Fannie Mae and Freddie Mac eliminate broker-ordered appraisals for eligible loans

Housing Wire has all the coverage of the landmark change in lending guidelines as Fannie and Freddie both eliminated broker-ordered appraisals for loans purchased by the GSEs. We talked about the problem with broker-ordered appraisals in the last mortgage minute; but let’s take a look at the language of the agreement which was reached as part of a settlement with the New York state attorney general Andrew Cuomo.

From Housing Wire on Fannie and Freddie no longer accepting broker-ordered appraisals:

The agreement, which hit a snag last week, was finalized Monday morning and will eliminate broker-ordered appraisals and reduce the use of appraisals prepared in-house or through captive appraisal management companies in underwriting mortgages.

?With this agreement, Fannie Mae and Freddie Mac have become leaders in transforming the mortgage industry,? said Cuomo. ?Now national banks have a clear choice: immediately adopt the new code and clean up appraisal fraud in the mortgage industry or stop doing business with Fannie Mae and Freddie Mac ? it is that simple.?

Brokers singled out – get used to it

We’ve talked for months about how brokers are going to get the short-end of the stick when the powers-that-be hand down the changes as a result of the mortgage meltdown. Our argument at the time (and we hold it today) was that these regulations and licensing changes would pile up to result in a competitive advantage for the big banks which in turn would drive the extinction of the mortgage broker. The elimination of broker-ordered appraisals is just another step in the direction of driving mortgage brokers (or at least a large majority) out of the lending picture.

Note that Fannie and Freddie are not “eliminating” in-house ordered appraisals, just the broker-ordered appraisals. Big banks that order appraisals will continue to be eligible for Fannie and Freddie even with the conflict of interest inherent with in-house appraisal orders.

Another advantage for retail loan officers

Put another arrow in the quiver of the retail loan officer. On ultra-competitive conforming loans retail agents will be able to “guarantee” a value for new home loans by checking with their in-house appraiser prior to ordering the report. Brokers, who will have to rely on a third-party appraisal will have to convince would-be borrowers to shell out $350 or more on a crap-shoot with nothing but “seasoned” title comps through a review of public records.

Brokers will have a very difficult time competing against the service provided by a retail loan officer who is not limited by the need to use an independent appraiser.

How brokers can compete

Brokers will need to get savvy about appraised value and find ways to provide accurate estimates of value without being able to call their “go to guy” who can be counted on to bring in a property “at value.” Brokers who are smart will use automated valuation software that is sanctioned or used by the target end investor. They’ll know that those in-house appraisers for the retail team will be guided heavily by the AVM as they deal with volume.

Brokers that invest in AVMs will be able to provide accurate estimates PRIOR to ordering the appraisal and give their borrowers a confident estimate that will be fairly close to what any retail loan officer could provide.

Good for the Economy

This is a good move. Conflict of interest appraisals have turned this industry in to a mockery as property values have been laughably inflated to get financing put in place. However, the implementation of the legislation is typically pro big guy and anti-competitive to the little guy. In-house appraisals should be eliminated with broker-ordered appraisals – not “curtailed” (a dubious descriptor if ever there was one).

Brokers Hosed

The brokers are the whipping boys. Not that there isn’t some major aspect of cosmic karma evening up the score a bit; but for the good brokers who have run a good business and have made smart business moves to survive it’s a bitter pill to swallow. What is your reward for soldiering through the toughest downturn seen in decades? More regulatory and competitive disadvantages to suck your capitial, time and resources. Seems worth it to keep on keeping on, doesn’t it? The best part – this is only the beginning!