copyright 2011 - mckissock l.p. - p.o. box 1673 - warren, pa 16365 - 1-800-328-2008 -page 1-...

Copyright 2011 - McKissock L.P. - P.O. Box 1673 - Warren, PA 16365 - 1-800-328-2008 --

FINANCIAL REFORM, FANNIE MAE

AND APPRAISERS

by Daniel A. Bradley, SRAVersion 2.11


SEMINAR OBJECTIVES

By the end of this seminar, you will:

• Describe episodes of economic turmoil that led to the regulation of the appraisal profession

• Explain key events that led to the recent mortgage, housing, and credit crisis

• Discuss the specific events which led to the creation of the Home Valuation Code of Conduct (HVCC)

• Summarize the appraisal-related provisions in the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act


SEMINAR OBJECTIVESBy the end of this seminar, you will:• Recall recent changes and clarifications to Fannie

Mae and Freddie Mac requirements • Articulate recent FHA changes designed to ensure

appraiser independence • Analyze recent trends in the appraisal profession,

including supply and demand • Identify alternatives to traditional mortgage lending

appraisals, and some guidelines and requirements for these types of assignments

• Cite appraisal best practices for promoting professionalism among appraisers


BEFORE WE BEGIN…

Throughout this course, we will address some controversial issues which may engender strong opinions and emotions. You will have plenty of opportunities to discuss and participate. However:

• This is not a four-hour complaint session

• Please maintain a courteous tone, and keep your comments professional

• Please respect others’ opinions and views, even if you do not agree with them

• Remember, we are all in this together!


MANY DIFFICULT QUESTIONS, NO EASY ANSWERS

• As we go through the course, we will discuss a number of problems and potential solutions

• There are no easy answers or one-size-fits-all solutions

• The idea is to make appraisers aware of and explore a number of options

• The answers may be different for everyone in this room

• Exploring the problem and becoming aware of solutions is a good first step


SECTION 1

A Brief History Lesson


“Those who cannot remember the past are condemned to repeat it.”

- George Santayana


“You can clutch the past so tightly to your chest that it leaves your arms too full to embrace the present.”

- Jan Glidewell


BOY, THE WAY GLENN MILLER PLAYED…

For most of the 20th century, problems in the mortgage industry were almost non-existent. Why, you ask?

• Mortgage lending was done mostly by local banks and depository institutions

• Banks lent their own money, and so were concerned with the possibility of loss

• Institutions carefully scrutinized borrowers to make sure they were credit-worthy

• Lenders often valued and/or inspected properties personally


SONGS THAT MADE THE HIT PARADE…

As the lending industry became more profitable, federally-regulated lenders (particularly S&Ls) began to take on riskier and riskier loans:

• High-end commercial developments

• Condominium projects

• Proposed subdivisions

• Foreign loans

This culminated in the S&L Crisis of the 1980s.


THE SAVINGS AND LOAN CRISIS

• Many S&L institutions failed due to poor lending practices

• Some had loaned money on overvalued or nonexistent properties, including:

Proposed residential subdivisions Condominium projects Shopping centers Apartment and office buildings

Fairly or unfairly, the appraisal industry received more than its share of blame for the turmoil.


FIRREA As a result of the Savings & Loan crisis, Congress passed the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) in 1989.

• This legislation bailed out the failed thrift institutions

• It created stricter lending requirements for federally-regulated institutions

• FIRREA required all appraisers completing appraisal work for federally-regulated financial institutions to be certified or licensed


FIRREA SAVES THE DAY!

With the passage of FIRREA, poor lending practices in America were eradicated, once and for all.

Our economy and financial system were saved!

Or were they?

As we are about to see, this was merely Act I in a drama that would play out 20 years later…


BUSINESS AS USUAL As federal depository institutions were dealing with their new lending rules and regulations, and appraisers were adjusting to their new status as licensed and certified scapegoats, things were quiet for a while as other industry players prepared to take center stage:

• The secondary mortgage market

• Mortgage brokers

• Subprime lending

• The use of homes as savings accounts


CREATING PROBLEMS • As depository institutions’ share of the lending

market decreased, into the breach stepped the mortgage broker and the secondary market

• “Other people’s money” was being loaned

• The secondary market assumed much of the risk for bad loans

• Loose or nonexistent regulations permitted individuals with questionable histories to work as brokers or loan officers

• Larger loan amounts meant larger fees and commissions for lenders, so borrowers were encouraged to borrow more and more


CREATING PROBLEMS

• Because mortgage brokers make money only by closing loans, some attempted to make as many loans as possible, regardless of quality

• Unscrupulous mortgage brokers encouraged borrowers to lie on applications

• Low-doc or no-doc loans (“liar loans”) offered by subprime lenders were magnets for unqualified or unscrupulous borrowers

• The idea of using a home as a never-ending source of cash by continuously refinancing was in its heyday


THE APPRAISAL WORLD

Many appraisers like to romanticize the lending boom of 2002-2007, but…

• Mortgage brokers controlled 70-75% of the lending market

• Many brokers used only those appraisers who would guarantee values in advance

• “Comp checks” were a way of life

• Pressure was rampant from brokers, lenders, real estate agents, and others


HOW WIDESPREAD WAS IT? In 2006, October Research conducted a nationwide survey of appraisers on the topic of appraisal pressure. The results were quite dramatic:

• 90% of appraisers surveyed indicated they had been pressured in an effort to influence their appraisals

• This was a significant increase from a similar survey in 2003, in which 55% of appraisers reported being pressured


SURVEY SPECIFICS • 75% of appraisers reported “negative

ramifications” if they did not come in at a higher value

• 68% said they had lost a client due to their refusal to inflate values

• 45% reported not being paid for appraisals they had completed


SOURCES OF PRESSURE

The October Research survey also asked appraisers to indicate who was exerting this pressure.

The leading sources of pressure were:

• Mortgage brokers - 71%

• Real estate agents – 56%

• Home sellers – 35%

• Mortgage lenders – 33%

(Obviously, survey respondents were permitted to choose more than one.)


PUTTING IT IN WRITING

Historically, appraiser pressure was implied. During the “boom” it became much more overt. Some clients, emboldened by years of successfully pressuring appraisers, even became willing to put their pressure tactics in writing!

The following two slides contain phrases taken from actual appraisal orders received by a number of real property appraisers, including the course author.

These are all real!


OFFENSIVE APPRAISAL ORDERS

• “Please call loan officer with estimated value before scheduling”

• “I need a value of $150,000” (at the top of the page in 48-point type)

• “If minimum value is not possible, do not appraise the property”

• “I don’t want the appraisal to be done if the value won’t be at least $72K”

• “This is a comp request. Please contact me if you can reach $265K value”


OFFENSIVE APPRAISAL ORDERS

It’s interesting that some of our clients think we can predict what a property will appraise for before we actually appraise it! If appraisers could predict the future with such accuracy, we wouldn’t need to appraise – we could instead make a nice living picking winning racehorses or lottery numbers.

• “The owners estimate the house to be worth anywhere between $230-240k; hoping you can narrow it down a bit to see if we have an order”

• “Money is only paid if the value is more than $83,000…If not, then the appraisal request is to be cancelled”


PREDETERMINED VALUES • It would be silly for a patient to ask a doctor to

guarantee a clean bill of health, over the phone, before the examination is even scheduled.

• Likewise, it would be ridiculous to ask a title searcher to guarantee clear title to a property before even beginning the search process.

• Yet appraisers were (and still are) expected to provide opinions of value on properties, free of charge, without completing even minimal research or analysis.


OTHER TYPES OF PRESSURENot all pressure on appraisers is value-related. Sometimes, parties pressure appraisers to:

• Ignore physical or functional deficiencies in a subject property

• Overlook FHA or VA repair items

• Ignore environmental concerns in a property or neighborhood

• Misrepresent the subject property’s current use or highest and best use

• Omit negative comments from reports

• “Tailor” reports to meet the client’s objectives


THE STORM CLOUDS GATHER Mortgage loans were being made in record numbers:

• From 2003-2007, subprime mortgage originations increased by a factor of almost 300%, from $332 billion to $1.3 trillion

• In 1997, the national mortgage denial rate was 29%; by 2002-2003, it was 14%

• Bond rating agencies incorrectly rated subprime mortgage-backed securities with AAA ratings; investors gobbled them up, so lenders pooled and securitized even riskier loans


THE PERFECT STORM These factors led to a record number of loans being made, and a record amount of indebtedness for U.S. homeowners:

• Double-digit property appreciation rates

• Pooling and securitization of loans

• Outrageous profits for originating lenders, especially subprime lenders

• Use of exotic and controversial loan products such as interest-only loans and ARMs

• The belief that mortgage giants Fannie Mae and Freddie Mac were “too big to fail”


A RIPPLE EFFECT The causes and effects of the crisis are more varied and detailed than we have time to cover here, but here is a simplified version of what happened next:

• The value bubble burst, dropping property values in most areas of the country

• Foreclosures began occurring in record numbers

• MBS offerings became impossible to sell

• The resulting economic recession claimed property owners’ jobs and led to more foreclosures

• Lenders began to fail in large numbers


PRIME FORECLOSURES


SUBPRIME FORECLOSURES


ALL LOAN FORECLOSURES


CUOMO vs. FIRST AMERICAN Against this backdrop, New York Attorney General Andrew Cuomo filed a lawsuit against First American Corporation and its AMC subsidiary, eAppraiseIT, in 2007. The suit claimed that:

