by Dan Krell (c) 2009.
www.DanKrell.com
In the fallout of the real estate market bust, past practices to pressure appraisers to inflate home valuations have been the focus of recent criminal and civil investigations. As a result, two important recent developments will affect the mortgage industry, and more directly the appraisal industry: the adoption of the new appraisal standards of practice and an Arizona Court of Appeals ruling.
On May 1st, new appraisal standards of practice went into effect for mortgages that are bought by Fannie Mae and Freddie Mac. These new standards were the result of the 2007 industry wide investigation conducted by the NY State Attorney General (AG), Andrew Cuomo, and the subsequent agreement between Fannie Mae and Freddie Mac. The investigation revealed some of the short comings of the mortgage industry, including appraisal manipulation and fraud. The AG’s statement dated March 3, 2008 (www.oag.state.ny.us) named Washington Mutual specifically for pressuring First American and eAppraiseIT to use appraisers who provided inflated appraisals.
The purpose of the new standards of practice, also known as the Home Valuation Code of Conduct, is primarily to establish independence and accountability in the appraisal industry. To minimize any attempt to influence the appraisal process, the new code prohibits communication between the lender and the appraiser.
An important development of the AG’s agreement with Fannie Mae and Freddie Mac is the formation of the Independent Valuation Protection Institute (independent-valuation-protection-institute.org). The purpose of the Institute is to maintain the integrity of the Home Valuation Code of Conduct and to monitor state and federal law. The Institute also will intercede on complaints brought by regulators and law enforcement agencies as well as consumers who feel that the appraisal process has been compromised. Additionally, the institute provides an outlet for appraisers to report attempts to pressure or manipulate appraisals by outside sources.
The other important development is the recent ruling by an Arizona Court of Appeals on April 30, 2009 that an appraiser has a duty to the home buyer or borrower (even if hired by the lender) (mortgagefraud.org). The ruling came after a home buyer sued the appraiser for overvaluing her home when it was purchased. The appraiser was accused of using incorrect living area, and other discrepant data. The original ruling by the trial court was that the appraiser did not have any duty to the home buyer because the appraiser was hired by the lender. However, the Court of Appeals disagreed ruling that “that an appraiser retained by a lender to appraise a home in connection with the granting of a purchase-money mortgage may be liable to the prospective buyer for failure to exercise reasonable care in performing the appraisal.”
Combined with the AG’s investigation, this recent ruling may open the door for home buyers to pursue appraisers who may have participated in mortgage fraud by artificially inflating home prices. The implication is that those who participated in mortgage fraud are accountable not only to government agencies, but also to the home buyers and borrowers who were affected by their actions.
Appraisers are under a lot of pressure to produce and deliver an accurate and quality product. To safeguard against future appraisal manipulation, the implementation of the Home Valuation Code of Conduct and the creation of the Independent Valuation Protection Institute will be helpful.
This column is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of May 11, 2009. Copyright (c) 2009 Dan Krell.