Appraisal Scoop

The 1004D - Appraisal Update and/or Completion Report - Uses and Misuses

Guest Author:  Ken Shure, Certified Residential Appraiser in the Los Angeles, California area.  Contact: kbshure@Yahoo.com

The 1004D form issued by Fannie Mae has two distinct sections. The first section is utilized to produce a summary appraisal report associated with a subject property for which a prior appraisal report was completed and to do so as of a new effective date. The form labels this section as a "Summary Appraisal Update Report" however it must be noted that when completing this section one has undertaken a new assignment and must be aware of the USPAP considerations of doing so. The second section is utilized to confirm whether or not requirements or conditions stated in the original appraisal report have been met. The focus of this writing is on the latter section.

The appraiser completing the lower section of the 1004D form certifies that they have performed a visual inspection of the subject property to determine that the conditions or requirements stated in the original report have been satisfied. This certification language makes the lower section appropriate for use when repairs were called for in a prior appraisal report that utilized the third check box option within the reconciliation section (CB3). Checking this box provides for the appraisal to be based on a hypothetical condition that specific repairs or alterations have been completed. In addition, the 1004D form is appropriate for use when the second check box option within the reconciliation section (CB2) has been utilized in the original report. Checking this box provides for the appraisal to be based on a hypothetical condition that the improvements have been completed according to plans and specifications that were in place as of the effective date.

Requests for completion of the lower section of the 1004D often expand beyond these appropriate purposes and it has become the "go to" form for lenders to request certification by the appraiser that an abundant array of issues are not problematic or have been solved. It is fairly evident to anyone who receives requests for this assignment type with any reasonable frequency that appraisers are being asked to complete assignments mandating the use of the 1004D in instances where this particular form is not appropriate.

The first example of this is the request for the 1004D when the lender requires an issue tobe corrected that was not conditioned for in the appraisal report via the use of CB3. The1004D language specifically states that the issues being confirmed as completed werethose where the requirements or conditions were called for in the original report. While this can be viewed as a minor distinction, it does mandate that the appraiser add in verbiage that the repairs are being required by the client. This will result in the presence of contradicting statements and the potential for one to be accused of producing a misleading document as the preprinted form language indicates that the repairs were a requirement of the original report. One possible action by the appraiser when such a request is made would be to supply an addendum confirming that the repairs required by the lender did in fact take place. Unfortunately this action is typically either not accepted by lenders or will result in the appraiser not being paid for the work involved for confirmation of the repairs in question. Ideally lenders and other clients would not put the appraiser in the position of having to complete an assignment or assignment element in an inappropriate and/or questionable fashion in order to be compensated for it.

The second example is one that can result in unnecessary and undesirable liability for the appraiser that complies. This deals directly with whether the original appraisal report called for repairs using CB3 in the reconciliation section or called for an inspection using the fourth checkbox option (CB4) in the reconciliation section. As was noted previously, an appropriate use of the 1004D form is to confirm that repairs or alterations that were called for by the appraiser via the use of CB3 in the original report have taken place. In these cases the appraiser can reasonably be expected to have the ability to confirm and certify the completion of these items using the 1004D.

Unfortunately, the 1004D is often being utilized by clients to engage the appraiser in cases where an inspection was called for via the use of CB4. This can be highly problematic for the appraiser.

• First, the form language of the 1004D does not call for the appraiser to certify that an inspection took place, was done properly, or had correct conclusions. The form language calls for verification that the improvements have been completed as required by the original report with certification that confirmation took place via a visual inspection of the subject property by the signing appraiser.
• Second, when an appraiser does certify that whatever item of concern is now satisfactory the appraiser has taken on a level of responsibility for the professional inspection that took place.

The signing appraiser has in effect become a potential responsible party in the event of a problem. The most common purpose of CB4 is for the appraiser to call for an inspection by an appropriate professional in cases where the appraiser is not qualified to make a particular determination. In these cases the inspection report is the proper vehicle to assist in the lending decision and complete the file, not a 1004D signed by an appraiser who has indicated via the use of CB4 in the original report that they do not have the expertise to make the determination in question. The only possible purpose of the 1004D in this instance is to add the appraiser to the list of liable parties should the inspection prove to be faulty. Appraisers would be well served to let other professionals such as roof inspectors, home inspectors, engineers, and pest controllers maintain full responsibility for their services and not sign certifications that make them responsible for the services, opinions, and conclusions of another professional.

As has been noted, when CB3 has been checked and the original appraisal has been based on a hypothetical condition that certain repairs have been made, it is reasonable for the client to expect that the appraiser is able to determine if the repairs have been completed and provide certification via the 1004D. Appraisers need to carefully review what they are requiring via the use of CB3 and determine if they will be competent to make the determination that the repairs or alterations have been completed. If the issue is sufficiently complex as to possibly require substantial construction or significant alteration then the appraiser needs to be clear if the issuance of a building permit would be necessary to certify completion via the 1004D. If the situation of concern will involve the use of plans and specifications that have been prepared as of the effective date, then consideration should be given as to whether the second check box in the reconciliation section (CB2) would be the more appropriate avenue by which to proceed. This option is typically utilized for new construction or major renovations and is only engaged if proper plans are already in place that can be reviewed by the appraiser.

