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, 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 Inc., 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."
