As controversy rages over whether foreclosure documents were pushed through the system by lenders' robo-signers, the government is moving ahead with cleaning up another part of the home lending industry – the independence of home appraisers.
The Fed this week issued an interim rule prohibiting appraisers from holding a financial interest in a property they evaluate. It also requires anyone who knows about appraiser misconduct to report it to the state agency that licenses appraisers.
The rule was mandated by the Dodd-Frank law to replace the Home Valuation Code of Conduct created by Fannie Mae and Freddie Mac to ensure appraisers weren’t pressured by lenders to overstate home values in loans they bought. The Fed’s new 182-page rule, however, has a broader reach and also applies to home-equity lines of credit and to anyone who performs valuation services, not just a licensed appraiser.
Separately, the Government Accountability Office, which acts as the investigative arm of Congress, issued a status update on its year-long study of home appraiser independence. The Dodd-Frank law ordered the GAO to take a close look at “the effectiveness and impact” of how lenders choose a home appraiser, the ways appraisers value a property, and the use of the Home Valuation Code of Conduct..
Lenders can hire independent appraisers, use an in-house appraiser, or work with an appraisal management company, which often subcontracts with independent appraisers.
Once hired, a home appraiser can use one or a combination of several approaches to estimate a property’s value. The cost approach calculates a value based on the cost to replace or reproduce a property and its improvements, minus depreciation. An income approach estimates the value by what an investor would pay for a property. And the comparable sales technique analyzes prices recently paid for comparable properties in the same neighborhood.
Among other things, the GAO said it would look at how the Home Valuation Code of Conduct had affected valuation costs and disclosures to consumers.