• eAppraiseIT enabled Washington Mutual to hand-pick appraisers based on who would provide inflated values

• eAppraiseIT pressured appraisers to inflate values

• eAppraiseIT’s president knew of these actions, and had agreed to WaMu’s demands


ENTER FANNIE & FREDDIE • November 2007: NY AG subpoenaed Fannie Mae

and Freddie Mac to find out what they knew about loans they purchased from WaMu and others

• March 2008: HVCC signed between Fannie, Freddie, the NY AG, and Office of Federal Housing Enterprise Oversight (OFHEO)

• NY AG dropped investigation of Fannie/Freddie

• Original HVCC was to be effective 1/1/2009

• HVCC was later revised, its implementation date changed to 5/1/2009, ending 10/31/2010


FOOTNOTE* FANNIE & FREDDIE • July 2008: To stabilize the mortgage, housing,

and credit markets, the Federal Housing Finance Agency (FHFA) was created to regulate Fannie Mae and Freddie Mac

• September 2008: FHFA placed Fannie Mae and Freddie Mac in conservatorship

• This conservatorship means the federal government now controls GSE assets and operations, and stands behind approximately $5 trillion in GSE debt


SECTION 2

The HVCC and its Consequences


“Every abuse ought to be reformed, unless the reform is

more dangerous than the

abuse itself.”

- Voltaire


WHAT WAS THE HOME VALUATION CODE OF CONDUCT?

• It was an agreement - not a law or regulation

• Fannie Mae and Freddie Mac agreed that after May 1, 2009, they would purchase mortgages only from lenders who warrant compliance with the requirements of HVCC

• It established requirements and prohibitions for lenders when selecting appraisers and procuring appraisals

• The actual HVCC can be found online at www.efanniemae.com/sf/guides/ssg/relatedsellinginfo/appcode/pdf/hvcc.pdf


HVCC: BUSTING THE MYTHS • It was not a law or regulation

• It applied to lenders, not appraisers

• It did not tell appraisers how to appraise properties

• It did not mandate the use of AMCs by lenders

• It did not prohibit agents or brokers from communicating with appraisers

• It did not prohibit a lender from requesting that an appraiser provide additional information or correct factual errors


HVCC: APPLICABILITY

• FHA or VA loans

• Loans on properties of more than five units

• Commercial/industrial loans

• Non-lending appraisals, such as relocation, estates, divorces, eminent domain

The HVCC applied only to one- to four-family mortgages sold to Fannie Mae and Freddie Mac. It did not apply to:


WHAT DID HVCC DO? • Prohibited lenders from influencing appraisals

through coercion, intimidation, bribery, etc.

• Prohibited a lender from requesting that an appraiser provide estimated values or comparable sales at any time prior to the completion of an appraisal report

• Prohibited lenders from providing an appraiser with a desired value for the subject (except that a sales contract may be provided)

• Prohibited lenders from ordering second appraisals except in specific circumstances


WHAT DID HVCC DO? • Prohibited lenders from accepting appraisals if

the appraiser was selected, retained, or compensated by a third party (like a mortgage broker or real estate agent), which meant borrowers could no longer pay appraisers

• Lender loan production staff was not allowed to select appraisers, order appraisals, or have substantive communication with appraisers regarding value

• If staff appraisers were used, the lender was required to separate the appraisers from loan production staff


WHAT DID HVCC DO? • Required lenders to perform quality control tests

on 10% of appraisals or valuations and report adverse findings to Fannie Mae or Freddie Mac

• Lenders had to certify that appraisals were obtained in compliance with the HVCC

• Lenders had to provide borrowers with a copy of the appraisal report, at no cost, no fewer than three days prior to loan closing (unless waived)

• Supposed to create an Independent Valuation Protection Institute (IVPI), a clearinghouse for complaints against lenders and appraisers; however, IVPI was never created


UNINTENDED CONSEQUENCES

• Increased use of AMCs

• Commoditization of appraisals

• Lower fees for appraisers

• Good appraisers leaving the mortgage lending appraisal business

• Loss of appraiser relationships with mortgage brokers and certain lenders

• Anecdotal indications that borrowers may be paying more and/or waiting longer for appraisals


INCREASED USE OF AMCs


EFFECTS ON APPRAISERS • Cannot market to mortgage brokers; previous

marketing efforts and relationships are now meaningless

• Marketing to real estate agents can only result in non-mortgage lending assignments

• AMCs can be large and bureaucratic; reaching a decision-maker can be difficult

• Lottery-type distribution of assignments does not favor more competent appraisers

• Lenders receive the benefits of using an AMC, while the appraiser pays by receiving lower fees


FEES AND QUALITY

• Lower appraisal fees usually mean lower quality appraisals

• More experienced appraisers often refuse to work for low-fee AMCs

• Appraisals are like any other service – you typically get what you pay for

• If you pay $100 for an appraisal, you won’t get a $400 appraisal – you’ll get a $100 appraisal

Although there are exceptions (maybe even some in this room):


AMCs AND FEES

• There are hundreds of AMCs throughout the U.S.

• Some pay lower-than-typical fees; yet others do not

• Many of them are serious about appraisal quality

• Many experienced and competent appraisers work for AMCs

• How much you charge for an appraisal is a business decision only you can make

It is unfair to paint all AMCs with a broad brush, just as it is unfair to make broad, sweeping statements about appraisers.


I READ IT IN THE NEWSPAPER, SO I KNOW IT MUST BE TRUE!

• More and more competency


IVPI • As stated previously, the IVPI does not exist

• An eight-page sample complaint form was posted on Freddie Mac’s Website in late 2009

• This form may be found at: www.freddiemac.com/singlefamily/pdf/IVPI-HVCC.SampleComplaintForm.pdf

• In May 2010, the FHFA announced that the IVPI would not be created

• Instead, complaints would be received directly by Fannie and Freddie and then forwarded to state authorities, as deemed appropriate


REGULATORY ENVIRONMENT

• AMCs historically have not been regulated at the federal level

• Practically anyone can own or operate one

• There are few restrictions on their business practices

• Reports of AMCs being owned or operated by debarred appraisers or convicted felons are common

• In 2009, a push to regulate these companies at the state level began


AMC REGULATION BY STATES

• Arkansas

• California

• Louisiana

• Nevada

• Florida

• Utah

At this time, there are over 20 states that have passed laws regulating AMCs, including:

There are also at least 11 states with AMC regulatory bills pending.


HIGHLIGHTS OF THESE LAWS • Arkansas’ law requires AMCs to be bonded

• California’s law requires that “controlling persons” of AMCs must be fingerprinted and submit to a background check

• Louisiana’s law states that an AMC cannot remove an appraiser from its panel without providing written notification and opportunity to respond

• Nevada’s law establishes a schedule of fines for AMC violations

• New Mexico’s law requires an AMC to pay an appraiser within 60 days

• Utah’s law requires the AMC to disclose to the client the amount of compensation paid to the appraiser


OH, THE IRONY! • The seminal event that led to the

eventual creation of the HVCC was an appraisal management company selecting appraisers because they would provide inflated appraisals, and pressuring appraisers at the behest of a lender

• The net result of the HVCC is that AMCs now have more power and control over the residential mortgage appraisal profession than ever before


WANT SOME MORE IRONY?

• More and more of the nation’s residential mortgage lending appraisal work is being farmed out to the “low bidder”, with little or no regard for experience or geographic competency

At a time when – more than ever before – the lending industry needs competent and experienced appraisers to produce credible value opinions:


THE FINAL IRONY

• Increased education requirements, with required numbers of hours in required topics

• College degree requirements

• Significantly more difficult certification exams

In an effort to increase public trust and respect for the appraisal profession, the AQB has significantly increased requirements for appraisers, including:

Yet appraisers report that in some areas of the country, fees for residential appraisals are the same as or lower than they were 10 years ago!


FHA APPRAISER INDEPENDENCE

• The HVCC did not apply to FHA loans

• However, in September 2009, HUD issued Mortgagee Letter 2009-28 (ML 2009-28) which adopted some HVCC-like requirements

• These requirements went into effect 2/15/2010

• In this letter, HUD reiterated the importance of appraiser independence


ML 2009-28

• FHA lenders may not accept appraisals from appraisers selected, retained, or compensated by mortgage brokers or commission-based lender personnel

• FHA does not require use of AMCs

• The lender or AMC must not prohibit the FHA appraiser from recording in the appraisal report the amount of the fee the appraiser was paid

• The FHA appraiser must be compensated at a rate that is customary and reasonable for the market area


ML 2009-28 • Commission-based lender personnel may not

have substantive communication with the appraiser regarding valuation issues

• Lenders may not coerce the appraiser using payment or prospects of future business

• Lenders may not request the appraiser provide an estimated value or comparable sales any time prior to completion of the report

• Lenders may not provide the appraiser with an anticipated or desired value, or a proposed or target amount to be loaned to the borrower

• A purchase contract must be provided


ML 2009-28 • Lenders may not remove an appraiser from an

approved list without written notice to the appraiser, outlining a “substantive reason”

• Lenders may not request a second appraisal or AVM, although there are specific exceptions which may apply

• These requirements also apply to third parties working on behalf of lenders (AMCs)

• This ML also reminds appraisers of their USPAP obligations regarding geographic competency


ML 2009-28 • These requirements were very similar to those

specified in the HVCC

• Many appraisers mistakenly believed the FHA adopted HVCC

• These are FHA’s requirements; they have nothing to do with Andrew Cuomo or Fannie Mae, and they remain in effect even though the HVCC is gone

• The Dodd-Frank Reform Act did not change any of these FHA requirements for appraiser independence


SECTION 3The Dodd-Frank Wall Street

Reform and Consumer Protection Act


“The hole and the patch should be commensurate.”