The time to ensure a proper engagement and completion of a 1004D begins during completion of the 1004 or related form. When it becomes apparent that the appraisal will need to be conditioned via CB2, CB3, or CB4 it is important to outline within the report what exactly the specific issues are and to classify them on an individual basis as to whether they have resulted in the report being conditioned subject to an inspection by another professional, subject to repairs, or subject to completion according to plans and specifications. It is also important to outline to the client precisely what the appraiser will be able to certify to in the event a 1004D is requested. Language within the original report clarifying that the appraiser will not be able to certify the conclusions of an inspection report called for via CB4 and completed by another professional (ie: roof inspection or termite inspection) is certainly proper. In cases where CB3 is utilized the appraiser needs to consider their own comfort level with certifying completion of the specific repairs that are being called for. While certifying that paint had been applied, a kitchen sink installed, or a window repaired would all be within reasonable expectations, would one be competent to certify that a roof had been repaired adequately to prevent the reoccurrence of water damage to the ceiling? If there is a question as to comfort level or competence in determining that the repairs being called for have been completed properly, one should evaluate if the more appropriate step would be to proceed via CB4. In the case of a roof issue, perhaps calling for repairs of the ceiling via CB3 if the damage is seen as extensive enough while also calling for an inspection of the roof by a qualified professional via CB4 to determine conclusively if repairs to the roof are needed and to what extent.

The 1004D form provides a desired format for a necessary function often required by lenders. When utilizing the lower section of this form appraisers would be well advised to proceed in a manner that conforms with the form language and to avoid the potential liability of certifying the inspection results of another professional. In addition, when conditioning a report for specific repairs via CB3 the appraiser should be confident that they will be able to competently determine if the repairs requested have been completed properly. If not, consideration should be given to proceeding via CB4 and requiring an inspection by the appropriate professional to determine if the need for repairs does in fact exist and if so to what extent.

Copyright KB Shure 2012

Guest Author:  Ken Shure, Certified Residential Appraiser in the Los Angeles, California area.  Contact: kbshure@Yahoo.com

Appraiser Joan Trice Authors New NAHB Primer Aimed at Helping Builders Work More Effectively With Appraisers

With builders around the nation continuing to grapple with faulty appraisals that jeopardize sales of their new homes, NAHB is adding an “Appraisal Primer” to its collection of resources aimed at helping association members strive for the best possible outcome from today’s less-than-perfect appraisal process.

The newly published primer from NAHB discusses in detail the appraiser’s role in the financing of new homes.

“There is a lot behind the scenes that affects the way appraisers must conduct their business,” writes Joan Trice, an appraiser and author of the primer; editor and publisher of Appraisal Buzz, an email publication; and the host of the Alterra Group’s Valuation Expo, which is the largest annual conference for the appraisal community.

Trice is also consulting with NAHB on the association's efforts to resolve appraisal problems.

“Understanding the regulations, methodologies and task of the real estate appraiser will provide home builders with the necessary knowledge to discuss valuation issues with appraisers before they become valuation problems,” Trice says.

Beginning in 2009, NAHB has held a series of four appraisal summits at the National Housing Center in Washington, D.C., attended by representatives of federal banking regulators, the appraisal industry, the housing finance industry, the real estate and housing sectors and others for discussions of deficiencies in the current system of evaluating homes and how to address them.

While much more needs to be done to reform the system — which is expected to be a long-term undertaking stretching far into the housing recovery now beginning to materialize in specific markets across the country — NAHB has made substantial headway on key appraisal issues.

Covered in detail in the Nov. 7, 2011, issue of Nation’s Building News — which was devoted to what NAHB has been doing to fix the broken new-home appraisal system — builders have seen progress on such key concerns as their ability to communicate with the appraiser and the right to have their homes appraised by individuals who are qualified to do the job.

In conjunction with the release of the “Appraisal Primer,” NAHB has updated its “Appraisal Guidance for Builders,” which summarizes information on:

• the selection of appropriate appraisers,
• the use of comparable sales in determining the value of new homes,
• what builders can and should do to ensure accurate appraisals and
• actions they should take if an appraisal was conducted improperly or contains errors.

In a FAQ section at the end of the new primer, Trice answers some specific concerns that builders have been voicing over appraisals.

Among the questions she addresses:

• What should an appraiser do to determine the value of a new home with options and upgrades that do not appear in other homes recently sold in the local area?
• Will the appraised value support the additional costs of expensive geothermal heating and other green options?
• What are some of the problems that builders can encounter when appraisers are selected by national appraisal management companies (AMCs), which may be looking for appraisers who charge the lowest fees so they realize the highest margin on the referral?
• Is it true that under the Dodd-Frank bill builders cannot communicate with appraisers?

For more information, email Steve Linville at NAHB, or call him at 800-368-5242 x8597.

SOURCE: National Association of Home Builders (NAHB) - Nation's Building News

 

Carnac The Magnificent (with envelope to forehead) Reveals the Answer: 319 a month!

Then, blowing into the torn envelope, Carnac reads the question:

How many appraisers are leaving the industry every month?!

According to the Appraisal Subcommittee, the # of appraisers reached its peak in 2007 with 121,407 active appraisers nationwide. From 12/31/07 to 12/31/08 there was a small decline of 856 appraisers. From 12/31/08 to 12/31/09 there was a decline of 3,760 appraisers. From 12/31/09 to 12/31/2010 there was a decline of 6,879 appraisers. From 12/31/2010 to present (9/11) we have a decline of 2,697 appraisers.

