The Bush administration has just fired a shot over the bow of the country’s mortgage lenders: Mess with appraisals, says the administration in a proposed regulation scheduled for publication today, and we are going to mess with you.
The proposals are limited to appraisals submitted in connection with FHA (Federal Housing Administration)-insured mortgage applications, but send a broader message to the industry. If put into effect later this year, the new regulations would hold lenders strictly accountable for the quality and accuracy of the appraisals that back up their loans.
Appraisal problems frequently are associated with insurance losses by FHA, a government-owned mortgage insurance operation inside the Department of Housing and Urban Development (HUD). Appraisers also have complained for years that appraisal inaccuracies sometimes are caused or exacerbated by “lender pressure”--loan officers insisting that appraisers “hit the number” needed to sell the house or complete the refinancing.
In the new proposals from HUD Secretary Mel R. Martinez, the government threatens lenders with debarment, suspensions and fines if they are found to be associated with poor appraisals. Appraisers will share “equal” liability with lenders under the new policy.
Appraisers welcomed the proposals when asked for comment last week by Real Estate-Realtor Times.
“Hallelujah!” said Don Kelly, vice president for the Appraisal Institute in Washinton, D.C. “We have been asking for this for a long time. Now it sounds like (the government) is getting serious about lender pressure on appraisers, and on the responsibility lenders share for the appraisals they submit.”
An attorney who represents the banking industry was less enthusiastic.
“It’s not the lender’s job to check every little fact (in an appraisal). It’s not even feasible,” said the lawyer, who had not seen the actual wording of the proposed rule and asked not to be named.
“If the appraiser mistakenly fails to notice some defect in the property, how is the lender supposed to know that?” asked the lawyer.
Mel Martinez’s answer to that question is contained in the preamble of the new rule: Lenders can and must quality-check appraisals--at least if they’re sending their mortgages to FHA for insurance coverage. They can perform “quality assurance” examinations, and they can use review appraisers on a regular basis to ensure conformity with FHA’s published guidelines. They can also use new technology such as “automated valuation models” (AVMs) to “ensure that home buyers receive an accurate statement of appraised value.”
Martinez’s latest move is part of a series of reform initiatives aimed at cracking down on FHA mortgage fraud, property “flipping,” and predatory lending. Last year Martinez proposed creation of an “Appraiser Watch” program for FHA, which would identify appraisers who work for lenders whose default and foreclosure rates are far above national and regional statistical norms. Martinez reportedly is also on the verge of issuing new “anti-flipping” regulations that would restrict the ability of speculators to rapidly buy and resell FHA properties with inflated appraisals.