- Thomas Jefferson


H.R. 4173

• Signed by President Obama on July 21, 2010

• Contains 2,319 pages

• Subtitle F of Title XIV addresses appraisal issues (pages 2205-2250 in the bill)

H.R. 4173, the Dodd-Frank Wall Street Reform and Consumer Protection Act, was passed by the U.S. Senate on July 15, 2010.

This is widely considered to be the most significant modernization of the appraisal regulatory structure since the passage of FIRREA in 1989.


BCFP

• The BCFP is autonomous, but will be housed within the Federal Reserve System

• A Consumer Advisory Board will advise the Bureau on emerging issues

• A Financial Stability Oversight Council is established to oversee the BCFP

The “centerpiece” of the bill is the creation of the Bureau of Consumer Financial Protection.

The director of the BCFP will be appointed by the President and confirmed by the Senate


BCFP OBJECTIVES• Ensure consumers receive timely and

understandable information

• Protect consumers from unfair, deceptive, or abusive acts or practices

• Address outdated, unnecessary, or unduly burdensome regulations

• Enforce federal consumer financial laws consistently

• Ensure the transparent and efficient operation of markets for consumer financial products and services


APPRAISAL PROVISIONS

• Title XIV is the “Mortgage Reform and Anti-Predatory Lending Act”

• Subtitle F is “Appraisal Activities”

• There are six sections in Subtitle F

Interestingly, the “short title” of this bill is the “Dodd-Frank Wall Street Reform and Consumer Protection Act.”*

* Do you wonder what the “long title” would be?


SUBTITLE F – SECTION 1471• Amends Chapter 2 of the Truth in Lending Act

• A creditor may not extend a higher-risk mortgage to a consumer without first obtaining a written appraisal on the property

• Appraisals on higher-risk mortgages must be performed by a licensed or certified appraiser who makes an interior property inspection

• If the higher-risk mortgage is a re-sale within 180 days, the lender must obtain a second appraisal; the cost cannot be charged to the borrower

• One copy of each appraisal must be provided to the borrower, by the creditor, without charge


SECOND APPRAISALS• If a higher-risk mortgage is used in purchase or

acquisition where: The property was purchased within the last

180 days, and The original sale price is lower than the

current sale price,

• A second appraisal must be ordered from a different licensed or certified appraiser

• The second appraisal must include an analysis of the difference in sale price, changes in market conditions, and any improvements made to the property between the prior sale and current sale


HIGHER RISK MORTGAGE

• A residential loan other than a reverse mortgage

• Not a “qualified mortgage” defined in Section 129C

• APR exceeds the “average prime offer rate for a comparable transaction” by 1.5 points or more if within FNMA loan limits, 2.5 points or more if exceeding FNMA loan limits, or 3.5 points or more for a subordinate lien residential mortgage loan

What is a “higher-risk mortgage”? It is defined in the bill as:


A ROSE BY ANY OTHER NAME…

It is essentially a euphemism for “subprime loan”!

So exactly what is a “higher-risk mortgage”?


CONSUMER NOTIFICATION

• Any appraisal prepared for the mortgage is for the sole use of the creditor

• The applicant may choose to have a separate appraisal conducted at his or her own expense

At the time of the initial mortgage application, the lender must provide the applicant with a notification which states:


SUBTITLE F – SECTION 1472• This section is titled “Appraisal Independence

Requirements”

• Amends Chapter 2 of the Truth in Lending Act

• Prohibits creditors from engaging in any act or practice that violates appraisal independence, when providing services in a credit transaction secured by the consumer’s principal dwelling

• Provides a specific list of acts or practices that violate appraisal independence


PROHIBITED ACTS• Coercion, extortion, collusion, instruction, bribery,

or intimidation of any person, AMC, firm, or other entity conducting or involved in an appraisal

• Mischaracterizing or suborning mischaracterization of the appraised value

• Seeking to influence an appraiser to encourage a targeted value in order to facilitate the making or pricing of the transaction

• Withholding or threatening to withhold payment for appraisal services rendered in accordance with the contract between the parties


EXCEPTIONS

• Consider additional, appropriate property information, including additional comparable sales

• Provide further detail, substantiation, or explanation for the appraiser’s value conclusion

• Correct factual errors in the appraisal report

A mortgage broker, banker, real estate broker, AMC, or other person is not prohibited from asking an appraiser to:


SOUND FAMILIAR?

• The requirements that a lender cannot withhold or threaten to withhold payment, or engage in any act or practice that would impair an appraiser’s objectivity, are in the HVCC

• Likewise, the statement that a lender may ask an appraiser for additional explanation or substantiation, or to correct factual errors, is also from the HVCC

If you’re thinking that some of this language sounds familiar, well, it should! Some of it is virtually word-for-word from the HVCC.


MANDATORY REPORTING • Any mortgage lender, mortgage broker, real

estate broker, AMC, or other person involved in a real estate transaction, who believes that an appraiser is violating USPAP or any applicable laws, or is otherwise engaging in unethical or unprofessional conduct, is required to “refer the matter to the applicable State appraiser certifying and licensing agency”

• A creditor who knows that a violation of appraisal independence standards has taken place may not extend credit based on the appraisal unless reasonable diligence has been exercised


APPRAISAL REPORT PORTABILITY

• The Dodd-Frank Act states that Federal financial institution regulatory agencies may issue regulations that address appraisal report portability

• Note that the law says “may”, not “must”

• Once put in place, these regulations would ensure the portability of an appraisal report between lenders for consumer credit transactions secured by a 1- to 4-family residence that is the borrower’s principal dwelling


CUSTOMARY AND REASONABLE FEES

• “Lenders and their agents shall compensate fee appraisers at a rate that is customary and reasonable for appraisal services being performed in the market area of the property being appraised.”

• Evidence for fees may be established by government agency fee schedules, academic studies, and private sector surveys

• “Fee studies shall exclude assignments ordered by known appraisal management companies.”


WHAT IS CUSTOMARY AND REASONABLE?

• This requirement applies to both lenders and their agents (AMCs)

• This language in the bill has been seen as a big win for appraisers

• Exactly how this is to be implemented or enforced remains to be seen

• Look for lenders and AMCs to push back against this requirement in some way

• Are AMCs that are paying $150 for an appraisal suddenly going to double their fees???


QUOTES OF THE DAY

• “The wording is such that it is unlikely the fee can be discounted to reflect the other-than-retail pricing model.”

• “Our position is that the free market should determine what constitutes customary and reasonable fees.”

• “Appraisers will get a raise and the fee issue is resolved. The downside is that lenders will likely pass that additional cost on to consumers.”

- Jeff Schurman, Executive Director of the Title and Vendor Management Association (as quoted in Valuation Review, July 19, 2010)


COMPLEX ASSIGNMENTS

• “Customary and reasonable” does not mean that all appraisals will command the same fee

• The law states, “In the case of an appraisal involving a complex assignment, the customary and reasonable fee may reflect the increased time, difficulty, and scope of the work required for such an appraisal and include an amount over and above the customary and reasonable fee for non-complex assignments.”


SUNSET OF HVCC

• “Effective on the date the interim final regulations are promulgated pursuant to subsection (g), the Home Valuation Code of Conduct announced by the Federal Housing Finance Agency on December 23, 2008 shall have no force or effect.”

HVCC Ends!


SUBTITLE F – SECTION 1473

• Amends the Financial Institutions Reform, Recovery, and Enforcement Act of 1989

• Requires the ASC to report the results of all audits of State appraiser regulatory agencies

• Permits the ASC to prescribe regulations limited to temporary practice, national registry, information sharing, and enforcement

• In order to prescribe regulations, the ASC must form an advisory committee of industry participants, including appraisers


SUPERVISION OF AMCs

• Provides the ASC with authority to monitor requirements established by the states for registration and supervision of AMCs

• Requires the ASC to maintain a national registry of AMCs that are subject to State regulation or are operating subsidiaries of federally-regulated financial institutions

• Federal agencies, including FRB, OCC, FDIC, NCUA, FHFA, and BCFP (Bureau of Consumer Financial Protection) shall jointly establish minimum requirements to be applied by states in registering AMCs


REQUIREMENTS FOR AMCs • Register with and be subject to supervision by

State appraiser certifying/licensing agency (with exceptions)

• Verify that only licensed or certified appraisers are used for federally related transactions

• Require that appraisals coordinated by the AMC comply with USPAP

• Require that appraisals are conducted independently and free from coercion

• Nothing in this section shall prevent states from establishing additional requirements for AMCs


NOT A REQUIREMENT • Some news sources within the appraisal

profession are reporting that lenders and AMCs will be required to have only USPAP-compliant reviews performed by licensed review appraisers located in the state where the property is located

• This language was in the original bill, but it was removed in conference committee*

• Lenders and AMCs are permitted to use non-licensed reviewers, and are not required to ensure that all reviews conform to USPAP

*HVCC’s Sunset and Other Appraisal Reforms on the Horizon, klgates.com 7/19/2010


AMC REGISTRATION

• “An appraisal management company that is a subsidiary owned and controlled by a financial institution regulated by a Federal financial institution regulatory agency shall not be required to register with a State.”