Download 1992-2010 Appraiser Statistics

That is 14,192 appraisers that have left the business since December 31 2007. 319 appraisers every month are being driven out of business by the AMCs. When will this insanity stop?

We have 107,215 active as of today. At the current rate of decline we will be at 2005 levels within 120 days. So much for growth in the industry.

Ironically the Appraisal Management Business is booming.  Streetlinks is opening new offices in new states, Corelogic is hiring staff appraisers nationwide, LPS is hiring on such a massive scale, that I have never seen in 13 years of appraising. 

A hiring rep for LPS recently told an applicant that: "This is the new business model for the industry. If you want to make a living appraising today, you need to be an employee of an AMC. Independent appraisers will no longer exist".

I have also learned that some AMCs are intentionally capping the # of reports an appraiser can receive in a months time. Intentionally keeping the appraisers income low enough to keep him or her desperate. A starving appraiser will be more easily pressured or manipulated.

Today we have reduced fees, scope creep, no loyalty from AMCs to the appraiser, increased costs, increased liability, reduced turn times, new regulations, new formats, increased demands from AMCs for content, no trainees allowed, waiting 60 days or more to be payed.

Perhaps the 14,192 that have already left were right?

GUEST POST: ANONYMOUS -  Article Submission - Name witheld by request

Sample URAR With Populated UAD Fields - Courtesy T.J. McCarthy

Good Morning Appraisers,

Here is a little something T.J. McCarthy put together to help his appraisal pals better adjust to the upcoming UAD format change that is about to hit the residential industry.

"This is a sample URAR with all the UAD fields populated. You will see many blank fields in this sample because not all fields are UAD specific. I have inserted instructions to further explain the rational behind some of the UAD required fields. The instructions have all been highlighted in yellow and placed in comment sections throughout the report."UAD URAR Helper

 

Click on the following link to access the PDF... Download TJ McCarthy's UAD HELPER

 

Special thanks to my friends Rich Heyn and Dawn Molitor-Gennrich for allowing me to borrow their expanded scope of work statement.

All appraisals performed for Fannie/Freddie/FHA and VA with an effective date on or after September 1, 2011 will need to be completed in UAD format.

Good luck everyone, Tj

TJ McCARTHY & ASSOCIATES
Real Estate Appraisers & Consultants
7903 West 159th Street, Suite B
Tinley Park, Illinois 60477

Email: appraisal@tjmccarthy.com
Phone: (708) 614.7200
Fax: (708) 614.7228

You Want It WHEN!? - How Long Does it Take To Complete An Appraisal?

How Long Does It Take to Complete the Development of an URAR USPAP Compliant Appraisal After the Assignment is Accepted?

Guest Post: The author, Edd Gillespie, is a Certified General Appraiser from Pueblo, CO that specializes in litigation support, 1031 exchanges, estate appraisals, and commercial mortgage work. 

And the answer of course is, “It depends.” Appraisers have different amounts of the necessary information needed to complete any given assignment, but let’s look at a situation where the appraiser deems it necessary to investigate and analyze everything about a non-complex assignment.

USPAP Standards Rule SR 1-4 lays out the required process to develop the appraisal. “In developing a real property appraisal, an appraiser MUST collect, verify, and analyze ALL information necessary for credible assignment results.”

It is clear there is no option for real property appraiser to do other than as SR 1-4 says. The real property appraiser MUST follow the rule with respect to ALL of the information necessary for a credible result.

1. Collection of Information: 6 hours

Where do you collect the initial information and how long does it take? The tax assessor usually describes most of what the appraiser needs to know about the subject in order to begin the development of the appraisal. That information is downloaded. The local MLS contains a wealth of information. Appraisers look there for market trend information, but most surely for comparable sales. At this point the appraiser begins to make choices since analyzing all of the sales is rarely necessary for credible assignment results. What would you do?

Many appraisers report that at this point they begin to eliminate all MLS sales that do not share some value-significant attributes with the subject. At the end of this initial research the appraiser has a handful of comparable sales identified and downloaded. I estimate the review of the MLS for collecting initial information consumes about two hours of time.

Next, additional information is collected from the public record or perhaps other proprietary sources. Assuming the subject is in one of those areas that search consumes an additional two hours. Then there is the collection of information about the subject which is most often done during inspection. The inspection of the subject consumes two hours, including driving time in inspecting the subject.

2. Verification of Information: 3 - 10 hours

Where and how does the appraiser verify the initial information and how long does it take? Even though USPAP recognizes quality, credibility and misleading in appraising it gives us no instruction about the process of verification. USPAP simply requires verification of ALL of the information that is necessary to a credible assignment result mandatory for a real property appraiser. So, what does verify mean?

In the context of the Rule, verify is a verb, it is something an appraiser MUST do. The meaning of verify is to establish the truth, accuracy, or reality of something. Although the appraiser may encounter new information while verifying, it is clear that the objective of verification is confirmation. And how is it done?

Although USPAP does not require inspection of properties employed as comparables, it is common practice for appraiser to at least drive-by, which is a form of verification. Many appraisers report that they have a standard set of questions they ask to verify the transactional and physical information they already have. Other appraisers report that if they have collected information from the MLS they verify it with the public record or vice versa.

