Negative Repercussions of HVCC & Dodd Frank Act – VaCAP
Virginia Coalition of Appraiser Professionals (VaCAP) Letter to Senator Warner Addressing the Negative Repercussions of HVCC and Dodd Frank Act
Dear Senator Warner:
In response to the devastating effects of the legislative changes that have crippled the appraisal profession and undermined the quality of appraisals, appraisers throughout Virginia have joined together to educate the public, raise consumer awareness, protect appraiser independence, and work toward effective legislation that will benefit us all. We have now formed the Virginia Coalition of Appraiser Professionals (VaCAP). VaCAP appreciates this opportunity to present to you the position of appraisers across the state regarding federal legislation as it relates to the appraisal profession and consumer protection. This letter is intended to first describe the situation that has arisen from the HVCC and Dodd Frank Act, and then propose key changes that we feel are essential to the recovery of the housing market and restoration of sound lending practices needed to sustain any recovery.
Despite the good intentions of appraiser independence and consumer protection purported first by the HVCC and later the Dodd Frank Act, it has become painfully obvious that these laws have done exactly the opposite. They have provided for unfair advantage to a handful of the largest banks, making it nearly impossible for smaller lenders and local community banks to compete. They have created loopholes for AMC ownership by lenders, which allow the largest banks to have more control over the appraisal process than ever, while giving them legal cover against anti-trust allegations. This has created a virtual monopoly on the bulk of appraisal-related services for a handful of bank-owned AMCs. This monopoly gives AMCs incredible power to manipulate appraisal fees and turn-time requirements.
Conveniently, the Dodd Frank Act provides for no requirement that the AMC fees be disclosed to the consumer. In conjunction with the strangling of appraisers, these laws also force the consumer to pay additional fees for AMC services that add no value to their loan but greatly increase the closing costs associated with it. Conveniently, the Dodd Frank Act provides for no requirement that the AMC fees be disclosed to the consumer. Lenders are allowed to combine all fees related to the appraisal on one line of the HUD statement. As a result, the borrower sees only that the appraisal cost them $600, which falsely implies that the appraiser has been compensated this much for their work and creates unfair ill-will toward the appraiser who is now viewed as “fleecing” the homeowner. In most cases, the reality is that the appraiser is actually being paid less now than they were 10-15 years ago, despite the fact that both the cost of business and the time involved in completing an appraisal have increased dramatically. The truth that should be disclosed to the homeowner is that the appraiser was likely paid half or even less of what the $600 appraisal line states, while the rest goes to an AMC whose main business focus is the fastest turn-time for the lowest fees.
Bank of America has made an extra $300 that they didn’t make before the HVCC and Dodd Frank Act, even if the loan never goes through.The lender’s incentive is obvious to the unbiased observer in the following example: Bank of America is one of the largest lenders in the US. Bank of America owns Landsafe Appraisal Services, which in turn is one of the largest AMCs in the US. Landsafe controls a huge percentage of the AMC business in the US, which gives them immense power to drive down the fees that they pay their appraisers. Work for less or starve is the not-so-veiled threat that appraisers are presented with, and the choice between demanding fair compensation or being able to feed and house their family is unfair but powerful incentive for appraisers to play along. Landsafe collects $600 from the borrower for the “appraisal fee”, pays the appraiser $300, and pockets $300 for nothing that the consumer can see at all. Since Landsafe is owned by Bank of America, the result is that Bank of America has made an extra $300 that they didn’t make before the HVCC and Dodd Frank Act, even if the loan never goes through. The greatest irony is that Bank of America is making as much or more off the appraisal in the current environment as the appraisers themselves, yet Bank of America is not an appraisal company and not subject to appraisal regulation. At a time when unemployment is skyrocketing and the housing market is in shambles, the federal government has essentially endorsed further theft of the consumer’s hard-earned money to fill the coffers of the very same big banks and investment companies that caused the housing market collapse.
