Appraiser Talkback Blog

Survey Questions: HVCC One Year On

1.   You have been appraising:
Less than 5 years, 5 – 10 years, 11 – 20 years, 21 – 30 years, 31 or more years
 

2.   You work with appraisal management companies (AMCs):
Always/often, Sometimes, Hardly ever/never
 

3.   You have found a sufficient number of AMCs you are comfortable working with and have adjusted to life after HVCC:
Agree, Disagree, HVCC did not affect my business, Not sure/don’t know
  

4.   You do non-lender, non-AMC work:
Always/often, Sometimes, Hardly ever/never
 

5.   You are interested in doing “Appraiser Price Opinions,” as long as fees are adequate and they are USPAP compliant:
Agree, Disagree, APO fees are not adequate, APOs are not USPAP compliant, Unsure/don’t know
 

6.   You refuse work from AMCs when fees are too low, given the scope of the assignment:
Always/often, Sometimes, Hardly ever/never, Fees are typically commensurate for the assignment, Unsure/don’t know
 

7.   You accept work from AMCs even when fees are too low, given the scope of the assignment:
Always/often, Sometimes, Hardly ever/never, Fees are typically commensurate for the assignment, Unsure/don’t know
 

8.   You consider having sufficient turn-around time for your assignments to be an important factor in returning competent appraisal work:
Always/often, Sometimes, Hardly ever/never, Unsure/don’t know
 

9.   You decline assignments from AMCs due to turn-around time requirements that are unreasonable:
Always/often, Sometimes, Hardly ever/never, AMC turn around requirements are typically reasonable.
 

10.   You accept assignments from AMCs with unreasonable turn-around time requirements and take the extra time required to do competent appraisal work anyway:
Always/often, Sometimes, Hardly ever/never, Turn around requirements are typically reasonable, Unsure/don’t know

11.   Appraisal quality suffers on AMC assignments you complete due to inadequate turn-around time:
Always/often, Sometimes, Hardly ever/never, Don’t accept assignments with inadequate turn times, Turn around requirements are typically reasonable
 

12.   Since HVCC, you’ve seen appraisal quality in general:
Improve, Worsen, Stay about the same, Unsure/don’t know
 

13.   Since HVCC, you’ve seen the cost of appraisal services paid by consumers:
Increase, Decrease, Stay the same, Unsure/don’t know
 

14.   Since HVCC, your appraisal-related income has:
Increased, Decreased, Stayed about the same, Unsure/don’t know
 

15.   You believe the decline in your appraisal income is mostly attributable to HVCC:
Agree, Disagree, Unsure/don’t know, No decline in income
 

16.   You are in favor of terminating HVCC:
Agree, Disagree, Unsure/don’t know
 

17.   You are in favor of AMC regulation:
Agree, Disagree, Unsure/don’t know
 

18.   You believe AMCs can regulate themselves:
Agree, Disagree, Unsure/don’t know
 

19.   You believe accurate and professionally prepared appraisals are vital to the health of the real estate industry/U.S. economy/home buyers/tax payers:
Agree, Disagree, Unsure/don’t know
 

20.   You believe that lenders believe that an accurate and professionally prepared appraisal is vital:
Always/often, Sometimes, Hardly ever/never, Unsure/don’t know
 

21.   You believe that AMC fees should be paid by the lender or other entity that chooses to use AMC services, rather than taken from appraisal fees:
Agree, Disagree, Unsure/don’t know
 

22.   You believe refusing to work for unrealistically low appraisal fees could be an effective strategy for raising fees back up to pre-HVCC levels:
Agree, Disagree, Unsure/don’t know, Appraisal fees are not lower since HVCC
 

23.   You believe a national appraisal “boycott” could be an effective strategy for calling attention to and changing current industry conditions that you consider unfavorable to appraisers:
Agree, Disagree, Unsure/don’t know, Current industry conditions are not unfavorable
 

24.   You would join and contribute financially to an appraisal “trade group” to advocate for appraiser interests:
Agree, Disagree, Unsure/don’t know
  

25.   You have trouble getting paid by AMCs:
Always/often, Sometimes, Hardly ever/never, Unsure/don’t know, Don’t accept AMC work
 

26.   AMC staff are generally competent:
Always/often, Sometimes, Hardly ever/never, Unsure/don’t know, Don’t accept AMC work
 