Most likely appraisers verify information from three to five sales and that can take from three to ten hours depending on the extent of verification the appraiser completes. It takes longer to verify information with parties to the transaction or their brokers. Frequently, conflicting or additional information is collected during the verification process, which triggers the need for additional verification. Once all of the necessary information is verified and the appraiser is assured that what he or she knows actually exists or actually happened, the information is ready for analysis.

3. Analysis of Facts: 9 - 16 hours

How long does it take to analyze the necessary information? Although the principle of substitution is applied to much of appraising, real property is not homogenous and often the data is not “clean.” Because of that appraisers spend as much time analyzing the verified necessary information as they do in collecting and verifying it. Analysis in residential appraisal includes market trend study and comparison and adjustment of the information from each sale. Seldom is all of the information necessary for adjustment included in the sales selected for comparison, which creates the need to collect and verify additional information as a part of the analysis.

4. Finishing the report: 1 hour

Appraisers say that the URAR report is for the most part completed as the development proceeds. They spend additional time filling in empty blanks and proof reading and estimate that takes about 1 hour.

The amount of time spent complying with SR 1-4 ranges from 18 to 32 hours. The mid-range estimate to complete the development of a non-complex residential market value appraisal is 25 hours.

What Do YOU think?!

• Do you agree that it takes 25 hours to complete a USPAP compliant development of a non-complex market value residential appraisal?
• How long does it take to complete the development required by SR 1-4?
• Do you think the requirements of SR 1-4 are excessive?
• If it takes 25 hours to complete the development of a USPAP compliant market value residential appraisal, are clients allowing sufficient time and paying a sufficient fee?
• Should USPAP be amended to eliminate the stringent requirements of SR 1-4?
• Should appraisers be better trained to understand what collect, verify and analyze mean?

 

The author, Edd Gillespie, is a Certified General Appraiser from Pueblo, CO that specializes in litigation support, 1031 exchanges, estate appraisals, and commercial mortgage work.  Contact Info: 590 N. Matt Dr. Pueblo,CO 81007 Phone 719-252-7624 E-mail eddgillespie@yahoo.com  

FannieMae's Uniform Appraisal Dataset Summary Published

To improve the quality and consistency of appraisal data on loans delivered to the GSEs, Fannie Mae and Freddie Mac are developing the Uniform Appraisal Dataset (UAD). As previously announced in August, we expect to provide business and technical details of the UAD, implementation dates for the Uniform Collateral Data Portal (UCDP), and use of the UAD and UCDP later this year. The implementations will occur in 2011. In the meantime, we are providing a high-level summary of the UAD requirements and related information. See Appraisal Scoop article UAD Overview The UAD includes all data points required for a complete appraisal report and standardizes key data points. The standardization of certain data points will support consistent appraisal reporting, regardless of geographic location of the property or any localized reporting conventions, by addressing vague or disparate data currently included on some appraisal reports, such as: Variations in formatting numbers, dates, and measures. Inconsistent terminology for identical information (such as waterfront vs. oceanfront). Inconsistent use of descriptions (for example, property condition is sometimes reported in absolute terms such as "brick" and in relative terms, such as "average"). Download UMDP_Overview The GSEs are focused on enhancing the quality of key appraisal data that is either most material to the valuation of a property and/or critical to determining a loan's eligibility for sale to the GSEs. The GSEs are working with appraisal forms vendors to incorporate the UAD requirements into the software appraisers use to complete appraisal reports. Upon implementation of the UAD, the GSEs will require that appraisals be completed with standardized responses in certain appraisal form fields. The UAD standardized response requirements include: Standardized formats for fields that include dates, values, etc. Allowable values from a list of choices provided for certain fields. Standardized abbreviations to allow more information to fit on the printed appraisal forms. Standardized ratings and definitions for the "Condition," "Quality," and "Updating/Renovations" of the property. Initially, the UAD will apply only to the following most commonly used uniform residential appraisal report forms (Fannie Mae/Freddie Mac form numbers), which represent the vast majority of appraisals supporting loans delivered to the GSEs: Uniform Residential Appraisal Report (Form 1004/70) Individual Condominium Unit Appraisal Report (Form 1073/465) Exterior-Only Inspection Individual Condominium Unit Appraisal Report (Form 1075/466) Exterior-Only Inspection Residential Appraisal Report (Form 2055/2055) The GSEs plan to extend the UAD and the standardized responses to the other residential appraisal forms at a later date. UAD Business Overview and Implementation Specifications Before the end of December, the GSEs will publish the full details of the UAD, which will include the following: UAD business overview (for lenders and appraisers) -- a list of standardized definitions and responses for a key subset of fields on the four uniform residential appraisal report forms initially covered by the UAD and relevant details for appraisers and lenders to understand the requirements. UAD implementation specifications (for appraisal software/forms vendors, appraisal management companies, and high-volume lenders) -- MISMO XML-based mapping information and other technical details. This information is used to translate the data entered on the form into the format expected by the Uniform Collateral Data Portal (UCDP) and will be used by appraisal software/forms vendors and any lender or lender agent, such as an appraisal management company (AMC), that will be consuming the data from the form electronically. Support and Training In addition to providing the business and technical requirements for the UAD, the GSEs are working on a full range of job aids, training opportunities, and other resources to assist lenders in implementing the UAD requirements. These tools will help lenders understand how to incorporate the UAD into their business processes. To aid appraisers in adopting the new data standards, the GSEs plan to work with appraisal trade associations to distribute information, training, and job aids. Electronic Appraisal Data Submission through the UCDP To facilitate delivery of electronic appraisal report data, the GSEs are developing the UCDP through which lenders must submit appraisal data for delivery to either or both of the GSEs. In addition to providing a PDF version of the appraisal report, lenders will be required to submit electronic appraisal data to the GSEs through UCDP prior to loan delivery for all residential appraisal forms. The UAD will be integrated into the UCDP so that submissions can be validated against the GSEs' requirements for completeness and standardized responses. More details on the availability of the UCDP and its required use will be provided at a later date. Get More Information Uniform Mortgage Data Program UMDP Overview  UAD Summary  UMDP FAQs ULDD Overview Fannie Mae Implementation Guide This communication relates to the Uniform Mortgage Data Program, an effort undertaken jointly by Freddie Mac and Fannie Mae at the direction of their regulator, the Federal Housing Finance Agency.

