September 14, 2009
Real Estate Finance Committee
Legislative Committee
This material is for discussion purposes only and has not been approved
by the Real Estate Finance, Legislative or Executive Committees or the
Board of Directors.
Issue:
Should C.A.R. sponsor legislation to change the rules for portability of
appraisals?
Action:
Optional
Options:
1. Do Nothing
2. Pursue non-legislative changes with lenders
3. Sponsor legislation to require appraisal to be "portable" as described
below;
4. Explore the issue with other interested groups and the Administration
and report back to the committees in January 2010
5. Other
Status / Summary
Existing California and federal laws
allow, but do not require, lenders to use a current appraisal to support a
mortgage even though that lender did not order the appraisal. Given the
increase in costs of appraisals and presumed increase in impartiality that
was to have resulted from the new HVCC (Home Valuation Code of Conduct)
there have been suggestions that lenders should be required, rather than
simply allowed, to accept an appraisal that the lender did not order. It is
unclear whether or to what extent a lack of mandatory acceptance of an
appraisal from another lender's appraiser is a real problem for REALTORS
and their clients.
Discussion
Existing statutes governing
appraisals. Appraisals and appraisers are governed by a complex web of
regulatory and ethical standards, imposed by both federal and California
law. While the appraisal may factor into negotiations, the real reason for
the appraisal in the transaction is to protect the lender and ensure that
the property has adequate value to secure a loan. In fact, it has only been
within the past two decades (and because of C.A.R. legislative efforts)
that the borrower has even been entitled to receive a copy of
appraisal.
Appraisers are licensed in California only because the federal government,
as part of the response to the Savings and Loan collapse of the 1980s,
mandated that the states create programs to license and certify appraisers
that valued "federally related" loans. The requirement was really a
conclusion that the lenders could not be relied upon to protect their own
safety and soundness by picking and supervising capable appraisers, and
that an external regulator needed to license and oversee the appraisers. In
California, that entity is the Office of Real Estate Appraisers (OREA). The
basic license requires education, an exam passage and 2000 hours of
experience.
The lending meltdown of the last 18 months has resulted in yet another
level of appraiser regulation. Last year the Attorney General of New York
concluded that lenders and the GSEs (Government Sponsored Enterprises -
Fannie Mae, Freddie Mac) had made and sold inadequately secured loans and
thereby contributed to the crisis. Under threat of lawsuit, the Attorney
General got the GSEs to agree to abide by a new Home Valuation Code of
Conduct or HVCC, and agree not to buy loans that were not made in
compliance with the new code. Ironically, the HVCC is an admission that
almost 20 years of licensing and regulation by a state entity (at least in
New York) had failed to produce reliable appraisals. The HVCC has been very
controversial; it was designed to create a layer of insulation between the
loan originator or selling agent and the appraiser and thus avoid undue
influence as to valuation. Please see the accompanying Issues Briefing
Paper on Appraisal Management Companies for additional information.
Are Appraisals Fungible? The issue pre-supposes that appraisals are
so regulated that they have become a fungible (generic) product, and one is
as good as another. Put another way, the suggestion is that appraisal
valuation has been reduced from an art to a science, and thus a lender
should be satisfied with any licensed or certified appraiser's
report and not insist upon being able to ask for their own.
How important to REALTORS® is it to have a "portable" appraisal?
Practice questions include:
- How would having a portable appraisal improve the sales process?
- If a loan originator (loan agent) is "shopping" a borrower for financing
on a specific property, is it appropriate to allow the borrower's agent to
force prospective lenders to rely on the first appraisal performed?
-Would such a rule make lenders more likely or less likely to extend
credit?
- Appraisals have reportedly become more expensive, especially since the
imposition of the HVCC. How big a "real world" or practical effect would a
portable appraisal rule have on transactions?
What position will other lobbying entities take? Political
achievability is often determined as much by the relative strength of the
supporters and opponents as much as by the actual virtue of the
proposal.
Lender groups (California Bankers Association, California Mortgage
Bankers Association and consumer finance lender groups) are powerful
lobbying entities and well represented.
Appraiser groups and mortgage brokers are less powerful, but still
capable. It is likely that all of them will strongly oppose such a
bill.
Administration. It is unclear what position might be taken by
regulators (OREA, DRE, Department of Corporations, Department of Financial
Institutions), and what they will recommend to the Governor.
Should C.A.R. SPONSOR legislation to require portable appraisals?
