As published in Scotsman Guide's Residential Edition, January 2010.
(Editor's note: On Dec. 22, the U.S. Department of Housing and Urban Development announced it would delay implementation of its new appraiser guidelines until Feb. 15. Previously, they were to take effect on Jan. 1. This article has been updated to reflect the change.)
Our friends at the U.S. Department of Housing and Urban Development (HUD) are starting the year with some Home Valuation Code of Conduct-like rules designed to improve appraisal quality for Federal Housing Administration (FHA) loans.
Unfortunately, it appears that instead of improving report quality, the new rules could end up costing consumers more for appraisals and even put some appraisal-management companies (AMCs) out of business.
The rules, effective Feb. 15 -- delayed from Jan. 1 -- state that appraisers no longer can be forced to split fees with many of the AMCs they have dealt with since April. Full fees attract the more in-demand appraisers, and the ones who worked for as little as half their normal fee — with the other half going to pay the AMCs' administrative costs — often did so because they were not attracting the full-fee assignments. This fee-splitting has been a suspected culprit for slow and sometimes-subpar appraisal results.
Under the HUD rules, FHA appraisers must receive "customary and reasonable" compensation for appraisal services performed in the subject property's market area. Further, the fee for an FHA appraisal may not include a fee for the management of the appraisal process or for any activity other than the performance of the appraisal.
AMCs also now must charge only for actual services related to ordering, processing and reviewing appraisals performed for FHA financing. They cannot exceed customary fees for these services for the market area of the property being appraised.
But what are "customary and reasonable" fees for appraisals or services in any given market? AMCs could vary widely on this, adding to the turmoil. In addition to not defining "customary," FHA also sets no limits on charges allowed for actual services.
The AMC fee is kept separate from the appraiser's fee on the closing statement, too. This was intended to help borrowers see what they are paying for valuation services outside of the appraisal itself. But will they notice it among the thousands of dollars on the form?
The FHA changes could leave some appraisal managers charging more, and brokers may find themselves quoting $150 to $200 more for FHA appraisals when using them. With this cost variance, we can expect a number of these AMCs to exit the FHA business. It is reasonable to expect smaller or no increases from AMCs that automate administrative tasks for lower margins. These companies could then offer full fees to appraisers while keeping less for themselves.
Until some of the vague variables involved are defined, the "customary and reasonable" phrasing in the new rules leave Hummer-sized loopholes that could affect the cost and potentially the quality of FHA valuations.
Griff Straw is president of Solidifi U.S., a leading technology-enabled appraisal-management company and provider of collateral-risk-management and data-analytic services. He writes a monthly column on valuation issues for Scotsman Guide. Straw is a 30-year mortgage banker, a former Freddie Mac technology executive and a Mortgage Bankers Association Master Faculty member. Reach him at firstname.lastname@example.org or (703) 496-7579.