Appraiser Urges the Fed to Implement the Dodd-Frank Act NOW! - Customary and Reasonable Fees

Guest Post by Joseph Lorinc, a State Certified General Residential Real Estate Appraiser, licensed by and working in the State of Florida. Joseph works for Neapolitan Appraisal, Inc. in Southwest Florida providing residential real estate appraisals. He has 13 years of residential and non-residential appraisal experience.

I am writing this letter to urge the Federal Reserve Board to move forward with the implementation of the appraisal independence and appraisal fee provisions in Title XIV of the Dodd-Frank Act.

 Download Customary Fee Letter

Title XIV (Section 1400 et seq) of the Dodd-Frank Act contains the “Mortgage Reform and Anti-Predatory Lending Act,” which includes Subtitle F – Appraisal Activities. Section 1472 of the “Mortgage Reform and Anti-Predatory Lending Act” adds Section 129 E to the Truth in Lending Act which will establish minimum federal appraisal independence requirements and customary and reasonable fee requirements.

Effective Date of Appraisal Requirements

The enacting language of the Dodd-Frank Act states that the appraisal requirements should be adopted in the Interim Final Regulations. As an appraiser, I believe it is vitally important that there should be no delay in implementation of the appraisal independence requirements under Title XIV of the Dodd-Frank Act. As part of the Dodd-Frank Act, Section 4312 (b) (2) also requires that lenders and their agents compensate appraisers at a rate that is customary and reasonable for appraisal services performed in the market area of the property being appraised.

 As defined in the Uniform Standards of Professional Appraisal Practice, 2010-2011 Edition by the Appraisal Standards Board of The Appraisal Foundation, valuation services are “services pertaining to aspects of property value,” an appraiser is “one who is expected to perform valuation services competently and in a manner that is independent, impartial and objective,” an assignment is “an agreement between an appraiser and a client to provide a valuation service or the valuation service that is provided as a consequence of such an agreement,” an appraisal is “the act or process of developing an opinion of value” and appraisal practice is defined as “valuation services performed by an individual acting as an appraiser, including but not limited to appraisal, appraisal review or appraisal consulting.” Appraisal services are valuation services provided by an appraiser as the result of an assignment. Under Section 4312 (b) (2), customary and reasonable fees must be paid to for appraisal services for residential loan purposes. There is no mention of specific appraisal products, rather the Dodd-Frank Act specifies appraisal services for residential loan purposes, covering any valuation services provided by an appraiser.

Customary and Reasonable Fees and Appraisal Management Companies

Customary and reasonable fees for appraisal services are available from a number of sources. Several companies have existing fee data surveys available, such as the Appraisal Fee Reference published by a la mode, inc. Over the past month since the passage of the Dodd-Frank Act, I have received invitations to participate in several other fee surveys from a variety of companies in the appraisal, appraisal management and banking fields. 

 
As Section 4312 of the Dodd-Frank bill is intended to promulgate appraisal independence requirements for residential loan purposes, I believe the most obvious source of customary and reasonable fees is being overlooked. In every residential mortgage transaction, a HUD-1 Form detailing fees (including appraisal fees) associated with the origination of a residential mortgage loan is required. The data on the HUD-1 Form could be used to determine the customary and reasonable fees that consumers have been charged for appraisal services. The HUD-1 data would provide an accurate and unbiased basis for determining the customary and reasonable fees that consumers are paying for appraisal services for residential loan purposes.

In its AMCs/Reasonable and Customary Fees/Turnaround Time FAQs HUD clarified what it believes to constitute a customary and reasonable fee:

 “FHA believes that the marketplace best determines what is reasonable and customary in terms of fees. The fee is the result of a business decision, which may or may not be negotiated, between the appraiser and the client. FHA does not set fees or determine whether a fee is reasonable or customary. Lenders are expected to know what is reasonable and customary in the areas in which they lend and are expected to ensure that the fees paid by consumers for both the appraisal and the management of the appraisal process are reasonable and customary.”

This statement appears to indicated HUD’s reliance on the free market system in determining fees.

