New Articles on the Internet About Lender Scrutiny and Extra Costs to Consumers

Written on August 26, 2010 at 2:50 am, by michaeleachus

Today, I came across this article on MLS Real Estate :

  It is an interesting and well informed piece, but I feel I must add my own “two-cents”…

The first quote I came across in this article is: “Any time you have a market in transition, appraisals aren’t going to keep up because the appraisal is based on historical data”

Now, that is true to a point; however, most lenders have been requiring appraisals have at least two relevant sales that closed within the past 90 days and at least one or two active or pending sales that support the appraiser’s conclusions – this has been (for at least the past year or two) the “norm”; among the bulk of lenders I work with and most appraisers I know; so, even though a “closed sale”  is “historical data” it stands to reason that a properly supported appraisal will also include at least one or two “currently offered” (listed) properties to balance the “historical” data with current inventory; it is then up to the appraiser to reconcile the current data with historical data. For instance: in a declining market, closed sales will likely be higher than what the available listings support; conversely, in an increasing market, the closed sales may be less than what current listings can justify. The bottom line: a good appraiser will not only look at closed sales, but also current inventory and market trends to make an informed and reasonable opinion of market value that takes the “historical” (closed sales) and “current” (active inventory and pending sales) into account when estimating a property’s value.  This helps to balance the “historical” with the “current”; and helps to recognize and apply market trends when appraising a property.

One other point I’d like to add: there is nothing preventing a home owner (or mortgage broker or agent) from consulting with a different appraiser than the one who performed their appraisal in order to be sure there are no major errors or problems with the original appraisal. A well informed and trusted local appraiser can provide a consultation assignment for a home owner that involves a technical review of another appraiser’s work; if major errors or violations of USPAP (the Uniform Standards of Professional Appraisal Practice – the codes, ethics and general rules for the appraisal profession) are found, the current rules (including the HVCC) require the lender to order a second appraisal; AND (if USPAP violations are present) it is up to the LENDER to provide the second / new appraisal at their own expense, not the borrower’s (under the HVCC).

Under current rules and law, the lender is responsible for selecting a competent appraiser and the quality of the appraisal for lending purposes. The lender is also responsible for being sure that an appraiser is paid a fee that is “customary and reasonable” in the market area; THIS is typically where the problem lies, as many of the large lenders use an Appraisal Management Company (AMC) to handle the appraisal ordering, appraiser selection, and quality control of the appraisals. Surprise!  The big banks also own the AMC they use; it has been common practice for the lender to order an appraisal through their own AMC that engages the appraiser who is providing the fastest and least expensive appraisal product; this results in a less reliable appraisal because the appraiser is often times only given a day or two to estimate a property’s worth and is only being paid a fraction of what has been “customary and reasonable” in their market.  To top it all off: the lender then charges the consumer the “customary and reasonable” fee for the appraisal and keeps the difference as profit (or “cost of business”, as they would argue). This has been a second revenue source for big banks within the lending process and should be considered appraisal “fee skimming”, an illegal practice in most, if not all, states.

I provide appraisal consultation services to home owners, lenders, and brokers; I have found that, when USPAP violations are present, the borrowers have been able persuade the lender to provide a second appraisal at no cost to the borrower -sometimes, this results in a different appraised value – sometimes, it also results in a better appraisal that the lender feels more comfortable proceeding with when providing a home loan – sometimes, it results in a second appraisal that is equally flawed as the first – and sometimes the second appraisal has no significant change in value from the first. At the very least, a borrower (or broker, or correspondent lender, or agent) can feel confident that they have a second set of “trained eyes” to find any errors or issues with an appraisal that may be questionable and a course of action. Most borrowers cannot recognize the most common appraisal errors, because most home owners are not appraisers or bankers.

If you find yourself in this position (with a questionable appraisal that appears flawed), feel free to give me a call (or email).

Good News for Appraisers?

Written on June 29, 2010 at 12:08 am, by michaeleachus

So far, it looks like we may be seeing the first good news in the Appraisal Industry after over a year since the HVCC went into effect. This comes in the form of  H.R. 4173, the Restoring American Financial Stability Act of 2010; if enacted, this could mean loads of good news for appraisers who have seen hard times over the past year due to the implementation of the Home Valuation Code of Conduct (HVCC), which dramatically changed the landscape of the appraisal profession for many Real Estate Appraisers who had spent years building business relations with clients. The HVCC essentially severed business relations between many Loan Originators and Appraisers by installing a “fire wall” meant to bolster appraiser independence. The effects of the HVCC included the bolstering of Appraisal Management Companies that are notorious for charging typical appraisal fees to the consumer while paying the appraiser, in some cases, half of the fee charged; the AMC keeps the other half of the fee, skimming money off the top. Typically, an AMC shops for the lowest fee among appraisers in a given area in order to retain more of the appraisal fee charged to the consumer; this has resulted in low quality appraisals that are sometimes performed by inexperienced or out-of-area appraisers. Okay, that is (some of) the history… now to the present.

