On Appraisals, Should You Follow The Money? Asks Kenneth Harney
Follow the Money
Some appraisers are being paid less than half the fee, while the balance flows to an appraisal management company.
Washington – The new Consumer Financial Protection Bureau is working on a real estate issue that gets to the core of the agency’s purpose: Bringing clarity and better disclosures about the often opaque and costly fees that homebuyers, sellers and refinancers are hit with at closings.
One of the disclosures now under review might surprise you: appraisal charges. Why do they need clarifying? Doesn’t just about everybody who applies for a mortgage, whether it’s to buy a house or refinance, have to pay $450 to $600 — sometimes more — to find out what the property is worth?
Correct. But the reality is a bit more complicated. Start with the fact that in three out of every four purchases or refinancings, according to industry estimates, the person who visits, inspects, measures and puts a market value on your property is receiving only a fraction of the money you are paying. Some are being paid less than half of the fee, while the balance flows to an enterprise you’ve never heard of — an appraisal management company — that assigns the job to the appraiser. That management company, in turn, may be wholly owned by or in a joint venture or affiliate relationship with your lender, which in turn may be pocketing a significant portion of your appraisal dollars.
Current federal settlement disclosures give you no hint of where that money is really going. There is just a single line item for appraisal charges on the standard HUD-1 settlement statement. Say you’re charged $550. There is no hint that the appraiser gets $250 and the rest goes to the management company and the lender. The CFPB is considering whether to shed light on this by mandating two disclosures — what the appraiser is paid and what the management company is taking.
Should you care about this? Absolutely. Although banks and mortgage lenders maintain there is no need for additional disclosure, appraisers, builders, realty brokers and others say the costs of appraisals to consumers have increased in the past two years, while the quality and accuracy of the work have declined. In a poll of its members last year, the National Association of Realtors found that 70 percent reported consumers were being charged higher appraisal fees at closing — sometimes $100 or more than was the typical charge previously.
At the same time, appraiser members reported sharp reductions in their own compensation by 40 percent to 50 percent per assignment. Many of the agents polled said they saw significant increases in the number of appraisers who were unfamiliar with local market conditions because they were from another geographic area. The same poll also found a growing incidence of sales transactions being derailed by appraisals that came in below the contract price agreed upon between the seller and the buyer.
Critics say the drops in fees to appraisers combined with higher charges to consumers are byproducts of the rapid spread of management companies, whose growth during the post-boom years has been fueled by rules from Fannie Mae, Freddie Mac and Congress aimed at ensuring “appraiser independence.”
Frank Gregoire, a past chairman of the Florida Real Estate Appraisal Board, which oversees and regulates the industry in that state, said that while appraiser independence is an important goal, banks and their affiliated management firms are raising the costs of appraisals to consumers without improving services.
“The borrower receives no benefit from the [appraisal management] ‘service,’” he said in an email. “The lender is able to outsource a significant responsibility” — the selection of an appraiser — “to an affiliated subsidiary, and profit from that task by making the consumer and the appraiser pay for the privilege. [This] business arrangement is concealed from the consumer/borrower, and the charge is misrepresented as an ‘appraisal fee’ on the HUD-1. This is dishonest, deceitful and unfair.”
Industry defenders of management firms, such as Donald Kelly, executive director of the Real Estate Valuation Advocacy Association, strongly disagree. Kelly said management firms perform the “back office” functions — including reviews and quality control — “that in the past were done by lender staff and employees.” In other words, they earn the money they get. And there’s no pressing need for consumers to see additional disclosures. They just need to know the bottom line.
Which brings the matter back to the Consumer Financial Protection Bureau. Though it can’t comment on pending rules, the agency has a statutory deadline in July to produce an improved version of the HUD-1 settlement form. How it comes down on real estate appraisal fee disclosures — more transparency for consumers or not — will be a revealing early test.
You bet people should care…and shouldn’t somebody…anybody care that the work load for a typical appraisal has doubled (at least) and that appraisers are now being paid half of a reasonable and customary fee? Shouldn’t the fee for an appraisal have risen in light of the new requirements and doubled work load? It is incomprehensible and wrong. Someday soon, there will be a lack of appraiser’s in this country. Why would anyone college student in their right mind want to enter a profession like this?
You are right on both counts.
There will indeed be an appraisal shortage in the near future. A shortage of experienced apparisers already exists. The continuing downward spiral in housing prices and upward spiral of inventory are the direct result of handing the keys to the industry to inexperienced appraisers. We have no way of knowing exactly how many appraisers have left the industry because states offer no incentive (discounts) for placing your license into escrow; therefore appraisers are renewing their license but refusing to use them. I’ve read that 30% have left the business in 3 years. I suspect that the reality of the number is closer to 50% with 80% of that that number being appraisers with 10 or more years of experience.
No intelligent human being will enter the profession in the future either (much less a college grad). This however plays into the hand of those who planned the gutting of the industry in 2008.
*Purge experienced appaisers and you ruin the quality
*Capture the profit but leave enough fee on the table to deceive the inexperienced. It will take this group months (or years) to figure out they cannot earn a decent living at it even by cutting corners.
*When the downward spiral occurs in home pricing and inventory increases lay the blame on ineffective appraisers.
*Now that 90% of the appraisal market has been forced to go through AMCs; use the new UAD platform to scrape the remaining data from appraisals which go through the system. [Before the UAD was implemented the system was incapable of handling the amount of data].
*Slowly begin a discrete campaign which promotes the use of AVMs rather than using actual appraisals. With advent of the UAD AVM quality will increase considerably. On the flip side, fee capture has already assured complete destruction of quality reports from appraisers.
Now you have it appraisers. The complete plan. Rob appraisers of their profits, insure that quality continues to erode, and then rid yourself of those pesky appraisers once and for all with higher quality AVMs.
I only wish that Ken could call it by it’s real name: LEGALIZED EXTORTION.
What amazes me small potatoe consumers such as Molly Katchpole can grab onto a piddly issue like a $5 monthly bank fee increase and wrestle the beast to the ground like a pit bull within months. These same people could care less however that homeowners are being raped on a daily basis through what Ken describes in this article. I have forwarded numerous articles on this to the Wall Street Movement and Molly Katchpole with no response. That leads me to believe that the following is taking place. Both Molly and the Wall Street Movement guys are smart enough to figure out that $5 service fee increases are not a good thing but they could care less about what Ken is describing since they live in tents rather than houses. Homeowners on the other hand are so busy working three jobs to save their mortgage that they never bother to dig out the few articles that have been written on the subject by Ken. Other than Ken’s once a year article the national media refuses to cover the issue. Why? Because media outlets are losing their assets (hand over fist) and depend upon the very banks they would be condemning to stay afloat.
End the rape. Visit BankRape.com
Very interesting and educational topic. I wasn’t aware of this issue and I’m sure many are like me, clueless about AMCs. Pretty sad for homeowners and appraisers!
Make the AMC’s file an IRS Form SS-8 – Request for Determination -status… and watch them drop out of sight. You don’t need them.. Let the banks pay for their so called quality control. Why should the consumer foot the whole bill and the appraiser get $$$some change in his/her pocket. All you need is firewall protection. You don’t need AMC’s
If the lender wants all their ordering, processing, underwriting, and quality control overseen by an AMC, then they should pay for it and not the consumer nor the appraiser. The borrower should be able to hand payment right to the appraiser.