• This means there will be two parallel tracks for AMC regulation: one at the state level and the other at the federal level

• “Owned and controlled” AMCs will be regulated at the federal level

• Other AMCs will be regulated by state boards


AMC OWNERSHIP • An AMC that is owned by a person who has had

an appraisal license refused, denied, cancelled, surrendered, or revoked in any state shall not be registered by a State or included on the national registry

• Any person who owns more than 10% of an AMC shall be of good moral character and shall submit to a background investigation carried out by the State appraiser licensing/certifying agency


REGISTRY FEES

• FIRREA is amended to increase the national registry fee from $25 to $40 per appraiser per year; this can be adjusted to a maximum of $80 at the discretion of the ASC

• AMCs are also subject to national registry fees of $25 per appraiser working for or contracting with the AMC; this can be adjusted to a maximum of $50 at the discretion of the ASC

• If an AMC has been in business for less than one year, the registry fee is $25 multiplied by an appropriate number to be determined by the ASC


REGISTRY FEES AND USPAP

• Many appraisers expect these fees to be passed on to appraisers by the AMC

• This is not illegal or unethical; however, USPAP requires an appraiser to disclose that a fee was paid in order to procure an assignment

It is possible (but unlikely) that AMCs are going to “eat” the $25 per appraiser per year registry fee.

This would likely require a disclosure in every appraisal report prepared for the AMC by an appraiser who paid the annual fee to the AMC


WHY THE REGISTRY FEE INCREASE?

• The increase in the registry fees is made with the intent of providing grants to State appraiser certifying and licensing agencies

• Many states are having budget problems

• Some states are “sweeping” accounts of licensing agencies, and putting the money into the state’s general fund

• Many licensing agencies find themselves with no money for investigation and enforcement, even though they generate significant revenue in application and renewal fees


MORE POWER FOR THE ASC

• The ASC shall enforce minimum AQB requirements for “Trainee Appraiser” and “Supervisory Appraiser”, in states where these classifications exist

• The ASC shall have the authority to remove an appraiser or an AMC from the national registry on an interim basis, pending the outcome of disciplinary proceedings

• The ASC has the authority to impose sanctions against a State agency that fails to have an effective appraiser regulatory program


PROFESSIONAL DESIGNATIONS

• FIRREA is amended to state that membership in a nationally recognized appraisal organization may be considered as a criterion for appraiser selection; however, lack of membership may not be the sole bar against consideration for an assignment

• The ASC shall monitor each State’s policies, practices, and procedures and whether the State has adopted and maintained effective laws, regulations, and policies aimed at maintaining appraiser independence


APPRAISAL COMPLAINT HOTLINE

• If six months after this law is enacted, there is no national hotline to receive complaints of non-compliance with USPAP, and complaints regarding improper influence of appraisers, the ASC shall establish such a national hotline

• The ASC shall refer complaints to appropriate governmental bodies, including State appraiser licensing agencies, financial institution regulators, or other appropriate legal authorities

• The ASC has the authority to follow up complaint referrals to determine status and resolution


NATIONAL COMPLAINT HOTLINE

• As stated previously, the IVPI was never established as called for in the HVCC

• The ASC complaint hotline will take the place of the IVPI, and will act as a “one-stop shop”

• As a government agency (as opposed to the IVPI which was supposed to be an independent, non-governmental entity), it is likely that the ASC will have more power and authority

• Complaints against appraisers and AMCs will be referred to states; complaints against lenders will be referred to federal regulatory agencies


AVMs • An AVM is defined as “any computerized model

used by mortgage originators and secondary market issuers to determine the collateral worth of a mortgage secured by a consumer’s principal dwelling”

• Automated Valuation Models (AVMs) shall adhere to quality control standards, as per the new law

• Federal regulatory agencies shall promulgate regulations to implement quality control standards

• These AVM regulations will be enforced by the Federal financial institution regulatory agencies, the FTC, the BCFP, and State attorneys general


BROKER PRICE OPINIONS • Defined in the law as “an estimate prepared by a

real estate broker, agent, or sales person that details the probable selling price of a particular piece of real estate property and provides a varying level of detail about the property’s condition, market, and neighborhood, and information on comparable sales, but does not include an automated valuation model”

• BPOs may not be used as the primary basis to determine the value of a piece of property for the purpose of a loan origination of a residential mortgage loan secured by a consumer’s principal dwelling


BPOs ARE NOT OUTLAWED • There is a misconception that this law has made

BPOs illegal; this is not true

• BPOs may be used as a secondary or ancillary basis to determine the value of a piece of property for the purpose of a loan origination of a residential mortgage loan secured by a consumer’s principal dwelling

• BPOs can still be used for loan modification, REO properties, and other non-origination situations

• State laws may come into play; some states have anti-BPO laws and regulations


SUBTITLE F – SECTION 1474• This section amends the Equal Credit Opportunity

Act (ECOA)

• For a loan that is secured by a first lien on a dwelling, the creditor must furnish a copy of all written appraisals and valuations promptly upon completion, but in no case later than 3 days prior to loan closing

• This is similar to the requirements of HVCC

• The applicant may waive the 3-day requirement

• The borrower may pay the cost of the appraisal, but may not be charged for the copy of the written appraisal or valuation (including AVMs or BPOs)


SUBTITLE F – SECTION 1475• This section amends Section 4 of the Real Estate

Settlement Procedures Act (RESPA)

• If an appraisal is coordinated by an AMC, the standard HUD-1 disclosure form may include a clear disclosure of:

The fee paid to the appraiser by the AMC

The administration fee charged by the AMC

• The law states “may include” this disclosure; it does not say “must include”

• The requirement for mandatory disclosure was removed in conference committee


SUBTITLE F – SECTION 1476• This section requires the Government

Accountability Office (GAO) to conduct a study on:

Effectiveness and impact of appraisal methods, types of valuations (including appraisals, BPOs and AVMs), and appraisal distribution channels

The Home Valuation Code of Conduct

The ASC’s functions pursuant to Title XI of FIRREA

• This study must be completed 12 months after the enactment of this Act


DODD – FRANK WRAP-UP

• The major appraisal-related reforms have been covered in this summary

• As the financial institution regulatory agencies promulgate regulations, this promises to be a changing landscape for the next few years

Obviously, there is more to this 2,319-page bill than can be covered in this course.

The next 12 to 24 months will be very interesting for appraisers and regulators.


FRB INTERIM FINAL RULE

• This was published in the Federal Register on 10/28/2010

• The 60-day comment period on the interim final rule ended on 12/27/2010

The first major regulation to be promulgated as the result of Dodd-Frank was the interim final rule issued by the Board of Governors of the Federal Reserve System (FRB)

This rule implements the Dodd-Frank amendments to the Truth in Lending Act (TILA)


LAWS NEED REGULATIONS

• A law is somewhat analogous to a skeleton, and the regulations are intended to put the flesh and muscle on the bones

• Regulations are typically more specific and detailed than the law they implement

Typically, after a new federal or state law is passed or amended, there are regulations that must be promulgated in order to implement the law

Many new regulations will be necessary in order to implement Dodd-Frank


INTERIM FINAL RULE

• The rule became effective at the end of the 60-day comment period (December 27, 2010)

• The implementation of the “customary and reasonable fee” portion of the rule was put off until April 1, 2011

Like Dodd-Frank, the interim final rule is lengthy and it is not possible to cover it all here

We will summarize the appraisal-related provisions of this rule on the next several pages


APPLICATION OF THE RULE

• Creditors

• AMCs

• Appraisers

• Mortgage brokers

• Realtors

• Title insurers

• Other firms that provide settlement services

This rule applies to “covered persons” including:


APPRAISAL REQUIREMENTS

• Consumer credit transactions secured by the consumer’s principal dwelling

• Closed-end loans

• Home-equity lines of credit (HELOCs)

The appraisal requirements specified in this rule apply to:

This scope is broader than the FRB’s Appraisal Independence Rules that were promulgated in 2008, because HELOCs are included


VALUATION

• This term “applies to an estimate of the value of the consumer’s principal dwelling whether or not a person applies USPAP in preparing such estimate”

• A “valuation” is prepared by a “natural person” such as an appraiser or real estate agent

• As such, the term “valuation” would not apply to purely computer-generated AVMs

The rule uses the term “valuation” in many places, instead of “appraisal”


PROHIBITED ACTS

1. Causing or attempting to cause the value to be based on a factor other than the independent judgment of the appraiser, through coercing, extorting, colluding with, instructing, bribing, or intimidating a person involved in an appraisal

2. Mischaracterizing or suborning mischaracterization of the appraised value of the property securing the extension of credit

Acts or practices that violate appraisal independence include:


MORE PROHIBITED ACTS

3. Seeking to influence an appraiser or otherwise to encourage a targeted value in order to facilitate a transaction

4. Withholding or threatening to withhold timely payment for an appraisal report or services when the services were rendered in accordance with a contract

