Are Appraisal Regs Ruining Appraisal Quality?
The latest Dodd Frank turmoil is over appraisers. Under the Act, lenders are now required to pay “customary and reasonable” fees to appraisers. What the heck does that mean? Can you imagine telling your 15-yr old that her allowance would be “customary and reasonable”? How about telling a car salesman that you would pay them something that was customary and reasonable for the car?
American Banker’s Kate Berry recently addressed 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 Berry points out:
“…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, banks also are asking for more information in valuation reports.”
So lenders want more items in the appraisal, like two listings on top of the three comps, for the same price. The article highlights the problem a free market has, and will have, when the government controls prices, in addition to the problems that arise when there are few competitors.
An appraisal veteran wrote to me saying, “This is absolutely true. There is an implied pressure on any provider (in any industry) whenever any that field is dominated by so few players. Witness the LSI’s and CoreLogic’s Valuation Services of the world choosing to maintain their pricing model to appraisers in the face of Dodd-Frank’s bright line. They operate on the ‘law of large numbers’. The amount of money they can make in the time it takes any regulatory agency to find them at fault will vastly exceed any potential fine they may incur. One could argue that HVCC was created to protect appraisers from bank pressure when, in my opinion, it was a vehicle to enhance capture rate for lenders and seed control over the appraisal process – a goal of large lenders for decades.
“Secondly, as the required data mounts that appraisers are being asked to provide and the fees stay static, or in many cases actually decline, there’s a ‘self-preservation’ that takes place. Appraisers tilt towards the most conservative approach so as to try and avoid a burdensome litany of revisions and explanations driven by some clumsy AVM data dump that an all too inexperienced (an underpaid) underwriter is using to determine whether an appraisal is ‘accurate’. The bottom line is that borrowers suffer from a diminished quality appraisal, markets suffer from the best and the brightest being driven from their industry by higher workloads and ever-diminishing fees and the public faces an ever growing risk of history repeating itself.”
So this provision of the Dodd-Frank Act where lenders are now required to pay “customary and reasonable” fees to appraisers is meant to address the complaint that the AMC’s have been driving down fees at the expense of quality. And we may see investors focusing on, or advertising, their appraisal process.