Ken Harney Shines a Light on AMC Appraisal Fee Splits

Along with all the appraisal related mandates in the Dodd-Frank Act is the primary reason for the legislation; creation of the Consumer Financial Protection Bureau.


The CFPB and the individual recent appointed to head the agency have been in the news quite a bit recently. Without offering any opinion about the agency, the appointments, and the politics, it is important to be aware of the CFPB's massive rule making authority. 


This week, Ken Harney writes about the CFPB reviewing ways to bring more clarity and better disclosure to fees associated with Real Estate Transactions. The focus of the story is the failure to inform borrowers of the fact a significant part of the fee may be paid to an affiliate or subsidiary of the lender. The CFPB is considering rules to require disclosure of the portion of the appraisal fee retained by Appraisal Management Companies.

Ken writes:

One of the fees being scrutinized might surprise you: appraisal charges. Why do they need clarifying? Doesn’t just about everybody who applies for a mortgage, whether it’s to buy a house or refinance, have to pay $450 to $600 — sometimes more — to find out what the property is worth?

and

Say you’re charged $550. There is no hint that the appraiser may be getting $250, with the rest going to the management company and the lender. The CFPB is considering whether to shed light on this by mandating two disclosures: what the appraiser is paid and what the management company is taking.

Frank Gregoire, a past chairman of the Florida Real Estate Appraisal Board, which oversees and regulates the industry in that state, says that while appraiser independence is important, banks and their affiliated management firms are raising the costs of appraisals to consumers without improving services.

Defenders of management firms, such as Donald E. Kelly, executive director of the Real Estate Valuation Advocacy Association, strongly disagree. Kelly says management firms perform the “back office” functions — including reviews and quality control — “that in the past were done by lender staff and employees.” In other words, they earn the money they get. And there’s no pressing need for consumers to see additional disclosures. They just need to know the bottom line.

Read the article HERE.
On the floor, next to my desk, is a stack of appraisal reports. Borrowers, lenders, real estate agents, and other appraisers sent them my way as examples of shoddy work and lack of quality control by AMCs. How do appraisal reports pass through a quality control check when the appraiser cites ZILLOW or TRULIA as the source of his date of sale, time, or market conditions adjustment, and that it is based on data from a zip code, not a market area? >
Wondering.

Ken Harney Weighs in on the FRB Interim Final Rule (TILA Section of Dodd-Frank)

If there is one national columnist with his ear close to the ground and regularly checking the pulse of the real estate and real estate appraisal professions, it's Ken Harney, of the Washington Post. In his latest column, Ken examines the Interim Final Rule released by the Board of Governors of the Federal Reserve System. The rule provides the implementation language for Appraiser Independence standards and Customary and Reasonable Fee requirements included in the Dodd-Frank Act amendments to the Truth in Lending Act (TILA).

Ken interviews a few appraisers, including Pat Turner (VA), Leslie Sellers (President of the Appraisal Institute) and yours truly. Although none of us talked with each other prior to the interview, it looks like we share the same concerns. Consumers, borrowers, and real estate agents should be concerned as well.

So what sort of changes are you likely to see? Experienced appraisers say probably not enough, at least in the proposal's current form.

"It's just a rehash of the [code]," says Pat Turner, a Richmond area appraiser and critic of the Fannie-Freddie rules.

Leslie Sellers, president of the 26,000-member Appraisal Institute, a professional group based in Chicago, says the Fed's proposals include important core principles of freedom from coercion and outside influence on valuations but don't lessen the current system's tilt toward cut-rate fees and short turnaround times over appraisal quality.

Frank Gregoire, past chairman of the Florida Real Estate Appraisal Board and incoming chairman of the National Association of Realtors' appraisal committee, says that "until the federal banking agencies decide to enforce some of the words they're putting on paper, the public can expect business as usual."

There's more, so please CLICK HERE and read the whole thing.

I've got more to say, but it's Friday night, and my wife, Fran, and I are headed out for some seafood ;-)

More on Fannie Mae Update to Appraisal Policies

Just a little over a week ago, Appraiser Active POSTED about Fannie Mae updating their Selling Guide and Appraisal Policies. We linked to the June 30, 2010 Fannie Mae Announcement and offered a few comments about items of interest.

Three items on that list are worth more discussion:

• Lender changes to the appraised value and guidance on addressing appraisal deficiencies
• Appraiser selection criteria
• Market Conditions Addendum to the Appraisal Report (Form 1004MC)

In this week's The Nation's Housing column, Ken Harney lets consumers know about some of the shenanigans going on behind the scenes while borrowers are gnawing their fingernails, waiting for their mortgage loan to be underwritten and approved.

Picture this: You've signed a contract to sell your house. Your buyers say they have nailed down the right mortgage. All is well. But then the appraisal comes in low -- $25,000 to $50,000 under what was agreed upon in the contract.

