Let's Put the Praise Back In Appraiser

First they came for the real estate appraisers.

When we last checked in, the National Association of Realtors, the Federal Reserve, the Mortgage Bankers Association, and the U.S. Office of Thrift Supervision were all in agreement that the steady deflation of housing costs could be arrested if not for "faulty valuations that keep buyers from getting a loan." New York State Attorney General Andrew Cuomo had tried and failed to promote appraiser independence by strongarming various parties (most importantly the government-owned mortgage guarantors Fannie Mae and Freddie Mac) into accepting a new appraisal "code of conduct." Click here for a savage nightmare journey through the Chicago-based Appraisal Institute, the Uniform Standards of Professional Appraisal Practice, and other NSFW follies.

Now David Streitfeld in The New York Times devotes 1,800 words to explaining how the Cuomo Code has raised costs for home buyers, reduced pay for appraisers, and left mortgage lenders with a monopoly on appraiser hiring. I must warn you that the article contains the following paragraph:

Financial change is one of the most contentious issues in Washington, and efforts to fix even widely acknowledged problems seem stalled. The attempt to change the appraisal system is an example of how difficult it can be to adopt changes that are good in theory and also work in practice—while simultaneously winning support from warring interest groups.

But the article deftly explains the machinery of the disagreement, and Streitfeld does try to disentangle the two issues: that lenders now monopolize the process and that various rogues blame low appraisals for the continuing softness of the real estate market. 

I'm not sure why we need an institute in Chicago setting appraisal standards for all 50 states, and I'm sure we don't need a New York political scion enforcing de facto national standards. But if we must have a national standard for determining whether you need new shingles, why shouldn't lenders drive the process? They are the ones putting their money on the line and thus have an incentive to get an accurate value of the property. Certainly a bank has less incentive to let a bad loan go through than does a real estate agent or a loan broker, the two groups locked out by the Codex Cuomonibus.

The article highlights a U.S. Bancorp memo urging appraisers to "try and get the value we need the first time," but it doesn't go into why lenders could want to do something so foolish as attempting to nudge appraisals up. Could there be a big federal institution, even two federal institutions, guaranteeing their loans? Could banks think that their bad loans will end up getting subsidized by taxpayers and that there won't be any consequences attached to throwing money at deadbeats? Nah, that's too far-fetched.

Weirdly though, the failure of the Cuomo code is getting mixed up with the claim that appraisers are giving lowball estimates. Supposedly the lender monopoly now allows appraisal management companies to hire "inexperienced appraisers, often traveling many miles to a market they do not know well." This in turn is "scuttling legitimate deals," according to agents. But if an appraisal scuttles a legitimate deal, it's not because it was generally off target but specifically because it was too low. How does lack of experience make you more likely to err on the low side than the high side?