Posts Tagged ‘Realtors’

Note: this is a long post.  It is fairly involved.  But the issues addressed are complex and critical to understand.  If you take the time to read all the way, you’ll be glad you did. Appraisers, loan officers, and Realtors, this especially applies.

On May 1, 2009, Fannie Mae and Freddie Mac agreed to abide by the Home Valuation Code of Conduct (HVCC), which regulated how appraisals could be ordered and performed.  Without going into a detailed analysis of the HVCC and how it spawned (that’s here, if you really want it), let’s just say that the results have been fairly negative for the ground troops in the mortgage/real-estate market.  This is hardly surprising, as there has never been a government regulation that I can think of that has made things better, but still.  Annoying.  Worse than annoying.

Appraisers have hated it, because it’s nearly universal that they are being asked to do more work for less money now.  Realtors hate it, because their purchases don’t fly when appraisals come in lower than the sale price.  Mortgage guys hate that, and also hate that low appraisals kill their refinance deals.  Borrowers hate it because their loans cost more and take longer.  So the experiment has not been a resounding success, has it?

The reaction, being as negative as it is, has caused Congress to act, putting a bill together to impose an 18-month moratorium on HVCC.  Unfortunately for the howling pack, this bill was sponsored by two of the most anonymous members of Congress, and has garnered only 19 co-sponsors (remember, there are 435 Congresspeople).  It is not being supported by the Appraisal Institute.  It has small to zero chance of passage.  The Federal Housing Finance Administration (FHFA) says everything is hunky-dory (no, really, see here).  And I have information out of Washington that the FHA is considering imposing its own version of HVCC, which would effectively make HVCC the national appraisal code for all mortgages.  Depressed yet?

Don’t be.  The HVCC may not be going anywhere, but the good news is that the HVCC is not the problem, at least, it isn’t the problem all by itself.  There are two things that are worse than the HVCC, one of which will fix itself, one of which has to be fixed in the HVCC, neither of which requires an act of Congress.

The first problem is that the market stinks.  Look, there is a huge overabundance of housing stock.  If no houses were built and no more went up for sale than what we have now, it would take nearly a year for us to sell all the ones that are on the market now.  Think that depresses prices?  Estimates are that up to HALF of the mortgages in the US are at risk of default.  Foreclosures are breaking records – one out of 84 houses in the US received a foreclosure notice in the first half of 2009.  More are on the way.  That’s causing huge pressure on the market, and not in a good direction.  When house prices fall like this, it blows up a lot of deals.  A good appraisal just tells you where things are, it doesn’t guarantee you’re going to like the feng shui.  This is NOT the fault of the HVCC.  And there’s nothing you can do about it.  But it will, eventually, go away as the market stabilizes.

The second problem, bad appraisals, long lead time, appraisers being shorted money, all these problems are also being blamed on HVCC.  But these are also not the fault of the HVCC, at least not directly.  How do I know this?  I know it because although like everyone else I am subject to HVCC regulation, I don’t have any of these problems.

It’s a miracle!  It’s like winning the lottery!  Nah.  It’s like any other part of this business.  My title companies do remote closes, even closes more than an hour’s drive away, for no extra charge.  Why?  Because they want my business, and that’s what it takes to get it.  Similarly, my appraisal management company (AMC) gets my orders done fast, and well, and pays their appraisers full fees, because that’s what it takes to get my business.  See, with title companies, I have a choice, so I get what I want.  The same is true with my AMC.

But here’s where the HVCC is screwing things up.  To show you how, let’s go back six months.  Were you happy with your appraiser six months ago?  Why is that?  Probably because he was honest, fast, and knowledgeable.  Did he like you?  Very probably.  Why?  Because you didn’t hassle him and he got paid on time.  The two of you were able to come to this amicable arrangement because each of you were free to choose to go somewhere else if you weren’t happy.  It was, in fact, a violation of the law for a lender to dictate the use of a particular appraiser on a transaction.  Choice and competition always lead to efficiency and improved performance.

Fast forward to the present, and what do you have?  Well, it depends.  If you’re a lender, you probably have an AMC that is a subsidiary of your company, and which you have to use.  If you’re a broker, each of your lenders has an AMC that it requires you use.  These AMCs are contractually bound to the lenders they serve, and their bread is buttered by the lender.  They do what the lender wants.  You, as a loan officer, have no choice but to use them.  If they stink – and ladies and gentlemen, the stench is overwhelming much of the time – it doesn’t matter.  They don’t care and they don’t have to, because you have no choice.  You have to use them.

It’s even worse for the appraisers, who get offered a pittance – 40% less than normal – for the same work.  If they don’t take it, they don’t get more work.  They have no choice, either.  What this means is that the good appraisers just quit.  They’re worth more than they’re being offered, and they know it.  To be true to their standards, they refuse the work.  So new and/or desperate appraisers take the jobs, and they take as many as they can, because they have to do more to make the same money.  Besides, the lender benefits directly when an appraisal is low – it reduces their risk.  Voila!  Lower appraisals, lower quality, longer lead times.  Sound familiar?

