As home prices fall again and regulatory reforms take hold, long-simmering tensions between mortgage lenders and appraisers are flaring up anew.
Under a provision of the Dodd-Frank Act, lenders are now required to pay "customary and reasonable" fees to appraisers. The measure was written to address a long-standing appraiser complaint: That appraisal management companies (AMCs), hired or owned by lenders, have been driving down fees at the expense of quality. The law's goal is to ensure lenders seek the most competent appraisers rather than the cheapest ones.
But appraisers and independent AMCs have complained to regulators that some lenders have lowered their fees since this part of Dodd-Frank took effect on April 1 — and that other lenders have effectively done so, by demanding more work for the same pay as before.
Interim federal guidance allows a bank to look at the fees it's paid in the past year to determine what is "customary and reasonable." So many banks have been holding their fees steady. At the same time, given a shaky housing market in which distressed sales make up as much as 40% of current listings, bank also are asking for more information in valuation reports.
"Lenders are scared," said Thomas J. Kirchmeyer, the president of Kirchmeyer & Associates, a midsize AMC in Buffalo, N.Y. "The risk is greater and they want more support for the value that they're getting from the appraiser. They don't want to buy back loans based on faulty appraisals."
The rub is that "the scope of work keeps increasing," Kirchmeyer said. "The lender wants more and more things in the appraisal for the same price."
For example, some lenders are asking for two current or pending listings in the area, on top of the usual three comparable sales.
The Dodd-Frank appraisal standards were created to address the fee compression that is said to have resulted from the Home Valuation Code of Conduct, which took effect in 2009 and barred loan officers and brokers from selecting appraisers. Many blame the HVCC — which sought to prevent commissioned sales representatives from bullying appraisers into inflating valuations — for driving business to appraisal management companies that act as middlemen.
Traditionally, AMCs took a cut of the fees for the appraisals they arranged. But a handful of banks, including Fifth Third Bancorp and U.S. Bancorp, have adopted what is known as a "full fee" or "cost plus" model that separates AMC fees from appraisal fees. Some have capped the AMC fee at $125 or less.
"The interagency appraisal guidelines suggest that banks use caution when engaging AMCs," said Tony Pistilli, the chief appraiser at U.S. Bancorp. "This may move banks towards engaging appraisers directly to ensure compliance and increase the quality of appraisals."
Under the interim guidance, the other way lenders may determine the "customary and reasonable" rate, aside from looking at the past year's fees, is by consulting a third-party market survey, such as the fee schedule that the Department of Veterans Affairs uses for its approved appraisers. These surveys do not include AMC fees.
"The first presumption is saying that the market controls the price so rates paid by the consumer remain competitive," said Nanci Weissgold, a partner at the law firm K&L Gates, who represents lenders. Using a third-party survey that excluded AMC fees was "like looking at wholesale rates versus retail rates," she said.
Meanwhile appraisers and some AMCs interpreted the rule as prohibiting the use of AMC fees as the basis for determining what is "customary and reasonable."
For some, the upshot has been a continuation of the status quo. If a borrower is charged a $375 appraisal fee, the AMC can pocket anywhere from $125 to $250.
"The idea that an appraiser under Dodd-Frank would make less is certainly not what was intended," said Griff Straw, the president of Solidifi, a Chicago appraisal management company. "Some AMCs took this as an opportunity to maintain their profit margins. But you get what you pay for. This is not the time to be scrimping on appraisals."
Much could change when the Consumer Financial Protection Bureau, a powerful agency created by Dodd-Frank, takes over rulemaking authority for appraisal fees after it gets up and running in July. "Because the appraisers are making a lot of noise with regard to this issue, AMCs are concerned that the CFPB could step in," Weissgold said.
A major concern for lenders is that Dodd-Frank imposes civil penalties of $10,000 a day for the first violation of appraiser independence standards and $20,000 a day for additional violations. The law prohibits lenders from directly or indirectly exerting influence over appraisals.
Don Kelly, executive director of the Real Estate Valuation Advocacy Association, a trade group for AMCs, said appraisers believe that paying them "less than they think they're worth means you're pressuring them to come up with a predetermined result," essentially opening the door for lenders to be assessed civil penalties.
"Logically that doesn't make sense," Kelly said, because paying a lower fee implies less pressure from lenders, not more.
Darius Bozorgi, the president and chief executive of Veros, a maker of software for property valuations, said appraisers are subject to "all kinds of pressure."
"It's very difficult to be independent when you're being paid by the institution you're rendering opinions about," he said.
Bill Garber, the director of government and external relations at the Appraisal Institute, a trade group for appraisers, said regulators are far less concerned about fees than they are about the competency of appraisers and whether AMCs' appraisal ordering systems always accept the lowest bid.
"Banks are responsible for the ordering, reviewing and independence of appraisers and there really is no other way to interpret the new guidelines other than that competency has to be first," he said. "It's odd because the appraisal is being done for the bank to help mitigate risk. They should want and demand a thoroughly prepared appraisal."
Lenders are starting to get some blowback. Joanna Conde, the president of the Arizona Association of Real Estate Appraisers, surveyed her members and published on the trade group's website a list of "The Bad and the Ugly" — lenders and AMCs that pay low fees, require unreasonable turnaround times, are slow to make payments and ask for additional work after the delivery of the report. The dubious honorees included 57 lenders and AMCs, including CoreLogic's Valuation Services, Lender Processing Services' LSI Appraisal and Wells Fargo & Co. and its AMC joint venture RELS Valuation.
"The problem is, there is no standard of what an appraisal is, what is customary and reasonable and what the lender should pay an AMC," Conde said.