If Congress agrees with a new policy recommendation by the National Association of Realtors, all home buyers and mortgage refinancers will have the right to review key real estate documents that they virtually never see today. For the first time, consumers will get copies of every form of property valuation the lender uses to make their mortgage. That includes the formal appraisal, plus any broker-price-opinions (BPOs), "short form" appraisals and other non-traditional collateral assessments performed in connection with the loan.

A resolution adopted in Washington by the Board of Directors of the NAR calls for the following: "Lenders be required to inform a borrower of the the methods used to value a property to determine the amount of the mortgage loan, and that borrowers should have the right to be provided with a copy of each value estimate or value opinion obtained."

The NAR intends to press Congress and federal regulators to incorporate the same full-disclosure policy into the rules that govern home purchase and mortgage transactions. Under current federal law, mortgage borrowers have the right to request a copy of the appraisal obtained by the lender in connection with the mortgage. But increasingly lenders are using non-traditional forms of property valuations--especially "automated valuation models" (AVMs) and exterior-only "drive-bys" performed by non-appraisers.

The biggest sources of mortgage money in the U.S.--Fannie Mae and Freddie Mac--are heavy users of AVMs in their electronic underwriting systems. Freddie Mac owns a private company that provides AVM-based value estimates to mortgage lenders. Fannie Mae allows some lenders to perform a minimal drive-by, exterior check on properties that Fannie has already valued using an AVM.

Many large private lenders use low-cost AVMs extensively for refinancings and home equity loans, especially when the borrower’s credit record is strong and the house is located in a metropolitan market. Some lenders use multiple collateral valuation methods as cross-checks in underwriting a single loan. They may use a BPO, an abbreviated or short-form appraisal along with an AVM--none of which are ever seen by the borrowers who ultimately pay for them.

Yet, says NAR Appraisal Committee head Frank K. Gregoire, these "different valuations frequently come up with different conclusions." One method, to cite a hypothetical case, might value a house at $150,000. A second might indicate the property is worth $155,000. A third might peg the true market value at $144,000.

"Realtors and their clients often do not fully understand the purpose of the appraisal or value estiamte," says an NAR Appraisal Committee report. "Buyer’s agents often make offers contingent upon an acceptable appraisal unaware that the mortgage lender may be relying on an alternative valuation product which is not an appraisal. Often, when an initial estimate or opinion of value does not support the sales price or the value needed to support the loan or terms quoted by the lender, additional estiamtes and opinions of value are solicited by the lender or originator.

"These are often concealed from the borrower and the agent," says the Appraisal Committee.

Part of the purpose of the new, full disclosure recommendation by the NAR is to remind home buyers and Realtors of the "safety, security and utility" of a full, traditional appraisal performed by a state-licensed or certified appraiser. A professional appraisal--far more so than an AVM--"may be useful to buyers in assuring them of the validity of the price paid for the property, securing the proper amount of (hazard) insurance, as well as in estate and tax planning," says the Appraisal Committee. "After the purchase, a (property valuation) estimate derived by an alternative method is of no use to the borrower."

Another purpose of the new NAR resolution: to eliminate the problem of marked-up appraisal charges on buyers’ settlement sheets--a $350 charge, for instance, when the lender made the loan using a $20 AVM. With full disclosure, says Gregoire, buyers "will know what they really need to know" about how their home was appraised--if indeed an appraisal was performed.

One of the most influential Democrats in the U.S. House of Representatives wants to totally reorganize the way American home buyers and refinancers see--and get to question--their mortgage closing fees.

Rep. John J. LaFalce (D-N.Y.), the ranking minority member on the House Financial Services Committee, plans to introduce sweeping mortgage reform legislation later this week. LaFalce’s "Mortgage Loan Consumer Protection Act" would revamp the HUD-1 and Good Faith Estimate (GFE) disclosures that are now standard nationwide. It would also require the reorganized HUD-1 settlement form to be delivered to all mortgage borrowers no less than two calendar days before the actual closing occurs.

An advance copy of the full text of the bill was obtained by Realty Times.

The bill would deal directly with some of the most frequent consumer complaints about the home mortgage process made to the U.S. Department of Housing and Urban Development (HUD). Tops on the list: the inadequacies of the current federally-prescribed disclosure formats for loan fees.

Under LaFalce’s bill, both the HUD-1 and GFE would be reorganized ino three clearly-segregated categories: (A) "Closing Costs" (defined as all costs necessary to obtain the loan), (B) "Prepaid Costs" ( such as prepaid interest and escrow items), and (C) "All Other Costs Paid at Closing."

LaFalce believes the current HUD-1 and GFEs are not arranged in logical order. Nor do they provide dollar totals, category by category--figures that would be helpful to borrowers analyzing their loan options, or shopping. With identical sets of settlement-cost categories on the GFE (three days after application) and the later HUD-1 (two days before closing), consumers would be able to spot and question any changes in expenses or fees.

LaFalce’s bill would also revise the federal Truth-in-Lending Act to improve the accuracy of the "Finance Charge" used in calculating the "Annual Percentage Rate" (APR) for a mortgage. It would mandate that APRs now include "all the costs that are required to obtain the loan." At present, by contrast, many expense items are excluded by statute from the APR calculations for home loans. That creates "misleading" APRs in the opinion of LaFalce--a conclusion also reached independently by HUD and the Federal Reserve Board.

LaFalce’s reform bill would attempt to deal with the problem of last-minute delivery of final HUD-1 settlement sheets to borrowers. Under current law, a home buyer "may" request to see the final HUD-1 one day prior to closing. If the lender or settlement agent fails to deliver it, however, there is little or nothing the consumer can do about it.

Most consumers don’t even know they have the right to ask for the one-day advance delivery, says LaFalce. As a result, many of them discover fees at settlement that they had never heard of before. That, in turn, forces them to either cancel the whole deal--something most buyers are reluctant to do--or go along with the last-minute charges.

The new bill would attempt to remedy this problem by requiring two-day advance delivery of the final HUD-1--cast in concrete--48 hours ahead of the settlement. It would also give HUD statutory authority to enforce this provision, with fines and other civil actions to punish non-compliance.

LaFalce’s bill is particularly significant because the congressman is the most senior member of his party involved in housing issues, and would head the powerful Financial Services Committee in the event of a Democratic takeover of the House following this Fall’s elections.

The bill is expected to be the focus of hearings--and possibly action--later in this congressional session.

Published: May 27, 2002

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.