Despite helping to cause the subprime crash, mortgage brokers in the US are crying foul over regulation aimed at stopping mortgage brokers and appraisers from getting get together and inflating home values.
I was a little confused this week by a section in the press release from the National Association of Realtors announcing May's existing home sales, in which NAR chief economist Lawrence Yun complained that sales were depressed because of "poor appraisals". In The Big Picture, Yun said the appraisal problem is serious: "Lenders are using appraisers who may not be familiar with a neighbourhood, or who compare traditional homes with distressed and discounted sales," he said. "In the past month, stories of appraisal problems have been snowballing from across the country, with many contracts falling through at the last moment. There is danger of a delayed housing market recovery and a further rise in foreclosures if the appraisal problems are not quickly corrected." However, I did not follow up on the point and discover that there is a lobbying campaign currently underway, led by the mortgage brokers and realtors, that aims to roll back recent regulatory changes designed to fix what was clearly a broken appraisal system. Here's what's going on. As a result of an investigation by New York State Attorney General Andrew Cuomo into a scheme in which Washington Mutual colluded with appraisers to pump up home valuations, Freddie Mac, Fannie Mae, the Federal Housing Finance Agency (FHFA) and Cuomo reached an agreement on a set of mandatory guidelines to ensure appraisal independence – the Home Valuation Code of Conduct. The clear purpose of the HVCC is to keep mortgage brokers and appraisers from getting get together and inflating home values. The HVCC took effect on May 1, 2009 – and the mortgage brokers immediately started screaming. In written testimony prepared for a Congressional hearing on "Strengthening Oversight and Preventing Fraud in FHA and other HUD Programs," Marc Savitt, president of the National Association of Mortgage Brokers, argued last week that "what the HVCC truly accomplishes is an increase in consumer costs, a decline in appraisal quality, the extension of closing deadlines, and the virtual extinction of local small business appraisers." Savitt goes on argue that the attempt to cut the financial links between mortgage brokers, realtors and independent appraisers has given "large national lenders and Affiliated Management Companies a virtual monopoly on the home appraisal process and removes the cost and quality checks and balances that a competitive marketplace provides." Savitt complains that the new rules are already extending the time it takes to close sales and hurting the business of local appraisers. It may be that there are some unintended consequences to the new rules that require some tinkering. If there's anything to be learned at first glance from an initial foray into home appraisal regulation it is just how complicated the whole business gets. But in his ten pages of written testimony, Savitt does not once acknowledge the out-of-control appraisal abuse that rampaged throughout the housing boom. Everybody in the real estate business stood to gain from inflated appraisals – and if you didn't deliver, you didn't get any new business. I'd say it would take a lot of gall to be a mortgage broker and complain about how overly tight regulation was hurting your business, right after the most ridiculous mortgage lending spree in human history set the entire global economy up for disaster. But hey, these guys are nothing if not ballsy. Regulation, already, is the problem again. And whatever mistakes were made the last time around – well, that's ancient history.