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Big mortgage buyers reappraise the appraisal process

January 24, 2009

By JIM WOODARD

Creators Syndicate

Home appraisals are a key element in the closing of residential sales transactions. The appraisal report can determine whether the buyer can obtain the needed mortgage to finance the purchase of a home.

One troubling aspect of the appraisal process has been the pressure applied by mortgage lenders and brokers to reach a "target valuation" number on appraisal reports. It should be noted that most independent appraisers resist the pressure. In fact, they actively fight against such practices.

However, overvalued appraisals have been identified as a contributing factor in the unprecedented run-up in housing prices over the past decade and the subsequent devastating crash in the past two years.

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To prevent this problem from happening again, Fannie Mae and Freddie Mac - the two largest government-sponsored buyers of existing home mortgages - have structured a "Home Valuation Code of Conduct," set for implementation May 1.

After May 1, Fannie and Freddie will no longer purchase home mortgages from lenders who have declined to adopt the code. Most mortgage sellers and servicers must represent and guarantee that the appraisal report they submit is obtained in a manner consistent with the code.

Many industry leaders disagree with some or all of the requirements cited in the code and are fighting its implementation. For one thing, mortgage brokers and Realtors would be banned from selecting appraisers. Such a ban could cause large, national lenders to turn to appraisal management companies for appraisal services.

"The agreement amounts to a de facto regulatory action which avoids the appropriate process," said Marc Savitt, president of the National Association of Mortgage Brokers. "The law provides for a process to implement regulatory and policy changes such as those specified in this agreement. It will increase costs to consumers and remove thousands of small business competitors from the marketplace. This will create a severe disadvantage to small business mortgage brokers and prevent them from engaging competitively in the mortgage marketplace."

Several appraiser associations are also objecting to the code requirements, saying they would force many of their members to take assignments from the large appraisal management companies. It would have no effect on the potential home buyer, who would still pay the full amount. But a portion of the fee that once had gone to smaller, local appraisal businesses would go instead to the large appraisal management firms.

Q: What is the proposed "cramdown" law all about?

A: Proposed cramdown legislation is gaining momentum and acceptance by lenders and real estate groups. This proposed law would give bankruptcy judges the power to change repayment terms on mortgages of certain homeowners who have declared bankruptcy.

A growing number of lenders, such as Citigroup, are cooperating with legislators in implementing cramdown, thus allowing judges to modify the payment terms on primary home mortgages. Nearly one in six homes is worth less than the value of its mortgage. The cramdown law refers to taking the value of a home mortgage and reducing it to the current market value of the home.

Financial and home building groups previously opposed the legislation, saying it would raise the cost of borrowing for potential home buyers. However, many of these groups now support it.

The National Association of Home Builders still opposes the concept. "We remain opposed to the legislation because of the destabilizing effect it would have on an already turbulent mortgage market," said John Courson, NAHB president. "We are still evaluating the proposed deal, but we believe there remains a number of crucial issues that need to be addressed."

Copyright 2009 Creators Syndicate Inc.

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