   This new legislation, if passed into law, will be the first major revamp of Title XI of the FIRREA Act since 1989 and should help to address several concerns among appraisers. The language introduced in this bill defines what I call “fee skimming” as “cram downs” of appraisal fees, calling them an “unfair and deceptive” practice (under the Truth and Lending Act). The language goes further to define that fees paid to appraisers must be “customary and reasonable”, much like the wording of the recent FHA changes; but, it even goes further by stating “customary and reasonable” appraisal fees should be determined by either government fee schedules (like FHA or VA)  or through independent studies that would exclude fees paid by Appraisal Management Companies – this is what I think is a big win for the appraisal community. A few months back, a company that is a major provider of software for appraisers had compiled a list of appraisal fees tracked through their online ordering system that were not related to AMC work; shortly after publishing these findings, a large advocate for the AMC industry immediately made statements to effect that AMC fees are the new “customary and reasonable”; so far, this looks like the legislation will shoot that notion down (and, in my opinion, rightly so).

   This new legislation, when passed, would also immediately “sunset” the HVCC. This would be a welcomed change to many in the Real Estate industry including appraisers, agents, loan originators, and local banks. This legislation would also put into place the means for regulating AMCs, something that only some states have been able to do so far; the new regulations would  require AMCs to be registered in each state in which they operate and be required to verify that they use only licensed or certified appraisers; AMCs will also have to certify that the appraisal services they coordinate comply with USPAP and section 129E of The Truth and Lending Act (a provision of appraiser independence).

   Another bane of appraisers has been the use of Broker Price Opinions (BPOs) by Real Estate Brokers; this legislation, if enacted in to law, would place restrictions on the use of BPOs, including prohibiting the use of a BPO as the primary basis of valuation for loan purposes in conjunction with the purchase of a consumer’s principal dwelling.

Back to some history: I have been appraising in the Seattle area for over a decade; in the first ten years of my career as an appraiser, the “customary” fee had not changed more than six percent (we actually saw a slight increase in fees sometime around 2005-2006) . Along came the HVCC and AMCs began to sprout up everywhere (some had been around for years, but many were founded after the implementation of the HVCC); most AMC’s immediately began offering appraisal fees to appraisers that were thirty-five to fifty percent less than the “customary” fee for the prior ten years. To top that off, a large portion of clientelle were now off limits to direct ordering with appraisers, shaving off nearly 70% due to the HVCC rules. Large banks began forcing mortgage brokers to use the bank-owned AMC (only) if the Loan Originator wanted to broker a loan through their bank; large bank-owned AMCs are, in my opinion, ust another revenue source for the bank that is hidden within the mortgage loan process; the consumer, in many cases, never knows that the fee paid for the appraisal is (in many cases) 35-50% more than what the appraiser is paid.

   Now, hopefully, this new legislation will pass and put an end to many of these issues. I am one of the few appraisers who has refused to work with the predatory AMCs; I have focused on retaining (and raising) quality standards in my own work and seeking out clients who genuinely want and need quality appraisal services (yes, there are some still out there). But, I also feel that I am one of the few taking this stance. There are appraisers accepting low-fee work and putting out low quality reports to build a “quantity versus quality” approach to the AMCs in order to remain profitable – how else would the AMCs survive? The bottom line is that not enough appraisers are saying “no” to low fee work and too many appraisers are turning a fast product of low quality to off-set the low fee. I, for one, cannot justify sacrificing quality – the clients I have retained can testify to that. 

 This legislation, when passed, will certainly help to solve some of the most pertinent issues that have come about since the HVCC went into effect; in some areas, it may not go far enough. But it is a start and, for once in the past thirteen months, I see it as “good news”.

07/15/2010: UPDATE

   The bill passed the Senate and the president has already said he will sign it into law next week. This has got to be the best news for residential appraisers in the last three to five years and certainly welcomed by most, if not all.

   Word to appraisers: “customary and reasonable” fees are to be established WITHOUT consideration of what AMCs pay. I know for sure that appraisal fees have been squashed by AMCs over the years and also know that they typically charge the consumer the same as a “customary reasonable” fee while keeping the rest as profit (in most cases up to 50%). This is a “win” for our industry and for consumers who pay for our services. Now – PLEASE – do not continue to under-sell your professional services. This is the time to establish your fees and keep them where they are fair. On the other hand, please produce high quality, reliable appraisals in order to continue to bolster our professional reputation among the consumers/public. I, personally, have not seen significant fee increases for appraisals in the past decade – I know I am not alone.

