The Impending Appraisal Disaster

The Impending Appraisal Disaster

In May 1, 2009, the new Home Valuation Code of Conduct goes into effect for Fannie Mae and Freddie Mac loans. For a consumer, if planning to obtain a Long Island mortgage or a mortgage in any part of the country, this code of conduct is a disaster. It will also hurt appraisers, realtors and mortgage brokers. Let me explain how the Home Valuation Code of Conduct (HVCC) came about, what it is and why it is bad.

During the sub prime mortgage fiasco, it was uncovered that Washington Mutual (WAMU) was pressuring appraisers into inflating the prices of homes so they could qualify for a mortgage. This was revealed by an investigation by New York State Attorney General Andrew Cuomo. In response to this, Cuomo wanted to pressure mortgage lenders into reforms of the appraisal process. As a result, Fannie Mae and Freddie Mac agreed to the HVCC. This will apply not only to Long Island mortgages or even New York State mortgages, but all mortgages throughout the country that will be purchased by Fannie Mae or Freddie Mac. It should be emphasized that this does not apply to FHA mortgages.

Here are the important provisions of the HVCC. First, realtors and mortgage brokers cannot order appraisals any more. If you are buying a house or refinancing your Long Island mortgage or any mortgage nationwide, the lender that has the mortgage application will order the appraisal. Secondly, the lender will order the appraisal through what is called an appraisal management company (AMC). The AMC will randomly assign an appraiser to perform the appraisal. Of course, the consumer must pay for the appraisal in advance by paying the AMC and half of that fee will go to the appraisal management company.

Neither the lender, the realtor or the mortgage broker can contact the appraiser so as to influence the valuation of the home.

Let us count the ways why this is a disaster. First of all, when realtors or mortgage brokers order an appraisal, they choose an appraiser in which they had confidence. It was some one they trusted and they knew had knowledge of the area and had experience. Many times they would ask the appraiser in advance if the value they were looking for was reasonable. This way they would know in advance if the deal was reasonable and not be a waste of time and the borrower’s money in paying for the appraisal. Under HVCC, this is no longer the case. The consumer will now have to pay for an appraisal without knowing if the deal is reasonable. This will be a waste of time and money.

Secondly, when an appraisal was ordered directly, it would take 3 days to get an appraisal. Now it has to go from the lender to the AMC. It will add about a week of extra time to the application process. This is especially harmful with a purchase where both the buyer and seller want to know as quickly as possible if the borrower will qualify.

Thirdly, the appraiser’s fee is now cut in half because the AMC is taking half. Many appraisers will leave the business so inexperienced appraisers will be be doing the evaluation. Other appraisers will need to double the number of appraisals they do to make up the income so they will have to rush them and they will not do as thorough a job.

Finally, when a broker ordered an appraisal, the appraisal was in the broker’s name. This was important because if the borrower did not qualify with a particular lender or the broker found a better rate with another lender, the appraisal could be submitted to a new lender. Now, the appraisal will be in the name of the lender. Under HVCC, if for some reason it is necessary to change lenders, you will have to order a new appraisal and the borrower will have to pay for another appraisal.

The irony of all of this is that the reason for HVCC is to prevent “unscrupulous” realtors and mortgage broker from unduly pressuring appraisers into giving artificially high valuations. As I discussed at the beginning of this article, it was a lender, WAMU, that was pressuring appraisers, not realtors or brokers. Under HVCC, who is ordering the appraisal now? You guessed it, the lender. It is a further irony that the entity that carries out the appraisal, the AMC, is totally unregulated. There is nothing about how they are to conduct their business. I fear that they will put pressure on the appraisers to artificially lower valuations. This will make it harder to obtain a Long Island mortgage or a mortgage throughout the country for a purchase a refinance. This will further depress the housing market.

Appraising Your Appraisal System

In May 1, 2009, the new Home Valuation Code of Conduct goes into effect for Fannie Mae and Freddie Mac loans. For a consumer, if planning to obtain a Long Island mortgage or a mortgage in any part of the country, this code of conduct is a disaster. It will also hurt appraisers, realtors and mortgage brokers. Let me explain how the Home Valuation Code of Conduct (HVCC) came about, what it is and why it is bad.

During the sub prime mortgage fiasco, it was uncovered that Washington Mutual (WAMU) was pressuring appraisers into inflating the prices of homes so they could qualify for a mortgage. This was revealed by an investigation by New York State Attorney General Andrew Cuomo. In response to this, Cuomo wanted to pressure mortgage lenders into reforms of the appraisal process. As a result, Fannie Mae and Freddie Mac agreed to the HVCC. This will apply not only to Long Island mortgages or even New York State mortgages, but all mortgages throughout the country that will be purchased by Fannie Mae or Freddie Mac. It should be emphasized that this does not apply to FHA mortgages.

Here are the important provisions of the HVCC. First, realtors and mortgage brokers cannot order appraisals any more. If you are buying a house or refinancing your Long Island mortgage or any mortgage nationwide, the lender that has the mortgage application will order the appraisal. Secondly, the lender will order the appraisal through what is called an appraisal management company (AMC). The AMC will randomly assign an appraiser to perform the appraisal. Of course, the consumer must pay for the appraisal in advance by paying the AMC and half of that fee will go to the appraisal management company.

Neither the lender, the realtor or the mortgage broker can contact the appraiser so as to influence the valuation of the home.