 
Since the introduction of the Home Valuation Code of Conduct in March of 2008, appraisal management companies participation in the market has grown from 15% of appraisals ordered to an estimated 80% today. While HUD’s stance on the importance of the free market system is not in question, the current situation in the appraisal industry has little resemblance to a free market. Appraisal fees are no longer negotiated between the client and the appraiser, they are dictated to the appraiser by the appraisal management company. The Dodd-Frank Act seems to recognize this fact in Title XIV, Section 129 E (i) (1)

“In General – Lenders and their agents shall compensate appraisers at a rate that is customary and reasonable for appraisal services performed in the market area of the property being appraised. Evidence for such fees may be established by objective third-party information, such as government agency fee schedules, academic studies and independent private sector surveys. Fee studies shall exclude assignments offered by known appraisal management companies.”

By specifically excluding fees offered by appraisal management companies, the writers of these regulations seem to be acknowledging the undue influence that the appraisal management companies have had on the appraisal industry.

In March of 2008, the Home Valuation Code of Conduct was introduced to curb the banking industries pressure on independent appraisers to produce appraisal reports that met their lending needs instead of reflecting the true market value of the properties being appraised. This practice by the banking industry resulted in many inaccurate appraisal reports being produced and then used as justification to finance residential mortgage loans. The unethical behavior of the banking industry and the appraisers who wrote appraisal reports they knew to be inaccurate contributed in a significant way to the collapse of the housing market in which we currently find ourselves.

Unfortunately, the Home Valuation Code of Conduct had the unintended consequence of producing a business climate where appraisal management companies have come to dominate the appraisal services market for residential lending. Under the appraisal management company business model, appraisal assignments are shopped to the appraiser that will accept the lowest fee and promise the shortest completion time. Little to no regard to the complexity of the assignment or the competency of the appraiser to complete the appraisal assignment is given.

To receive orders from an appraisal management company, appraisers are forced to complete appraisal assignments requiring an ever increasing amount of information gathering, analysis and reporting mandated by Government-Sponsored Enterprises (Federal National Mortgage Association [Fannie Mae], Federal Home Loan Mortgage Corporation [Freddie Mac]), the appraisal management companies and finally the client, in an unrealistically short timeframe for substantially reduced fees. Though it was written to improve the quality of appraisal services, the unintended results of the Home Valuation Code of Conduct have been the same, an increasing number of inaccurate reports are being produced by unqualified appraisers. In time, this may lead to yet another collapse of the housing market.

Section 4312 of the Dodd-Frank Act was intended to re-establish a business environment where appraiser independence can be maintained. In the midst of the current housing crisis, delaying the implementation of this vital legislation could have a devastating and far reaching impact on not only the housing market but the overall economy of the United States. 

The Case for Centralized Appraisal Ordering - Part 1

Guest Post by Fred Rossiter - State Certified Residential Appraiser - Seahaven Appraisal Services

This is the first of a two-part series presenting a case for, and benefits of, centralized appraisal ordering.

 For there ever to be true appraiser independence, the direct link between the lender and the appraiser must be forever severed. A fundamental change must occur that replaces the lender as the appraiser’s client. This change would sever the appraiser’s current fiduciary to the lender.  

Moving forward, the appraiser’s new client should be the new Consumer Financial Protection Agency (CFPA), the FHA, VA or a GSE (take your pick). The appraiser’s fiduciary would be owed to a government entity who has no motivation to corrupt him and instead, is interested only in quality appraisal reports and protecting the country from another housing melt down. Only then will there be an end to the lender’s coercion, intimidation, corruption and influence of this nation’s appraisers. This paradigm shift would insure the proper collateralization of this nation’s housing stock.

I envision a government web site, run by the new Consumer Financial Protection Agency (CFPA), that would be accessed by any registered lender or mortgage broker desiring to order a residential appraisal. The Home Page would serve as an engagement letter between the appraiser and a government entity. The lender ordering the appraisal would be noted on the appraisal report, not as the client, but rather as an intended user of the report. 

The lender would populate the blank fields of the engagement letter noting the property address, zip code, contact info, type of appraisal product, turn around time requested, addendums requested, etc. No stipulations would be allowed. Once filled out, the lender would click on the Submit Information button.

The lender would then view the next page which would list appraisers (anonymously), who are actively licensed or certified, have a current E & O policy, and who are geographically competent (based upon the zip code) to appraise the subject property. Every appraiser would certify what zip codes they were geographically competent in.  

This list of (anonymous) appraisers would be generated from the Consumer Financial Protection Agency’s database. Their database would be derived from the Appraisal Subcommitttee’s national registry but include fees and particulars inputted by each participating appraiser.

Qualified appraisers would be listed randomly as: Appraiser A, Appraiser B, Appraiser C, etc., with their basic and ancillary fees. An estimated fee for the assignment would be calculated and quoted for each appraiser on this page for the lender’s consideration. The appraiser’s qualifications, years of experience and industry affiliations would be listed. The lender would select one appraiser from the list of anonymous appraisers and simply click on Order an Appraisal. In doing so, the lender has selected an appraiser anonymously.

The appraisal order (engagement letter plus any purchase contracts) would then be automatically e mailed to the appraiser. The appraiser would have time to research the property before deciding whether to accept, deny, or conditionally accept the assignment based upon a new proposed delivery date and/or fee. The appraiser would have 24 hours to respond to the order or it would be automatically canceled and the lender would then be given an opportunity to select a different appraiser. The web site would automatically notify the lender by e mail of the appraiser’s decision. 

If the appraiser accepted the assignment, he would set up the inspection time, inspect the property and complete the appraisal by the delivery date. The appraiser would be penalized, monetarily, for missing the inspection date and/or the delivery date.

