Kabir Mahadeva

Once upon a time, we lived in a perfect world where everyone knew everyone and things went smoothly with the appraisal process. Your loan officer (mortgage broker or mortgage banker) had a list of appraisers that she knew understood the market, and ordered appraisals directly. In a perfect world, loan officers and appraisers never argued about property values, and never collaborated to inflate values to commit loan fraud. Loan officers never put pressure on appraisers to increase values so they could fit a loan into the right ratios, and appraisers never deliberately ignored good comps that didn't support the property value. Since the borrower relied on the integrity of the process, they never got taken advantage of and didn't end up with property that was not worth what they paid and lenders didn't get loans on property that was worthless.

YEAH, RIGHT!

We really never lived in that world, and the Attorney General of the State of New York went after Fannie and Freddie and obtained a consent decree that later became the Home Valuation Code of Conduct (HVCC).

In sum, HVCC prevents anyone with a direct financial stake in the loan origination process from having any communication with the appraiser until the appraisal has been submitted for review. Other than sending the appraiser a sales contract, no contact is permitted until underwriting, at which point the underwriter may request further information, clarification, or corrections.

Only lenders may order appraisals now (cutting mortgage brokers off completely from the appraisal process). Mortgage bankers who work directly for lenders must rely on their lender's compliance with HVCC. Mortgage brokers are completely at the mercy of the lenders they use.

To comply, lenders have essentially two approaches depending on their size and business operations. Either they contract the appraisal ordering process out to a third party, known as an appraisal management company (AMC) or they set up a separate department within their operation that orders appraisals but that has no direct financial stake in the loan approval process.

AMCs contract with appraisers to do the work, and have been getting a reputation for not paying appraisers as much as they would otherwise earn. For example, an AMC might charge the lender $500 for an appraisal, then offer to pay the appraiser $250 in a market where most appraisers normally charge $350.

The net result is what you'd expect: many local appraisers won't take the assignments, so the AMC ends up scrounging up an appraiser from someplace else who is hungry enough to work for less. Now you have an appraiser coming in from outside the area, or who is inexperienced. You won't have to look hard for appraisal horror stories these days, and this is one of the root causes.

I'm not saying that all appraisers sent by an AMC are bad, but the likelihood of getting someone who doesn't have the best possible market knowledge for your area increases substantially with AMCs.

The only time an AMC can be useful is if one is doing a deal outside one's own local area, but this, too, is a two-edged sword. When a non-local lender is involved, such as a hometown bank with a relocating or second home buyer, then an AMC likely will be used order the appraisal, with some risk that the assigned appraiser will not know the market.

That is why realtors try to get buyers to use local lenders. However, if the local lender's company now uses an AMC, you could still have a problem.

If your local mortgage banker works for a lender that has its own appraisal ordering department, then they will have a roster of local appraisers among whom assignments get rotated. In most cases, to keep things simple, there will be two or three firms that will be used consistently. These appraisers will be carefully chosen for their expertise, and you can count on the fact that they know the local market.

So, when you next shop for a mortgage, you must ask the question, "Who is ordering the appraisal?" It could make a big difference in your outcome.

In the last several weeks, loan rates have changed between .125 and .5% in a matter of hours. The mortgage bond market has never been so volatile before, and rarely has anyone been able to predict the moves with any certainty. Now, more than ever, I advise my clients to lock.

When advising a borrower about locking or not locking, I have stopped trying to time the market, because it ends up causing heartache nearly every time. Just ask the people who floated their loans on May 28 only to see rates skyrocket the very next day because the experts called it wrong on the jobs report.

I now tell my clients, "You always save time and money if you lock. If rates go up, you're protected. If rates go down far enough prior to closing, most lenders will allow you some leeway to renegotiate the rate. If rates stay the same, you saved time and stress dealing with the market volatility."

A note about renegotiation here: most lenders will not renegotiate unless rates move about .25-.375% lower. And a successful renegotiation will probably yield a rate somewhere between the current rate and the locked rate. For example, if you lock in today at 5.5%, and rates go down to 5.125%, you may be able to renegotiate a new rate of 5.25% or 5.375%.

Also, people holding out for a .125% difference in rate often fail to realize that it makes a very small difference in a monthly payment, about $8 per month on a $100,000.00 loan.

But if people don't want to lock, I tell them, "You lose time or money 2/3 of the time when you float. If rates go up, you pay more. If rates stay the same, you've had more than a few nerve-wracking moments with today's market volatilty. You only win if rates go down, and lately that's not been happening."

Mortgage bond prices move in the opposite direction from rates, and are affected by many macroeconomic and political factors. Lately, to use a mountaineering analogy, prices drop off a cliff, but climb back up a mountain of sand. Translating this to rates, they go up fast but go down slowly.

Most people do not have the fiscal literacy to follow the mortgage bond market and the many factors that affect it. While technical trend analysis can help in short term decision making, unexpected economic or political news can tip the scales suddenly and without warning, as we have seen in the past few weeks. Even routine news, such as the size of government borrowing (i.e. upcoming Treasury auctions) can affect rates.

Government intervention in the mortgage market is still keeping rates substantially lower than they would be without the intervention. This purchasing by the Fed will eventually stop when the money runs out, and then we will see substantially higher rates down the road. The refi boom is mostly over, though some of the fence sitters hoping for the 4.5% rates are now embracing reality and may settle for a higher rate while still saving money.

In the meantime, those of us who want to proactively control our destiny need to focus on the purchase market. And in that market, if we want our borrowers to win 100% of the time, we will advise them to lock when they can.