Tags: Fannie Mae
Last month I spoke to and interviewed Tony Pistilli, a certified real estate appraiser on the Minnesota Department of Commerce Real Estate Appraiser Advisory Board. He’s got a possible solution to the current appraiser – appraisal management company conflict. Its all about conforming to RESPA and preventing banks from shifting the burden to appraisers to pay for bank compliance.
Its the first logical solution I’ve heard. The banks are essentially making the appraiser pay for their RESPA compliance by taking it out of the appraiser’s fee, often 50% of the stated appraisal fee. The consumer is being mislead by the appraisal fee stated by the lender at time of mortgage application.
His views seemed to have been picked up by the Appraisal Institute, the largest appraisal trade organization in the US, in their letter to HUD looking for clarification on RESPA and the disclosure of fees paid by consumers. Here’s the FAQ on the new RESPA rule.
Check out the podcast
I was provided an interesting solution to the AMC appraisal issue from Tony Pistilli, a certified residential appraiser who has been employed for over 25 years in the appraisal area, at governmental agencies, mortgage companies, banks and has been self employed.
He wants appraisers to get the word out. His solution is compelling.
Anyone who reads Matrix knows what I think of the Appraisal Management Company and the Home Valuation Code of Conduct (HVCC) problem in today’s mortgage lending world.
Here’s a summary of the his article before you read it:
AMC/HVCC appears to violate RESPA (Real Estate Settlement Procedures Act) since a large portion of the appraisal fee is actually going for something else coming off the market rate fee of the appraiser.
(RESPA) was created because various companies associated with the buying and selling of real estate, such as lenders, realtors, construction companies and title insurance companies were often engaging in providing undisclosed Kickbacks to each other, inflating the costs of real estate transactions and obscuring price competition by facilitating bait-and-switch tactics.
by Tony Pistilli, Certified Residential Appraiser and Vice-Chair, Minnesota Department of Commerce, Real Estate Appraiser Advisory Board, Minneapolis, Minnesota
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 appraisers 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.
Here’s the result of an email interview I conducted with Brick Underground expressing my dissatisfaction with Appraisal Management Company (AMC) appraisers these days and corresponding situation that a real estate agent was going through.
The real world appraisal situation – the name of the appraiser and related organization was omitted to protect the guilty. Here’s the sequence – READ THE DETAILS CLOSELY (sorry for the all caps but I really am yelling):
And the key detail…
In other words, the appraiser did not know the market or how to appraise a walk-up, was guided by the contract price which was actually wrong. When told the price was wrong and a smaller apartment was appraised, the AMC stood by the appraisal.
I didn’t appraise the property and have no idea whether the apartment was worth the sales price. I’m just using the information provided.
The only solution for the buyer is to roll the dice and go to another bank. The bank loses because a professional evaluation was not performed. The bank likely doesn’t even know that this happened. A buyer and seller lose because the appraiser was incompetent. The broker may lose a fairly earned commission because of a form filler who has no business being called an appraiser.
This is not appraising – it is idiotic form filling managed by people who should not be in the mortgage lending business.
So you can see how my interview on Brick Underground covering this topic was so terse – I was being told the above situation at the same time. Here is the link again:
How to not get scrwd by an appraiser [Brick Underground]
As I’ve said many times before, the current appraisal system with Appraisal Management Companies is an accident waiting to happen while we pretend that everything is OK.
About a week ago, doormaninNYcity started to follow me on twitter and I found the tweets quite fascinating. This anonymous feed of information reminds me of the old days (4 years ago) when Property Grunt and Brownstoner burst on the blogosphere scene – they were anonymously written sites that gave readers fantastic insights (still are).
A few days ago doormaninNYcity wrote this tweet:
An appraiser came for a resident when I buzzed the resident asked if he can wait 5 min he wasn’t ready, the appraiser said no & left.
Think about that for a second – for the appraiser to leave because he couldn’t wait 5 minutes must have meant he budgeted five minutes for the inspection and would be late for the next one. Depending on the size of the property, 30 minutes should be the bare minimum time spent in the property.
