Let Borrowers Order Their Own Appraisals
The two most important pieces of information
mortgage applicants should have in entering the market is
their credit score and the appraised value of their
property. The first is easy, they can get free estimates on
the web, or buy their score for $25 or so. When they apply
to a lender, one of the first things the loan officer will
do is pull their credit on-line, which takes only a few
Appraised value is another matter entirely. It has to be
ordered by the lender after the borrower has applied for the
loan. In most cases, the order goes to an appraisal
management company (AMC) which selects the individual
appraiser who does the work and delivers the appraisal
report to the AMC, who delivers it to the lender, who
delivers it to the applicant.
This clumsy process, largely dictated by regulation,
imposes heavy costs on borrowers relative to a system in
which borrowers order their own appraisals from AMCs. This
article and the one that follows describes the costs of the
current system relative to the alternative, which would not
be difficult to implement.
Appraisals Can Only Be Used Once
Borrowers pay for the appraisal but it carries the name
of the lender who ordered it. For all practical purposes,
the appraisal belongs to that lender because the borrower
cannot use it with another lender. While nothing prevents
borrowers from purchasing appraisals on their own, lenders
will not accept them, which means that they will have to pay
for a second appraisal when they apply. And if by chance
they decide that a lender other than the one they selected
initially is the one they want, they will pay for (and wait
for) still another appraisal.
In the alternative system where borrowers order
appraisals, one appraisal could be used with any number of
lenders within the 120 day validity period specified by
No Early Warning on Loans That Don’t Work
In the existing system, consumers are denied the
opportunity to see the appraisal when it will do them the
most good – which is before they apply for a mortgage. In
many cases, having the appraisal early on would save the
consumer from a bad decision – the decision to apply for a
loan for which they either cannot qualify, or which is too
costly to pursue, because the property value is
insufficient. This is not a rare occurrence, and when it
happens it wastes the lender’s time as well as that of the
In the alternative system where borrowers order
appraisals, they would be ordered before applying for a
loan. This would avoid the costs incurred when a low
appraised value aborted a transaction.
Loan Process Is Extended
Because appraisals are not ordered until the borrower has
selected the lender, the loan process is extended by the
time required for the appraisal. This is a minimum of 12
days. If the appraisal delays the transaction to the point
where the rate lock expires, the borrower is exposed to a
possible rise in market rates.
To avoid that risk, I advise refinancing borrowers to
lock for 45 days instead of the 30 that was common before
the financial crisis, and purchasers to lock for 60 days
instead of 45. This 15-day increase in the lock period can
cost as much as ¼ of a point – or $500 on a $200,000 loan.
This cost of appraisal-induced delays is like a tax imposed
on every borrower.
The alternative system where borrowers order appraisals
would eliminate the tax.
Damper on Shopping
Lender-specific appraisals dampen the ability or willingness of mortgage borrowers to shop, which is hard enough without it. The disclosures that government requires lenders to provide applicants are supposed to protect borrowers by making it easier for them to shop. However, borrowers don’t receive the disclosures until after they have applied for a loan and paid for an appraisal. For a borrower to withdraw at this point in order to begin again with another lender is difficult under any circumstances. The certain knowledge that doing so will require another appraisal fee makes it doubly so.
Assuring Appraisal Independence
An important policy objective is protecting appraisals
from pressure exerted by any of the parties with a vested
interest in the outcome. This was the major purpose of the
Home Valuation Code of Conduct (HVCC) which
became effective May 1, 2009 and which
has substantially changed the appraisal landscape.
The crux of HVCC was an “Appraisal Independence
Requirement”, under which mortgage brokers and Realtors
could no longer have any contact with appraisers,
and lenders had to obtain appraisals in some manner that
prevented them from exercising any control. In order to
protect themselves from liability, most lenders today order
appraisals through appraisal management companies (AMCs).
The theory was that lenders influenced appraisals through
contact with appraisers, and if the AMC stood between them,
the process would be clean. But this overlooks that the
lender is positioned to direct a continuing stream of
clients to the AMC, and won’t do it if the appraisals that
come back don’t meet the lender’s expectations. Similarly,
the AMC is positioned to direct business to appraisers and
won’t if the appraisers work products makes the AMC unhappy,
which will be the case if the lender is unhappy.
Having borrowers purchase appraisals directly from
appraisers is not a good idea because borrowers could shop
for the appraiser that would do the borrower’s bidding. But
in purchasing appraisals through AMCs, borrowers would have
very little leverage -- much less than lenders because each
borrower transaction would be a one-shot deal.
Quality of appraisals
A much noted feature of the growth of AMCs as
intermediaries in the appraisal process is a decline in the
quality of appraisals. While some lenders select AMCs on the
basis of price and service, lenders that have affiliated
business relationships with AMCs direct their business to
them. Affiliated AMCs are chosen because the lender shares
its revenues, not because the AMC has well-paid appraisers,
or appraisers located in proximity to the subject property.
All the major lenders have affiliated business
relationships with AMCs. That is why one hears frequently
about appraisals being done by appraisers who are not
familiar with the local market.
If borrowers ordered appraisals from AMCs, they would
select an AMC with local appraisers on their rosters,
because AMCs would emphasize this in marketing to consumers.
Some AMCs might also disclose what they are paying
appraisers, or what amounts to the same thing, what they are
retaining for themselves, as a way of emphasizing the
quality of their appraisals.
Under existing arrangements, AMCs must
compete for the business of lenders who refer borrowers to
them. Such competition results in higher marketing costs for
AMCs, and in revenue splits of affiliated business entities
that are favorable to lenders. The result of this kind of
competition is higher appraisal fees paid by borrowers.
Appraisers in turn must compete for the business of AMCs who
retain them to do appraisals. The result of this competition
is lower fees for appraisers and poorer quality appraisals.
Nobody competes for the borrowers, who pay higher appraisal
fees for poorer quality appraisals.
If borrowers ordered appraisals from
AMCs, lender would be out of the process, and good riddance.
AMCs would then have to compete for the patronage of
borrowers, which would reduce appraisal fees.
It should be public policy to have
appraisals ordered by borrowers and have such appraisals
accepted by all mortgage lenders. The key to implementing
this policy is acceptance by Fannie Mae, Freddie Mac and FHA
of appraisals carrying the borrower’s name rather than the
Borrowers who order their own appraisal
and require an FHA mortgage will face two special problems,
both of which are solvable. Problem 1 is that FHA will only
accept appraisals from FHA-approved appraisers. This means
that a borrower who may need an FHA must inform the AMC that
they need an FHA-approved appraiser.
Problem 2 is that FHA makes it difficult to use the same appraisal twice. It assigns a case number to every application which is stamped on the appraisal form. This makes the appraisal non-useable by a second lender unless the first lender attests that the borrower was not rejected! Not surprisingly, lenders who are rejected by borrowers are reluctant to assist their competitors, so this rule has the effect of locking FHA borrowers into dealing with the first lender to whom they apply.
But borrowers ordering their own appraisal could defeat this regulatory inanity in a very simple way. When they shop, they provide the lender with a copy of their appraisal but not the original upon which the case number is attached. They hold on to the original until they are prepared to make a commitment.