If these prohibited acts seem familiar to you, it may be because they are almost identical to the prohibitions that appeared in the old HVCC


PROHIBITED

• A covered person may not provide an appraiser with a “specific value” or “predetermined threshold”, which includes predetermined minimum, maximum, or a range of values

• This is “substantially similar” to the FRB’s current provisions which prohibit a covered person from “telling an appraiser a minimum reported value of the consumer’s principal dwelling that is needed to approve the loan”


PERMITTED ACTS

• Consider additional, appropriate property information, including additional comparable properties

• Provide further detail or explanation of the appraiser’s value conclusion

• Correct errors in the appraisal report

A person with interest in a transaction (lender, mortgage broker, real estate broker, AMC, consumer, etc.) is not prohibited from contacting an appraiser and asking him or her to:


COERCION

• Covered persons are prohibited from engaging in coercion, bribery, or other actions designed to cause anyone to base a valuation of a property on factors other than the person’s independent judgment

• The FRB final rule states that if a creditor is aware that coercion has taken place, or if the valuer has an interest in the property or the transaction, the creditor cannot engage in the transaction unless the creditor engages in “reasonable diligence” to determine that the valuation is sound


CONFLICTS OF INTEREST

• Employment relationship does not, by itself, violate this prohibition

• A staff appraiser for a lender or an affiliated AMC may prepare valuations for the lender as long as adequate firewalls have been established between loan production and appraisal functions

The rule states that a person who prepares a valuation or valuation management services may not have an interest in the property or the transaction


MANDATORY REPORTING

• The duty to report is limited to those failures that are likely to affect the value of the property

• A “reasonable basis” means the person has knowledge or evidence that would lead a reasonable person to conclude that a violation has occurred

A creditor or settlement service provider who has a “reasonable basis” to believe that an appraiser has not complied with applicable laws or USPAP must report the failure to comply to the appropriate state licensing agency.


CUSTOMARY AND REASONABLE

• “…a creditor and its agent must pay a fee appraiser at a rate that is reasonable and customary in the geographic market where the property is located.”

The FRB’s rule also implements the “customary and reasonable” rates of compensation for fee appraisers, as specified in Dodd-Frank

This rule specifies two presumptions of compliance (i.e., “benchmarks”); a lender or AMC is required to meet only one of the two


BENCHMARK #1 FOR C&R FEES

1. The fee is “reasonably related to recent rates paid for appraisal services in the relevant geographic market”, as long as the lender or agent has:

• Taken into account specific factors, including, for example, the type of property and the scope of work, and

• Not engaged in anti-competitive actions under state or federal law, such as price-fixing or restraint of trade


BENCHMARK #2 FOR C&R FEES

2. The creditor is presumed to comply if it establishes a fee “by relying on rates established by third party information, such as the appraisal fee schedule issued by the Veterans’ Administration, and/or fee surveys or reports that are performed by an independent third party”

• Such surveys and reports must not include fees paid by AMCs

This language appeared almost verbatim in the Dodd-Frank Act.


SUMMARY OF C&R

1. A fee that is “reasonably related to recent rates paid for appraisal services in the relevant geographic market”

2. A fee that is established by relying on third party information, such as the fee schedule established by the Veterans’ Administration and/or independent fee surveys and reports which exclude AMC fees

A creditor or its agent (AMC) is required to meet only one of the two benchmarks, which are again:


FINAL WORD ON C&R

• Lenders and AMCs have already begun asking for such statements in appraisal reports

• The rule clarifies that such statements do not create a presumption of compliance

According to the FRB rule, “a document signed by a fee appraiser indicating that the appraiser agrees that the fee paid to the appraiser is ‘customary and reasonable’ does not by itself create a presumption of compliance…or otherwise satisfy the requirement to compensate a fee appraiser at a customary and reasonable rate.”


FRB RULE

• The “customary and reasonable fees” section has received the most attention from appraisers

• As we discussed, however, there are other provisions that are just as important

This rule contains a number of additional provisions; not all of them pertain to appraisers

This rule contains a number of requirements that are similar or identical to the Home Valuation Code of Conduct; so the spirit of HVCC essentially lives on even though it is no longer in effect.


INTERAGENCY GUIDELINES

• The guidelines are intended to replace existing guidance, specifically:

• 1994 Interagency Appraisal and Evaluation Guidelines (FIL-74-94)

• Financial Institutions Letters FIL-20-2001, FIL-84-2003, and FIL-53-2006

The Dodd-Frank Act also required the federal bank regulatory agencies to issue revised Interagency Appraisal and Evaluation Guidelines; these were released 12/2/2010


WHAT IS INTERAGENCY?

• Office of the Comptroller of the Currency (OCC)

• Board of Governors of the Federal Reserve Board (FRB)

• Federal Deposit Insurance Corporation (FDIC)

• Office of Thrift Supervision (OTS)

• National Credit Union Administration (NCUA)

According to the Interagency Guidelines document, the guidelines were issued jointly by:


REQUIREMENTS

• Borrowers’ ability to repay their loans remains the primary consideration in the lending decision

• An institution must implement policies and procedures for appraisals and evaluations

• Examiners will review appraisals and evaluations to ensure they are consistent with both the Agencies’ regulations and the institution’s policies

The Interagency Guidelines apply mostly to financial institutions; however, some of them apply indirectly to appraisers


APPRAISAL PROGRAM

• Provide for independence

• Establish appraiser selection criteria and monitor ongoing appraiser performance

• Ensure that appraisals comply with regulations

• Ensure that appraisals and evaluations contain sufficient information to make a credit decision

• Maintain criteria for content and appropriate use of evaluations

An institution’s appraisal and evaluation program should:


APPRAISAL PROGRAM (CONT’D)

• Provide for receipt and review of appraisal or evaluation report in a timely manner

• Develop criteria to assess whether an appraisal or evaluation can be used subsequently

• Implement internal controls for compliance

• Establish criteria for monitoring collateral values

• Establish criteria for obtaining appraisals or evaluations for transactions that are not otherwise covered by Agencies’ regulations

An institution’s program should:


INDEPENDENCE

• Collateral evaluation employees (including those who order and review appraisals and evaluations) should have reporting lines separate from loan production staff

• Appraisers must be independent of loan production and collection processes

The institution should maintain standards of independence between loan production staff and the collateral valuation program

Small institutions must demonstrate “prudent safeguards” to ensure independence


INFORMATION, PLEASE

• Consistent with the FRB’s final rule, an institution may not “directly or indirectly coerce, influence, or otherwise encourage an appraiser or a person who performs an evaluation to misstate or misrepresent the value of the property.”

An institution may “exchange information with appraisers and persons who perform evaluations” including providing the appraiser with a copy of the purchase contract

There are also lists of permitted and prohibited acts


PERMITTED ACTS

• Consider additional information about the subject property, or additional comparable sales

• Provide additional support for the valuation

• Correct factual errors in an appraisal

An institution may request an appraiser or evaluator to:

These permitted acts are consistent with the FRB’s final rule, as well as the now-retired HVCC


PROHIBITED ACTS

• Communicating a predetermined, expected, or qualifying estimate of value, or a loan amount, or target loan-to-value ratio

• Specifying a minimum value requirement for the property that is needed to approve the loan

• Conditioning a person’s compensation on loan consummation

• Failing to compensate a person because the property is not valued at a certain amount


MORE PROHIBITED ACTS

• Implying that the current or future retention of a person’s services depends on the amount of the appraisal or evaluation

• Excluding a person from consideration for future engagement because the reported market value does not meet a specified threshold

Additionally, an institution should not use the threat of reporting a false allegation of USPAP to a state enforcement agency as a method of coercing or influencing an appraiser


SELECTION OF APPRAISERS

• The person possesses “education, expertise, and experience” to complete the assignment

• The work performed by the appraiser is periodically reviewed by the institution

• The person is capable of being unbiased

• The person is independent and has no interest, financial or otherwise, in the transaction

• The appraiser is appropriately licensed or certified (does not apply to evaluations)

An institution should ensure that:


MORE ON SELECTION

• An institution or its agent must directly engage the appraiser

• Under certain circumstances, an institution can use an appraisal prepared for another institution

• The borrower or loan production staff is not permitted to recommend, select, or engage a person to perform an appraisal or evaluation

• An institution’s use of a borrower-ordered appraisal violates the Agencies’ appraisal regulations


OTHER “SHOULDS” • If an institution uses an approved appraiser list,

the institution should have procedures for developing and maintaining the list

• There should be internal, periodic review of the approved appraiser list (if used)

• An institution should use written engagement letters when ordering appraisals

• Appraisal or evaluation development work should not commence until the institution has selected and engaged a person for the assignment


MINIMUM APPRAISAL STANDARDS

• Conform to generally accepted appraisal standards as evidenced by USPAP

• Appraisal must be an opinion of market value

• An AVM is not considered an appraisal for these purposes

• A BPO may not be used as the primary basis to determine the value of a property for the purpose of loan origination of a residential mortgage loan

The Agencies require that an appraisal must:


MORE MINIMUM STANDARDS

• Be written and contain sufficient information to support the institution’s lending decision

• Analyze and report appropriate deductions for proposed construction, partially leased buildings, non-market lease terms, unsold tract developments

• Be based on the definition of market value set forth in the regulation

• Be performed by licensed or certified appraisers

The Agencies require that an appraisal must:


REPORTING

• USPAP provides various report options, and an option that merely states, rather than summarizes or describes the information, may lack sufficient information and analysis

• “Generally, a report option that is restricted to a single client and intended user will not be appropriate to support most federally related transactions.”

