Eye on Washington

Appraisal management firms have attracted a lot of attention — and a similar volume of complaints — since Fannie Mae and Freddie Mac first implemented the Home Valuation Code of Conduct in May.Designed to shield appraisers from pressure and undue influence from loan officers and mortgage brokers, the code has increased the cost of originating loans while raising questions about the quality of the appraisals being performed."It's a good idea to separate the ordering of the appraisal from the loan officer," said Scott Stern, chief executive of Lenders One, a mortgage banking cooperative with 130 member firms. However, Mr. Stern believes AMCs are hiring appraisers based on price — appraisers who have little knowledge of local market conditions. "I don't think it's fair that AMCs are hiring the cheapest appraisers," he said.Lenders One, the National Association of Realtors and appraiser groups are hoping new appraisal policies recently adopted by the Federal Housing Administration will correct some of the problems associated with HVCC and AMCs.While it is likely to lead to higher appraisal costs, FHA's approach allows appraisers to disclose their fee. Currently, the appraisal and AMC fees are combined and disclosed as a lump sum.FHA also addressed the portability issue that allows a lender to transfer an appraisal to another lender. (Fannie and Freddie have not addressed this issue.) "It seems like FHA is trying to eliminate some of the problems [associated] with the implementation of HVCC," said Mr. Stern.Starting Jan. 1, FHA appraisers can record their fee on the appraisal report. A source close to the issue noted that a consumer, for instance, might see that an appraiser was paid $200 by the AMC but that the consumer was charged $350, a markup of $150. "It will hold the AMCs' feet to the fire," he said.Appraisers contend that FHA's current policy essentially caps their fee and allows AMCs to fund their operations on the backs of appraisers. "Our members have reported widespread and consistent cramdowns of their fees," said Bill Garber, director of government and external relations at the Appraisal Institute.FHA's new policy allows the appraiser's fee and the management company's fee to float separately at market rates. The Appraisal Institute is hoping Fannie and Freddie adopt a similar policy, Mr. Garber said.Patrick McEvoy, vice president of First National Appraisal Management, said some AMCs are cramming down fees. "They broadcast to the lowest bidders and they have systems to detect the lowest price," he said.Mr. McEvoy started FNAM two and a half years ago with a fellow certified appraiser. The Hicksville, N.Y.-based AMC pays on a "higher scale," Mr. McEvoy said, which ensures a “little bit of loyalty” from the independent fee appraisers. "We want a good product to give our clients."He expects consumers will be "confused" by FHA's new policy when they see the appraiser's fee on the report and a different number on the HUD-1 settlement sheet.The AMC executive noted the appraisal fee on a FHA transaction is generally higher than a conventional Fannie/Freddie mortgage appraisal because it takes more work. But he said he didn't know if the new FHA policies will increase the price. "Appraisals on conventional loans have gone up at least $100 to $150 since the HVCC went into effect," Mr. McEvoy said.Donald Blanchard, chief compliance officer for Lender Processing Services, which owns LSI, said the fees his AMC pays appraisers "have been relatively stable for five years." He noted LSI is the oldest AMC and works with 20,000 fee appraisers. "The average tenure on our appraiser panel is 13 years. There are thousands of appraisers that understand the value added that AMCs bring," Mr. Blanchard said.AMCs and their trade group have a lot of questions about FHA's new appraisal policies and will be seeking clarifications, especially with regard to the fees AMCs can charge. "There is no clear direction yet on how the fees are going to be disclosed on the HUD-1," Mr. Blanchard said.Nevertheless, the LSI senior vice president expects FHA's policies will lead to higher fees for appraisals and more appraisers will be willing to work with LSI. "If this will satisfy those appraisers that argue about the fees AMCs pay — that's a good thing," he said. But he noted that lenders will have to pass the costs onto consumers. "I am not sure that the consumer is going to want to pay more," Mr. Blanchard said.The National Association of Realtors has been highly critical of the HVCC and the use of inexperienced appraisers. But the Realtors like FHA's approach. "FHA comes right out and says you don't have to use an appraisal management company," NAR's chief spokesman Lucien Salvant said.FHA lenders (like Fannie/Freddie funders) can move the ordering of appraisals into a separate department, away from their loan officers and other commissioned staff, as an alternative to hiring an AMC. But for compliance reasons, a lot of lenders choose AMCs.NAR also likes the FHA approach because of the new fee disclosure and the ground rules for transferring appraisals to another lender. The Realtors want FHA and the GSEs to issue joint question-and-answer guidance, bringing their appraisal policies closer together.The Lenders One CEO also wants better coordination. "FHA, Fannie and Freddie have a vested interest in ensuring that AMCs or other independent third parties hire experienced in-market appraisers. Otherwise, HVCC will continue to negatively impact home sale transactions," he said.