This has got to be one of those appraisal management company appraisers who have the real estate industry up in arms about the poor quality appraisals.
The Realtors said that home sales rose 2.4 percent to a seasonally adjusted annual rate of 4.77 million last month, from a downwardly revised pace of 4.66 million in April. Prices, meanwhile, were 16.8 percent lower than a year ago.
That’s all well and good, but there was a new wrinkle this month. Someone to new blame for continued weakness in the housing market.
You guessed it: The Appraiser.
“We have just been flooded with e-mails, telephone calls on the appraisal problems,” said Lawrence Yun, the Realtors’ chief economist.
“Poor appraisals are stalling transactions. Pending home sales indicated much stronger activity, but some contracts are falling through from faulty valuations that keep buyers from getting a loan.”
This unleashed a flood of appraisal coverage today.
The NYT’s Floyd Norris writes a great blog post on this topic called Realtors: Blame the Appraisers
ACRONYM Alert!!! AMC = Appraisal Management Company.
I was on Fox Business last night with Neil Cavuto. Don’t have the clip yet but the topic was..you guessed it…appraisers and whether we are killing the recovery.
Most of the good appraisers I know don’t work for Appraisal Management Companies nor are they getting much work from the national retail banks. Why? Because they don’t agree to work for half the market rate, crank out work in 24 hours that doesn’t allow enough time to research and cut corners because of their low fee structure.
But they likely got most of the appraisal volume during the spring mortgage boom with record low mortgage rates.
AMC’s are the unregulated byproduct of the Cuomo/Fannie Mae deal called HVCC or Home Valuation Code of Conduct. Generally, the lowest common appraisal denominator work for AMCs and you get what you pay for – usually garbage.
The likelihood of fragile deals blowing up because some out of area yahoo comes to bang out a dozen reports in one day and has no idea what is going on in the local market is likely to come in low on the value because they think that’s what the bank wants. And guess what? AMCs and the appraisers they use got most of the work during the spring.
NAR doesn’t seem to understand this – they seem to be inferring appraisers are singlehandedly stalling the housing market. Appraisers don’t all get together and say “Gee, lets all do a really bad job on our appraisals these days. It systemic. Banking wants to use AMCs. AMCs want to make a profit so they hire cut rate appraisers.
The NAHB press release today was even more silly. More on that in the next post. Like anything associated with appraisals, many know something is wrong, but they have no idea what it is.
One of the biggest issues facing higher priced housing markets as of late, has been the absolute lack of jumbo mortgage financing. The TARP, TALF (and BARF – Bank Asset Relief Fund) only address mortgages within the parameters of Fannie Mae, ie conventional and jumbo conventional financing. In Manhattan that’s about $729k and with an average sales price just under $1.6M, a lot of homeowners are having great difficulty in obtaining mortgages with more than a 50% LTV.
This Bank of America announcement is great news for this sector of the housing market and may spark other interest in the sector.
Kenneth R. Harney’s must-read WaPo column “The Nation’s Housing” covers this announcement this week in his article: A Big Boost for Buyers Seeking Jumbo Loans:
Bank of America, the country’s largest mortgage lender, is rolling out a large program to finance jumbo loans between roughly $730,000 and $1.5 million, with fixed 30-year rates starting in the upper 5 percent range. The loans will be available through the bank’s retail network and also through its Countrywide Home Loans subsidiary. After April 27, Countrywide will be rebranded — shedding the name it has had since 1969 — and morph into Bank of America Home Loans. Bank of America acquired Countrywide, once one of the biggest subprime lenders, last year.
So Countrywide becomes Bank of America Home Loans.
Last week, Landsafe, the appraisal management company arm of Countrywide approached us to be approved as an appraiser. Their quality people have met with us many times but for some reason, the sales function didn’t allow our type of firm to connect because you had to rub elbows with loan reps at each of their offices. Crazy bad.
