Unencumbered by the thought process!

Four of the five federal bank regulators have called for the withdrawal of the Home Valuation Code of Conduct and the Home Valuation Protection Program and Cooperation Agreements saying they could "unnecessarily undermine the safe and sound extension of mortgage credit, reduce the availability of mortgage credit to many consumers, and ultimately lead to less reliability and accuracy in real estate appraisals." The agreements, entered into by the New York Attorney General, Fannie Mae, Freddie Mac and the Office of Federal Housing Enterprise Oversight, require mortgage lenders seeking to sell single-family mortgage loans to the GSEs to adopt the HVCC and to comply with certain practices imposed by the Code. In a joint letter, the Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, Office of Thrift Supervision, and National Credit Union Administration cited concerns of insufficient information collection and analysis and the fact that the Agencies' rules already address the issues of appraiser independence and protection from coercion.

Writing separately, the Federal Deposit Insurance Corporation echoed those concerns stating that the Financial Institutions Reform, Recovery and Enforcement Act of 1989 and the Uniform Standards of Professional Appraisal Practice "promote effective appraisal processes for mortgage underwriting and can be enforced by the federal banking agencies if institutions fail to comply."

The FDIC said that the Code and Agreements "would overlay this long-standing set of federal regulations and professional appraiser practice" potentially with "unintended costs and consequences. " Specifically, since both bank-affiliated and independent appraisal firms can be subject to undue influence, according to the FDIC, "it is not clear that forcing business along rigid organizational demarcations is more suitable."

Instead, the FDIC recommended "permitting flexibility for appraiser independence that would accommodate professional practice standards and could be appropriately scaled to correspond with the wide variety and size of mortgage lending institutions. "

The FDIC stopped short of calling for a withdrawal of the agreement but promoted the use of notice-and-comment rulemaking instead of a sweeping carte blanche enforcement and supported the recent announcements that OFHEO may pursue amendments to the Code and Agreements based on the comments received by the April 30 comment period deadline.

The four other regulators stated that, if not withdrawn, "the Agreements and Code should be revised to exempt federally regulated lenders, and the implementation of the Agreements and Code should be deferred until the significantly adverse consequences are prevented and other material legal and policy concerns... are satisfactorily addressed."

The appraisal industry has justifiably come under fire for its role in the great housing bust. Property appraisals, required by lenders before a loan is made, are supposed to provide an independent assessment of the home's value. But during the boom, appraisers routinely signed off on a doubling or tripling of home values, sometimes racked up in just a matter of months. Investment properties were appraised at prices that made no investment sense. And homeowners were charged a pretty penny for what often amounted to rubber-stamp service.

Now the industry is about to undergo a shakeup. On Jan. 9, Fannie Mae (FNM) and Freddie Mac (FRE) announced revisions to their Home Valuation Code of Conduct. Starting on May 1, lenders that want to sell their loans to the two industry behemoths must follow the new guidelines. Mortgage brokers and Realtors are no longer able to choose appraisers. They will be selected by lenders, which are not allowed to influence appraisers by withholding payments or promising future work. If lenders have in-house appraisers, the bank's loan-origination department is not allowed to influence their valuation decisions or supervise their work.

The changes follow an agreement reached last year between Fannie, Freddie, the New York State Attorney General's Office, which was investigating the appraisal industry, and the Office of Federal Housing Enterprise Oversight, which oversees Fannie and Freddie. The new rules only apply to loans bought by or guaranteed by Fannie and Freddie. Lenders who operate independently of those channels do not have to follow them. But since Fannie and Freddie buy or guarantee a huge share of all U.S. mortgages, the changes should have wide application.

Countrywide Sued over Seattle Appraisal

Typical of the complaints about appraisers' bubble-era behavior are those spelled out in a lawsuit filed on Jan. 12 in the U.S. District Court for the Western District of Washington by Carrol and Gregory Clark. The suit, which seeks class-action status, claims that Countrywide Home Loans and its in-house appraisal arm, LandSafe, inflated home valuations during the boom so Countrywide could make more loans and sell them on Wall Street.

The lawsuit claims that when the Clarks refinanced their Seattle home for $350,000 in February 2007, they were required to use the Countrywide affiliate for the appraisal. It says they paid $410, double what LandSafe actually paid an outside appraiser to do the work. The suit further claims that outside appraisers who didn't come up with high home values were denied future work from the lender.

Countrywide was acquired by Bank of America (BAC) in July 2008. Asked for a response, Bank of America spokeswoman Shirley Norton said, "We have not been served yet, but based on what we have heard about this suit we believe it is without merit."

A lot of appraisers aren't happy about the looming changes. In a poll conducted on Jan. 16 by the American Appraisal Institute trade group, 60% of appraisers said the code was unlikely to change the quality of appraisals. The 600 or so survey participants also said the biggest problem in the industry wasn't pressure from clients, but poorly trained appraisers.

Fear of Appraisal Management Companies

Gerhard Morell, an appraiser with Northern Colorado Valuations, said during a conference call organized by the appraisal institute that many independent appraisers depend on referrals from mortgage brokers for work. "Historically, we've gone about our business by creating relationships that now look like they will be cut off," he said.

