New rules governing appraisals on loans slated for purchase by Fannie Mae and Freddie Mac are also affecting valuations conducted for loans guaranteed by the Federal Housing Administration, trade groups representing appraisers say.
The Home Valuation Code of Conduct, which went into effect May 1 for loans destined for purchased by Fannie and Freddie, has caused "a significant transfer" of appraisals ordered by mortgage brokers to appraisal management companies, the groups said.
Many experienced appraisers are declining FHA assignments from appraisal management companies, the groups said in a letter to Housing Secretary Shuan Donovan, because of another policy adopted more than a decade ago that limits how much appraisal management companies can charge.
Appraisal management companies are therefore assigning more FHA work to inexperienced appraisers, "adding unnecessary and substantial risk to the FHA program," groups including the Appraisal Institute and American Society of Appraisers said in the July 1 letter.
Those claims echo complaints by Realtors and lenders that the Home Valuation Code of Conduct has derailed many pending home sales, in part because inexperienced appraisers are using distressed properties as comparable sales.
The National Association of Realtors has called for an 18-month suspension of the code to address its unintended consequences (see story), and legislation has been introduced in Congress that would accomplish that goal.
The Appraisal Institute says it supports provisions of the Home Valuation Code of Conduct that are intended to help appraisers maintain their independence and protect them from coercion.
But the group’s members are concerned about the impact the code has had in funneling work to appraisal management companies and away from independent appraisers, and the alleged tendency of appraisal management companies to hire appraisers based on turnaround time and price instead of experience and qualifications.
The code prohibits mortgage brokers originating loans that will be purchased by Fannie and Freddie from ordering appraisals directly. Loan officers working for banks and other lenders must delegate the process of ordering appraisals to other in-house staff, or go through an appraisal management company. …CONTINUED
While the code does not directly impose rules upon FHA appraisal-ordering practices, many lenders are now applying the same standard to their entire appraisal-ordering practices, groups representing appraisers said in their letter to Donovan.
Another policy adopted by the U.S. Department of Housing and Urban Development more than a decade ago effectively forces appraisal management companies to pay appraisers less than they would earn if they were working independently, the letter said.
The HUD policy, spelled out in Mortgagee Letter 97-46, limits appraisal management companies to charging no more than the "customary and reasonable fee for an appraisal in the market area where the appraisal is performed."
Because HUD’s policy doesn’t distinguish between the fee paid to the individual who performs the appraisal and fees charged by the appraisal management company, the "customary and reasonable fee" formerly earned by an independent appraiser is now often split between an appraiser working for an appraisal management company and the company assigning them the work.
"The restriction on total appraisal fees to ‘no more than’ the customary fee for an appraisal has driven down the fees paid to large numbers of appraisers to well below what has been customary and reasonable in given market areas," groups representing appraisers said in their letter to Donovan.
The problem is compounded by the practice of many appraisal management companies to instruct appraisers "not to have any conversation with the homeowner about the actual fee paid to the appraiser," the groups said.
Some appraisal management companies have reportedly told appraisers to collect a fee at the door, and to keep part of it and send the remainder to the management company — even though HUD requires that lenders pay appraisers conducting valuations for FHA-backed loans, the letter said.
The groups are asking HUD to rescind the policy on "customary and reasonable" fees spelled out in Mortgagee Letter 97-46, and to revise the HUD-1 settlement statement to include separate lines for the fee earned by the appraiser and additional fees charged by appraisal management companies.
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