A key piece of Congress's forthcoming comprehensive reforms for the home mortgage market was made public last week -- and safeguarding appraiser independence is at its core.

Rep. Paul E. Kanjorski (D-Pa.) introduced his “Escrow, Appraisal and Mortgage Servicing Improvements Act” (H.R. 3837) with the understanding that it will be rolled into House Financial Services Committee chairman Rep. Barney Frank's larger anti-predatory lending bill that is expected to be unveiled on Capitol Hill shortly.

Kanjorski, who says he is concerned about the role of inflated appraisals in the nation's mortgage mess, is proposing a series of changes that would touch every home buyer who applies for a loan. If enacted, the bill would:

• Amend the Truth-in-Lending Act to require that home buyers be given access to all appraisals performed in connection with the purchase. If a lender or broker ordered multiple appraisals-but only used the one with the higher valuation that justified the mortgage amount needed to close the sale-the buyer would be guaranteed the right to see all estimates.

“This requirement will help to ensure that consumers know if an appraiser calculated a different value than the one actually used (in) the transaction, and would help them to avoid incidents of relying on faulty appraisals that overvalue the underlying property,” according to a summary of the bill released by Kanjorski.

• Add tough new language to the federal Truth-in-Lending Act prohibiting interference by loan officers in appraisals. Specifically the bill would ban all forms of “compensation, coercion, extortion, collusion, instruction, inducement, bribing or intimidation … for the purpose of causing the appraised value assigned to the property to be based on any fact other than the independent judgment of the appraiser. “

The bill prohibits efforts to force appraisers “to hit a targeted value” and withholding payment for appraisals that did not hit the desired value. In several recent national surveys appraisers ranked interference by loan officers-especially demands that they “hit the number” needed to close the deal or forfeit payment for their services-as the greatest obstacles to their rendering objective, honest valuations.

Proposed penalties for such behavior would be severe: up to $10,000 for the first violation, and $20,000 each for subsequent violations.

• Require any lender making a high-cost subprime mortgage to obtain a full written appraisal, based on interior and exterior inspections of the property. If the house is being resold within a 180-day period after its purchase by the seller, lenders would be required to obtain and deliver a second appraisal at no cost to the home buyer “in order to protect (consumers) against property flipping scams.”

In other sections, Kanjorski's bill would impose new rules designed to prevent credit-impaired borrowers from taking out loans with no escrow accounts. According to Kanjorski, less than 25 percent of all subprime borrowers in recent years have been provided escrow accounts for tax and insurance payments-an omission that frequently has led to delinquencies and foreclosures. Escrow accounts are virtually mandatory in the prime mortgage market.

The bill would also clamp new limitations on mortgage servicers' ability to “force-place” property hazard insurance at high premiums, and would bar servicers from charging fees for responding to borrowers' written requests for information about their loan accounts.

Published: October 22, 2007

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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.