• This appears to prohibit a Restricted Use appraisal report for an FRT

The Interagency Guidelines state:


EVALUATIONS PERMITTED

• Transaction value equal to or less than $250,000

• Business loan with a transaction value of $1,000,000 or less, under certain conditions

• Involves an existing extension of credit under certain conditions, such as

• There has been no material change in the market or the property, or

• No new monies are advanced

For these transactions, an “evaluation” may be used in lieu of an appraisal:


EVALUATIONS

• An evaluation must be consistent with safe and sound banking practices

• An institution should be able to demonstrate that an evaluation provides a reliable estimate of the collateral’s market value

• A valuation method that does not provide market value is not acceptable as an evaluation

• For example, a BPO provides a sales or list price, and cannot be used as an evaluation because it does not estimate market value


EVALUATION CONTENT

• Identify the property’s location

• Provide a description of the property and its current and projected use

• Provide an estimate of the “as is” market value

• Describe the methods used to confirm the property’s condition, and the extent to which an inspection was performed

• Describe the analysis performed and supporting information used in valuing the property

An evaluation should, at a minimum:


EVALUATION CONTENT (CONT’D)

• Describe supplemental information considered when using an analytical method or technological tool

• Indicate all sources of information used in the analysis, including external data sources, property-specific data, photos, description of the neighborhood, and local market conditions

• Include information on the preparer, such as name and contact information, and signature

An evaluation should, at a minimum:


REFERRALS

• An institution should file a complaint with the appropriate state appraiser regulatory agency when it suspects that a state certified or licensed appraiser has failed to comply with USPAP or applicable state laws

• As of April 1, 2011, an institution must file such a complaint

• An institution must file a suspicious activity report (SAR) with FinCEN (Financial Crimes Enforcement Network) when suspecting fraud


INTERAGENCY GUIDELINES

• More information on transactions that are exempted from appraisal requirements

• Use of AVMs for collateral evaluation

• Loan workouts and restructuring

• Tax assessment valuations (TAVs)

Is this all? No. The guidelines establish many additional requirements for institutions, including:

There is also a glossary of terms (Appendix D)


SECTION 4

Recent Fannie Mae Revisions and Clarifications


“Nothing in the world is ever completely wrong. Even a stopped clock is

right twice a day.”

- Paulo Coelho


“I can’t change the direction of the wind,

but I can adjust my sails to always reach my

destination.”

- Jimmy Dean


FANNIE MAE ANNOUNCEMENTS

• These are similar to HUD Mortgagee Letters

• Not all of these announcements affect appraisers

• Can be found at www.efanniemae.com

Fannie Mae periodically releases announcements to inform appraisers and loan originators of changes in FNMA requirements and policies.

Announcement SEL-2010-09, released 6/30/10, outlines changes to appraisal-related policies


FNMA ANNOUNCEMENT 2010-09

• Appraisal-related changes to Selling Guide

• Miscellaneous appraisal-related guidance

• Miscellaneous Selling Guide updates

• Other updates of non-appraisal related nature

Contents of this announcement:

We will address the appraisal-related issues in this section of the course.


INTERIOR PHOTOGRAPHS • Effective 9/1/10, if an appraisal

involves an interior inspection of the property, interior photographs are required to be included in the appraisal report

• Photos are to include kitchen, all bathrooms, and the main living area

• Photos also should include recent remodeling and updates, as well as physical deterioration and deferred maintenance


LENDER CHANGES TO VALUE• Lenders are not permitted to arbitrarily change

value opinions in appraisal reports

• If two appraisals are ordered, a lender may not simply average the two values

• If a lender finds an appraisal to be “deficient”, it has three options:

1. Contact the appraiser to address the problems, or

2. Obtain a desk or field review of the original appraisal, or

3. Order a new appraisal


REQUEST FOR VALUE CHANGE

• A request for a change in market value must be based on “material and substantive issues”

• It cannot be made solely on the basis that the value indicated in the appraisal does not support the proposed loan amount

• If a desk or field review is ordered, it must conform to USPAP and must be completed by licensed or certified appraisers in the state where the property is located

• A new appraisal must be based on the same level of inspection as the original appraisal


APPRAISER SELECTION

• Appraisers must have geographic competency and access to appropriate data sources

• Fannie Mae does not permit appraisers to obtain such competency during the assignment

• Fannie Mae’s requirements are therefore more restrictive than USPAP, and must be followed when applicable

• This would be an assignment condition

These changes are considered mostly clarifications, although some minor revisions have been made.


LENDER RESPONSIBILITY

• Fannie Mae does not require the use of a third-party vendor

• The lender is ultimately responsible for representations and warranties related to value, condition, and marketability of the property

• The lender must hold the AMC responsible for compliance with Fannie Mae requirements

The Selling Guide has been updated, with regard to third-party vendors (AMCs), to clarify that:


SELECTION OF COMPARABLES• The appraiser is responsible for selecting

appropriate comparable sales

• If foreclosure sales or short sales are used as comparable sales, the appraiser must:

Identify and consider differences

Consider the property condition

Consider whether the property has a stigma

• The appraiser must conduct proper research, and cannot simply assume that a short sale or foreclosure sale is equal to the subject property


VERIFICATION • A list of acceptable data and verification sources

is provided in the Selling Guide

• For new construction, an appraiser can use the HUD-1 Settlement Statement from the builder’s file as a verification source, if the sale is recent and not available from other sources

• The appraiser also must use one sale located outside the new subdivision, and another sale that can be either in or out of the subdivision

• The appraiser must verify these other sales from reliable data sources, other than the builder


COMMUNICATION• An employee of a lender or authorized third party

is not prohibited from requesting that an appraiser provide additional information or explanation, or correct objective factual errors

• Loan production staff or commission-based personnel may not have “substantive communication” with an appraiser regarding issues that impact valuation

• It is incorrect for the appraiser to indicate that he or she is not permitted to communicate with the lender or AMC to correct errors or to address the lender’s concerns


OTHER FNMA ISSUES• Sales and financing concessions should be given

particular attention to ensure they are accounted for; otherwise, an inflated value may result

• Fannie Mae’s market value definition requires adjustments for special or creative financing or seller concessions of the comparable sales

• Personal property, including furniture, vehicles, boat docks, or art work may not be part of the security for a single-family mortgage, unless otherwise specified by Fannie Mae


SALES CONCESSIONS

• Adjustments must be made to the comparables for special or creative financing or sales concessions

• No adjustments are necessary for costs that are paid by sellers as a result of tradition or law

• The amount of the adjustment should approximate the market’s reaction to the financing or concessions, based on the appraiser’s judgment

Page 4 of the URAR form states:


2010-09 1004MC GUIDANCE • The supply of active listings should be based on a

specific date in time

• These numbers should be based on the last day in the applicable period described

• For example, for the “Current 3-month” period, the number of listings should reflect the most recent day in the period (this would be the effective date of the appraisal)

• It is not appropriate to use a cumulative number of listings for these periods

• This updated methodology is required as of 9/1/10


1004MC - INVENTORY

• For the 4-6 month period specified on the 1004MC, the number of listings will reflect those that were available on the most recent day of this period (approximately 90-92 days in the past)

• For the 7-12 month period, the number of listings should reflect those that were available on the most recent day in the period (approximately 180-184 days in the past)

• This assumes data from these prior time periods is available to the appraiser


SECTION 5

The Future: Take Back Your Profession


“Everyone thinks of changing the world, but no one thinks of changing himself.”

- Leo Tolstoy


WHERE WE STAND

• HVCC-related revisions to the Fannie Mae and Freddie Mac Selling Guides are not rescinded

• The FHA prohibition on mortgage brokers ordering appraisals is unlikely to be reversed

• Millions of dollars have been invested in AMCs; they are not going to give up and go away

• Structural changes within lending institutions are not going to be undone

Now that HVCC is gone, residential appraising will not return to the way it was before; certain aspects of the HVCC are here to stay:


WHERE ARE WE GOING?

• Allowing mortgage brokers licensed under the SAFE Act to order appraisals

• Promulgation of new federal regulations as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act

• State AMC and appraiser independence laws

Possible changes to independence requirements:

At the time of this writing, none of these is finalized; they are merely possibilities on the horizon.


DECLINING NUMBERS

• On the following two pages, there are graphs of the number of U.S. appraisers, based on statistics provided by the Appraisal Subcommittee

• The number of certified/licensed appraisers has decreased by approximately 5.5% since 2007, from 121,407 to 114,737

According to the Appraisal Subcommittee, which maintains a registry of state-licensed and certified appraisers in the U.S., the number of licensed and certified appraisers peaked in 2007, and has since been in decline.


U.S. APPRAISERS 2001-2010


At a more than ever before:

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000


U.S. APPRAISERS 1993-2010


At a more than ever before:

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000


ANALYSIS OF TRENDS

• The trend went sharply upward in 2003, culminating with a peak in 2007

• This was due to a number of factors, most notably the lending boom and new AQB certification requirements which began 1/1/2008

• One might conclude that the number of 88,000 to 93,000 appraisers appears to be a more sustainable number, based on historical trends

The previous graph indicates that between 1993 and 2002, the number of appraisers remained fairly stable, with minor year-to-year fluctuations, generally between 85,000 and 93,000.