Upon completion, the appraiser would download the appraisal report through the web site to the lender and the Consumer Financial Protection Agency (CFPA) where an original copy would be archived. Downloading the completed appraisal report would automatically trigger the electronic payment of the report by debiting the lender’s reserve account and crediting the appraiser’s account. 

Only upon receipt of the completed appraisal report would the lender discover the true identity of the appraiser. The lender would be able to run a Quality Assurance check of the appraisal. The lender would be permitted to contact the appraiser directly to make any corrections or revisions. And, the lender or the appraiser would be free to refer any complaints or instances of negligence, fraud or coercion to state appraisal boards through a Consumer Financial Protection Agency (CFPA) Hot Line.

In Part 2 of this series, I'll present the "Benefits" of a Centralized Appraisal Ordering System.

 

Fannie Mae Photo Requirements - Effective Sept. 1

Fannie Mae’s post-purchase reviews of mortgage loan files have identified issues with appraisals. As a result of those reviews, new policy requirements and clarifications concerning existing lender requirements are being added to a number of appraisal sections of the Selling Guide, including:

• Inclusion of interior photographs in the appraisal report 
• Lender changes to the appraised value and guidance on addressing appraisal deficiencies 
• Appraiser selection criteria 
• Sources of comparable market data 
• Selection of comparable sales 
• Communication under the HVCC 
• Seller concessions 
• Treatment of personal property 
• Market Conditions Addendum to the Appraisal Report (Form 1004MC) 

Fannie Mae is requiring that interior photographs of specific rooms and areas be included in appraisal reports whenever an interior inspection is performed. 

 The minimum requirements for the interior photographs are described in the topic noted below. 

Updated Selling Guide Topic B4-1.2-06, Appraisal Forms and Report Exhibits 

Download Fannie SEL 2010-09 06.30.2010 released on June 30, 2010 requires that on all interior appraisals contain at a minimum the following photos:

• kitchen(s); 
• all bathrooms; 
• main living area; 
• examples of physical deterioration, if present; and 
• examples of recent updates, such as restoration, remodeling, and renovation, if present

Updated Selling Guide Topic B4-1.2-06, Appraisal Forms and Report Exhibits

Runt Rants - The Appraisal Business Versus the Appraisal Professional - The AMC Discussion Continued

AUTHOR: Ken Verrett: The author is the owner of Acorn Appraisal Associates, a 24 year old firm offering a wide range of quality appraisal services to the Financial and Business Communities. 

This series has generated much good comment and views from various readers.  Thanks to all for taking the time to add to the discussion!

We've tried to focus on several basic points in this series...points which not everyone agrees with, but which I believe are quite crucial to our understanding of where the Appraisal Profession is today, and what fundamental changes should be considered to ensure it's viability for the future. 

The Fundamentals

• The Appraisal Profession is a vital part of the Loan Origination Market - The existence of an Appraisal on each property adds confidence and security to the underlying asset which therefore extends to packages of loans sold in the market.
• The Professional Appraiser is the single unbiased supporter of the loan transaction and that position aides in the confidence created in the Collatorized Mortgage Obligations (CMO) that are offered to the global market.
• Appraisal Management Companies (AMCs) have been created to facilitate the interaction between the lender and the appraiser to achieve transactional efficiencies vital to current and future markets. 
• The AMC market is composed of a few large firms that control 80 percent of the appraisal demand in the USA, and many smaller firms that compete for the remaining business.
• The large AMCs that control 80 percent of the market function as an Oligopoly which results in inordinate power over the market.
• The Oligopoly has created a two tiered pricing structure for appraisal products services which serve their short term purposes, but which fundamentally damage the working of a competitive market.
• The resulting problem is not with the existence of Appraisal Management Companies, but with the business model of the top firms which are able to distort the market by virtue of their Oligopoly status.

Let's be very clear.  The result is the imposition of a two tiered pricing market for appraisal services; the 'one off' market, and the AMC market. We've described that stark contrast earlier parts of this series and the impact on the Appraisal Profession is very significant.   

There is one last fundamental part of the AMC business model that affects the Appraisal Profession adversely and should be addressed whenever the opportunity for change presents itself.  That fundamental is recognition of the role of the Appraisal Business as a separate reality, apart and distinct from the Appraiser.  That's the subject of today's post.

The Appraisal Business Versus the Appraisal Professional

 We've discussed previously the changing market...moving from local to regional to national to global.  As the market for securitized loans has evolved, the lenders have moved from being the holder of those loans to the originator and seller role.  The lenders are now selling the loans to investors who ultimately buy the loan packages as a simple investment...much like a bond. 

The lender/originator is now more of a retailer; using their retail outlets to originate loans, packaging them into like groups, then offering those packages to the market.  When the package is sold the lender then uses the proceeds to originate more loans which are in turn sold. 

As that market evolved new businesses evolved to serve that changing  market: the AMCs, Mortgage Servicing Companies, Automated Valuation Companies, the Wall Street "Bankers" who sold the packaged loans, even Appraisal Businesses that employ a number of appraisers.  Each of these business models evolved to serve the needs of a changing market.

It is a long standing tradition that users of appraisal services engage the appraiser directly for the appraisal.  That arrangement was quite efficient when local lenders made local loans to local borrowers and a local, lone appraiser was engaged to provide the appraisal.  For some appraisers, that model still best characterizes the way they do business: they are sole entrepreneurs working alone, perhaps with an clerical assistant.