I believe that has all been changed or is being changed for the better.
However, although we are state certified and likely because of all their problems with appraisal quality, their efforts to right the wrongs effective screen out qualified appraisers. They wanted among other things:
Seemed pretty aggressive to us. What about identity theft concerns?
The irony of this sort of scrutiny is pretty powerful given past practices. Hopefully once things begin to run more smoothly and one hand knows what the other is doing, they’ll reconsider trying to attract qualified appraisers. We’ll wait patiently.
I’ve discussed the curse of stadium naming. The new Citi Field stadium name is in danger of going Enron on us. After all, the naming rights are only a paltry $400M and the Sunday’s Citi bailout was $326B.
For the past few years (for security reasons?) appraisers have been required to provide private financial information to Citi in order to consider whether the appraiser was solvent enough to work for them. Appraisers I know fought tooth and nail against this. In our case, we had been working for them for more than 20 years and now they want to know how much money we make? In other words, they wouldn’t want an appraiser to go under during the middle of a $400 appraisal assignment. It would be (apply sarcastic tone here) devastating to the entire financial system I would think.
Don’t get me wrong, we work for other areas of Citi which are sophisticated and professional. I am simply fed up with the “efficiency” theory of banking as it applies to backroom operations of large retail banks. They have lost their way. Incidentally, nothing has changed in this regard since the credit crunch began in the summer of 2007.
A few months ago, Citigroup’s retail banking appraisal group based in Missouri put my appraisal firm out to pasture (demoted to backup) in favor of appraisal management companies (those big national companies known for high speed, low costs and virtually zero quality (aka “army of form fillers”) aka AMCs and high volume appraisal shops/factories.
Of course, Citigroup gets a bailout.
Here’s a sampling of our former clients who are national banks that went with appraisal management company factories and ended up getting into financial trouble.
Not really. Like the stadium naming deal, the shift to an AMC symbolizes the point when a mortgage lender goes too far and loses touch with it’s understanding of risk. The corporate culture loses the ability to understand the importance of assessing the value of the collateral to which they are lending. Common sense evaporates.
For the most part, the individual review appraisers that worked at these lenders were professional and competent and could see the issue at hand, but they just didn’t have the political weight, so to speak.
Hopefully those institutional politics will be crushed by the time we reach seventh inning stretch (at US Treasury Field).
This just in: Tiger Woods now needs to rustle up lunch money.
Here’s a great story on the plight of appraisers that aired yesterday on the CBS Evening News with Katie Couric. I have rarely watched this program because I am never home at that hour but I happened to be watching yesterday….karma???
I have followed with great interest the legal tactics applied by eAppraisIT (ironically, the appraisal management company being sued by NY Attorney General Cuomo) last summer after she posted information about them on her site Mortgage Fraud Watch List. I am sorry that Pamela Crowley lost her appraisal business as a result of the pressure she was placed under. She sounds like another one of the good people forced out of the business. It’s crazy.
What is most amazing to me, is the fact that there are still lenders, mortgage brokers and appraisers out there STILL practicing as they were in the past, in Florida of all places, one of the weakest real estate markets in the country. The appraiser in the pick up truck must have nearly had a heart attack. If he knew he was being honest, he would have stayed to do the appraisal (correction: fill out a form). Incredible.
Reporter Sharyl Attkisson’s blog post “Houses Of Cards And Hot Potatoes” on Couric & Co. lays it out pretty clearly.
Why did the lenders go along – even solicit the inflated appraisals – if they were going to get left holding the bag at the end of the day? Because there’s such a lucrative market in selling the mortgages. A lender that makes a risky loan with a bad appraisal and simply sells the mortgage (along with the undisclosed risk) on the secondary market before anyone figures it out. Who’s to know? It’s sort of like the old game of Hot Potato: If you can make your money and then get rid of the loan (by selling it to another bank) before it goes belly up, you’re in the clear. But a lot of the loans are all going belly up at the same time now, and the financial institutions holding the mortgage are the ones getting burned by the Hot Potato.