One group proves that this isn’t how things have to be – correspondent lenders.  Free to use whichever AMC does the best job, correspondents (my brokerage is one) are free to select AMCs that meet the best standards and do the best work.  Magically, most of the HVCC problems evaporate.  I can testify to this first hand.  In fact, I use my AMC even for FHA loans, even though I don’t have to, because they make my life better.

So while I believe that HVCC is here to stay, and I think that all attempts to get it overturned are doomed to failure, there is a change to the status quo I think is not only necessary but relatively simple to get implemented.  What is needed is a return to the situation that existed before the HVCC went into force, when it was black-letter illegal for a lender to require the use of a specific appraiser.  No lender can demand a specific title company, so why a specific AMC?  Is that not an obvious conflict of interest?  ESPECIALLY when the AMC is owned by the lender itself?!?

All it takes is a regulation that no lender can mandate the use of a specific AMC.  Instantly, we have competition and choice.  My AMC, 1st Choice AMS, which plays fair and does mind-blowing customer service, can take on the First Americans of the world and beat them.  You, loan officer, your problems go away (except for the market, sorry, can’t fix everything).  You, appraiser, can get paid to be good again.  The AMC streamlines the process for everyone.  And presto, the HVCC stops being an obstacle to good business.

The small change proposed above can be handled by administrative rule, not congressional action, can be implemented in a weekend, preserves the integrity of the appraisal process and solves the market problems the current system exacerbates.  Instead of this pointless tilting at windmills in Congress, why not get behind a proposal that has a chance to work, and fixes not only our problems but the industry’s as well?

Look, it’s not that they don’t mean well. The courts really are trying. But the fact is that most judges do not understand how private property rights protect consumers. They consistently err on the side of “access for consumers” to data or markets, instead of protecting the incentives for providers to create that data or market in the first place.

To what do I refer? Glad you asked. Recently, the National Association of Realtors settled an antitrust suit with the Justice Department, agreeing to allow the government to strip its property rights in the name of “protecting the consumer”. Seems that the multiple listing services the Realtors maintain were, in some markets, restricting access by unaffiliated Realtors to MLS data. The access is now to be granted to anyone, decision effective end of the summer.

Who created the data? The Realtors did. Who has the right to sell the data to whomever he pleases? No one, apparently. Is this going to result in lower commissions for Realtors? Possibly. Is this going to result in lower fees paid by buyers and sellers? Not likely.

Why? Here’s the lesson: markets and repositories of data and other goods and services are created by Party A for one reason – to make a profit. The more that profit is protected, the more reason a party has to believe that his rights to the good or service will be protected by law, the more likely he is to create value by providing additional goods and services, and the more likely others are to start competitive enterprises to get some of the pie for themselves. If, however, there is no expectation that profit can be maintained or maximized, because by government whim property rights can be voided or involuntarily transferred, then creation will lessen and eventually disappear.

An example: you decide to open a lemonade stand. You buy the lemons, squeeze them, sugar the juice, get cups and ice and a cash box, and a small stand. You set up shop, and business is brisk. There are, however, customers that cannot come to your stand because they live too far away. You look at the profit in selling to them and decide that it doesn’t make sense to service those people, because the transportation costs are too high. Along comes the government and says, no, not only do you have to service these people, you have to service them at the same price you charge everyone else. This will, the government says, lower the cost of the service for these people. Otherwise it isn’t fair.

What do you do? Well, there are three options. One, you can continue to charge the same price and just lose money (in which case you are a hobbyist or a philanthropist, but not a businessman) or two, you can go out of business, or three, you can raise your prices for everyone, so that you can make the profit you were making before. Since option one is only available to a small number of people, the vast majority of us will choose options 2 or 3, which raises the cost of the lemonade for everyone (in the case of option 2, it raises it to infinity, since the lemonade isn’t available at all at any price), exactly the opposite of what the government intended.

Government, and especially the court system, seems to view property rights as outmoded, as being unworthy of protection (except, of course, for movies and music), and even as restrictions on trade and competition. In effect, with most antitrust suits, the government is telling us that if it weren’t for these pesky property rights, our costs would be lower and competition would flourish. In actuality, the reverse is true. As the kite falls when the “restricting” string is cut, so competition and choice disappear when the government fails to protect the rights of producers to the thing they produce. The string actually supports the kite, giving it resistance against which to rise with the wind. Property rights allow producers to have confidence that their work will be valuable. It is property rights that create competition, and the stronger those rights are, the better and more robust the competition will be, and the better the choice and the cost for the consumer.

This ruling, like so many, many others, ignores basic economics and property rights. It’s bad for practically everyone.

Shocker.

P.S. For a brilliant exposition of this, see anything written by Hernando DeSoto, or try this book.