IF WE WAIT…

• Appraisers will continue to leave the profession until more sustainable numbers are reached, probably in the low ninety-thousands

• Supply and demand factors will cause fees to reach an equilibrium

• Who will accept a $150 fee when he or she is booked out for two to three weeks?

Although the course author is not a professional prognosticator, there are some safe bets regarding the appraisal profession and mortgage industry over the next several years:


“Change starts when someone sees the next step.”

- William Drayton


“Change your thoughts and you change your world.”

- Norman Vincent Peale


I WENT DOWN TO THE CROSSROADS…

• Appraisers who depended heavily on mortgage brokers for appraisal work find themselves scrambling for new sources of business

• Some appraisers have left the profession altogether

Many appraisers are finding themselves at a professional crossroads, as changes in the lending industry have caused many to re-examine their business models.


LET’S LOOK at the BIG PICTURE

• Small industry – traditionally less than 100,000 members

• Lack of unity – no single organization represents the majority of appraisers

• Interests of the profession often run counter to those of bigger-money interests, namely the banking and real estate industries

The appraisal profession has historically had little power to effect changes beneficial to the profession and its members – why?


DISCUSSION: SOLUTIONS?

Ways in which the appraisal profession can overcome its power problems:

• Strengthening existing associations

• Affiliation with a powerful organization (NAR®)

• Forming a new association

• Unionization

Each option has inherent problems which render it unlikely to happen.


UNLIKELY SOLUTIONS • Strengthening an existing association or forming

a new association takes time, money, and large numbers of appraisers participating, which has heretofore proven impossible

• Affiliation with a large group like NAR® leads to representation problems, plus if appraisers’ interests run counter to the larger organization’s goals… guess who wins?

• Unionization is unlikely to get enough appraiser members to be effective; appraisers tend not to run in packs


CASE IN POINT • On March 8, 2010, the Appraisal Institute sent a

letter to the Secretary of the Treasury, raising concerns about the use of BPOs in the Home Affordable Foreclosure Alternatives (HAFA) program

• Citing a growing fraud practice called “flopping”, AI asked the administration to revise HAFA guidelines to prohibit the use of BPOs for valuing properties in short sale situations

• “Flopping” involves the purchase of short sale properties at artificially low prices using deflated BPO valuations, then re-selling for profit


A QUICK RESPONSE • NAR® wasted little time in responding to AI’s

request letter

• On March 12, they sent a letter to the Secretary of the Treasury in support of the use of BPOs in valuing foreclosure and short sale properties

• In their press release, they stated that “an appraisal may not be the best tool” for these transactions

• They also stated that BPOs are widely accepted in the real estate industry, and there is no evidence that appraisers are less likely to engage in fraud than real estate agents are


THE CONFLICT • This example demonstrates the inherent conflict

between what is good for the appraisal profession and the real estate industry

• The National Association of REALTORS® has over one million members

• They do have appraisers as members, but appraisers make up only a small percentage of the membership

• When these interests conflict, the majority rules

• Appraisers cannot expect someone to stand up on their behalf if they are unwilling or unable to do it for themselves


NEVER SAY NEVER • The possibility of the emergence of a large and

powerful lobbying force for appraisers’ interests is unlikely, to say the least

• Of course, there are many who disagree with this statement, so you can never say never

• The reality is, the appraisal profession lacks political clout

• And, because it is not a big-money profession, it cannot purchase clout


NOW, A MICRO VIEW

• The way they do business

• The types of clients they work for

• The types of services they provide

• How they market themselves and their services

If appraisers are unlikely to effect change at a national level, then what?

Individual appraisers can change:


APPRAISAL COALITIONS • Appraisal coalitions have proliferated in a

number of states

• These are grass-roots lobbying groups which try to create change at state and local levels

• Several coalitions have been successful in getting AMC legislation passed in their states, including AZ, IL, and NV

• To find out if there is an appraisal coalition in your state, visit www.nationalappraisalcoalition.org


“It is not necessary to change. Survival is not mandatory.”

- W. Edwards Deming


DISCUSSION QUESTION

What are some of the changes that an individual appraiser can make to position himself or herself better in the current climate?

Be creative.


POSSIBLE SOLUTIONS • Lower your expenses

and overhead

• Work for some of the better-paying AMCs

• Upgrade certification to general and do commercial appraisals

• Offer other appraisal services, such as appraisal review

• Work for non-FNMA lenders

• Develop an appraisal specialty, such as eminent domain

• Do REO and short sale appraisal work

• Find non-lending clients, like attorneys or private individuals

• Do forensic reviews or investigations for state appraisal agencies or lenders

Solutions are as varied as the people in this room


“The entrepreneur always searches for change, responds to it, and exploits it as an opportunity.”

- Peter F. Drucker


EXAMINING THE SOLUTIONS

Let’s take a closer look at some of the solutions in more depth.

Where possible and practical, we will address some of the competency and regulatory issues related to these appraisal specialties.


REO AND SHORT SALES

• Some areas are more active than others, but no area of the country is immune

• Both foreclosures and short sales provide business opportunities for appraisers

• Short sales typically need an appraisal before the lender gives approval

• These types of appraisal assignments are not subject to FIRREA

Throughout the country, foreclosures and short sales continue to dominate the market.


A RIPPLE EFFECT


REO AND SHORT SALES

• REO appraisals often have client-specific guidelines

• Fannie Mae and HUD are two of the largest consumers of REO appraisals

• Large banks often get REO appraisals; these may come direct, or from AMCs

• Smaller, more local banks usually order their own REO appraisals

As we saw on the previous graph, over 43% of buy-side transactions involve some sort of distressed property, whether short sale or REO.


FANNIE MAE REOs

• As-is and as-repaired values

• Three listing comparables included, with adjustments

• Avoiding use of REO sales unless they represent the current market

• Itemized list of repairs with estimated cost of each

• Supplemental REO addendum in report

Fannie Mae requirements for REO appraisals include:


HUD REOs

• To find the HUD M&M contractor responsible for your state, go to: www.hud.gov/offices/hsg/sfh/reo/mm/mminfo.cfm

• There are special requirements for HUD REO appraisals, which may be found in Appendix A of HUD Handbook 4150.2

HUD REO appraisals are not ordered by lenders or HUD offices; they come from Management and Marketing (M&M) contractors.


HUD REO REQUIREMENTS • Before inspecting the property, the appraiser

must be provided with a Property Condition Report from the M&M contractor

• The M&M contractor is responsible for ensuring the utilities are turned on

• The intended user of a HUD REO appraisal is the M&M contractor, the lender (under certain circumstances), and HUD/FHA

• Properties are to be appraised “as-is”

• Appraiser must provide a repair list, with an itemized cost to cure


INSURABLE OR NOT?

• “Insurable” means the property meets FHA MPRs and needs no repairs

• “Insurable with repair escrow” means the property needs no more than $5,000 worth of repairs to meet MPRs

• “Uninsurable” means the property needs more than $5,000 in repairs to meet MPRs

The appraiser is responsible for rating the property’s insurability for an FHA mortgage.


NEW LEAD PAINT DISCLOSURE

• Formerly, on properties built prior to 1978, the appraiser was required to condition the appraisal on a lead-based paint test

• Now, lead-based paint tests are no longer automatically required

• Instead, appraisers are required to observe the painted surfaces on pre-1978 homes

Mortgagee Letter 2010-17 updated the reporting requirements for HUD REO appraisals, as of June 1, 2010.


LEAD PAINT – REO APPRAISALS • If the appraiser observes defective paint

surfaces in a pre-1978 home, the appraiser must enter an “X” in the physical deficiencies box, and note all areas affected

• If there are no defective paint surfaces noted, the appraiser does not need to explain this in the report

• Again, these new reporting requirements apply only to HUD REO appraisals, not origination appraisals


DIVERSIFICATION Common sources of non-mortgage appraisal assignments include:

• Relocation companies

• Trust companies

• Attorneys

• State highway agencies

• Utility companies

• REO companies

• Private individuals


COMPETENCY ISSUES • Many of these types of assignments require

specialized knowledge and skill sets

• Assignments for highway departments require competency in eminent domain work, as well as familiarity with standards and guidelines (assignment conditions) issued by state and federal agencies

• Assignments for attorneys may involve expert witness testimony, which makes some appraisers uncomfortable


RELOCATION APPRAISALS • These types of assignments typically require

advanced skills

• During the recession, the number of relocations decreased significantly, making these assignments more scarce

• Worldwide ERC revised the report form for relocation appraisals; this form was released in May 2010

• Additional information is available on the Web at www.worldwideerc.org


CHANGES TO ERC FORM

• It is now 7 pages long instead of 6

• The definition of “Anticipated Sales Price” has been modified slightly

• “Reasonable marketing time” has been replaced with the term “assignment marketing period”

• An extraordinary assumption has been added which will allow the effective date of the appraisal to be different than the inspection date

The 2010 ERC Summary Appraisal Report form incorporates many changes:


MORE ERC FORM CHANGES• There is a new section of the form that covers

condominiums and co-ops

• The market trends section of the form is now more detailed, covering 2 pages instead of 1

• The market trends section is divided into three sections: Historic Trends Current Factors Forecasted Trends

• An enhanced summary of pertinent information has been added on page 6 of the report form


ERC GUIDELINES

• Relocation appraisals are different from mortgage appraisals

• It is inappropriate to use Fannie Mae, HUD, or other mortgage lending appraisal guidelines when completing a relocation appraisal

There are nine guidelines for ERC appraisals, which appear on page 1 of the Summary Appraisal Report form and are explained in detail in the 2010 Relocation Appraisal Guide by Worldwide ERC.