However, as the market has evolved and grown the efficiencies required that spawned the specialization of efforts such as AMCs has also required response by appraisers who wish to serve the mortgage loan origination market. The Appraisal Business Model employing several appraisers has evolved to meet that need.

The majority of appraisal businesses now are multi appraiser firms.  I did a survey of 174 appraisal businesses last year.  Sixty percent of those firms employed multiple appraisers, with the average employing three full time appraisers.  Generally, the more appraisers employed the more efficiency the appraisal business achieved.

The efficiencies that result  are significant.  In the survey I conducted, the Appraisal Business that employed five appraisers was on average four times more productive than the single appraiser business as measured by the average monthly output per appraiser. 

The typical multi appraiser business is owned by one or more appraisers.  They invest in offices, hardware, software, and data bases that are needed to produce appraisal products.  They employ administrative staff to provide clerical and administrative support services to an appraiser staff who are W2 employees, not independent contractors.  The appraisal business provides marketing, training, customer service and quality control to the lender/clients. The appraisal business guarantees quality, service times, and regulatory standards for each assignment they accept.

If my survey is representative of the market today (and I believe that it is) sixty percent of the appraisal firms employ multiple appraisers, and because they are much more productive, they produce the vast majority of loan origination appraisals completed by appraisers each year.  In my survey, over eighty percent of the appraisals delivered were completed by multi appraiser firms. 

That should not be a surprise.  The evolving mortgage origination market requires shorter response times, more efficient participants, all while maintaining quality standards.  The multi appraiser business model is a response to those demands, just as is the Appraisal Management Company. 

Yet the process of ordering appraisals is often according to the old standard, when sole proprietors were the dominant appraiser business model.  That is, some lender/clients insist on specifying the appraiser to assign the order to, rather than assigning it to the appraisal firm.

That old standard works for the sole proprietor, but it doesn't work as well for the multi appraiser firm.  The multi appraiser firm guarantees the quality and performance of their employees.  The advantages they provide to their clients are dependable service, consistent turn times, consistent service.  They achieve that by taking advantage of the efficiencies that the larger business model provides.

One of those advantages is the ability to deploy the firm's resources in the most efficient way possible.  Assigning appraisal orders to the staff as appropriate results in significant efficiencies.  Studies we've done in our own firm suggest that we achieve a 30 percent increase in field efficiency by assigning each appraisal to the employee who can best meet the performance required.

Many, even most, clients recognize that reality.  They assign the appraisal to the Appraisal Business and allow the firm to deploy their resources in the most efficient way to meet the client's needs. 

The Oligopoly does not. The top AMCs require that they assign appraisals directly to the employees of the appraisal firm, bypassing the ability of the multi appraiser business to control and allocate their resources in the most efficient manner.

The result is that the Oligopoly creates a market in which they force the appraisers to accept a 30-40 percent lower fee for the appraisals they order, and they refuse to allow the appraisal business to deploy their resources in the most efficient and profitable way, reducing field research efficiency by 30 percent in multi appraiser firms operating in large metropolitan markets.

Since the vast majority of The Ologoply's appraisals are delivered by multi appraiser businesses, the effect is to threaten the long run health of the entire Appraisal Profession. 

What industry or profession could remain healthy when their market is dominated by an unregulated Oligopoly that forces the market to accept price discounts in the form of kickbacks equal to 30-40 percent of the competitive one off price for the product, and in addition bypasses the major efficiencies created by those businesses to deliver service to their clients?

If we all can accept that a healthy local, regional, national and global market place for mortgage originations depends in part on a healthy Appraisal Profession, isn't it reasonable to demand that the Oligopoly make simple changes to their business model which cause that health to be threatened?

Isn't that in part what HUD/FHA recognized when they attempted to adopt rules which would force AMCs to unbundle their pricing, pay appraisers for their services equal to the "one off" standard fee which prevails in each market? 

Simple Changes For the Betterment Of All

I don't consider AMCs to be evil. I consider them to be a positive development in the evolution of the global market for first and second loan originations.  My firm's personal, in depth, and long term experience with AMCs is that they are generally well run, efficient, even pleasant to deal with.  I recognize that they provide a very needed service to the large national lenders and mortgage originators and I welcome them in the industry. 

The two simple changes to the business model of the Ologopoly members that I propose would change the market for the betterment of all, including the lenders and orginators they serve. 

• First, unbundle fees they charge for their services; bill the lender for the outsourcing services, and the appraiser for the efficiencies they provide to appraisal firms who work with them. Pay the true market rate for the appraisals they order, without requiring the haircut, the kick back, that is deemed illegal in other markets.
• Second, contract appraisal services with Appraisal Firms, and allow the Appraisal Firm to assign the appraisal to appraisers in their employ who are best qualified to deliver that particular service at that particular moment.

Those two changes would correct the injustices perpetuated over the last two decades, restore the health of the Appraisal Profession, and improve the overall business of the first and second mortgage loan origination markets, markets which have grown to be a significant engine of prosperity for local, regional, national and global economies.

Isn't that in everyone's best interests?

AUTHOR: Ken Verrett: The author is the owner of Acorn Appraisal Associates, a 24 year old firm offering a wide range of quality appraisal services to the Financial and Business Communities.