New appraisal standards to impact mortgage ratesby Peter Miller
The idea under the Uniform Appraisal Dataset is that all appraisals should have a common set of descriptors so we’re all on the same page when someone says a “brick” house is in “average” condition.
At first, this seems like some sort of bureaucratic malarkey, but the new rules for Fannie Mae, Freddie Mac and the FHA actually have a very important purpose:
They may allow us to unearth faked, falsified and incompetent appraisals and thus prevent loan fraud, illegal flipping and bad mortgage investing. And such improvements in the valuation process might actually lead to lower mortgage rates by removing excess risk from the marketplace.
Consider what often happens with illegal flipping.
A home is purchased by a group of illegal flippers. An appraiser is part of the group. Magically, the property gets a new appraisal on the basis of a suddenly higher valuation, and the property is sold to an innocent buyer.
The key to the process is the faked appraisal.
The appraisal validates the buyer’s sense of value and it’s used to get financing for the over-priced property.
There have been efforts to stop illegal flipping in the past, notably HUD’s anti-flipping rule which–until February 2010 when it was suspended–said no property which had been resold in the past 90 days would qualify for an FHA loan.
The concept was attractive, but the problem was that the rule also impacted legitimate investors and rehabbers who could quickly turn around properties. Once the rule was dropped, HUD reported that it insured 21,000 additional FHA mortgages in fiscal 2010, mortgages that otherwise would have been rejected under the anti-flipping rules, loans worth $3.6 billion.
Catching bad appraisers
While the new appraisal requirements are also an effort to standardize the appraisal process, it’s hard to ignore another purpose:
Tighter appraisal standards make it easier to catch cheats and, also, to drive bad appraisers and lenders out of business.
Under Wall Street Reform, there is something called a “duty of care” standard for lenders. It essentially requires that all loan documents must include the lender’s national registration number.
Now imagine that you’re a mortgage investor. You are considering the purchase of part of a mortgage-backed security, a tranche. As part of your due diligence, you go through the loans and see they include mortgages from lender Smith with a particular registration number. You know this lender has twice the foreclosure rate of other nearby lenders, thus you are willing to buy an interest in the MBS–but not any part which includes loans from lender Smith.
Weeding out the bad seeds
Soon enough it will happen that Smith will be unable to re-sell loans in the secondary market and not long thereafter Smith will be out of business.
In a similar sense, the new appraisal standards will allow lenders and government officials to quickly review past appraisals to see if they conform to national standards. If yes, fine. If not, lenders are likely to provide less business (or no business) to the appraiser with the bad rep.
Some appraisers are screaming that the new standards are being implemented too quickly–but they were, in fact, first announced in December 2010 and finalized in February 2011. There has been a ton of time to see what was coming and to prepare for it.
Lower mortgage rates?
Will the new appraisal standards result in lower mortgage rates? To the extent they reduce lender risk, the answer is yes, so borrowers should cheer the new rules.