Comments on the proposed “Home Valuation Code of Conduct”

Shelter Rock Mortgage Corporation has been a New York State Registered Mortgage Broker for over 20 years. During this time we have seen the mortgage marketplace go through extreme cycles. Time has shown that governmental over-reaction to market conditions can make a bad situation, worse. A detailed analysis of the issue, followed with input from all industry participants, yields a superior response. We would like to recommend that the agreement, creating The Home Valuation Code of Conduct, be reconsidered based on its overall impact to the consumer.

We understand the desire to address the current mortgage crisis and to take whatever action necessary to prevent this situation from ever happening again. We have worked closely over the years with State government, as well as the New York State Banking Department, in drafting laws and regulations regarding the mortgage industry.

There is no question that we are currently in a mortgage crisis. Numerous mortgages were written based on overly optimistic projections of our economy, in addition to those that were written due to criminal actions. The Federal Bureau of Investigation divides these criminal actions into 2 classes, Fraud for Property and Fraud for Profit. Fraud for Property involves the direct actions of the borrower to obtain a mortgage for either a purchase or a refinance, by knowinly misrepresenting his income, debt or property value usually involving only that one loan. According to the FBI, this represents 20% of the total of fraudulent mortgages. Fraud for Profit is what the FBI identifies as the actions of industry professionals in criminal actions to close mortgages, which involve many many properties and mortgages.

An accurate appraisal report is the foundation of a well underwritten mortgage. Without a proper evaluation of the collateral an underwriter is ill equipped to do his job. The Home Valuation Code of Conduct attempts in improve the overall accuracy of appraisals. We feel that the agreement reached between Andrew Cuomo, the GSEs and OFHEO does not address the real issues and will result in increased costs to the borrower both in money as well as in time, without adding any tangible benefit to the consumer.

The current policy regarding the ordering of appraisals is that the originating entity orders the appraisal from a state licensed appraisal. Some entities have their own list of approved appraisal companies; others have a list of appraisers that they will not do business with, and others may actually have appraisers on staff. The Home Valuation Code of Conduct was written under the assumption that the entity ordering the appraisal has the ability to influence appraisers to generate appraised values reflecting what the entity needs and not fair market value.

Only a fool would say this situation can never happen but it’s not reasonable to claim the problem is wide-spread without assembling the necessary data. Appraisal services are not high profit businesses. The typical fee for the work necessary to produce a finished report on a 1-family residence is $350.00. How many professionals are willing to jeopardize their livelihood for an additional $350.00? We can’t forget that appraisals are reviewed for accuracy by a lender before accepting the value shown. In addition to the underwriter’s review, prior to commitment, it is also common practice for the investor who finally purchases the closed loan, to utilize one of the various databases available that are designed to confirm the reasonableness of the appraised value.

The appraiser’s name and license number is tied to the mortgage from the beginning of the process right through to when the mortgage is paid off. It at any time a question regarding the accuracy of the appraisal is raised, the appraiser will be questioned. If a lender’s underwriter is not doing a review of the appraisal when approving a mortgage and the investor isn’t doing the proper due diligence when purchasing a portfolio of mortgages, shouldn’t we be addressing these weaknesses in the mortgage process?

There is no data presented showing that the GSEs have purchased large numbers of mortgages with inaccurate appraisals. The only apparent reason this agreement was made with the GSEs is strictly based on the fact they purchase the majority of the mortgages written in this country, so this agreement then covers the majority of appraisal reports.

A contributing factor for a mortgage going into default is an inflated appraisal. The vast majority of mortgages that are currently in default, are subprime mortgages. The GSEs do not purchase subprime mortgages. From this we can conclude that although this agreement covers the majority of mortgages, it does not address the subset of mortgages that are most likely to go into default. If this agreement were in place during the housing bubble, it would have had no effect in reducing the number of mortgages going into default. Therefore, there is no reason to conclude it will help the industry going forward.

The money that will be spent in implementing The Home Valuation Code of Conduct would be better spent in enforcement actions against those committing Fraud for Profit. Taking the criminals out of the industry will have a more far-reaching impact and help rebuild confidence in the mortgage market.

The appraisal business is like any other business. In order to be profitable, an appraisal company needs to provide a higher level of service to its clients, than its competitors, in order to maintain its share of the market. Appraisers do this by giving their clients what they want. This doesn’t mean bringing in the value based on what the client wants. It does mean doing their job in a professional manner. Arranging for appointments that meet the homeowner’s busy schedule. Treating the homeowner with the respect they deserve. Developing a more extensive knowledge in certain geographical areas, making themselves a more valuable commodity. This puts them in greater demand to clients who need work done in those regions.

In order to comply with The Home Valuation Code of Conduct, a lender will develop a list of appraisal companies and randomly select off that list each time an appraisal in needed. This will give the larger appraisal companies an advantage over the smaller shops, forcing many of the smaller shops out of business. Why would this happen? Larger shops will naturally have a larger staff of appraisers. If they are also randomly assigning appraisers, just like the lender’s policy is when selecting the appraisal company, the lender separates himself further away from the appraiser. This would be a good business practice on the part of the lender; allowing for a greater diversification of appraisers from a shorter list of appraisal companies.

A mortgage broker that currently orders appraisals will deal with the companies that have a reasonable turnaround time in completing a report, schedule appointments at the homeowner’s convenience, arrives on time for the appointment and will answer any questions that an underwriter has regarding his work in a timely and complete manner. If an appraiser doesn’t fulfill any of these expectations, he will no longer get appraisal orders. Once the appraisal is complete the broker can use that appraisal in submitting application packages to as many lenders as needed, without additional cost to the applicant. A broker’s obligation to his applicant is to help the applicant arrange for the best financing that fits his needs. This can mean submitting a package to more than one lender.

If The Home Valuation Code of Conduct is implemented, the broker and the applicant will not be able to predict how long it will take for the appraisal to be completed. If the file needs to be submitted to more than one lender, the applicant will need to pay for multiple appraisals as well as wait for each new appraisal to be completed.

Currently, a broker has the appraisal report prior to submitting the application package to the lender. The actual appraised value permits the broker to accurately calculate the loan-to-value (LTV), adjust pricing to reflect that LTV, calculate the mortgage insurance properly as needed and update the applicant regarding any changes to his profile based on the appraisal report. None of this can be done if the appraisal is performed later in the process. Any preliminary work that was done before the package was submitted will now need to be redone with the updated data. We are not helping the applicant by slowing down the process, only making the entire process more expensive and tedious.

Longer processing time will require applicants to lock-in for a longer period. This costs the applicant money. Should an applicant need to go to a second lender, a second appraisal will need to be done. This costs the applicant money. This agreement will increase each lender’s cost in conducting business and this will be passed onto to applicant. This costs the applicant money.

The consumer is not getting any real benefit in return for what it’s costing him.