BUREAUCRATS STRIKE AGAIN - NEW APPRAISAL REGS INCREASE COSTS AND WAIT TIMES
Once again, Fannie and Freddie have come up with a massive bureaucracy which legitimacy is suspect and has no clear path to usefulness. UAD and UCDP compliance increases costs of appraisals and how long it takes to obtain one.
Definition: This new Uniform Appraisal Dataset (UAD) specifies the new way appraisals must be formatted or prepared for review. The GSEs are also developing a Uniform Collateral Data Portal (UCDP), where the appraisers can make the submission. The UCDP went into voluntary effect June 27 and the use of it will be a requirement starting March 19, 2012.
See the glossary (at the end of this article) for meanings of the various acronyms.
The GSEs will end up with a massive database - every appraisal on every loan it guarantees or holds. It already has an appraisal for every loan file. Only now, it will be formatted according to specified fields which will allegedly give some analysts the ability to compile and format the data.
There is no doubt that increased data can be helpful in any economic endeavor. The entire credit world rests upon it. But, it also relies upon (actually it lives and dies by) the proper analysis of data and not just the raw data itself.
And this is where the rub comes in. While the GSEs (Fannie Mae, Freddie Mac) and HUD will be the repositories of all this mass of information, we have no idea how they might use it. Well, that’s not totally accurate. Here’s what we do know.
The GSE’s and HUD will use the data to “flag” a concern about an appraisal that is entered into the system. Let’s say that the data tracking reveals that values have been declining or have been flat in a particular zip code or neighborhood. The lender can still package and sell the loan to Fannie or Freddie or place it for coverage with HUD (FHA loans). But, if the loan ever defaults or shows signs of stress, the investors/insurers (GSE’s/HUD) are off the hook. They immediately tell the lender “we told you so.”
Since the GSE’s and HUD are national in scope, what’s to prevent them from interpreting data nationally? In other words, while values may be rising in one area of the country and falling in another area, the GSE’s could use the data to hedge their credit risk by flagging as many appraisals as possible – any that have the slightest oddity or nuance. In this manner, they would be tightening their reviews and acceptance standards of appraisals nationally, not adjusting them as they have always been adjusted, regionally or really locally. Remember, all real estate is Location, Location, Location! Or “Local, Local, Local!”
So now we have it. The net result is CYA. Or really, “pass-the-buck.” The buck passing is from Fannie/ Freddie/HUD back to the lenders who deliver the loans for sale.
Jon Prior has observed,
1“Lenders know that with access to this kind of data, the GSEs will have an easier time enforcing repurchase and warranty claims.”
Now, one might argue that lenders must indeed take greater responsibility for the quality of loans that they package and re-sell. And I can go along with that so long as it’s a rational requirement under contract law and reasonable purchase agreements. Lenders should not deliver loans to the GSEs that it knows to be bad. (But, one must ask “What is a bad loan?” See http://divorce-mortgage.blogspot.com/2011/08/is-there-such-thing-as-bad-loan.html).
The fact is, there are already severe penalties to lenders who fraudulently deliver faulty loans. It’s called . . . well, I already gave it away, “fraud.” There is simply no incentive (any more than for it to commit any number of criminal acts) for a lender to do this.
But, this is not what is happening. The GSE’s are increasingly becoming less of an investor and more of a temporary holding place for mortgages so long as they do not show loss. That’s NOT an investor. If it is, I think I’d like to be an investor under those terms. So long as my “investments” show a profit, I keep them. If they show a loss, I make whoever sold them to me buy them back. You can call this a lot of things but it’s not “investing.”
Here’s what UAD and UCDP will actually feature:
1. Increased Costs
Besides the extra time that an appraiser must devote to these new forms (some estimate about 2 hours per appraisal) and the sheer expense of having to do this (some say that in a free market, they would have to raise their price by about 10%), there are numerous other costs not visible to the casual inquirer.
For one, nearly all appraisals are generated through proprietary software and produce a copy in .pdf format. The cost to “extract” the necessary information from a .pdf formatted appraisal will run anywhere from a minimum of $3.50 per try to $12 per page (average number of pages = 17). But, not so fast. This still does not account for the inevitable errors in extraction which must be detected by painstaking review of the text of the appraisal. Now, we have more time and effort compounding upon initial outlays.
Of course, the increased “cost of doing business” manifests with the regularity of a fiber-rich diet these days. There is the time needed in the learning curve. Not only must appraisers learn new input protocols, mortgage professionals will either retreat into a shrug-of-the-shoulders form of denial or will engage an even steeper learning curve in order to simply learn how to read and interpret an appraisal. Mind you, this new education enhances the appraiser’s or mortgage professional’s skills one whit. It merely teaches them how to navigate through a bureaucratic morass.
