End of Year Note – What you need to know about appraisals in 2014
Every year I try to put together a note about the appraisal industry, what’s going on and what to look out for in the coming year. 2013 brought enough regulatory activity to spin the head of even the most seasoned compliance folk. And I don’t expect it to slow down any time soon. This year has been by far one of the most comprehensive as there’s been so many things going on. From AMC licensure requirements, CFPB rulings (and enforcement!), USPAP changes, state licenses, solar, UCDP and ULDD the list goes on and on. As the regulators and auditors draw closer, I’d like to give you my suggestions on how to prepare for 2014 and beyond.
- Compliance starts to get real, but won’t be in full force until 2015. Although many highly anticipated rules get implemented this year, but the regulators will need time to do their research. isn’t going to come to 2015 when they will have expected you to already have a dynamite process in place in regards to appraisal compliance, verification, review, delivery and scoring. Law firms, AMC’s and other third parties will certainly take advantage by selling through scare tactics. However, the reality is (the CFPB does not want to make a mockery of itself by chasing unsubstantiated cases and, in effect, becoming a hindrance to the market it is intended to preserve. Prepare now by developing efficient processes, building strong vendor relationships, and sound analytics. Don’t misunderstand me, we will witness enforcement this year, but the teeth will come out in 2015.) You need to make the changes now and then be scared in 2015 that they are going to actually check then and verify everything thats taking place and suppose to take place.
AMC State Licenses
- An increasing number of states have implemented appraisal management licensing requirements at this point, a trend which will continue per Dodd-Frank requirements. Many states follow a similar formula with nearly identical verbiage on a variety of topics, but be mindful of key variances on appraiser payment, fee disclosure, and compliance manager qualifications. A list of current state license requirements can be found on the appraisal institute website and located in the link below:
Customary and Reasonable Fees
- This is something that has caused more confusion and yet it’s still a topic. How do you define customary and reasonable? And if you can do that, are you authorized to do so? Well, some states, like New Jersey, think they can and they did. This example, a public notice released in late 2012, mandates a range mortgage lenders charge for appraisal related fees. The basis? It’s “most recent” fee survey dating back to 2010. So what’s the issue? The information utilized to enact this stipulation is not only dated, but overly broad the fee is $350-$450 on all appraisals which makes no sense. Averages at the state level, frankly, don’t work. The way I see it, there exist two options. 1) Allow appraisers to set their fees, and have the licensed entities monitor averages at the county level (at minimum, zip ideally), and report their findings to the state who will produce an annual fee tolerance by county 2) The Federal Government possesses more data on appraisal fees than any other entity on the planet. If fee regulation is truly an objective, establishing a database of fees, annual (if not quarterly) schedule by county, and online reporting system would achieve it. The fee is low and doesn’t make any sense but they set a fee. However in other areas this is very much still up for debate. I wrote a solution which can be found on my blog here. Our solution is to allow the appraisers to set their own fee and then keep it within a 10% median of what other appraisers set in the area.
Borrower Appraisal Delivery
- Many lenders rely on their AMC partners to adhere with this requirement. Our team developed monitoring system that confirms borrower delivery and download. In the event the borrower fails to respond within a reasonable amount of time (manageable by account), or if the address bounces, client users can adjust the address and resend the original package directly from the site. Customizable analytics also afford compliance officers live details on delivery status. For borrowers who don’t have an e-mail address were considering using a print shop to automatically redirect it and mail it however were not 100% sure as it would add cost and is it something that the market would be willing to pay for.
Joint Ventures and Third Party Interest – If you own an AMC or have a partial interest as a lender
- Sell it, sell your shares or close it. There’s about 500 reasons but the general rule is the CFPB doesn’t want you in anything but your main business so if you’re making money off of title, appraisals or anything else besides the standard loan fees I’d plan on not having that income for long. If you look at the big companies, like Wells and a few others, you can see they are disassembling and selling off their joint ventures and settlement service business channels. Theres a very good reason and I’d play close attention to this. The regulators want the appraisal and settlement processes completely independent and not a profit center at any level.
Maintaining an In House Process – If you have an In House process and want to maintain it
- Hire a chief appraiser, make the office about 3 or 4 miles from your office, invest in a good software solution and let them run it. Get all your licenses and don’t plan on making a profit from it. You could just cover baseline expenses with this but I’d be careful about it, and you’re going to have to especially in disclosing this as a fee charged to the borrower. I’ve seen some in house processes done very well and you can actually do it right if that’s the road you want to go down; however you must plan to run these as completely independent entities. Document all methods of correspondence between the two, and ensure your management teams understand one instance of influence in either direction can spell disaster. They want it totally separate and to run independently.
