RISMEDIA, March 13, 2009-In testifying before Congress yesterday, the Appraisal Institute told lawmakers that mortgage reform legislation is needed to address structural weaknesses in mortgage industry regulation. Calling current regulatory oversight “feeble,” the Appraisal Institute called upon Congress to provide state and federal appraisal oversight agencies with greater enforcement power, the lack of which has contributed significantly to mortgage fraud.
“Too often, the appraisal has been relegated to a formality in mortgage lending, a gimmick to push a deal, rather than an essential element of risk-management. It is a dangerous precedent for lenders to outsource their risk management functions,” Jim Amorin, MAI, SRA, President of the Appraisal Institute, noted in his testimony. “Confidence in our financial system will be restored only when serious attention is devoted to prudent lending practices.”
To address weaknesses plaguing the mortgage lending industry, Amorin presented the U.S. House of Representatives Subcommittee on Financial Institutions and Consumer Credit with a short list of recommendations that the Appraisal Institute believes will protect the safety and soundness of mortgage transactions.
His recommendations included the following:
-The introduction and passage of mortgage reform legislation addressing the inappropriate pressure of appraisers, providing greater accountability of federal and state appraiser regulators, and promoting professionalism among appraisers.
-The establishment of a high-level agency Chief Appraiser position for collateral valuation review, with oversight of all appraisal and valuation issues across the financial spectrum, including the mortgage and secondary markets, and all financial, mortgage and real estate-related financial instruments.
-The undertaking of an immediate review of the new loan modification guidelines (Home Affordable Modification) released by the Treasury Department last week, to ensure that consumers and neighborhoods are being protected and that proper valuation is being utilized, including questioning the allowance of broker price opinions in lieu of appraisals.
In addition, Amorin identified automated valuation models (AVMs) and broker price opinions (BPOs) as unregulated methods of obtaining opinions of value that undermine federally created appraisal standards. Lenders’ use of these unregulated methods put both banks and consumers at risk of receiving inaccurate valuations.
“Our organization is concerned by the Administration’s decision to rely heavily on unregulated valuation services such as brokers,” said Amorin. “Frankly, we are shocked. Once again, we are not treating the valuation process seriously. Computer-generated analyses cannot approach the valuations prepared locally by hands-on appraisers who are experts in their communities.”
Amorin, representing 25,000 real estate appraisers from the Appraisal Institute, also voiced the need to regulate appraisal management companies (AMCs). “Currently operating as unregulated institutions, AMCs act as a conduit between bankers and appraisers, but often fail to inform the consumer that the company retains as much as 60 percent of an appraisal fee. As a result, such practices typically attract new and less qualified appraisers,” he said.
“With the rise of AMCs, we are concerned that the appraiser independence problem simply may be diverted from one formerly unregulated entity (mortgage brokers) to a new one (AMCs),” concluded Amorin.