Like politics, all real estate is local. This is drummed into us time and time again. You hardly ever see a report about state or national real estate trends without the cautionary caveat that "local markets are all different." So how, then, does it make any sense for real estate appraisals to be conducted by out-of-the-area appraisers who lack (and don't have time to get) specific local-market knowledge?
Well, it doesn't, of course; but the practice has become commonplace thanks to the recent adoption of the Home Valuation Code of Conduct (HVCC). The HVCC is not a result of legislation. Rather, it is the result of an agreement, a settlement, entered into by Fannie Mae, Freddie Mac, and the office of the New York State Attorney General. The agreement went into effect May 1, 2009. Its aim was to put an end to corrupt practices in the business of appraising residential properties. Perhaps, to some degree, it has achieved its aim; but what we know for sure is that it has caused a lot of problems so far.
The major emphasis of the HVCC has to do with the selection of appraisers. Believing that much of the abuse of appraisal practices resulted from quid-pro-quo selection practices, and good-old-boy networks, the Code seeks to insure that the selection of an appraiser will be an arms-length transaction. Hence, for example, under the HVCC neither a mortgage broker nor a real estate agent may be the person who selects the appraiser. A lender may select the appraiser, but the person who does the selecting can have nothing to do with the "loan production" staff.
The institutional response to this, following the path of least resistance, has been to employ a third-party Appraisal Management Company (AMC) to select the appraiser. An AMC is a middleman. It receives an appraisal request from a lender and then it assigns an appraiser from its list of approved appraisers who have agreed to take assignments.
The use of AMCs has a great appeal in theory. But, on the basis of outcries from around the country, in practice it is not working out very well.
The primary complaint about AMC appraiser selection processes is that too often appraisers are given assignments that take them out of their geographical area of familiarity and expertise. Let's face it: an appraiser, just like a real estate agent, can at best be very knowledgeable about only an extremely limited number of neighborhoods or areas. Each may be licensed by their state agencies to work anywhere in the state; but none are likely to have the ability to do so with expertise.
The following scenario has become commonplace since AMCs have become the selectors of appraisers: the appraiser does not live in the area of the subject property; he or she may have never had an assignment in the particular neighborhood or even the city; the appraiser is not a member of the local or regional MLS and does not have access to relevant comparable information (which, of course, is not simply geographically determined). You just have to hope they have a GPS system so that they can find the property.
Moreover, unlike earlier days, it is turning out to be much more difficult for an agent (the one who is likely to know the neighborhood and relevant comparables) to provide helpful information to the appraiser. Actually, the HVCC does not prohibit real estate agents and appraisers from talking to each other; but everyone is so uptight about the new regulations they have been interpreted to mean that no one can have a substantive discussion with the appraiser. The over-zealous attempts to avoid even the appearance of trying to exert undue influence have resulted in a diminished quality of the reports.
National Association of Realtors® (NAR) President, Charles McMillan, recently met with both the New York State Attorney General and with the head of the Federal Housing Finance Agency – the overseer of Fannie Mae and Freddie Mac – to convey industry concerns. Representatives Travis Childers (D-MS) and Gary Miller (R-CA) have co-sponsored HR 3044 that would impose an 18-month moratorium on the use of the HVCC. It would seem a good time to pause and reassess.
http://realtytimes.com/rtpages/20090818_apprules.htm
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