Others in the industry fear that appraisers will be forced to turn to one of the 200 or so appraisal management companies that are becoming a larger force in the business. These companies handle appraisals on behalf of lenders, but often negotiate steep discounts from the appraisers they hire.

"Appraisers feel management companies pay too little—$175 per job," said Kenneth Harney, a syndicated columnist and managing director of the National Real Estate Development Center, an industry training firm. "The turnaround times imposed are unacceptably short. Many of the most experienced appraisers feel this will drive them out of residential work to be replaced by less-experienced appraisers. That's not better from a consumer perspective."

But Joseph Stott, who supervises appraisals at the State Bank of Southern Utah, said the code will force his bank to place its appraisers under more scrutiny.

"We're going to be more restrictive of who we put on our approved list," he said. "Those who have been sloppy or lax because of a relationship they have with a certain loan officer will be gone. It's a step in the right direction."

Palmeri is a senior correspondent in BusinessWeek's Los Angeles bureau.

By Kenneth R. Harney

When you apply for a mortgage to buy or refinance a house, should you be concerned that your appraiser is being paid much less — maybe just half –– of the $300 to $600 you're charged on your settlement sheet? Should you know who pockets the rest, or that cut-rate fees are too low to attract the most experienced, highly trained appraisers?

Should you care that the appraiser might be pushed to come up with a number so fast –– almost overnight in some cases –– that he or she doesn't have the time to do a proper inspection and accurate evaluation of comparable properties, pending sales contracts and local market trends?

All these questions are at the core of a swirling controversy created by the release of new appraisal standards by Fannie Mae and Freddie Mac, the giant mortgage investors. The "home valuation code of conduct," issued by the companies' federal regulator late in December, is under attack by the very industry it purports to protect –– professional real estate appraisers. It's virtually certain to turn into a political issue in the new Congress, and may be the subject of a federal court suit.

The code of conduct, now scheduled to take effect May 1, is the end product of a settlement involving New York Atty. Gen. Andrew M. Cuomo, the Federal Housing Finance Agency and the two congressionally chartered mortgage companies the agency oversees.

The settlement came after Cuomo threatened Fannie and Freddie with an investigation aimed at ferreting out alleged appraisal overvaluations, and evidence of illicit pressure on appraisers to "hit the numbers" needed to close loans. As part of the deal, the two companies and their federal regulator agreed to create a set of standards to ensure that appraisals are accurate and insulated from pressure –– whether from lenders, mortgage brokers, realty agents or third-party appraisal management companies.

But trade groups representing appraisers are unhappy about key details. Four of the largest appraisal organizations, including the Appraisal Institute and the American Society of Appraisers, issued a joint statement charging that the code will force lenders to shift their valuation assignments to third-party appraisal management companies, abandoning the traditional system of using local appraisers selected by mortgage loan officers. The code bans brokers, who originate a substantial share of new mortgages nationwide, from any involvement in selecting appraisers.

Management companies, the groups complained, "place appraisal quality last while shifting the cost of appraisal . . . services to the consumer without any disclosure." Often, management companies require appraisers to perform valuations for $180 to $200 –– far below their regular fees of $300 to $600 — and deliver their report within 24 hours to 48 hours of an assignment.

Consumers are charged the full fee at settlement with no knowledge that a third-party management company is taking a large percentage of what appraisers normally are paid for their work.

The Title Appraisal Vendor Management Association, which represents third-party managers, denies that lower fees result in less-accurate home valuations. Jeff Schurman, the group's executive director, says "there's no evidence of that," and if there were, major banks and mortgage lenders would not hire them. Appraisal management firms offer lenders valuation services anywhere in the country they're needed to handle loan applications, said Schurman, and they deliver them quickly. He added that the portion of the appraisal fee the management companies take is "reasonable" given the overhead savings they provide lenders.

But some prominent appraisers are scathing in their criticism of management firms. Jonathan Miller, president and CEO of Miller Samuel Inc, one of the largest appraisal companies in the New York City area, says "their quality is terrible –– all they want you to do is crank it out at the lowest cost." Only "the least experienced people" are willing to do the work, "and the product is unreliable."

George Dodd, an appraiser based in Virginia, says that rather than work for peanuts, "I can flip burgers at McDs for more."

Where is all this headed? The National Association of Mortgage Brokers plans to appeal to Congress to reverse the code's ban on broker selection of appraisers, and it is considering a lawsuit challenging the code. Appraisers also are expected to seek changes, either from Fannie and Freddie's regulator, or from Congress.

Why should this matter to you? Miller says quick, slipshod appraisals can severely undervalue properties –– forcing buyers to come up with bigger down payments –– and can scuttle refinancings. Or they can overvalue houses that should be selling for less.

Either way, it matters.

I was attempting to explain how loans work to my 15 year old son. I told him that you sign a document that is basically a promise to pay the loan terms.

I explained how the interest rate is directly related to risk and the term of the loan is directly related to the asset. For example - you can't get 30 year car loans because the car won't have any value after 10 or 15 years.

We then talked about the bad stuff... what if you can't pay the loan anymore? We talked about car repo's and home foreclosures.

But, now I have a question: Why do people make payments on car loans? Everyone knows that cars decline in value....