Get rid of your branch specific appraiser panel
- This is very low on the totem poll for most regulators however it’s starting to happen but we’re beginning to hear rumblings already. They don’t like it and don’t want you involved. Branches, loan officers should have zero say and should not have an appraiser panel at any level. You can get away with a companywide approved appraiser list but the branch level is too close for comfort. Start the process of disassembling this in 2014 with the idea in 2015 its gone. I know why companies have them for branches and there’s some pros and cons but the spirit of things is totally independent and a branch specific approved list is a little too much con. If you choose to maintain an organization level panel, plan to employ at least one non production employee, possibly a team given the size of your organization, to work directly with your partners and regulators on valuation issues.
If your AMC doesn’t have its own software
- Find out when they are going to build their own. The reality is the SaaS model for an AMC is just not going to work, in house I’m comfortable with it as you have direct control over business operations however when you look at it from a third party risk prospective it’s just too risky for me and my taste.
UCDP and ULDD Gets Real
- We all know what the GSE’s are doing with your appraisal data. They’re storing, running analytics, and leveraging it then when they want a reason to push a buyback. They’re going to possess the ability to run it against thousands of other appraisals and say “here’s 20 reasons why”. The reality is that the GSE’s have mass data on their side and with over 9 billion appraisals scanned by the GSE’s I’m sure they could come up with a pool of data that says your appraisal is wrong. It’s the definition of an unfair advantage, but you can take steps to level the playing field. In this case, the best defense is a good offense. Data and appraisal review analytics companies are working full force to beat them at their own game. Some are good, some aren’t worth it, the sell is “You’ve done everything you could.” I’d rather have it so that you know you’re right. Our system doesn’t attempt to reinvent the wheel by creating arbitrary scoring metrics you likely won’t use for much more than a routing tool. It sticks to the basics by running against regulatory guidelines and investor overlays, utilizing market data to confirm support of variances. Simple logic and hard data. It’s better than some analytics companies systems and definitely better than any other appraisal management company I just wished we had more data.
USPAP Changes – Just so you know
- Conduct section of the Ethics Rule: The Conduct section requires that an appraiser disclose any current or prospective interest in the subject property and any services performed regarding the subject property in the past three years. The disclosure to the client occurs prior to or when discovered, as well as in the certification. In assignments where there is no report, only the initial disclosures to the client are required. There is no additional certification requirement.
- Competency Rule: This requires that an appraiser be competent to perform the assignment, or acquire the necessary competency, or withdraw from the assignment. However, the Competency Rule does not expressly require the appraiser to act competently in the given assignment. The sentence “In all cases, the appraiser must perform competently when completing the assignment” will be added to the 2014-2015 USPAP.
Solar Electric –
System will begin making a notable difference in values of homes. In areas like Colorado and Texas you’re already starting to see an influx the difference and we have enough data is out that to determine its going to start becoming a factor in all markets. The recurring issue with this which has always been the issue is that the cost of the improvements outweigh the benefits. $20,000 for a solar system that saves a few hundred yearly isn’t worth it for the average consumer. There’s some that think its worth it and do it anyway, typically for environmental reasons over financial benefit, but it hasn’t been adopted by the masses. The appraisal industry everything we deals with is in the mass market, so it’s important to realize that it takes some time for new technologies, especially high end ones like this, to have widespread effect. Take a little time and the industry is starting to finally recognize this. In 2015 you’ll see it really starting making a difference as solar will likely improve enough to power an entire house and the systems will be cheap enough to make it feasible for the common homeowner.
- Also most of these systems are being leased as well on 20 year leases which they should extend to the life of the loan from my prospective as it would help eliminate a layer of risk.
- System will begin making a notable difference in values of homes. In areas like Colorado and Texas you’re already starting to see an influx the difference and we have enough data is out that to determine its going to start becoming a factor in all markets. The recurring issue with this which has always been the issue is that the cost of the improvements outweigh the benefits. $20,000 for a solar system that saves a few hundred yearly isn’t worth it for the average consumer. There’s some that think its worth it and do it anyway, typically for environmental reasons over financial benefit, but it hasn’t been adopted by the masses. The appraisal industry everything we deals with is in the mass market, so it’s important to realize that it takes some time for new technologies, especially high end ones like this, to have widespread effect. Take a little time and the industry is starting to finally recognize this. In 2015 you’ll see it really starting making a difference as solar will likely improve enough to power an entire house and the systems will be cheap enough to make it feasible for the common homeowner.
Risky Mortgage Appraisal Documentation – You should be doing this anyway.
- Six federal financial regulatory agencies issued a joint final rule on January 18 establishing new appraisal requirements for higher-risk mortgage loans. Mortgage loans secured by a consumer’s home with interest rates above a certain threshold are considered higher-risk under the Dodd-Frank Act. The new rule requires creditors making such loans to use a licensed or certified appraiser to prepare a written report based on a physical inspection of the property’s interior and mandates additional valuations, at no cost to the consumer, for a higher-risk mortgage loan if the seller acquired the property for a lower price during the previous six months. Since January, the agencies issued a proposed rule to amend various provisions of the rule.