Editor’s Note: FHA clarifies “customary and reasonable” as the new regulations requiring fair fees kick in. One appraiser begs to differ.
HUD Responds: Customary and Reasonable Fees
by David Brauner, Editor Working RE
FHA appraiser William R. Pruett, SRA has a problem that we’re sure you can relate to.
Pruett, appraising 12 years, five in West Des Moines Iowa, knows what a “customary and reasonable” fee is for an FHA 1040 in his market and so does everyone else, he says, except the large national bank and its in-house AMC (appraisal management company) that cancelled Pruett’s order when he asked for the full fee.
The report was ordered after the February 15 implementation date of FHA Mortgagee Letter 2009-28, which among other things, requires that appraisers are paid “customary and reasonable” fees. Pruett complained to his local FHA Resource Center and after some wrangling was given an address to file a formal complaint (see below).
“If you ask 10 loan officers and appraisers in our market they will all tell you the same thing regarding what a typical or ‘customary and reasonable’ fee is,” said Pruett. “I reminded them (AMC) of Mortgagee Letter 09-28 and stated the ‘customary and reasonable’ fee for the area is $375. I requested this fee in accordance with current FHA policy. They cancelled without further discussion.”
Last fall, FHA announced new regulations which borrow much from HVCC (Home Valuation Code of Conduct), including support of appraiser independence and a prohibition against mortgage brokers or lenders ordering reports directly from appraisers. HVCC does not cover FHA appraisals. The guidelines also include requirements to correct some of the unintended consequences of HVCC, including widespread reports of appraiser selection based on the lowest bidder instead of the most qualified professional, in many cases. According to the OREP/Working RE HVCC Appraiser Talkback Survey, with over 5,100 appraisers responding, 98 percent say that, in their experience working with AMCs, appraiser selection is based solely on obtaining the lowest fee at least some of the time (less than two percent answer that appraiser selection is “never” based solely on obtaining the lowest fee).
FHA Mortgagee Letter 2009-28 requires that appraisers be paid “customary and reasonable” fees and that AMC fees must be separated from those paid to appraisers (visit WorkingRE.com for Appraisers Talk, FHA Listens, under “Current Issue”). “I was very encouraged with the FHA announcement at first but the rules have to be enforced,” said Pruett. “The whole idea is to uphold quality (for tax payers); that quality appraisers must be paid adequately. For a competent appraiser to do a competent job a reasonable fee must be paid.”
HUD Responds: Customary and Reasonable
Ever since the new regulations were announced, it has been unclear what “customary and reasonable” means. Last week, Lemar C. Wooley, Office of Public Affairs, HUD HQ Washington, DC, told Working RE, “FHA has an internal quality control (QC) process in which targeted endorsed FHA-insured mortgages are reviewed for determining compliance with FHA underwriting and mortgage credit policies and procedures. Among other aspects of the loan, the QC process includes a review of required documentation, including appraisals and fees associated with loan closing. If, in the course of conducting a review, FHA determines that the fee paid to an FHA Roster appraiser for performance of an appraisal is not in keeping with what is reasonable and customary for such a service in the subject property’s market area, the lender may be counseled or otherwise directed to comply with the mandates of Mortgagee Letter 2009-28.”
Wooley sited an FAQ from the 2009-28 FAQs which addresses the question of customary and reasonable: What does FHA consider customary and reasonable fees for preparing an appraisal report?
Customary and reasonable appraisal fees are reflective of those fees established and negotiated by an FHA approved self employed independent fee appraiser or an appraisal firm that may directly employ FHA approved roster appraisers or retain FHA approved roster appraisers as independent contractors, for appraisal services rendered, regardless of whether a lender, AMC or a 3rd party company or vendor is ordering/requesting appraisal services. The fee charged must be commensurate with the level of services provided and should reflect the amount of research, level of difficulty, and due diligence required on the appraiser’s part to produce a credible, reliable and accurate appraisal report that is in compliance with all FHA guidelines and USPAP.
Customary and reasonable Appraisal fees, for purposes of FHA, do not include:
* AMC or other third party fees.
* Management or review fees charged by lenders.
To read more, find a link to the FAQs at WorkingRE.com, Sidebar: ML 09-28 FAQs.
FHA Talks Back
When asked by WRE whether “customary and reasonable” means “whatever fee an appraiser will accept,” Wooley provides the following. “FHA believes that the marketplace best determines what is ‘reasonable and customary’ in terms of fees. Unlike the VA, FHA does NOT set or enforce fee schedules for its Appraiser Roster. To a large degree, the fee is the result of a business decision, which may or may not be negotiated, between the appraiser and the client, whether the client is an individual lender, an AMC or some other party in need of appraisal services.”
Wooley continues, “Appraisers may discount fees based on volume of work or other considerations. The fee may be based on the distance traveled or other factors, such as having recently performed appraisals in the same market, thus having already performed some of the due diligence inherent to any appraisal report. The fee charged to perform an appraisal of the same single family detached dwelling can vary hundreds of dollars, depending upon the client. For instance, an appraiser who regularly performs appraisals for a lender may charge that lender significantly less (for the same property) than to an attorney who is asking for an appraisal for estate tax or divorce purposes.”