It all looks so obvious right now, but appraisers have been complaining about this for the past five years and no one seemed concerned and no one listened.
The recognition of the problem with the appraisal independence as it fits within the mortgage lending process is only a first step, but it is an essential first step. The solution has to insure independence so there will some faith restored in the investor community that buy mortgage paper. Because right now, its pretty much non-existent.
…the title…imagine the voice of Captain Jack Sparrow’s first mate…arrr
OFHEO and NYS Attorney General Andrew Cuomo reached a deal today that may help create an environment for appraisers to be independent. Karen Freifeld and Sharon L. Lynch’s Bloomberg News article Fannie, Freddie to Overhaul Appraisals in Cuomo Deal says:
“The goal of the office is to find out what went wrong and how to fix the problem,” Cuomo said today at a news conference. “What we identified as the common denominator, if you will, was appraisal valuation.”
“We believe the appraisals were often fraudulent because there were conflicts of interest and pressure on the appraisers,” Cuomo said.
Cuomo strategy was to get the GSEs to agree and the other markets will follow.
And long time mortgage lending critic NY Senator Charles Shumer chimes in:
“Accurate, independent appraisals are very important to ensuring the safety and soundness of Fannie Mae, Freddie Mac and the mortgage market,” Lockhart said in a statement. “The agreements should help restore confidence in the mortgage market by enhancing underwriting practices, reducing mortgage fraud and making home valuations more reliable.”
In James R. Hagerty and Amir Efrati’s WSJ article Fannie, Freddie Set Stricter Appraisal Rules quotes me:
“In my opinion, 70% to 80% of appraisals that were done during the housing boom are probably not worth the paper they’re written on because the appraisers…were rewarded with more volume,” said Jonathan J. Miller, a New York appraiser and longtime critic of industry practices. He estimates that home values are overvalued nationwide by at least 10% because of inflated appraisals.
My significant concerns over appraisal management companies aside, important element of this agreement are spelled out in the Home Valuation Code of Conduct.
The first part of the code was what interested me most:
No employee, director, officer, or agent of the lender, or any other third party acting as joint venture partner, independent contractor, appraisal management company, or partner on behalf of the lender, shall influence or attempt to influence the development, reporting, result, or review of an appraisal through coercion, extortion, collusion, compensation, instruction, inducement, intimidation, bribery, or in any other manner including but not limited to:
withholding or threatening to withhold timely payment for an appraisal report;
withholding or threatening to withhold future business for an appraiser, or demoting or terminating or threatening to demote or terminate an appraiser1;
expressly or impliedly promising future business, promotions, or increased compensation for an appraiser;
conditioning the ordering of an appraisal report or the payment of an appraisal fee or salary or bonus on the opinion, conclusion, or valuation to be reached, or on a preliminary estimate requested from an appraiser;
requesting that an appraiser provide an estimated, predetermined, or desired valuation in an appraisal report, or provide estimated values or comparable sales at any time prior to the appraiser’s completion of an appraisal report;
providing to an appraiser an anticipated, estimated, encouraged, or desired value for a subject property or a proposed or target amount to be loaned to the borrower, except that a copy of the sales contract for purchase transactions may be provided;
providing to an appraiser, appraisal management company, or any entity or person related to the appraiser or appraisal management company, stock or other financial or non-financial benefits;
allowing the removal of an appraiser from a list of qualified appraisers used by any entity, without prior written notice to such appraiser, which notice shall include written evidence of the appraiser’s illegal conduct, a violation of the Uniform Standards of Professional Appraisal Practice (USPAP. or state licensing standards, substandard performance, or otherwise improper or unprofessional behavior;
ordering, obtaining, using, or paying for a second or subsequent appraisal or automated valuation model in connection with a mortgage financing transaction unless there is a reasonable basis to believe that the initial appraisal was flawed or tainted and such basis is clearly and appropriately noted in the loan file, or unless such appraisal or automated valuation model is done pursuant to a bona fide pre- or post-funding appraisal review or quality control process; or
any other act or practice that impairs or attempts to impair an appraiser’s independence, objectivity, or impartiality.
arrrrgh, matey (sorry – but I have been waiting for years for some progress on this).