Out of State AMC’s Hurt Local Appraisers and Impact State and Local Economies

Written on April 12, 2010 at 11:05 pm, by michaeleachus

What is an AMC? An Appraisal Management Company is the new “firewall” between lenders and appraisers implemented as a consequence of the Home Valuation Code of Conduct (HVCC) that went into effect earlier this year. The AMC is a middle-man thrown into the process that currently has little to no oversight and many do not fully understand the appraisal or lending industries. As a matter of fact, in many states, AMCs are not licensed or regulated and can operate from out-of-state. Because AMCs typically rely heavily on shaving a portion of the appraisal cost off of the appraiser’s established fee, these out-of-state AMCs are not only hurting the bottom lines of small appraisal businesses and independent appraisers, but ultimately harming our state revenues and local economies. In the past few years, there has been new lending, agent, and appraiser regulation in Washington State including loan originators to be licensed, appraisal and agent trainees to be licensed, and several consumer-based laws that have subsequently been implemented around these professions; the spirit of these laws (for the most part) was to have loan originators be licensed, not only as consumer protection, but also insuring that revenue from transactions occurring within Washington would stay within our state; thus, improving our economy.

From the rise of the AMC, new problems are born: for instance: an AMC located in Arizona or Canada can now benefit from a transaction here in Washington, taking taxable income from our state and our local appraisers and benefiting an out-of-state (or out-of-country) business that in turn, benefits their (not our) economy. Furthermore, AMCs are not required to have any level of education tied to this newly established business. Our state (WA) requires a college degree and continuing education for appraisers and initial and continuing education for real estate agents; the AMC can be operated by a high school student or drop-out. The bottom line is no license and / or regulation = no training / education necessary.

Many states have introduced AMC legislation and the federal government has been working on drafting similar laws. Until these laws are enacted, out-of-state AMCs can operate like vampires to our economy and independent appraisers. There are some locally operated AMCs that are struggling to gain market share among the AMCs used by the large banks; these are the ones I personally seek to work with. Is there still a fee taken from the appraiser? – Yes. But, not as much as the larger AMCs and, at the very least, I can be sure the revenue is being taxed and used within our own state economy.

Update: since this post was originally created, Washington State passed legislation to regulate AMCs; this is thanks to the hard work of the Appraiser’s Coalition of Washington (ACOW) and Stan Sidor. Although the legislation does not go as far as I and many other appraisers would have liked, it does address many of the largest issues including local and state revenues.

Politics at Their Worst!

Written on April 6, 2010 at 3:33 pm, by michaeleachus

How many Washington state residents know about the “political window dressing” that Christine Gregoire is trying to pull down over their eyes? Well, I as a small business owner, certified appraiser, and local professional for over ten years in this state know that something stinks! I recently attended the Appraiser’s Coalition of Washington State Meeting at the “ACOW XI” and found out that even though our state’s Real Estate Appraiser Commission is 100% funded by the appraiser licensing fees already collected, that our Governor wants to remove the ONLY source of consumer protection that our state has in place for professional appraisal practices (as far as regulation)… WHY??? because the politics of appearing like government “trimming the fat” and attempting to dupe the public into believing our Governor is actually making real moves to balance an unbalanced budget (that went from balanced to unbalanced VERY quickly after taking office). It is important for EVERY VOTER and LEGISLATOR to understand that the removal of our only consumer protection regarding professional valuation services may end up on the “chopping block” for no sane reason at all – PERIOD! The reason is, plain and simple, a politician that is trying to “make appearances” of trimming down government…. But, remember, no funds for this organization come from the general fund…. so it makes NO sense at all.

Some of you might be thinking, “what about federal protection?” well, the newly adopted HVCC (Home Valuation Code of Conduct) WOULD have had some balance IF some original clauses would have been included – but (read my other posts) the final draft did not include some key safeguards and/or were never adopted; instead we are still waiting for an ” Independent Valuation Protection Agency”, a provision of the poorly implemented HVCC that has still yet to be established. – So – there really is no Federal protection right now because the big lending giants, FannieMae and FreddieMac have now been taken over by our government (instead of previously being Government Sponsored Entities – “GSE”s). To top that off, the “housing recovery” is also not working fast enough for those who really need it, so we need this type of consumer protection more than ever right now.

Do we really need to trim away an established and self-funded program that is not costing our government or tax payers any money (and no time)? Abolish a local agency that may be the ONLY protection in place at this time within our state?

I truly believe this is politics at their worst. I hope our legislature sees through this and preserves the only consumer protection we currently have surrounding these issues in our state.

Please do not let our governor make decisions for simple “window dressing” – the bottom line is that tax payers in our state deserve good protection – we have that – and what we already have is not costing our tax payers anything. Until we make new legislation, please help preserve the only safeguard we have. Please, talk to your legislator.