The Home Valuation Code of Conduct (HVCC) for banks and appraisers is supposed to protect appraisers from coercion by banks to “hit the numbers.”
 
Adopted May 1, 2009, for banks making Fannie Mae or Freddie Mac loans, the new code prevents lenders from ordering appraisals directly from the appraiser. Instead, banks are offloading this task onto appraisal management companies (AMCs) to avoid the appearance of influencing appraisal outcomes.
 
The problem is twofold - the fox is watching the henhouse, and AMCs are taking shortcuts to boost their profits, which they may be sharing with their lender partners.
 
Some banks own or have an interest in appraisal management companies, which keeps the money in the family, including Countrywide and its subsidiary AMC LandSaft, Wells Fargo and Rels Valuation, among others.  These partners are already engaged in lawsuits over their alleged practices of inflating appraisals and/or intimidating appraisers.
 
With banks able to own up to 20% of an AMC without violating the HVCC, there’s little oversight with teeth, which is enabling banks to “hit the numbers” in the opposite direction – to avoid making housing loans.
 
While proof is missing that this practice is happening, there’s plenty of talk in the trenches that whether intentionally or unintentionally, housing transactions are hitting walls – due to appraisals coming in under market value.
 
The first person to bring this to my attention was Fritzi Barbour, president of the Greenville Association of REALTORS®. She told me that it was appearing that if a bank is accepting TARP funds, “you will have worse problems getting your loan approved.” 
 
One broker who wishes to remain anonymous told me one of her office’s listings failed to appraise. The loan was through Bank of America, which used an automated valuation model (AVM) out of Florida –three states away- instead of hiring a local appraiser.
 
AVMs, an online valuation product, can be ordered for as little as $35 compared to hiring a professional appraiser at $350-$500.
 
Explains David Reed, a mortgage broker and author in Austin, Texas, “AMCs sign up appraisers from all over the country to be a part of their service.  When an appraisal order comes in, whomever is next in line for an appraisal gets the order.  AMCs also require the appraisers to take a reduced fee for their appraisals if they want to be on ‘the list.’"
 
The HVCC in effect allows AMCs to perform much like HMOs. They operate as a middleman – taking a cut of money from the service provider (doctors, appraisers) while reducing service to the customer (patients, home buyers.) 

Reed says that he almost lost a deal when an AMC hired an appraiser to do a drive-by – also a low cost “exterior only” alternative to a full appraisal. The appraisal came in $4,000 low because the appraiser wrote in his report that the interior was “below average,” and despite being hired to perform an exterior-only appraisal, missed including the positives – a sprinkler system, fence, and greenbelt view which would have more than made up the $4,000 shortfall.  
 
“Did you catch that?” says Reed. “An ‘exterior only’ appraisal means you don't go in the house.  So how could the appraiser determine that the interior was below average?  The fact is that he couldn't have.”

Thanks to the restrictions by the HVCC, the loan officer of the bank Reed was working with couldn't call the appraiser and point out these errors.
 
“He could only call the AMC and complain,” says Reed. “Nothing happened for a couple of days so the Realtor called him but the appraiser never called him back, either.”

The loan officer then ordered a full appraisal from the same AMC, the AMC ordered the appraisal and of course, the value came in at $225,000. 
 
Yet another horror story reveals the problems with the new Fannie Mae/Freddie Mac “declining market” guidelines. Appraisers now must provide sets of numbers all the way back to a year ago. This means that even if a market is climbing, like 33 metros recently identified by the NAR, appraisals can still come in 5% lower than similar homes purchased as little ago as April 2009. The reason? If the market was declining in January, that goes into the formula.  
 
How’s that for a kick in the pants?
 
If you have deals that are being lost due to similar problems, there are a few things you can do:  
 
Have a portfolio lender on tap to take over if a TARP lender is finding too many reasons not to make a righteous loan.
 
Make sure the lender involved in your transaction is ordering a full appraisal. Your client should be provided with a copy of the appraisal.
 
Make sure you have proof whether or not your market is declining. Lenders have some discretion to acknowledge rising markets.  
 
Alert your buyers and sellers to be prepared for possible snags. Make sure your buyers have longer locks on their loans, and alert sellers that closings may not take place on time.