out to a roster of appraisers. Even though they don't know the area or the property values, they jump on the chance to get another assignment as they desperately need to augment their income which has been so drastically cut.

Enter HUD and Appraiser Independence. In the wake of HVCC and all of the problems associated with it, HUD issued Mortgagee Letter 2009-28 which was to be effective with all loans receiving Case Numbers on January 1, 2010 and after, but implementation was later delayed until February. HUD's Mission Statement is "HUD's mission is to increase homeownership, support community development and increase access to affordable housing free from discrimination. To fulfill this mission, HUD will embrace high standards of ethics, management and accountability and forge new partnerships--particularly with faith-based and community organizations--that leverage resources and improve HUD's ability to be effective on the community level."

HUD apparently didn't notice all the problems with HVCC and how many borrowers it was hurting, not helping when they implemented Appraiser Independence. AMC's work most often with appraisers they do not know, do not supervise and in many cases perform no quality control over whatsoever. Just the first month Appraiser Independence has been in place for us in the reverse mortgage industry has been extremely perplexing for senior homeowners.

Case in point, we ordered an appraisal with an AMC in Fort Lauderdale Florida. The AMC assigns an appraiser with just a couple years experience who made a mockery of the appraisal process. Without going into the entire issue, the borrower who is just steps from the ocean has had to wait through a delay of almost a full month already while we cannot even contact the appraiser and the novice appraiser (once we finally did get the appraisal we were then able to check on credentials) stands firm on the choice of land locked comparable sales over those in the same neighborhood which all support higher values.

We also received an appraisal today from an appraiser who made the following disclaimer in right on the appraisal:

In accordance with HUD Mortgagee Letter 2009-28 (Appraiser Independence) FHA appraisers are not prohibited by the lender, AMC or other 3rd party, from recording the fee the appraiser was paid for the performance of the appraisal in the appraisal report. Appraiser will be paid $120. (bold emphasis is from the appraiser) $120 for an appraisal for which the borrower paid $440 and the AMC did absolutely nothing. The appraiser went to the borrower's home, performed the work and because HUD has this requirement, the appraiser just received a pay cut of 73%! And this is how HUD believes they will get better quality appraisals?

We have all former lending associates working in our company, some with 20 years or more experience and some with as much as 33 years of mortgage banking experience, working for direct lenders. We may have had one or two loans with appraisal conditions which were considered serious and possibly one or two suspended loans due to appraisal issues all last year because we take the time to resolve appraisal issues for our customers before we submit the loans to the lender for underwriting, saving the borrowers time and money. Now we don't get to even see the appraisal until after the loan has been underwritten and we have had 3 serious appraisal problems, two resulting in suspended loans in the first 5 loans the lenders underwrote with the appraisals supplied by their own AMC's.

That equates to 60% of the loans so far having poor appraisals since being forced to use lender AMC's for FHA reverse mortgages for us so far. I guess most of the time you get what you pay for - the appraiser who wanted to tell the world he only received $120 to complete his assignment actually did a very thorough job on his appraisal, but I wonder at that fee how long he can afford to keep putting the effort in to keep his appraisals at that quality or if he will have to throw up his hands and cut corners to increase volume.

Most appraisers genuinely want to do a thorough and valid job but they can't work for $120 per assignment. We also have to be fair and say that this is written after working with only two different AMC's and their appraisers. However, we have also gotten other feedback so it appears the quality of the work is not improving under this system, and may be sinking fast so the intent behind the program is backfiring.

Appraiser Independence is becoming appraisal nightmare for all HUD borrowers and the senior borrowers who rely on the reverse mortgage product are feeling it the worst. We are looking forward to finding and working with AMC's who utilize and pay experienced appraisers well and we will follow up if we find that the experience changes. If the quality and appraisal issues do not improve and HUD does not take positive steps to alleviate these issues, all borrowers may be subject to some very tough lending ahead.

Read our first blog post on appraisal independence dated 12/07/2009

"Appraisal Changes Could Hurt Seniors and Reverse Mortgages"

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By Michael G. Branson, CEO - All Reverse Mortgage Company

email: mike@allrmc.com

Phone: (888) 801-2762