The message to appraisers regarding their responsibilities is clearer: “Regardless of the amount of compensation received, the appraiser has an obligation, under USPAP, to perform a credible and accurate report,” Wooley said. “If an appraiser chooses to be a low bidder on an assignment, he or she is not relieved of the obligation to produce a credible and accurate report and can and will be held accountable.”
According to OREP/WRE Talkback survey, 59 percent say: Low fees (from AMCs) effect the quality or completeness of the finished report compared with higher fee appraisals at least some of the time (41 percent say it “never” effects quality).
Wooley concludes, “The appraiser community, along with professional trade associations, is keenly aware of the range of appraisal fees typically paid for the different type of appraisal assignments, as is the residential mortgage lending industry.”
Case for Fair Fees
Pruett, like many appraisers, has his own take on what “customary and reasonable” means. “If the appraisal fee for an area is $350, for example, this is a fact known by all appraisers and lenders doing business in the area,” Pruett said. “There may be temporary discounts from appraisers just starting their businesses or discounts from individual appraisers for multiple orders but ‘customary and reasonable’ fees are established by the business relationships of appraisers and lenders over years of service and are not a secret. In fact, in my company, which has 23 offices in five states, each office can tell you what the customary fees are for appraisal products in their market area. These fees are not established by any other method than by the general agreement of those practicing in the market area. If one was to poll the appraisers in my market area as to the fee for an FHA appraisal on FNMA Form 1004, the answers would be within $25, hardly the 20 to 30 percent variance offered by these large institutions.”
Pruett continues, “To postulate that a large lender could contract a few appraisers in an area to perform assignments at a 30 percent discount and call that ‘customary and reasonable’ would be a new definition of the term to say the least. Also, to suggest a Direct Endorsement underwriter could lower fees in a market area and thus redefine ‘customary and reasonable’ would deny the market forces at work and jeopardize the intent of hiring competent appraisers. It is no secret that appraisal management companies have been saddling appraisers with the burden of their management and reducing fees to the point of driving competent local appraisers out of their field of expertise. It is also no secret in light of the current housing crises how valuable local, competent appraisers are to their community. I applaud the policy-makers at HUD for understanding the vital importance of this industry and for taking steps to insure that qualified appraisers are compensated fairly. It is therefore expedient that HUD enforce Mortgagee Letter 2009-28 by upholding ‘customary and reasonable’ fees, thus insuring FHA lenders are in compliance to their policy,” Pruett said.
In our last online issue we reported that software provider a la mode compiles median appraisal fees nationwide utilizing its Mercury Network (WorkingRE.com, Premium Content: HVCC: Taking Back Control of Your Fees). The fees are for non-AMC reports. This sheds light on median fees by county nationwide when AMC pressure is not a factor. According to the report, the median fee for Pruett’s Des Moines County is $350. After looking at median prices in their own areas, several appraisers wrote to say that they do not believe FHA orders are included in the a la mode report because these appraisals typically have a higher fee; $50-$100 more according to some. One appraiser wrote on the Talkback Blog, “Relying on median and average appraisal fees by region that include conventional appraisals will typically result in low fees, below the true median and average FHA appraisal fees.”
Sure enough, says Leonard Acquaye, Analytics Product Manager at a la mode. Acquaye explains the methodology, “The fees calculated (in the report) are for a base URAR with no indicated extra fees or assignment particulars. For example, we have done our best to exclude assignments where we know that the client has requested 1004MCs or other special addenda or where the report is indicated to be for FHA specifically. Nor have we knowingly included extra fees for driving times, unless the appraiser incorporated those into the base fee.”
So Pruett’s fee of $375 seems about right.
There is much at stake for American tax payers if appraisal work is doled out to the lowest bidder. FHA’s balance sheet is under close scrutiny these days to make sure it does not follow Fannie Mae and Freddie Mac into bailout land. (FHA is required under the National Housing Act to maintain a two percent capital reserve ratio. That ratio has dropped below two percent as of year-end 2009.)
There is much hanging in the balance for appraisers too, as many struggle to stay afloat under the weight of AMC fee pressure as a result of HVCC. FHA has been a life preserver for many in the 10 months since HVCC took effect. A Coester AppraisalNewscast in late December 2009 states that as much as 60 percent of home loans made in 2009 were FHA. A recent 2010 HousingWire Update email stated that four out of 10 home loans are FHA. Whether FHA lending makes up 40 or 60 percent of mortgage lending in 2010, it seems certain that FHA work is important to appraisers. And appraisers are important to FHA.
FHA may be a safe harbor for full fee appraisers if the regulations can be clarified and enforced. The question in the spotlight is whether FHA will allow “customary reasonable” to mean “the lowest bidder” or whether they have a higher standard in mind. Many appraisers say they can’t wait to find out: they will not work for reduced market fees and encourage others to do the same.
You can send your formal complaint in writing to:
U. S. Dept. of HUD
1670 Broadway, 21st Floor
Denver, CO 80241
Attn: Technical Support Branch.
About the Author
David Brauner is Editor of Working RE magazine and Senior Broker at OREP, a leading provider of E&O Insurance for appraisers, inspectors and other real estate professionals in 49 states (OREP.org). He has covered the appraisal profession for over 16 years. He can be contacted at firstname.lastname@example.org or (888) 347-5273. Calif. Insurance Lic. #0C89873.
Click here for more Working RE Magazine coverage of Customary and Reasonable Fees.