DHA Appraisal Blog

Since the inception of the Home Valuation Code of Conduct (HVCC) in May 2009, there has been much discussion, and misinformation, about the benefits and harm caused by the controversial agreement with the New York Attorney Generals office and the Federal Housing Finance Agency.  This agreement, originally made with the Office of Federal Housing Enterprise Oversight, requires Fannie Mae and Freddie Mac to only accept appraisals ordered from parties independent to the loan production process.  Essentially, this means, anyone that may get paid by a successful closing of the loan cannot order the appraisal.

In the past 6 months while the Realtors and Mortgage Brokers associations point fingers at appraisal management companies for their use of incompetent appraisers who don’t understand the local markets, appraisers are complaining that banks are abdicating their regulatory requirements to obtain credible appraisals by forcing them to go through appraisal management companies at half of their normal fee.  

Banking regulations allow banks to utilize the services of third party providers like appraisal management companies, but ultimately hold the bank accountable for the quality of the appraisal.  Unfortunately, the banking regulators have yet to express a concern that there is a problem with the current situation.

I need to state that appraisal management companies can provide a valuable service to the lending industry by ordering appraisals, managing a panel of appraisers, performing quality reviews of the appraisals, etc.  However, banks have been enticed by appraisal management companies to turn over their responsibility for ordering appraisals with arrangements that ultimately do not cost them anything.  

The arrangement works like this, the bank collects a fee for the appraisal from the borrower; orders an appraisal from the appraisal management company who in turn assigns the appraisal to be done by an independent appraiser or appraisal company.  During this process the appraisal fee paid by the borrower gets paid to the appraisal management company who retains approximately 40% to 50% and pays the appraiser the remainder.  So for the $400 appraisal fee being charged to the borrower, the appraiser is actually being paid $160-$200 for the appraisal.  Absent an appraisal management company the reasonable and customary fee for the appraiser’s service would be $400, not the $160 to $200 currently being paid to appraisers.
 
Rules within the Real Estate Settlement Procedures Act (RESPA) have allowed this situation to occur, despite prohibitions against receiving unearned fees, kickbacks and the marking up of third party services, like appraisals.  RESPA clearly states, “Payments in excess of the reasonable value of goods provided or services rendered are considered kickbacks”.  

Banks are allowed to collect a loan origination fee.  This fee is intended to cover the costs of the bank related to underwriting and approving a loan.  Ordering and reviewing an appraisal is certainly a part of that process.  Understanding that banks ultimately have the regulatory requirement to obtain the appraisal for their lending functions, why is it that borrowers and appraisers are paying for these services that are outsourced to appraisal management companies?  Does the borrower benefit from a bank hiring an appraisal management company?  Does an appraiser benefit from a bank hiring an appraisal management company?  The answer to those two questions is a very resounding, no!  Clearly the only one in the equation that benefits is the bank, so why shouldn’t the banks be required to pay for the outsourcing of the appraisal ordering and review process?  
It is here where I believe the solution for the appraisal industry exists.  Since banks are the obvious benefactor from the appraisal management company services, the regulators should require that the banks, not the borrowers or appraisers, pay for the services received.  This one small change in the current business model would allow appraisers to receive a reasonable fee for their services and in turn they should be held more accountable for the quality and credibility of the appraisals they perform.  Appraisal fees would be competitive among appraisers in their local markets, much like the professional fees charged by accountants, attorneys, dentists and doctors.  Appraisal management companies would suddenly be thrust into a more competitive situation where their services can be itemized and their quality and price be compared to those of competing providers.  This will ultimately lead to lower fees and improved quality of services to the banks.  The banks will then have a very quantifiable choice, do they continue to outsource their obligations to an appraisal management company and pay for those services or do they create an internal structure to manage the appraisal ordering and review process?  Either way, the banking regulators need to hold the banks more accountable at the end of the process.  

When all of the previously discussed elements are present, I believe the appraisal industry will be functioning the way it was intended.  Appraisal independence will be enhanced and borrowers will be rewarded with greater quality and reliability in the appraisal process.  This is exactly the change that is needed, in addition to the HVCC, to stop the current finger pointing and address the poor quality and non-independent appraisals that have been and are still rampant in the industry.    

Tony Pistilli
Certified Residential Appraiser
Vice-Chair, Minnesota Department of Commerce,
Real Estate Appraiser Advisory Board Minneapolis, Minnesota

"We strongly believe continuing to allow `broker price opinions' (BPOs) in the property valuation component will not adequately protect the public interest (consumer, borrowers, etc.) or the interests of the various parties to the loan (lenders, loan servicers, etc.) and is likely to exacerbate mortgage fraud," the appraiser organizations wrote.

"We urge the Department to reestablish independence in the valuation process to protect the safety and soundness of financial institutions, improve transparency, and safeguard the public trust," the appraiser organizations' letter said, later adding. "We urge the Administration to revise the (Home Affordable Foreclosure Alternatives) HAFA guidelines to prohibit the use of BPOs for property valuation requirements involving foreclosure alternatives, including short sales."

To read the summary, click here

WASHINGTON, DC - Although the economy has been growing lately, fallout from the recent recession continued to negatively impact commercial real estate sectors in the fourth quarter, but there is hope for some improvement next year, according to the National Association of Realtors®.

Lawrence Yun, NAR chief economist, said commercial real estate almost always lags the economy. "Because of the lingering impact from the deep recession over the past two years, vacancy rates will trend higher and many commercial property owners will need to make rent concessions," he said.

"With the job market expected to turn for the better later this year, we'll see rising demand for office and warehouse space, but that isn't likely before 2011," Yun said. "At the same time, improved consumer confidence would help sustain the retail sector and encourage more people to enter the rental market."

Yun notes that commercial vacancy rates remain high in most market areas and are depressing rents.

For the rest of this article and more industry news go to News & Views at: www.RealtyRates.com

The Appraisal Journal is the quarterly technical and academic publication of the Appraisal Institute, the nation's largest association of real estate appraisers. (The materials presented in the publication represent the opinions and views of the authors.)

"Zillow's Estimates of Single-Family Housing Values," by Daniel R. Hollas, Ph.D., Ronald C. Rutherford, Ph.D., and Thomas A. Thomson, Ph.D., examines how Zillow's estimates of value, known as Zestimates, compare to actual sale prices. Zillow.com is an automated valuation model Web site.

The authors looked at home sales in Arlington, Texas, a location where Zillow has indicated its data has the highest accuracy level. The authors' study found that 40 percent of the homes in the sample were overvalued by Zillow by more than 10 percent compared to actual sale prices. The study's authors suggested that Zillow may not take into account the occupancy of properties, which has been shown to affect sale prices.

Other studies have shown that on average homeowners' overestimate the values of their homes by 5.1 percent and new owners overvalue their homes by about 8.4 percent. The authors conclude, therefore, that while Zillow is a helpful tool, it may not be more accurate than the owners' own estimates of value.

To read the Appraisal Journal's Winter 2010 cover article on Zillow estimates of value, click here: Zillow's Estimates of Single-Family Housing Values.

http://lumlibrary.org/webpac/pdf/TAJ2010/TAJW10pg_026-032T.pdf