Dodd Frank Act unfairly punishes those that had little or nothing to do with the housing bubble and its eventual collapse. In the three years since the HVCC first gave AMCs monopoly over the appraisal business, the effects have been disastrous. The housing market is a major driver of the entire economy, and it should be clear by now that the federal government cannot manipulate and regulate it into correction. The only hope for its recovery is by restoring the free market. The AMC monopoly has resulted in poor quality appraisals and countless failed loan applications because appraisers can no longer compete based on skill, expertise, and quality. When competition becomes based entirely on the lowest fees and fastest turn-time, it is inevitable that quality will suffer. Breaking the AMC monopoly by restoring the right of loan originators and production staff to order appraisals is key to any housing market recovery and restoration of appraiser independence. Dodd Frank Act unfairly punishes those that had little or nothing to do with the housing bubble and its eventual collapse. Loan officers did not create the lending policies that allowed for virtually no money down, stated income or interest only loans, and risky loans to individuals with poor credit. Those loan originators simply tried to make as much money as possible within the system in which they worked. Similarly, appraisers did not single-handedly inflate the housing bubble by over-valuing properties in order to meet the demands of loan originators. Fannie Mae, Freddie Mac, FHA, and terrible lending policies did this by manipulating supply and demand. Loose lending guidelines created a false level of demand by qualifying hundreds of thousands of borrowers who were not truly in the financial position to purchase a home. That demand quickly outpaced the supply of houses for sale, which created intense appreciation of the value of the existing supply. When there is less of something to go around than there is demand for it, the price always increases. Appraisers cannot control supply and demand. They can only report the current value of a property that has resulted from the existing supply and demand circumstances. Taking away the ability of loan originators and their staff to order their own appraisals from appraisers they know and trust has destroyed the free market principal of competition based on quality and service.
VaCAP believes there are three main areas that should be addressed at the federal level immediately in order to restore appraiser independence, control the skyrocketing costs to the consumer, and begin to repair the housing market. We urge Senator Warner to lead the charge in true reform of appraisal and lending regulation, and put us on the path to real recovery. According to public record, JP Morgan’s employees and political action committee have contributed $194,000 over the course of your career, making JP Morgan the largest donor to your campaign committee. The fact that from January to March of this year, JP Morgan’s employees and their hedge fund, Highbridge Capital Management, have contributed $87,600 to your campaign committee demonstrates their belief in the power of the lobbyist’s dollar. They know that appraisers and consumers are tired of this broken system and are banding together to change it right now. Your siding with the consumer and the small business appraiser on this critical sector of the economy will go a long way to change the perception that the special interests of big banks and their lobbyists will continue to control our government, our laws, and our economy. We respectfully request strong consideration of the following three steps.
- Whatever the intention of the HVCC and Dodd Frank Act, the AMC monopoly has rewarded the big banks for the bad lending practices that caused the housing bubble and its collapse, while punishing the appraisers, consumers, and loan officers who are just trying to survive in an environment they did not create. Restoring the free market to appraisal ordering, and returning to appraisers the independence they need to do the business of appraising is critical.
- Along with restoring the free market to the appraisal industry, proper regulatory and professional enforcement is essential. All of the problems described for appraisers and consumers, and indeed the current mortgage crisis itself, could have been avoided but for one crucial thing: the lack of regulatory and professional enforcement. Enforcement is the key. For appraisers, there must be a new “watchdog” agency whose sole purpose is to support an appraiser’s independence, and proactively go after those external parties that attempt to influence an appraiser’s objectivity. This enforcement mechanism should be central and proactive in its mission, and perhaps could be a division of the CFPB.
- Finally, lenders should be prohibited from using staff appraisers or wholly owned AMCs in order to prevent conflicts of interest (this applies to primary collateral valuations in mortgage loans). The entire concept of having a financially disinterested, unbiased, and independent third party (the appraiser) to perform collateral valuations is a systemic safeguard that is critical to the safety and soundness of the lending process. Forcing consumers to pay for a false firewall via AMCs owned by the very lenders making their loan is an expensive and deceptive smoke screen to provide cover for anti-trust practices. AMC fees result in untold millions of dollars of consumer spending that could be going back into our struggling economy instead of being diverted back into the coffers of the banks which use it to lobby for more favoritism to keep the cycle going.
In closing, we urgently need your help to bring these issues to the forefront and demand responsible correction of these unintended consequences at the federal level. VaCAP wishes to extend our support for legislators who have the courage to fix this broken system, restore the free market, and give consumers back their right to choose the loan company and the appraiser that is best for them. Time is of the essence. VaCAP understands that we cannot kick this can down the road, or sit back any longer and hope things improve. Please partner with us for the sake of Virginia and the whole United States.
President-Elect, Virginia Coalition of Appraiser Professionals
PO Box 42314, Richmond, VA 23242