I predict that by 2013 we will see an average, standard appraisal cost above $500 (from the previous average of about $350 in 2008).
2. Extra Time to Complete Appraisals
Here’s a peek-a-boo into my world. I received this notice from our bank’s appraisal coordinator on how long appraisal orders will now take.
“We have received notifications from RELS (Wells Fargo), VEROS (GMAC), and Streetlinks that turn times are a minimum of 7 days for a "typical" conforming loan and 10 days on jumbos and properties with special characteristics or locations, and our appraisers are right in line with these turn times as well. We expect this to continue and possibly increase a small bit over the next few weeks maybe month.”
Whereas we have been used to 3-5 day turn-times, we have immediately doubled that turn-time to from 7-10 days. This means that the increased time table has nothing to do with increased volume. It has nothing to do with a decreased work force. It is a response to one thing only – the new UAD compliance requirements.
These turn times will adjust and vary, even from lender to lender. But, there is no denying that the compliance requirements have increased the relative cost and turn-times for obtaining appraisals.
Enter the law of unintended consequences? It will also take underwriters longer to underwrite the loan file. Among other new duties, the underwriter will take extra time to review the appraisal with all its new acronyms, confusing terms and fields; then, send it to the investor for their data-base review, receive feedback (probably negative), run it by risk-management (which is a new internal review/approval process that each lender will need to employ to give a “thumbs up” or a “thumbs down” on whether or not they proceed with the loan in spite of negative feedback from the UCDP). Perhaps #3 should be simply “See #1 – More Costs.” There is no possible way for these extra time-thieves to do anything other than increase the cost of doing business.
3. Harder to comprehend
The new appraisal format will be harder for the layman (which includes nearly all borrowers and most mortgage professionals) to understand; mainly, because the appraiser will be allowed less opportunity for simple, written input or observation and the “fields” will be filled with incomprehensible acronyms. [This was allegedly done so that the actual form would not have to be expanded but more data could fit into the existing number of pages.] We won’t know how the heck to read the dang thing without a glossary and a RosettaStone course in Appraisal-ease, US Government Dialect to be precise.
In my view, UAD and UCDP are installments #N and #N+1 in a series of attempts to destroy the housing market.
Rather than tell you what I think you should do, let me tell you what The Mortgage Institute is doing to mitigate loss to consumers.
First of all, we are paying extra attention to the timing of an appraisal order. For example, in a divorce wherein one party is financing a buyout (and the property’s value is of critical importance), the appraisal must be ordered soon enough but not too soon. We are stepping up our request for information about the expected finalization of the divorce. I realize that this is a “roll of the eyes” moment for attorneys when a 3rd party (or even the client) wants to know when their divorce will finally be final. But, within reason, we will do our best to keep our fingers on the pulse of this timing so that we might perform on our approval and assessment letters.
Secondly, we are coaching our applicants to converse with the appraiser at the time of inspection. The more information that a home owner can provide the appraiser, especially when justifying a stronger value, the better (provided it is positive information).
Thirdly, we are managing expectations. This applies to our customers who might expect a certain value to be reported on their appraisal to our first suggested “Equity Determination Worksheet” which includes potential sales scenarios wherein reductions to “net funds to seller” are seriously possible. This also has the overall effect of protecting, as much as possible, the home owner from future loss in equity because they overpaid their spouse for spouse’s interest in the property.
The best advice I have for you is to refer your clients to me as early as possible. It takes longer to develop the legitimate report of value opinion. Yet, this information still needs to be delivered to you within a sliver of time during the settlement negotiations. More lead time will benefit everyone.
1 http://www.housingwire.com/2011/09/01/new-gse-appraisal-database-to-tighten-scrutiny-on-mortgage-lenders?utm_source=feedburner&utm_medium=twitter&utm_campaign=Feed%3A+housingwire%2FuOVI+%28HousingWire%29; accessed 9/6/11
Freddie Mac’s propaganda on it:http://www.freddiemac.com/sell/secmktg/docs/uniform_appraisal_dataset_879.pdf
UAD - Uniform Appraisal Dataset
UCDP - Uniform Collateral Data Portal
GSE – Government Sponsored Entity (like Fannie Mae and Freddie Mac that began as a government agency, became privatized yet remain effectively backed by government or more accurately, tax payers). As such, they are sensitive to government-mandates, congressional law and agency regulations. They also work more closely with government to develop standards like
HVCC – Home Value Code of Conduct (beginning May 1, 2009) which redefined how appraisals must be ordered in a finance transaction, effectively increasing the cost of appraisals, reducing interaction between the originator and appraiser and eliminating certain communications altogether. All of this “consumer protection,” it must be noted, has not resulted in any reduction of appraisal fraud or any measurable benefit to the home buyer.
MAD – One’s condition upon attempting to digest yet one more series of regulations on the mortgage industry.