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Articles & Reports
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Editors Note: This article appeared in the September 21, 2009 issue of Appraisal Buzz and is reprinted here with permission.
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It is rather difficult to gain your footing during a seismic shift. The
FHA Mortgagee Letter 2009-28 that was published late on Friday, September
18, 2009 created a massive shock wave throughout the appraisal community.
Actually there were three appraisal related bulletins. Here they are:
It is big. It is good. But don’t relax, yet.
First, there is the
prohibition on mortgage brokers and commissioned loan officers from “selecting
and retaining” appraisers. This is strong appraiser independence language and
further reinforces HVCC. Good stuff. Expect another strong reaction from the
Mortgage Broker community – now that FHA has adopted this concept from HVCC,
mortgage brokers will have rare opportunity to engage appraisers directly. Next
there is the requirement for FHA approved lenders to pay the AMC for the
services the AMC renders. Appraisers are to be compensated “customary and
reasonable fees”. That is straightforward enough…..appraisers must be paid the
standard rate for an appraisal in their market and the AMC must segregate the
cost of services they provide a lender beyond the appraisal report itself.
Transparency is good. But while simple, the ramifications are huge. It turns the
current compensation system on its head.
Early on I was a tremendous
supporter of HVCC and I’ve taken my fair share of heat about it. I believe I
described it as a “call to quality”. I cautioned that it would take some time
for that to occur but with GSE demands on loan buy backs based on faulty
appraisals, eventually quality had to trickle up. Well, now you don’t need to
wait to see if I was right. FHA just nudged things along. Will Fannie and
Freddie follow suit with similar “full fee” language and with segregation of
management and review fees? Even if the GSEs do not follow suit, a multi-tiered
process for lenders would be nearly impossible to manage. Most would agree that
a consistent set of rules and regulations would benefit all parties.
It
also affirms my contention that AMCs are not inherently evil. Downward pressure
on fees emanating from lenders got pushed down the food chain. It is one of
those natural laws. Lenders viewed the AMC business model as a “free lunch”.
They outsourced their entire appraisal department to a third party at no cost.
Appraisers fell victim to that pesky law of unintended consequences and de facto
funded lenders’ risk management out of their own pockets. The appraisal
community has long suffered from having the least leverage of the various
participants in mortgage process. I’d be willing to bet that appraisers’ view of
the AMC as a business channel just changed overnight. Now that AMCs have no
financial incentive to seek the lowest cost provider, we may experience a sea
change in how they manage their panels. What was up is now down.
We are
not done yet. I believe, there will be more to come. I’d view regulation,
policy, and guidance around collateral valuation as dials on a dashboard.
Certain components are going to get dialed up and then dialed back down.
Eventually we will find an equilibrium that works. It takes leadership to be
bold enough to make the necessary changes. Let’s have a big round of applause
for the team over at FHA. Yes, there may be some need to tighten up language
here and there but generally these requirements and affirmations are an effort
to draw a line in the sand.
The new mantra will be competency. The
discussion around “geographic” competence is a diversion. It’s about competency
regardless of how far you drive to get there. Conversations within the lender
community have been for some time, that once bias is finally dealt with we might
discover that we have a vast pool of poorly trained appraisers. We also need to
examine the very core of what we do (process) and what we deliver (our reports).
And with all of the pressures on fees and turn times hopefully now the debate
has changed. Short term as well as long term strategies should be focused on
accuracy and integrity of appraisals.
Let’s get our footing and
contemplate next steps to advance the science of collateral risk and train and
engage true professionals in valuations.
Joan
Trice
Publisher, Appraisal Buzz
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