March 7, 2019

This article is the second on simple changes in financial regulation that can be implemented by executive action. They do not require funding by the Government or the concurrence of Congress, yet would pay huge dividends to homebuyers. The change discussed last week, requiring lenders to pay for the title insurance that protects them, would sharply reduce title insurance costs to borrowers. The change proposed here, that borrowers acquire ownership of the appraisal they pay for, will allow them to shop multiple lenders effectively. Where the president would implement the first proposal through the Federal Housing Finance Agency, he would implement this one through the Consumer Financial Protection Bureau.

Mortgage Shopping Under The Current Appraisal System

Lenders ordinarily will not commit to (“lock”) the price of a mortgage until the property has been appraised. If a borrower tries to shop multiple lenders, each lender will order its own appraisal, billing the borrower for it, receiving the appraisal from the appraisal company at different times.  Meanwhile, mortgage prices are being reset every day with changes in the market. Hence, even if the shopper was willing to pay for multiple appraisals, it would be difficult to obtain locked price quotes from different lenders at the same point in time.

The difficulty arises because appraisals are issued in the name of  the lender who orders it, which effectively makes it the property of that lender. That never made any sense. Since the prospective borrower pays for the appraisal, it should belong to the   borrower, which would make it useable with any number of lenders. That would generate major benefits to borrowers.

The Benefits

Effective Shopping: With a portable appraisal, a mortgage shopper could begin the process by getting an appraisal, then applying to several lenders, with the appraisal included with each application. The borrower would invite each lender to make a firm offer at a specified date and time. The borrower would accept one of the offers that day-- offers will lapse at the close of business -- and pay the lock fee of the selected lender.   

A lock fee will be necessary to discourage shoppers from walking away from deals when interest rates decline, and starting the process again with another group of lenders. But lock fees would be subject to the same competitive pressures as the other components of the mortgage price.

Reduced Processing Time: In the present system, appraisals are not ordered until the borrower has selected and made application to a lender, which increases processing time by the period required to obtain the appraisal -- ordinarily about 2 weeks but longer when appraisers are in short supply. This delay increases the cost to borrowers of locking the price. If borrowers could order appraisals before applying for a loan, this cost would be eliminated.  

Avoid Costs of Aborted Applications: Under existing arrangements, loan applicants are denied the opportunity to see the appraisal before they apply for a mortgage. The result is that sometimes consumers incur needless costs when the property value turns out to be insufficient. If borrowers could order appraisals before applying for a loan, they could avoid the costs incurred when a low appraised value aborts a transaction. 

Will the Integrity of Appraisals Suffer?

An objection to this proposal is that the integrity of appraisals will be eroded as appraisal management companies compete for consumer clients by inflating values. But lenders will not be obliged to accept appraisals from companies they don’t respect, and in competing for consumer clients, appraisal firms will emphasize the acceptability of their appraisals to lenders.

Under the existing system, many appraisals come from companies in which the lender ordering the appraisal has a financial interest. That arrangement does not encourage appraisal integrity. With appraisals becoming the property of borrowers, those arrangements will die out.