HAFA Harmony: Two Heads are Better Than One

Strong words have recently been exchanged in the disagreement between the National Association of Realtors (NAR) and the industry’s leading appraisal organizations over the type of valuation product that should be used in the Home Affordable Foreclosure Alternatives (HAFA) program, and more precisely, who should render that product.

Currently the guidelines for HAFA allow for broker price opinions (BPOs) to be used in the valuation stage of a short sale or deed-in-lieu.  But, was this decision the result of a thoughtful risk policy analysis that carefully considered the immediate interests of all parties and weighed the potential long term impact? Or, was it a case of: “It’s how we have always done it” in the preparation of a listing of a distressed property?

In a letter to US Department of Housing and Urban Development (HUD) secretary Shaun Donovan and US Treasury Department secretary Tim Geithner, the appraisal organizations site that “Generally speaking, real estate agents and brokers are not independent or properly trained valuation specialists. They have an inherent bias towards quick results and action which produces a fee for themselves irrespective of whether the lender/servicer/investor/property owner/borrower gets a fair return on the short sale.”

NAR president Vicki Cox Golder responded on behalf of NAR’s 1.2m members, that “while an appraisal is a very important part of a purchase money mortgage transaction, it may not be the best tool for other real estate transactions. In many cases, a more appropriate and cost efficient measure is the broker price opinion.” She goes on to say “BPO’s are completed by licensed real estate agents with a detailed knowledge and understanding of real estate pricing and local market trends developed through active participation in the listing, negotiation, and sale of properties. This perspective offers a unique viewpoint that supports sound real estate decisions with accurate estimates of the value of real estate.”

Notably, Cox Golder does not address the inherent conflict of interest created by the commission payment to that agent. By the way, wasn’t HVCC instituted to remove value pressure from commissioned parties involved in a convention lending transaction? It would seem that by removing the unbiased, third party appraiser entirely in HAFA transactions, not only is the “pressure” relieved, but the door to a sale at any cost is wide open.

The appraisal organizations seem to agree: “We believe that such conflicts can and should be mitigated by implementing basic requirements reestablishing independence and competency in the valuation process. Specifically, any arrangements to encourage short sales must require competent appraisals prepared in accordance with the Uniform Standards of Professional Appraisal Practice. Such a requirement is a minimum safeguard to enhance the fiduciary responsibility of lenders, eliminate conflicts of interests, and ensure independence and objectivity in the short sale process.”

If buying a home is the biggest financial decision most people make — in which they need the counsel of experts — why then when faced with loosing that home, arguably far more dire then acquiring it, less importance is placed on demanding impartial, accurate property valuations? Shouldn’t we as taxpayers insist that at the very least, TARP-funded programs require an objective, credible opinion of value in the transaction? In a brave new world of risk adversity and transparency, this seems like a reasonable strategy that not only applies to the transaction at hand, but impacts the stability of future transactions.

The real question is, can industry professionals come together to drive a solution in which each applies their respective expertise to contribute to the path of recovery in the real estate markets? Across these professions, we have the technology, the data and professional judgment. But do we have the desire?

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