Author: Terry Shannon, Certified Residential Real Estate Appraisers, Indianapolis, IN. Terry has been an appraiser for 22 years and actively writes for his Indy Boomer blog and on BlogCritics.org. This article has been reprinted with permission.
Out of all the cacophony caused by the current meltdown of this country's financial industry, one of the sources in the grass roots mechanics of how all this housing mess came about has been largely ignored: The appraisal.
In the past, until a few years ago, FHA maintained a list of approved appraisers who were given assignments by FHA, not the lender. While there is no sure thing, this system made it more likely that the appraiser would be impartial, that she or he would be an advocate for the property - not the lender, the buyer or seller, or even the Realtor, if one was a participant. This system allowed the appraiser to maintain an arm's length relationship with others involved in the transaction.
Under pressure from the banking/lending industry, plus the efforts in Washington to downsize government, FHA abandoned that system in favor of allowing each lender to choose its own appraiser. While HUD still requires that those performing appraisals for FHA-insured mortgage loans be approved via application and testing, the arm's length situation that formerly prevailed is no more.
Also, until a few years ago many banks and other mortgage lenders employed one or more staff appraisers, who valued properties being secured by that institution for conventional or insured conventional loans. A few lenders still maintain appraisers on staff, but the obvious appearance of a possible conflict of interest finally made the maintenance of them untenable for most lenders.
On the surface, this seemed to be a good thing - not for staff appraisers of course, but for the lending industry as a whole - in that it would promulgate that arm's length relationship. That, however, has not been the case. Pretty much across the board, lenders maintain a list of approved appraisers who are not employees, but who are, in effect, fee paid contractors. The same pressures remain; in order to remain on that approved list, each appraiser must play ball, as it were.
Of course, it has become more complicated than that. Three major factors have developed over the past 15 to 20 years:
First, the advent of so called "mortgage brokers." By and large, over time, these people became the real bottom feeders. Most of their clientele were people who could not obtain approval from any of the more mainstream lenders. If purchasing a home, many of these wannabe mortgagors came into the game often with little cash, questionable income, spotty employment records and weak credit scores. If refinancing existing loans, many brought to the table some or all of the above, plus the added problem of attempting to borrow against a property having little or no equity. More often than not, these were the people on behalf of whom mortgage brokers were attempting to obtain approval. Note that a mortgage broker makes nothing unless the loan is closed.
Herein lay the problem for the appraiser. Especially with refinances and home equity type loans, the pressure came loud and clear from brokers that a certain figure must be met in the appraisal for the deal to work. Failure to comply meant that the broker would simply make a phone call or two until he or she found an appraiser who would get the value up where it needed to be.
Second: The advent of computer generated Automated Valuation Models, or AVMs. AVMs are created via large data bases maintained by companies which gather real estate sales data, much like locally maintained multiple listing services (MLS), but on a regional or national level. These AVMs use this accumulated data to determine the value of individual properties via computer generated models. Many lenders have adopted their use in lieu of standard appraisals. In some instances, an AVM valuation may be backed up by a so called "desk top" or "drive by" appraisal performed by either appraisers or real estate brokers. Neither the desk top nor the drive by report involves an actual "feet on the ground" inspection of the property.
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Author: Brian J. Davis, RAA - 
The following letter was sent to the director of the Office of Federal Housing Enterprise Oversight (OFHEO) to comment on the proposed Home Valuation Code of Conduct (HVCC). Comments were also sent to officers at Fannie Mae and Freddie Mac.
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