In 1990 appraisers took a lot of blame for the S&L meltdown. A major tightening of licensing and oversight ensued. In 2008 appraisers again were blamed for many of the problems with the collapse of the residential mortgage market. Once again, new rules were instituted.

Will it make any difference? According to Diana Olick at Realty Check, the answer may be no. 

This time around, the fix is to separate the mortgage broker or mortgage lender from the appraiser. Instead of ordering appraisals directly, lenders are now supposed to order appraisals through appraisal management companies. The theory being that with a middleman the opportunity to pressure an appraiser directly to produce a certain value for the appraisal is diminished. According to Olick there are some holes.

Why is it that some of the largest banks in the country are allowed to have partial ownership in the Appraisal Management Companies ?? Isn’t this once again the fox watching the hen house??

Interestingly, as I wrote earlier, the HVCC arose out of a 2007 lawsuit against First American Corp. and its subsidiary, eAppraiseIT, whose largest client was Washington Mutual. It charged eAppriaseIT with conspiring with WaMu to “inflate real estate appraisals.”

If the whole idea is to get the appraisal system out of the banking/lending system, then why is it that First American Corp., still has joint venture appraisal management companies with: JP Morgan Chase (Quantrix),Citigroup (Finiti), Wells Fargo (Rels), making First American one of the largest Appraisal Management Companies in the nation? Oh, and there’s currently a class action lawsuit against Rels, claiming it rigged the appraisal process for Wells Fargo.

A press release from Attorney General Cuomo’s office, from March of 2008, states: Lenders will be prohibited from using “in-house” staff appraisers to conduct initial appraisals and Lenders will be prohibited from using appraisal management companies that they own or control.

I contacted Fannie Mae, Attorney General Cuomo’s office and the FHFA for comment, but nobody wanted to talk. FHFA Director James Lockhart gave me a statement, which, interestingly, hammers home the need to rid the system of fraudulent appraisals, but never actually, in words, directly supports the HVCC.

A lot of the push back from lenders on the new regulations is guff. Overall, the new rules and procedures make sense. While it’s going to cause a lot of appraisers to reorganize their business, it does make the process more arms length. Olick, however, raises a good point with respect to the banks.

As big as the banks are it’s naive to think that you are going to ever completely eliminate their ability to influence appraisal values. Making them use an independent third party at least would make them think twice about someone ratting them out if they did press for certain values. So I’ll go Orlick one better. Instead of asking why they’re allowed to use their own joint venture companies we should ask why they’re allowed to have any ownership interest in an appraisal company. 

Don’t count on an answer from anyone.