If there hasn't been enough upheaval in the way mortgage originators and appraisers interact in the past few years, the next 12 months will see possibly the greatest changes to that relationship since the passage of the Financial Institutions Reform, Recovery and Enforcement Act in 1989.
Back then, FIRREA, which for the first time imposed federal standards on appraisers, was crafted in response to the thrift crisis. Dodd-Frank, crafted in response to the mortgage crisis, looks to finish the job that FIRREA started of pushing the appraisal industry towards conformity, one expert on the topic declares.
There are a lot of unknowns facing appraisers as a result, with some items in the new legislation that could pose some interesting challenges, continued William Fall, who heads up the eponymous William Fall Group.
All the initiatives going on the industry, notes Griff Straw, president of Solidifi US, including the government-sponsored agencies' Uniform Mortgage Data Program, is going to create a new level of scrutiny for the appraisal industry that has not been seen in the past.
Meanwhile, the hot-button topic of fees, raised in the wake of the implementation of the Home Valuation Code of Conduct, is on the table as well because of Dodd-Frank.
Fees are one of the areas of unknown, notes Brian Coester, the chief executive of Coester Appraisal Group. The law has language regarding customary and reasonable fees.
What exactly that means has yet to be defined. And even so, he notes, already there is an out, with language that indicates if the appraiser accepts the amount, then it is customary and reasonable.
A possible model, Coester said, is for regulators to craft the customary and reasonable fee rules similar to those for the insurance industry use to pay medical professionals.
Overall, there are "a lot of unclear questions. As people are saying, we're just as confused as everyone else," he said.
Under the present system, there is HVCC for the government-sponsored enterprises, the Federal Housing Administration had its own rules, banks that put their originations into portfolio aren't even bound those rules and so forth for each different investor.
Dodd-Frank streamlines the system and everyone is pretty much playing by the same rules, Coester noted.
Still, Fall said, the appraiser independence stand brought into place by HVCC is one of the more important points brought forward into the Dodd-Frank legislation.
But fees remain the big bugaboo. The industry is waiting for regulators to come out with something (Coester said he has been checking every day). And the result is likely that the industry will not have enough time to comment on them.
Besides the option on customary and reasonable fees, there are other places where the rules allow similar options for alternative scenarios if proper procedures are followed.
Coester has also spoken with an industry participant who told him that nowhere in the rule is there a prohibition on mortgage brokers ordering appraisals, but that item is being ignored.
His advice to appraisers—as long as you are making a living, hang in there until the situation clarifies. Be prepared to react to either likely scenario—the regulators will do something or they will do nothing.
"They may come out with something that's totally different than anything we've ever though about, or they may come out with something that is much more in line with what we've thought of. But if you commit too much either way, you are kind of putting yourself in a bad scenario," Coester said.
Another suggestion: talk with your clients and the appraisal management companies you deal with and see what they have planned.
While the independence of the appraiser had been strongly emphasized in Dodd-Frank, Fall said one of the unknown consequences could be a large thinning of the ranks, if not an outright end, of the independent contractor appraiser.
There is a lot of language in Dodd-Frank as well as the interim final rule recently brought out relative to reporting obligations and compliance.
Furthermore, with the fees generated by AMC licensing rules many states are putting into place, he feels a lot of those dollars will go toward individual state initiatives that could lead to a lot stronger scrutiny of the individual appraiser.
"There's a clear, strong emphasis of appraisal independence, but correlated to that is a strong expectation to be more responsible to the integrity of the process," he said.
As a result, those who remain independent will have to be more careful in running their business, and quite a few might not be up to the task. This is true not just from a technical competency point of view, but from having general business know-how ability as well.
So the large appraisal companies will need to provide the foundation for the future of the industry when it comes to things like training, mentoring, guidance and education. Fall says this could be like what the accounting profession does.
While you might see some appraisers go into salary arrangements, Fall expects the field to remain fee-driven based on product and scope of work that is being delivered, especially with the wide gamut of services that can be performed. Straw said the changes would mean that appraisers would need to be more detail oriented in their work, as well as better communicators.
"When you look at an appraisal, and it [asks for] condition and they answer 'good,' what is 'good?'
"Good to you and good to me could be two different things. Part of the evolution of the appraisal is going to be more specifics in the way we communicate with each other.
"Because at the end of the day, the investor who invests in the loan or the mortgage-backed security wants to have a better handle on what they are getting into and what is the collateral for these loans," Straw said, adding that with the UMDP, Fannie Mae and Freddie Mac are looking to give more of an understanding to investors of what the risks might be.
Lenders will be holding appraisers more accountable for a better quality product, he said. The quality of the appraisal will be critical; there will be no more wiggle room. They will need to have the best-quality appraisal by the best-qualified appraiser to build confidence in the loan for investors.
There have been reports of thinning in the appraiser ranks and Fall believes it will be difficult to rebuild the ranks until the economics of the business are better, as well as an increase in the need for appraiser, occurs.
Straw compared reports of people leaving the appraisal business with what took place in the mortgage origination business. When times got tough, a lot of marginal and part-time originators left the business.
"By the same token, there were people doing appraisal that probably should not have," he continued. But he pointed to Appraisal Institute data which show the average appraiser is 58 years old.
People aren't signing up to be appraisers and "fast forward 10 years, where are the people going to come from to fill that gap?" he asked.
We could also see a weeding out of the AMC population, Straw said, noting that there are approximately 300 of these companies but many are small local shops.
Quality will be the name of the game for appraisers, as they not only have to improve the quality of their work, but also as independent contractors have to improve the quality of the business they run.
"The appraiser's role is changing and as it changes, they need a new set of tools to learn their craft," Straw said.