We will briefly cover these nine guidelines in this section of the course.


ERC GUIDELINE 1 • Appraisals are “as-is” (although they can be

“subject to” if specifically instructed by the client)

• The appearance of a home will require the appraiser to consider both condition (repairs, improvements) and appeal (decoration, design)

• Adjustments for condition and appeal factors should be based on market impact on anticipated sales price, not cost to cure

• If the subject is new construction not completed as of the date of valuation, the appraiser should value the property using a hypothetical condition that the improvements have been completed


ERC GUIDELINE 2• Develop and support the price the property is

anticipated to sell for during its Assigned Marketing Period, paying attention to: Competing properties Pending sales Comparable sales Supply and demand Availability and terms of financing Location Overall market conditions Other pertinent factors


FORECASTING

1. Any change in the value that is anticipated from the current date to the end of the assignment marketing period (not to exceed 120 days); this could be either positive or negative

2. Any reduction in price necessary to sell the property within the assignment marketing period

The forecasting adjustment is based on two factors:

It is possible that no forecasting adjustment may be necessary, if the market is stable and the property is anticipated to sell within 120 days


ERC GUIDELINE 3

• “Anticipated Sales Price” is based on cash, or cash equivalent terms

• Sale prices of comparable sales should be adjusted for the effect of any sales or financing concessions

• These are not necessarily mechanical, dollar-for-dollar adjustments

• Adjustments for financing concessions should reflect the difference between what the comparable sold for with concessions and what it would have sold for without the concessions


ERC GUIDELINE 4

• The property is appraised as though free of all liens and special assessments, even if there are still outstanding installment payments


ERC GUIDELINE 5• Gross living area (GLA) is to be standardized

• Exterior measurements are used, except for condominiums and co-ops

• Should include habitable, above-grade areas

• Bedroom and bath counts must be located within the GLA

• Heating, lighting, and ventilation are to be considered in determining habitable areas

• Finished basements and attics are not to be included in GLA, even if they contribute to value


MORE ON GLA • If a room has a sloping ceiling, only the part of the

room that has a ceiling height of 5 feet or more should be included in GLA

• If an area is 50% or more above grade, fully finished, with a design that has the “look and feel” of above-grade area, the appraiser can opt to include this area in GLA

• The method of handling partially below-grade areas must be similarly applied to the competing listings and comparable sales

• Two-story foyers and other open areas are to be deducted from GLA


ERC GUIDELINE 6• Defines the ratings that are used for the

neighborhood and the property

• These ratings are assigned by comparing the subject property to competing properties in its market

Excellent = (superior)

Good = (better than)

Average = (comparable)

Fair = (not as good as)

Poor = (considerably inferior)


MORE ON RATINGS

• A custom-built luxury home may be rated as “average” if it is located in a subdivision of other similar custom homes, and its amenities are standard and typical for its location

• Likewise, a home that is in need of several repairs could be rated “average” if its condition and repair issues are typical for other competing properties in its market

• This rating scale is significantly different than the rating scale used for mortgage lending appraisals


ERC GUIDELINE 7

• Photos of subject front, rear, street, and interior, as well as any adverse conditions, view, or marketability issues (positive or negative)

• Photos of competing properties and comp sales

• Dwelling sketch with all measurements and calculations, and room locations

• Map depicting locations of subject, comparable sales, and competing listings

The report must include the following exhibits:


ERC GUIDELINE 8

• The relocation appraiser should not attempt to solicit a listing or generate a referral fee as a result of the appraisal assignment


ERC GUIDELINE 9

• Do not discuss appraisal opinions or reveal sensitive information to anyone other than the client

• You cannot provide even a “ballpark” estimate to the relocating employee

• Deviation from any of the ERC definitions and guidelines is not permitted without client approval, and such deviations must be specifically disclosed in the report


EMINENT DOMAIN APPRAISALS Eminent domain appraisal assignments are diverse, challenging, and potentially lucrative.

• Highway departments, airport authorities, and utilities often engage appraisers

• Property owners (condemnees) and their attorneys also engage appraisers

• Appraisers must be aware of any laws and/or regulations that apply in the development and reporting of these appraisal assignments

• Remember also the COMPETENCY RULE


THE YELLOW BOOK If federal government funds are involved in acquiring property, the appraisal must conform to the Uniform Appraisal Standards for Federal Land Acquisitions, also known as UASFLA, or the “Yellow Book.”

• If a state highway department is acquiring property (even if federal highway money is involved), the appraisal must conform to the state highway department’s appraisal standards, not the Yellow Book

• State standards can be very detailed; most even have their own report forms


DIVORCES AND ESTATES Attorneys and private individuals often engage appraisers for these types of assignments.

• Many of these appraisals are on typical, non-complex single-family homes, and require no special competency

• However, for non-complex properties, the attorney or owner may hire the low bidder

• Expert testimony may (or may not) be required

• Be wary of situations when the attorney assures you that testimony will not be required – before you even undertake the assignment


MARKET VALUE Many litigation appraisal assignments have market value as their objective.

• Be sure to use the definition of value (market or otherwise) that is appropriate for the assignment

• Many courts and jurisdictions have their own definition of market value

• USPAP requires you to cite the source of the definition in your report

• Use of the pre-printed definition from the Fannie Mae URAR form is not appropriate


PRIVATE INDIVIDUALS

• Assignments for private individuals may require patience and the ability to explain appraisal issues and standards to people who have limited (or no) understanding of appraisal practice

• Even if private individual clients like your work, they may not have any follow-up business to give you

• Diversification is not a panacea

• It may be difficult to replace all your traditional mortgage lending work with appraisals from other sources


FORENSIC REVIEWS The term “forensic” has several meanings; its most common involves the establishment of facts or evidence in a court of law.

• As our society becomes more litigious, lawsuits against appraisers are filed regularly

• In appraisal cases, both plaintiffs and defendants need experts to prepare reports and testify

• These experts are usually appraisers with an advanced knowledge of USPAP, appraisal theory, and techniques


STATE AGENCY REVIEWS Many states use certified appraisers as reviewers or investigators when pursuing disciplinary cases against appraisers.

• Find out if your state is one of them

• These assignments generally pay very well

• A high level of knowledge and good expert witness skills are a must

• Some states do not require their reviewers to follow STANDARD 3 of USPAP

• As a bonus, you are helping the profession


SECTION 6

Summary: Best Practices for Maintaining Your Professionalism


“The quality of a person’s life is in direct proportion to their commitment to excellence, regardless of their chosen field of endeavor.”

- Vince Lombardi


APPRAISAL BEST PRACTICES

In summary, rather than provide a list of negative exhortations (“Don’t do this, don’t do that”), we believe it is preferable to provide positive reinforcement.

The next five slides highlight some appraisal “best practices.”

These can help appraisers improve business and income, cultivate new business opportunities, protect an ethical reputation, and limit professional liability.


1. PROTECT YOUR REPUTATION• Treat your ethical reputation like what it is – your

most important professional possession

• You have only one reputation – it takes years to nurture and build it, but just one bad decision to destroy it

• Never compromise your ethics for an appraisal fee, or the promise of future appraisal business

• Avoid cutting corners for low-fee clients

• Associate yourself with professionals; rightly or wrongly, we are judged by the company we keep


2. BE A PROFESSIONAL • If you wish to be treated as a professional, you

must look and act the part

• Dress and conduct yourself professionally

• Continuously improve your knowledge and skills

• Treat other appraisers as professionals, even though they may be your competition

• Bad-mouthing another professional to a client or member of the public is not how a professional should act


3. DIVERSIFY YOUR PRACTICE

• As stated previously, there are non-lender clients out there who really want to know what a property is worth

• These assignments often require more knowledge and specialized skills

• To many clients, ethical and competent performance is more important than a low fee or a fast turn-around time

• Find these clients – it may take some searching – and cultivate opportunities to service them


4. KNOW USPAP • USPAP sets forth ethical standards and

performance requirements for appraisers

• This is the “measuring stick” that is used in judging whether an appraiser’s work meets the recognized standards of the profession

• If you complete every assignment in compliance with USPAP, you will be able to defend yourself against whatever is thrown your way

• USPAP knowledge can be a gateway to other opportunities, such as forensic appraisal or review work


5. GET INVOLVED • Appraisers often grouse about a perceived lack

of ethics by their peers, but are unwilling to do anything about it except complain

• If you receive an appraisal report you believe to be fraudulent or misleading, turn it over to the appropriate authorities

• If you are competent in appraisal review, contact your state enforcement agency and offer your services as a reviewer or investigator

• We cannot expect anyone else to keep our professional “house” clean – we must do it ourselves


“I do the very best I know how – the very

best I can; and I mean to keep on doing so

until the end.”

- Abraham Lincoln


THE END

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recent mortgage

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recent changes

appraisal profession

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