New York Attorney General Andrew Cuomo's effort to reform the home appraisal process is running into resistance from just about every player in the mortgage industry, including Charlotte's big banks.
In March, Cuomo announced a new code of conduct aimed to ensure “independent and reliable” home appraisals. The agreement with mortgage giants Fannie Mae and Freddie Mac is set to take effect Jan. 1, but it spurred sharp opposition during a public comment period that ended last month. The dispute could end up in court.
The Home Valuation Protection Code is designed to cure what Cuomo has called a major contributor to the nation's mortgage meltdown: “rampant appraisal fraud.” Critics acknowledge the need for accurate appraisals, but argue the attorney general's approach will cost jobs, shatter traditional business relationships, bump up prices for consumers and circumvent Congress and federal regulators.
The voluntary agreement would have a sweeping effect on the real estate business because it places new restrictions on loans purchased by Fannie and Freddie. These are the so-called “government-sponsored enterprises” that pump capital into the mortgage lending industry by buying up about 60 percent of all U.S. home mortgages.
In an industrywide probe, Cuomo said he found banks putting pressure on appraisers to inflate the value of homes. This allows lenders to make bigger loans. Declining home values are now a major factor in the U.S. housing crisis, leaving borrowers with homes that are worth less than they owe on their loans.
In an effort to end conflicts of interest in appraisals, Cuomo's code, among other stipulations, would:
Prohibit mortgage brokers from selecting appraisers.
Ban lenders from using in-house staff appraisers to conduct initial appraisals.
Bar lenders from using so-called appraisal management companies that they own or control.
The agreement, which has been approved by Fannie and Freddie's federal regulator, creates a new organization to monitor the code, funded with $24 million from Fannie and Freddie.
Charlotte's Bank of America Corp. and Wachovia Corp. oppose the code because they both have in-house appraisers and own appraisal management companies. These are companies that coordinate the hiring of outside appraisers. Both banks said they endorse the need for independent appraisals but oppose implementation of the code.
Bank of America spokesman Terry Francisco said the agreement was “overly broad in scope and structured in a manner where there will be unintended consequences that will increase the costs of mortgages.” Changing systems and complying with new rules would incur costs ultimately passed along to consumers, trade groups have said. In-house appraisers should be permitted, whether employed by the lender or an affiliate, Francisco added.
Wachovia spokesman Don Vecchiarello said the bank has “multiple layers of regulatory oversight and quality control” to ensure independent and accurate appraisals. If implemented, the agreement would increase cost to consumers, disrupt the industry and lead to the “displacement of many highly trained and qualified appraisal professionals,” he said.Many trade groups opposed
A host of trade groups representing banks, mortgage brokers and appraisers have also submitted comments, raising concerns about various aspects of the code.
The N.C. Appraisal Board, which oversees the state's appraisers, said in its comments that the agreement could undermine legislative efforts in Congress and divert attention from problems with poor lending practices. “Appraisers are not responsible for this crisis and should not be the ones to pay for it,” board chairman Henry Faircloth and executive director Philip Humphries wrote.
The appraisal board is concerned because the agreement allows lenders to use so-called “Broker Price Opinions.” These are valuations conducted by real estate agents. Under N.C. law, real estate agents can value property only to assist the buyer or seller of a property. Only appraisers can determine property values for lending decisions, according to the letter.
The board also is worried the code will cause a “dramatic rise” in appraisal management companies, or AMCs. That's because the agreement requires appraisals to be ordered by the lender or a third party authorized by the lender.
The board noted that AMCs are not licensed by the state or federal regulators. Most “experienced and well-qualified” appraisers won't work for AMCs because of the low fees they pay, the board wrote, which can result in lower quality appraisals.
Jim Blackley of Charlotte is one of the mom-and-pop appraisers worried about the proliferation of AMCs, including those owned by the banks. The code, though, would lead to expanded use of these companies, he said.
“I'm completely for the intent” of the code, said Blackley, whose wife and son also work for The Blackley Appraisal Group. “But when you get to the details it's horrible.”
Cuomo's office did not respond to a request for comment. Spokespersons for Freddie Mac and Fannie Mae said they were reviewing the comments, in accordance with the agreement.