In a recent post on Matrix, [Talking Points] The National Appraisal Clearinghouse I published the memo text in full for the first time in public domain (that I am aware of). I got a lot of calls and emails from appraisers, organizations as well as links from other sites with a slew of commentary.
The focus of the feedback seems to be on the “clearinghouse” concept in the talking points memo by Fannie Mae. The clearinghouse has the potential to be a huge morass of bureaucracy because it is presented as vague in purpose.
The common perception by most within the appraisal industry that I have spoken with or have provided commentary is that the clearinghouse will become:
I’d say that both of these issues expressed by the appraisal industry are absolutely of significant concern if AMCs become enabled as a result of the implementation of this memo, it spells disaster for any sort of relevant solution to the problem of disconnect between the valuation of property and the mortgages that are lent against them.
Here’s the specific text from the memo on the clearinghouse and some thoughts on each point.
3. A CLEARINGHOUSE of appraiser information, conduct and activity will be established.
my comment: The purpose seems to either overlap or supersede the function outlined in FIRREA for the licensing of appraisers to be managed by each state. At the state level, budget constraints do not allow them to go much beyond managing license compliance. After all, it is not practical, fair or realistic for a state to tell an appraiser, “Gee, you overvalued this property by $12,000.” State agencies are not given adequate resources to be able to police all appraisers. It has been my experience, at least in New York, that the Department of State has been competent and fair, despite the lack of resources. The function for each state is to provide oversight to make sure appraisers are correctly licensed, their courses taken are approved and to answer complaints by consumers for shoddy appraisal practice. That means dealing with legitimate complaints as well as those from crackpots hoping to smear an appraiser because they were unhappy with a value conclusion. However, that does not address the quality problem with mortgage brokers and AMCs.
a. All lenders will be required to provide post-purchase copies of appraisal documents to the Clearinghouse.
my comment: Of course, with digital documents and scanning capabilities, this process is fairly simple (we’ll get to who pays for this later).
b. It will be an independent entity with an executive and board of directors (no Fannie Mae employee involved).
my comment: This point is important, and as an independent entity, it should include majority representation by appraisers and appraiser organizations as well as lender representation. No mortgage broker or appraisal management company representation since they are part of the reason for the need for this entity to begin with.
c. It will staff a hotline for industry and consumer complaints.
my comment: I see this as redundant to the state function and not able to serve much of a purpose that will prove effective in resolving problems. I think this should remain on the state level and the clearinghouse aggregates complaint data from the states as part of its reporting function. Remember that this organization is essentially one step removed from the state level and could really only refer complaints to each state to handle.
d. It will provide annual reporting publicly.
my comment: From the stand point of summarizing aggregate data, this is an effective tool to create awareness of progress with this serious problem with the mortgage industry. However, it should not be used to publish complaints about individual appraisers unless it can publish complaints about lending institutions, mortgage brokers and AMCs.
DISASTER WAITING TO HAPPEN
Appraisal management companies [AMC] should be pretty happy about their prospects if the talking points memo as presented, becomes standard practice, because they become essential to lenders if mortgage brokers are not allowed to order appraisals for lending purposes. The same quality problems with appraisals will remain, if not get worse.
In other words, the appraisal quality produced by AMC’s is just as bad as the work generated for mortgage brokers. I think it would be a disaster and a monumental waste of energy, given all the progress that New York State Cuomo has made in correctly identifying the real issues at hand if AMC’s become more relevant.
Ideas for consideration
Other ideas or suggestions welcomed.
Aside: I would love to be officially part of the government clearinghouse effort because, as someone recently told me, “the devil is in the details” and I think it is important to have appraisers on the front line actively involved in fixing the disconnect problem.