The lender insists on cutting the mortgage amount to reflect the lower appraised value. You refuse to negotiate anywhere near the price indicated by the appraisal, and suddenly -- poof! The whole deal is off. You, the buyers and the agents involved are all left sputtering over the appraisal that scuttled the transaction.
This scenario is not unusual in many markets across the country, say home builders, brokers and appraisers.

Here's one little-publicized reason why: Lenders unilaterally may be lowering the numbers on the appraisals submitted to them, in order to avoid accusations that the loans they sell to giant investors Fannie Mae or Freddie Mac are based on inflated appraisals -- even slightly inflated.

Fannie Mae, in their Announcement, links to language in the Selling Guide to make it clear that such actions by the lender or underwriter are NOT PERMITTED.

Changes to the Appraised Value

The lender is responsible for ensuring that appraisal reports are complete and that any changes to the report are made by the appraiser who originally completed the report. If the lender has concerns with any aspect of the appraisal that result in questions about the reliability of the opinion of market value, the lender must attempt to resolve its concerns with the appraiser who originally prepared the report. If the lender is unable to resolve its concerns with the appraiser, the lender must obtain a replacement report prior to making a final underwriting decision on the loan. Any request for a change in the opinion of market value must be based on material and substantive issues and must not be made solely on the basis that the opinion of market value as indicated in the appraisal report does not support the proposed loan amount. For information concerning the process lenders must follow to address a change of the opinion of market value, see Guidance on Addressing Appraisal Deficiencies, below.

Lenders must pay particular attention and institute extra due diligence for those loans in which the appraised value is believed to be excessive or where the value of the property has experienced significant appreciation in a short time period since the prior sale. Fannie Mae believes that one of the best ways lenders can reduce the risk associated with excessive values and/or rapid appreciation is by receiving accurate appraisals from knowledgeable, experienced appraisers.

That guidance certainly differs from reports we've heard from the field and relayed to Ken:

In other situations, we have seen out of state reviewers and "Chief Appraisers" for certain lenders contact appraisers with their concerns about value, suggest alternative comparable sales and "more credible" value estimates. These comments are based on first hand, personal experience.

Typically, Gregoire says, the lender orders a low-cost electronic valuation -- based on publicly available statistical data, with no onsite inspections -- to review the accuracy of what was submitted by the appraiser. If there's a discrepancy between what the computer says and what the appraiser reports, the lender's underwriters sometimes simply cut the number -- even if this means knocking the real estate transaction off track. Or they demand an immediate explanation from the appraiser.

The fact that Fannie decided to specifically address this in the Selling Guide seems to indicate the practice of arbitrarily changing the opinion of value must be fairly widespread.

Ken also addresses the Fannie guidance on Appraiser Selection Criteria:

Fannie also makes it clear that the use of an Appraisal Management Company is not required to comply with the HVCC.

Fannie's new guidelines also attempt to clarify other issues that have arisen during the past year, including the widespread use of inexperienced appraisers who are unfamiliar with local market conditions. Real estate agents, builders and mortgage brokers have complained to Congress that rules adopted by Fannie and Freddie last year encouraged lenders to use "appraisal management" companies to value properties.


Those companies, in turn, often pay appraisers deeply discounted fees -- half off traditional prevailing rates in some cases -- and require them to complete their assignments far faster than normal turnaround times. Critics have said that low-budget appraisers working for management companies frequently travel long distances to do their valuations, have minimal access to local data, and make excessive use of foreclosures and short sales as comparables


Fannie's letter attempts to clarify its "appraiser selection" standards. Top on the list: Appraisers should be experienced, "have the requisite knowledge" about local market conditions and have access to all local data sources. Fannie also emphasized that the demonstrated experience of an appraiser should always trump fees or turnaround times -- a clear swipe at management companies that bid out their work on the latter two criteria.

Specific guidance is in the Selling Guide, page 476

• neither the Home Valuation Code of Conduct (HVCC) nor Fannie Mae requires the use of a third-party vendor;
• lenders are ultimately responsible for representations and warranties related to the value, condition, and marketability of the subject property; and
• lenders must hold the AMC responsible for complying with Fannie Mae’s requirements.

The clarification about the lender's use of AMCs is welcome. More than likely, many lenders believed the use of an appraisal broker absolved them of any responsibility for the appraisal report, or assuring the qualifications of the appraiser. It's nice to see Fannie actually mention "qualified" in reference to appraisers working for AMCs.

There is still a BIG question about the use of Review Appraisers. This section of the Selling Guide requires an inspection of the subject property by the appraiser signing the report. The section of the Selling Guide that addresses lender/underwriter changes to value opinions outlines the procedures the lender must follow if they do not have faith in the original appraisal. One of those is an Appraisal Review.

Although Fannie has not spelled it out, in reading all the sections together, I believe the Review Appraiser would have to meet the same, "USPAP Plus", Competency Standard the new language makes clear.

That leaves the Fannie Mae 1004MC. There's plenty to discuss about the "new" guidance. My concern is that it will result in a misleading report, or misleading information about the condition of the current market. It's worth a post of its own.

Stay tuned.

UPDATE - Thanks to Jonathan Miller (MATRIX) for the mention and link!