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Appraiser Independence?

Federal Reserve Proposal Comment regarding Docket No. R-1394 and RIN No. AD-7100-56:

Post your own comments to the Fed:  http://bit.ly/fJ3lkW

Just because someone has an appraiser’s license does not mean they are knowledgeable, ethical or moral nor good at what they do.  Therefore, the “judgments” of these people are not infallible and Appraisal Management Companies (AMC) seem to just be another revenue stream for the Big Banks and provide no benefit to the consumer whatsoever.

Since the implementation of the Home Valuation Code of Conduct (HVCC) and the “forced” use of AMCs, I have seen more errors in appraisal reports than ever before.

Some examples include:  Omitting an entire bedroom (making a 3 bedroom SFR into a 2 bedroom) from the report and their sketches even though county records and the home itself clearly showed 3 bedrooms.  On several occasions I have seen appraisers using comparable home sales from bisecting neighborhoods that should not be used to determine a home’s value, in most cases, deflating the subject home’s value AND consequently deflating that property’s adjacent home values for all of its neighbors.

I have seen AMCs send an appraiser who lives in Sedona, AZ to do an appraisal in Mesa, AZ (about 150 miles apart).  They might as well have sent him from another state like Oklahoma to Arizona; it would provide the same poor results.  And in about 80% of all reports that I have seen there are poor comps in the report, incomplete reporting and even multiple spelling errors that forces underwriters to condition for clarification or additional comments on their loan approvals which have led to unnecessary increases in closing times, lost revenue and increased stress for the consumer.

But even in those examples listed above, appraisers still got paid for their shoddy work which in some cases derailed the hard work that was provided in good faith by the real estate agent and the loan originator.  All this does is ultimately hurt the consumer with artificially lower home values (in many cases), increased stress and anxiety, in addition to forcing the consumer to pay (30% more than in 2009) for poor service.  (Appraisals went immediately from $350 to $450, $650 with a rent schedule, in 2009 when HVCC was implemented.)  The appraiser MUST be held accountable to the consumer who is paying for the report!

Local business people and residents know who the good businesses and bad businesses are in their local area and that includes appraisers.  The Federal Reserve, Fannie & Freddie, Big Banks located thousands of miles away have no realistic expectation as to what is a good or a bad appraisal or who is giving good or poor service.  It is those people on the ground (real estate agents, loan originators and local, reputable appraisers) and in the field who know what the expectations should be and it has always been that way.

Homeowners must be allowed to say, “I do not want that person to appraise my home.”  You must see the unfairness of forcing a homeowner to pay a vendor that they have had problems with in the past.  HVCC gives appraisers too much power once an appraisal has been assigned to them and with no accountability.  They are paid regardless of the accuracy or competency of the report and that is just wrong.

The only people who truly know that the appraisals might be flawed (the mortgage originator who interviewed the homeowner, the real estate agents and the homeowners themselves) are the very people who are prohibited from talking to the appraiser.  Does that make any sense?

You must understand that for low to moderate income homeowners, an appraisal fee of $450-750 (the standard fee range since HVCC was adopted) can easily represent 25 percent or more of their monthly income.  That is a lot of money to spend on a gamble with no accountability.

Prior to HVCC, my conversations with appraisers about value prior to completion of the report were not intended to coerce a higher than fair value but they were to determine if we should proceed from the standpoint of consumer protection.

For example, let’s say I have a consumer with low to moderate income (that’s 90% of my book of business) wanted to refinance their primary residence.  If they owe $100k, in order to successfully refinance, they would need an appraisal that shows that they have a certain amount of equity right?  Prior to HVCC, if my appraiser advised me that the homes in that consumer’s neighborhood were selling in the $90k range, then I could advise my client not to waste their $450 on an appraisal.

Ethical appraisers and originators liked this because ethical appraisers and originators don’t want to see a consumer pay for a product that does not benefit them.  Now, HVCC forces the consumer to lose $450 to find out that they cannot refinance.

The large majorities of mortgage brokers doing business in their communities have been and still are ethical, honest and upfront people.  Like any business, if consumers receive poor or unethical service, word gets out and that business eventually goes away.  It’s called a “free market”.  It has worked great for centuries…

“Concentrated power is not rendered harmless by the good intentions of those who create it.” - Milton Friedman

A free enterprise system is the fastest way to put a bad company out of business, NOT government interaction.  All that government interaction has done is made things worse for the consumer.  It has not protected them and has directly increased costs in the form of over-priced appraisals, extended closing times with daily late fees and lock extension fees in some cases.  HVCC was unnecessary for those of us who never used our positions to coerce, bribe or threaten an appraiser.  More importantly, those actions are illegal and immoral already and were committed by a very small number of originators and we didn’t need HVCC to tell us that.  As a matter of fact, if the current laws that we had on the books prior to 2005 were simply enforced, then there would not be this need for legislators to create more new and complicated legislation that ultimately hurts those people they intend to protect!