Let us count the ways why this is a disaster. First of all, when realtors or mortgage brokers order an appraisal, they choose an appraiser in which they had confidence. It was some one they trusted and they knew had knowledge of the area and had experience. Many times they would ask the appraiser in advance if the value they were looking for was reasonable. This way they would know in advance if the deal was reasonable and not be a waste of time and the borrower’s money in paying for the appraisal. Under HVCC, this is no longer the case. The consumer will now have to pay for an appraisal without knowing if the deal is reasonable. This will be a waste of time and money.

Secondly, when an appraisal was ordered directly, it would take 3 days to get an appraisal. Now it has to go from the lender to the AMC. It will add about a week of extra time to the application process. This is especially harmful with a purchase where both the buyer and seller want to know as quickly as possible if the borrower will qualify.

Thirdly, the appraiser’s fee is now cut in half because the AMC is taking half. Many appraisers will leave the business so inexperienced appraisers will be be doing the evaluation. Other appraisers will need to double the number of appraisals they do to make up the income so they will have to rush them and they will not do as thorough a job.

Finally, when a broker ordered an appraisal, the appraisal was in the broker’s name. This was important because if the borrower did not qualify with a particular lender or the broker found a better rate with another lender, the appraisal could be submitted to a new lender. Now, the appraisal will be in the name of the lender. Under HVCC, if for some reason it is necessary to change lenders, you will have to order a new appraisal and the borrower will have to pay for another appraisal.

The irony of all of this is that the reason for HVCC is to prevent “unscrupulous” realtors and mortgage broker from unduly pressuring appraisers into giving artificially high valuations. As I discussed at the beginning of this article, it was a lender, WAMU, that was pressuring appraisers, not realtors or brokers. Under HVCC, who is ordering the appraisal now? You guessed it, the lender. It is a further irony that the entity that carries out the appraisal, the AMC, is totally unregulated. There is nothing about how they are to conduct their business. I fear that they will put pressure on the appraisers to artificially lower valuations. This will make it harder to obtain a Long Island mortgage or a mortgage throughout the country for a purchase a refinance. This will further depress the housing market.

Face the facts: Creating a new performance appraisal system is a difficult undertaking. It’s even more difficult if the organization doesn’t have a logical, well-tested, step-by-step process to follow in developing their new procedure.

Based on my experience in helping dozens of companies create performance appraisal systems that actually work, here are ten tips that will help any company create a new performance evaluation system that will provide useful data and be enthusiastically supported by all system users.

One – Get top management actively involved. Without top management’s commitment and visible support, no program can succeed. Top management must establish strategic plans, identify values and core competencies, appoint an appropriate Implementation Team, demonstrate the importance of performance management by being active participants in the process, and use appraisal results in management decisions.

Two – Establish the criteria for an ideal system. Consider the needs of the four stakeholder groups of any appraisal system: Appraisers who must evaluate performance; Appraisees whose performance is being assessed; Human Resources professionals who must administer the system; and the Senior Management group that must lead the organization into the future. Identifying their expectations at the start helps assure their support once the system is finally designed. Ask each group: “What will it take for you to consider this system a smashing success?” Don’t settle for less.

Three – Appoint an Implementation Team. This task force should be a diagonal slice of both appraisers and appraisees from different levels and functions in the organization.

The implementation team is responsible for accomplishing the two major requirements for a successful system. First, developing appropriate appraisal forms, policies and procedures. Second (and the task too often overlooked) assuring a successful deployment.

Four – Design the form first. The appraisal form is a lightning rod that will attract everyone’s attention. Design the form early and get lots of feedback on it. Don’t believe anybody who tells you that the form isn’t important. They’re wrong. If you’re designing a new form internally, make sure it assesses both behaviors and results.

Five – Build your mission, vision, values, and core competencies into the form. Performance appraisal is a means, not an end. The real objective of any performance management system is to make sure that the company’s strategic plan and vision and values are communicated and achieved. Core competencies expected of all organization members should be included, described and assessed. If your mission statement isn’t clearly visible in the performance appraisal system, cynicism will likely result. Values become real only when people are held accountable for living up to them.

Six – Assure on-going communication. Circulate drafts and invite users to make recommendations. Keep the development process visible through announcements and regular updates. Use surveys, float trial balloons, request suggestions and remember the cardinal principle – “People support what they help create.”

Seven – Train all appraisers. Performance appraisal requires a multitude of skills – behavioral observation and discrimination, goal-setting, developing people, confronting unacceptable performance, persuading, problem-solving, planning, etc. Unless appraiser training is universal and comprehensive, the program won’t produce much. And don’t ignore the most important requirement of all: the need for courage.

Eight – Orient all appraisees. The program’s purposes and procedures must be explained in advance – and explained enthusiastically – to everyone who will be affected by it. Specific skills training should be provided if the new performance management procedure requires self-appraisal, multi-rater feed-back, upward appraisal, or individual development planning.

Nine – Use the results. If the results of the performance appraisal are not visibly used in making promotion, salary, development, transfer, training and termination decisions, people will realize that it’s merely an exercise.

Ten – Monitor and revise the program. Audit the quality of appraisals, the extent to which the system is being used, and the extent to which the original objectives have been met. (One of the great advantages of an online performance appraisal system is that all of these data are available instantaneously.) Provide feedback to management, appraisers and appraisees. Train new appraisers as they are appointed to supervisory positions. Actively seek and incorporate suggestions for improvement.

A company’s performance appraisal process is critically important. It answers the two questions that every member of an organization wants to know: 1) What do you expect of me? and 2) How am I doing at meeting your expectations? Using these ten tips will help you develop or select a system to will give accurate and complete answers to everyone.

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