“Confusion About Appraisal Fees?”
All of this confusion started, when our government got it’s finger in the appraisal business. This is a result of our government intention to regulate every facet of our lives.
HVCC was first created, as a result of a couple of bad apples in the industry. If you recall, it was Countrywide and Washington Mutual owning their own appraisal companies and literally doing their own appraisal, which was certainly self- serving.
Well, this was correctly stopped, but that wasn’t good enough, our government decided that all banks, mortgage companies and appraisers were crooks and they all had to be reined in. What a farce. This has put a lot of very good and honest appraisers out of business. Most of all instead of a consumer paying $300 for an appraisal, the fee went to $450 overnight. How is the service now?
This doesn’t seem to be enough chaos, now let’s incorporate the new and improved version of HVCC and incorporate the supervision and more regulations into Dodd-Frank. Does anyone thing we need any more regulations or confusion. I have a simple solution. Repeal Dodd-Frank and this regulation nightmare.
Fed's Appraisal-Fee Revamp Befuddles Mortgage Industry
By: Kate Berry
A Federal Reserve rule has sown widespread confusion about the way lenders pay housing appraisers, creating turmoil in an industry already burdened by expensive middlemen, falling home prices and diminished ranks.
A provision of the Dodd-Frank Act requires that lenders pay appraisers "customary and reasonable" fees, to ensure that banks and mortgage companies seek the most competent appraisers rather than the cheapest ones. But a Federal Reserve interim final rule that went into effect a year ago created two ways to satisfy the fee requirement that few in the industry agree on, and which many claim are contradictory.
Lenders and appraisers complain that regulators have not defined exactly what they mean by "customary and reasonable," leaving the complicated rule open to differing interpretations and adding confusion to an already-volatile appraisal landscape.
"It's muddied the waters," says Bill Waltenbaugh, chief appraiser at Kirchmeyer & Associates, a Buffalo, N.Y., appraisal management firm. "Everybody's interpretation is different. The lenders don't agree, the appraisers don't agree and the appraisal management companies don't agree."
The fee issue raises a host of concerns for banks, which are required to oversee the third-party appraisal management companies that have wedged themselves in between mortgage lenders and the people conducting appraisals of the properties they lend against.
Banks now must spend more time and money ensuring those third-parties' compliance with regulations; some lenders, including US Bancorp (USB), have reacted by bringing most of their appraisals in-house. The fee confusion also affects lenders' all-important property valuations, since cheaper appraisals do not necessarily provide the most accurate assessments of how much the homes they lend against are worth.
The overall confusion is a direct result of the Home Valuation Code of Conduct that took effect in 2009 and was folded into Dodd-Frank. The regulatory agreement prevented banks' staff and mortgage brokers from directly overseeing the appraisal process, in an effort to avoid conflicts of interest for loan officers or other salespeople who would have an interest in inflating real estate values. The code had the indirect result of encouraging banks to engage third-party appraisal management companies, in an effort to keep the appraisal process independent from salespeople.
These so-called AMCs, some of which are owned by large banks themselves, now order more than 80% of all appraisals. That marks a sharp reversal of the market before 2008, when 60% of appraisals were ordered by mortgage brokers. The third parties generally take a cut of the appraisal fees, meaning that the people actually doing appraisals now are paid less.
Some have said this trend has led to lower-quality appraisals, and indirectly to higher foreclosure rates. Banks would have far fewer losses if they had a good appraisal behind every bad loan, according to Tony Pistilli, chief residential appraiser at U.S. Bank. And that view is gaining traction among other bankers concerned about what they describe as the low quality and inconsistency of appraisals these days.
"Bad appraisers do bad appraisals," says Pistilli, who estimates that even a slight improvement in appraisal quality could reduce loan losses by tens of millions of dollars. "We've learned over the last few years that valuation matters."
Banks are spending millions of dollars every month on a wide array of appraisal products, many to determine the value of distressed and foreclosed properties. They also have been shelling out money on loan repurchase requests and out-of-court settlements with investors for faulty appraisals from the heady days of the housing bubble.
Yet bankers and appraisers say that the new regulations are creating more problems without resulting in better-quality appraisals.
Mark Chapin, the chief valuation officer at consulting firm Interthinx, says a core problem is that some AMCs use appraisals as "loss leaders," keeping fees low to help sell lenders other mortgage-related products, including title insurance, flood insurance and credit reports. Many AMCs are also vendor management companies, which provide a host of such products for lenders along with appraisals.
"The deal is usually originated by the appraisal, so if the appraisal doesn't work out for them, they don't get all these other products," says Chapin, who conducts due diligence on appraisals for lenders.
"That goes directly to the issue of appraiser pressure," he says. "If a bank contracts with an AMC for an appraisal and the appraisal works, then the AMC gets the revenue for other settlement services products. That is a recipe for pressuring the appraiser."
Jeff Schurman, a consultant and the former executive director of the Title and Appraisal Vendor Management Association, a trade group, acknowledges "the perception" that appraisals can be a "loss leader," primarily because margins are so low to begin with.
"In a situation where a company provides both title and closing services, there is more money in the transaction in issuing the title policy, and the full-serve vendor management companies like the larger fee that comes with title insurance," says Schurman. "So they will provide appraisals recognizing there are no real margins in appraisals and it's not a profit center for them."
The Fed's interim guidance allows a bank or appraisal management company to determine fees using two different methods. The first method, which has caused the most confusion, allows fees to be based on market rates that have been paid in the past year for similar assignments. But lenders or third parties also must take into account six variables to fulfill the standard for what is reasonable, including the type of property, scope of work, the time in which the appraisal is required to be completed, an appraiser's qualifications, experience and work quality.
The second method allows appraisal fees to be set based on specific third-party fee surveys, including private or government studies that exclude fees generated by appraisal management companies.
Some industry experts say the first method was created to take into account the practical reality that small banks in rural areas are unable to gauge customary fees if a market is dominated only by AMCs. Appraisers say AMCs have largely interpreted the rule as allowing them to maintain the status quo and continue paying low fees.