“One of the great mistakes is to judge [government] policies and programs by their intentions rather than their results.” – Milton Friedman

But what HVCC has done is severely increased costs to the consumer (the average increase is about 30%) while simultaneously very much lowered the bar for appraisal reporting.  How is this benefiting the consumer? I have no idea.  Mostly, it seems to be benefiting the bottom lines of those investors (many of them Big Banks) who now wholly or partially own the AMCs that are supposed to be helping the consumer but instead continue to hurt the consumer at every turn.

With the recent discussions about eliminating the mortgage interest tax deduction and compile that with declining home values, in part due to shoddy appraisals derived from the inception of HVCC, our government is taking away the last two financial incentives to own a home in this country, appreciation and tax deduction.

This then begs the question, “Is it truly the government and the Federal Reserve’s intention to really protect the consumer?”

Here are some points for the Federal Reserve to consider before ruling:

Ø  Reasonable and customary fees should be based on appraisal fees PRIOR to the implementation of HVCC.  AMCs add about $175-200 per file leaving the appraiser a reduced income.  If the appraiser should normally get $350 per appraisal then the AMC adds a markup it should increase the burden to the consumer and NOT reduce the appraiser’s income.  This is how competition is reduced to just the appraisers willing to work for less but not give a better report.

Ø  Total fee for the appraisal report should be separated on the final HUD-1 as a fee paid to the appraiser and a separate fee paid to the AMC.  Since the AMC did not create the appraisal report, they should not be listed on the HUD as “appraisal fee”.  It should be clear to the consumer that the AMC fee is a pure markup fee.

Ø  AMCs should not be allowed to “review” an appraisal unless that “reviewer” is a certified licensed appraiser with a minimum of 2 years experience.

Ø  AMCs MUST be whole and separate entities.  The AMC should not be allowed to be owned wholly, partially or in any manner (subsidiary, affiliated business partner, etc) by any financial institution, bank, credit union, etc.

Ø  Appraisers need a contact and a secure site for reporting violations of appraisal independence against AMCs, banks, mortgage bankers, mortgage brokers, credit unions, real estate agents, lawyers, etc.

Ø  Appraisal reports ordered in compliance with Uniform Standards of Professional Appraisal Practice (USPAP) guidelines should be portable and accepted by ALL lenders, banks and secondary markets including Freddie and Fannie.  If the USPAP guidelines are followed and a second lending institution requests another appraisal report, the cost of that appraisal should be at that lender’s expense.  That expense should NOT be taken from the loan originator’s income NOR charged to the consumer.

Ø  Appraisers are currently not “graded” or “tracked” by revision requests from an AMC.  Most revision requests should be tracked and graded to those appraisers that seem to be providing inferior reports.  This “grading” system needs to be publically accessible by the consumer and vendors alike.  Typical revision requests have been for using poor comps from bisecting neighborhoods that are not representative of the subject property’s value, misspelled words, fields with more than 50 characters (if more than 50 then the rest is cut off from the report), UW requesting clarification or comment, no aerial photos of the property or a change in contract price after the report has been completed.

Ø  There is absolutely NO NEED for a geographical market area for each AMC.  Fair competition is always better for the consumer.

Ø  Stop blaming the Mortgage Broker for the financial meltdown. We did not create the risky loans you keep pinning on us.

Ø  Why is the Mortgage Broker the only industry that has to disclose our income?  Banks, mortgage bankers and credit unions should have to disclose their Service Release Premium and their total income as well.  Why the double standard?  All that does is provide less transparency which is always bad for the consumer.

Ø  ALL Mortgage Loan Originators MUST undergo the same testing and compliance measures as loan originators that work for Mortgage Brokers.  Each individual loan originator at a mortgage broker’s office has to pass a state and national licensing test, complete an FBI background check, national fingerprint recording, 24 hours of pre-licensing education and 8 hours of continuing education annually.  Not to mention all of the new fees and classes to pay for (I spent over $1400 this year to get my license).  If I have to do it, why shouldn’t bank and credit union employees who originate mortgages have to do it?  Isn’t that what’s best for the consumer?

Please feel free to contact me directly for conversation regarding these issues.

Post your own comments to the Fed:  http://bit.ly/fJ3lkW

Spencer Anglin – Licensed Mortgage Loan Originator
Velocity Financial, LLC | NMLS# 226533
O: 480.287.5719 | C: 602.705.6293 | F: 1.866.589.5742