Appraisers are welcoming Thursday’s passage of legislation that makes sweeping changes to the nation’s financial regulatory system, saying the bill includes the first modernization of real estate appraisal regulations in more than 20 years.
HR 4173, the Dodd-Frank Wall Street Reform and Consumer Protection Act, includes appraisal independence requirements and provides grant funding for state oversight and enforcement of those regulations.
The bill creates a new Bureau of Consumer Financial Protection that’s charged — among many things — with drafting new interim final regulations that specifically define acts or practices that violate the bill’s appraisal independence requirements.
The regulations are to be drafted within 90 days of the bill’s signing, superseding the Home Valuation Code of Conduct, rules adopted by Fannie Mae and Freddie Mac in May 2009.
Realtors have complained that the code, which was intended to protect appraisers from coercion by lenders, has resulted in lenders relying more on appraisal management companies (AMCs) that may employ appraisers with little experience in the markets in which they are asked to provide valuations, paying them less than experienced local appraisers.
Fannie Mae on June 30 put lenders on notice that they must use appraisers with local experience who can access records on recent sales in markets where they are being asked to provide valuations.
The appraisal independence requirements of HR 4173 provide that AMCs register with state agencies, and stipulate that lenders and AMCs pay "reasonable and customary" fees to appraisers. Violators will be subject to penalties under the Truth in Lending Act.
The new law allows lenders to establish what’s "reasonable and customary" by citing "objective third-party information, such as government agency fee schedules, academic studies, and independent private-sector surveys." But fee studies can’t include assignments ordered by AMCs.
The Appraisal Institute, a group representing appraisers, says that language will encourage the use of "highly trained and competent appraisers."
“We encourage AMCs to justify the legitimate services they are providing to lenders by charging for those services, rather than penalizing highly trained and competent appraisers" by offering subpar wages, Appraisal Institute President Leslie Sellers said in a press release.
The banking and lending industry is wary of many of the bill’s other provisions, saying they will create more costs and tighten the availability of credit to consumers.
After the House passed the bill on June 30, the Mortgage Bankers Association issued a statement saying the bill would change mortgage lending, increasing costs and creating new regulatory burdens that would affect consumers and lenders.
Lenders’ concerns about the bill include risk retention provisions for loan originators and the lack of strong federal preemption of state consumer protection laws, preserving the rights of states to pass even stronger measures.
According to one analysis by attorneys at K&L Gates, the bill "essentially mandate(s) that all flavors of mortgage loans besides ‘plain vanilla’ will disappear from the menu."
For consumers who want something besides staid 30-year fixed-rate loans and other loans viewed as less risky? "Sorry, the government has determined that it may be hazardous to your health," K&L Gates attorneys Kristie Kully and Lawrence Platt wrote.
Although the lending industry won some concessions in the long fight over financial regulatory reform, "the extent to which makers and holders of non-plain vanilla mortgages are targeted for punishment through enhanced monetary damages, defenses to foreclosure, and risk retention requirements," came as a surprise, Kully and Platt said.
"Only time will tell whether the mortgage finance industry will assume the risks and expand the menu of mortgage options."
Commenting on Thursday’s Senate passage of HR 4173 in a 60-39 vote, the American Bankers Association said the group was "very disappointed" with bill, calling it "overloaded with new rules and restrictions on traditional banks that did not cause the financial crisis. The result will be over 5,000 pages of new regulations on traditional banks and years of uncertainty as to what the massive new rules will mean."
On that point, the National Community Reinvestment Reinvestment Coalition did not disagree.
The proof of the bill’s worth "will come not from what is written in the bill, but how the regulators interpret the bill, write the rules and then enforce them," said John Taylor, NCRC’s president and CEO, in a statement. The bill leaves "too much to study, and (up to) the discretion of the existing regulators."
NCRC welcomed beefed-up reporting requirements under the Home Mortgage Disclosure Act that will require lenders to include more details on loan terms and conditions and borrower characteristics to regulators. That information can be used to determine whether lenders are discriminating against minority borrowers or underserving some communities.
The bill also creates a default and foreclosure database that NCRC said will "serve as an early warning system" allowing regulators to take action when data shows a spike in foreclosures
Regulators will also have access to a database of individual loan records for homeowners participating in the Home Affordable Modification Program (HAMP) program, which NCRC said will increase industry accountability for loan modifications.
The National Association of Realtors largely stayed on the sidelines of the battle over financial reform, after lawmakers made it clear last year that the Consumer Financial Protection Agency they envisioned would not have authority over real estate agents and brokers, or other businesses that bill customers after services are provided, such as doctors and lawyers.
Speaking on a panel at Inman News’ Real Estate Connect San Francisco Thursday, NAR CEO Dale Stinton said the group was focused on the Obama administration’s next project: determining the fate of Fannie Mae and Freddie Mac, and the future of the secondary mortgage market.
"On the consumer side, we try to pick our fights, and that wasn’t our fight," Stinton said, noting that the U.S. Chamber of Commerce was an advocate for businesses during the debate.
Stinton said that 25 years ago, a previous NAR CEO made a public appeal for the government to implement spending reductions to tackle the national deficit. NAR "paid the price for 10 years for putting our nose where it didn’t belong," Stinton said.
Appearing onstage at Connect with Stinton, ForeclosureRadar.com founder and CEO Sean O’Toole said that loose lending standards and mortgage products like pay-option adjustable-rate mortgages with low interest rates artificially inflated home prices during the boom by allowing people to buy more home than they could really afford.
But the root of the problem was the loose lending standards employed by lenders because they were able to pass risk along to secondary market investors — not the loan products themselves, O’Toole said.
"I’m not sure subprime lending isn’t OK … we’re going to lose a lot of good products that could expand homeownership, " O’Toole said.
"I think all of these products could be on the market" if lenders were partners with borrowers in a home, sharing the risk. One way to do that would be to bar deficiency judgements against borrowers who default on their mortgage, O’Toole said.
The American Land Title Association was pleased that the HR 4173 does not place title insurance under the jurisdiction of the Bureau of Consumer Financial Protection, as originally proposed by the Obama administration.
The bill does create a new Federal Insurance Office within the Treasury Department, which will have the authority to determine when state insurance regulations are inconsistent with international agreements relating to prudential measures for insurance or reinsurance, ALTA said.