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Thanks to the Federal Reserve, Appraisers Should Earn More

Residential appraisers should command higher fees now that new regulations will require lenders and appraisal management companies to pay them “customary and reasonable” compensation.

The requirement is part of a Federal Reserve interim final rule on appraiser independence that was mandated by Congress.

“A creditor or its agent must pay a fee appraiser at a rate that is reasonable and customary in the geographic market where the property is located,” the Fed rule says.

But not everybody is sure what a customary or reasonable fee is.

It is not defined in the Dodd-Frank Wall Street Reform and Consumer Protection Act and there is no set methodology for establishing C&R fees, according to Mark Linne, executive vice president of AppraisalWorld in San Jose, Calif.

Not surprisingly, many companies are now running around conducting surveys of appraiser’s fees because they saw the rule coming.

“Everyone is terrified because they are not quite sure how they prove that they are, in fact, paying reasonable and customary fees,” Linne said.

Fortunately, compliance with the Fed rule is voluntary until April 1, 2011. The agency is seeking public comment for 60 days, which means there could be changes before the rule is finalized.

Appraisal Institute president Leslie Sellers said the appraisal rule will move the industry away from “cheap and quick” appraisals and ensure that homebuyers are paying for a competent and experienced appraiser.
But the Appraisal Institute wants the Fed to take another step and require disclosure of the appraiser’s fee and the AMC’s fee on the HUD-1 settlement sheet. “We want complete transparency,” Sellers said.

The Fed rule also addresses conflicts of interest in the appraisal process to protect appraisers from undo influence or coercion by lenders and other parties in the transaction. (The Dodd-Frank Act directs the Fed to undertake such rulemaking.

At the same time, the lawmakers directed Fannie Mae and Freddie Mac to issue new appraiser independence guidance to replace the Home Valuation Code of Conduct. Congress, though, gave the GSEs leeway to adopt tougher standards than the Fed.

The GSEs responded by issuing new standards continuing the HVCC prohibition on loan officers and mortgage brokers selecting appraisers.

“The Appraiser Independence Requirements maintain the spirit and intent of the HVCC and continue to provide important protections for mortgage investors, homebuyers and the housing market,” Fannie says in a notice to lenders.

Freddie issued its guidance in the form of a question-and-answer format. One Q&A indicates a mortgage broker can transfer an appraisal prepared by Lender A to Lender B—provided the “mortgage broker has no control over, or involvement in the appraisal assignment.”

Because the Dodd-Frank bill calls for the HVCC to sunset on Nov. 1, the Fed took a different tack and stopped short of prohibiting loan officers and mortgage brokers from selecting appraisers. The Fed rule does not expressly permit or prohibit loan officers or mortgage brokers to select appraisers.

In fact, the rule is largely silent on how brokers would interact with wholesalers and banks when it comes to appraisals. It appears that creditors could use an appraisal obtained by a broker if they do enough due diligence to determine the appraisal has not been compromised. But they could face penalties if the appraisal materially misstates the value of the collateral.

And the penalties are stiff. Violations of the appraisal rule can result in penalties of $10,000 per day under the Dodd-Frank Act.

To avoid sanctions, lenders have to separate the appraisal and loan production functions and operate within a “safe harbor” created by the rule.

“The interim final rule establishes a safe harbor and specific criteria for establishing firewalls between the appraisal function and the loan production function to a prevent conflicts of interest,” the Fed says.

These firewalls allow banks to employ in-house appraisers and use affiliated appraisal management companies. “The Fed should be specific and tell brokers how they can comply with the rule,” Sellers said. He also wants the Fed to provide more “specifics” about other parts of the rule.

“They need to provide a way for commerce to work in the market, and that it is consumer friendly and risk-management safe,” the Appraisal Institute president said.

Needless to say, the National Association of Mortgage Brokers is not impressed by the Fed rule. “It doesn’t really matter what the Fed says. The folks that create the secondary market are going to dictate the terms,” said NAMB executive vice president Roy DeLoach.

“At the end of the day, most lenders are going to use an appraisal that Freddie and Fannie will accept,” DeLoach said. But he noted that “portability” of appraisals remains a problem. A broker can initiate an order for an appraisal from an AMC, but the lender has to be named as the owner of the appraisal.

Also, it can be difficult for a broker to get Lender A to transfer the appraisal to Lender B. In cases where the broker has to shift to another lender, the consumer ends up paying another $400 to $500 for another appraisal. “The Fannie/Freddie approach is costing consumers more money,” DeLoach said.