Guest Post by Joseph Lorinc, a State Certified General Residential Real Estate Appraiser, licensed by and working in the State of Florida. Joseph works for Neapolitan Appraisal, Inc. in Southwest Florida providing residential real estate appraisals. He has 13 years of residential and non-residential appraisal experience.
I am writing this letter to urge the Federal Reserve Board to move forward with the implementation of the appraisal independence and appraisal fee provisions in Title XIV of the Dodd-Frank Act.
Download Customary Fee Letter
Title XIV (Section 1400 et seq) of the Dodd-Frank Act contains the “Mortgage Reform and Anti-Predatory Lending Act,” which includes Subtitle F – Appraisal Activities. Section 1472 of the “Mortgage Reform and Anti-Predatory Lending Act” adds Section 129 E to the Truth in Lending Act which will establish minimum federal appraisal independence requirements and customary and reasonable fee requirements.
Effective Date of Appraisal Requirements
The enacting language of the Dodd-Frank Act states that the appraisal requirements should be adopted in the Interim Final Regulations. As an appraiser, I believe it is vitally important that there should be no delay in implementation of the appraisal independence requirements under Title XIV of the Dodd-Frank Act. As part of the Dodd-Frank Act, Section 4312 (b) (2) also requires that lenders and their agents compensate appraisers at a rate that is customary and reasonable for appraisal services performed in the market area of the property being appraised.
As defined in the Uniform Standards of Professional Appraisal Practice, 2010-2011 Edition by the Appraisal Standards Board of The Appraisal Foundation, valuation services are “services pertaining to aspects of property value,” an appraiser is “one who is expected to perform valuation services competently and in a manner that is independent, impartial and objective,” an assignment is “an agreement between an appraiser and a client to provide a valuation service or the valuation service that is provided as a consequence of such an agreement,” an appraisal is “the act or process of developing an opinion of value” and appraisal practice is defined as “valuation services performed by an individual acting as an appraiser, including but not limited to appraisal, appraisal review or appraisal consulting.” Appraisal services are valuation services provided by an appraiser as the result of an assignment. Under Section 4312 (b) (2), customary and reasonable fees must be paid to for appraisal services for residential loan purposes. There is no mention of specific appraisal products, rather the Dodd-Frank Act specifies appraisal services for residential loan purposes, covering any valuation services provided by an appraiser.
Customary and Reasonable Fees and Appraisal Management Companies
Customary and reasonable fees for appraisal services are available from a number of sources. Several companies have existing fee data surveys available, such as the Appraisal Fee Reference published by a la mode, inc. Over the past month since the passage of the Dodd-Frank Act, I have received invitations to participate in several other fee surveys from a variety of companies in the appraisal, appraisal management and banking fields.
As Section 4312 of the Dodd-Frank bill is intended to promulgate appraisal independence requirements for residential loan purposes, I believe the most obvious source of customary and reasonable fees is being overlooked. In every residential mortgage transaction, a HUD-1 Form detailing fees (including appraisal fees) associated with the origination of a residential mortgage loan is required. The data on the HUD-1 Form could be used to determine the customary and reasonable fees that consumers have been charged for appraisal services. The HUD-1 data would provide an accurate and unbiased basis for determining the customary and reasonable fees that consumers are paying for appraisal services for residential loan purposes.
In its AMCs/Reasonable and Customary Fees/Turnaround Time FAQs HUD clarified what it believes to constitute a customary and reasonable fee:
“FHA believes that the marketplace best determines what is reasonable and customary in terms of fees. The fee is the result of a business decision, which may or may not be negotiated, between the appraiser and the client. FHA does not set fees or determine whether a fee is reasonable or customary. Lenders are expected to know what is reasonable and customary in the areas in which they lend and are expected to ensure that the fees paid by consumers for both the appraisal and the management of the appraisal process are reasonable and customary.”
This statement appears to indicated HUD’s reliance on the free market system in determining fees.
Since the introduction of the Home Valuation Code of Conduct in March of 2008, appraisal management companies participation in the market has grown from 15% of appraisals ordered to an estimated 80% today. While HUD’s stance on the importance of the free market system is not in question, the current situation in the appraisal industry has little resemblance to a free market. Appraisal fees are no longer negotiated between the client and the appraiser, they are dictated to the appraiser by the appraisal management company. The Dodd-Frank Act seems to recognize this fact in Title XIV, Section 129 E (i) (1)
“In General – Lenders and their agents shall compensate appraisers at a rate that is customary and reasonable for appraisal services performed in the market area of the property being appraised. Evidence for such fees may be established by objective third-party information, such as government agency fee schedules, academic studies and independent private sector surveys. Fee studies shall exclude assignments offered by known appraisal management companies.”
By specifically excluding fees offered by appraisal management companies, the writers of these regulations seem to be acknowledging the undue influence that the appraisal management companies have had on the appraisal industry.
In March of 2008, the Home Valuation Code of Conduct was introduced to curb the banking industries pressure on independent appraisers to produce appraisal reports that met their lending needs instead of reflecting the true market value of the properties being appraised. This practice by the banking industry resulted in many inaccurate appraisal reports being produced and then used as justification to finance residential mortgage loans. The unethical behavior of the banking industry and the appraisers who wrote appraisal reports they knew to be inaccurate contributed in a significant way to the collapse of the housing market in which we currently find ourselves.
Unfortunately, the Home Valuation Code of Conduct had the unintended consequence of producing a business climate where appraisal management companies have come to dominate the appraisal services market for residential lending. Under the appraisal management company business model, appraisal assignments are shopped to the appraiser that will accept the lowest fee and promise the shortest completion time. Little to no regard to the complexity of the assignment or the competency of the appraiser to complete the appraisal assignment is given.
To receive orders from an appraisal management company, appraisers are forced to complete appraisal assignments requiring an ever increasing amount of information gathering, analysis and reporting mandated by Government-Sponsored Enterprises (Federal National Mortgage Association [Fannie Mae], Federal Home Loan Mortgage Corporation [Freddie Mac]), the appraisal management companies and finally the client, in an unrealistically short timeframe for substantially reduced fees. Though it was written to improve the quality of appraisal services, the unintended results of the Home Valuation Code of Conduct have been the same, an increasing number of inaccurate reports are being produced by unqualified appraisers. In time, this may lead to yet another collapse of the housing market.
Section 4312 of the Dodd-Frank Act was intended to re-establish a business environment where appraiser independence can be maintained. In the midst of the current housing crisis, delaying the implementation of this vital legislation could have a devastating and far reaching impact on not only the housing market but the overall economy of the United States.