27.   It appears that AMC staff you interact with are located offshore:
Always/often, Sometimes, Hardly ever/never, Unsure/don’t know, Don’t accept AMC work
 

28.   You feel pressure from AMCs “to make a deal work”:
Always/often, Sometimes, Hardly ever/never, Unsure/don’t know, Don’t accept AMC work
 

29.   Since HVCC, your appraisal fees when working with AMCs have:
Increased, Decreased, Stayed about the same, Unsure/don’t know, Don’t accept AMC work
 

30.   Low fees are the main criteria for your receiving appraisal assignments from AMCs:
Always/often, Sometimes, Hardly ever/never, Unsure/don’t know, Don’t apply for AMC work
 

31.   AMCs consider your qualifications and/or the quality of your work product when choosing you for an assignment:
Always/often, Sometimes, Hardly ever/never, Unsure/don’t know, Don’t apply for AMC work
 

32.   You believe that in your market most appraisers/lenders and other interested parties know (about) what a “customary and reasonable fee” (CRF) is for a particular assignment:
Agree, Disagree, Unsure/don’t know
 

33.   You are receiving what you consider to be CRFs from AMCs for appraisal assignments:
Always/often, Sometimes, Hardly ever/never, Unsure/don’t know, Don’t accept AMC work
 

34.   You believe that delivering a consistently reliable appraisal product is dependent on being compensated for CRFs:
Agree, Disagree, Unsure/don’t know
 

35.   Since new FHA guidelines requiring appraisers be paid CRF, you have requested and received CRFs on FHA assignments:
Always/often, Sometimes, Hardly ever/never, Unsure/don’t know, Don’t do FHA assignments
 

36.   Since new FHA guidelines requiring appraisers be paid CRFs, you have requested CRFs and have not received them or lost assignments:
Always/often, Sometimes, Hardly ever/never, Unsure/don’t know, Don’t do FHA assignments
 

37.   Things have improved for you since HVCC was implemented:
Agree, Disagree, Unsure/don’t know
 

38.   Things have improved for consumers since HVCC was implemented:
Agree, Disagree, Unsure/don’t know
 

39.   Things have improved for the appraisal profession since HVCC was implemented:
Agree, Disagree, Unsure/don’t know
 

40.   Things have improved for lenders/AMCs since HVCC was implemented:
Agree, Disagree, Unsure/don’t know
 

41.   You believe no one is effectively advocating for appraiser interests:
Agree, Disagree, Unsure/don’t know
 

42.   Mortgage brokers should be licensed and regulated like appraisers:
Agree, Disagree, Unsure/don’t know
 

43.   Mortgage brokers should be allowed to order appraisals directly if licensed and regulated:
Agree, Disagree, Unsure/don’t know
 

44.   You are experiencing less pressure today to alter your appraisal reports, for any reason, than you did before HVCC was implemented:
Agree, Disagree, Unsure/don’t know
 

45.   Your appraisal reports are more accurate, complete and free of outside influence today than before HVCC:
Agree, Disagree, Unsure/don’t know
 

46.   You have been “dropped” from an AMC roster for not meeting conditions placed on you that you felt were not in the best interests of an accurate appraisal:
Always/often, Sometimes, Hardly ever/never, Unsure/don’t know, Don’t work with AMCs
 

47.   You are in favor of VA-style appraisal panels for all conventional and FHA mortgage lending assignments:
Agree, Disagree, Unsure/don’t know
 

48.   You believe the banking regulators have been doing an acceptable job in enforcing existing banking regulations that pertain to the use of appraisals at the direct lenders:
Agree, Disagree, Unsure/don’t know
 

49.   You believe that some of the misconduct that occurs in the engagement and use of appraisals would decline if the government regulators did a better job at enforcing existing regulations:
Agree, Disagree, Unsure/don’t know
 

50.   E&O Insurance:
You purchase your E&O insurance from OREP/David Brauner Insurance Services, You purchase your E&O insurance from someone other than OREP, You don’t purchase your own E&O but are covered under someone else’s policy, You are not covered under any policy, You are covered but would rather not say where

51.   Please offer any questions we missed or comments you’d like to make.

Click here to take the New HVCC Talkback Survey: One Year On.

Editor’s Note: Enjoy this “how to” on proving appraisal adjustments. This is Part One, Part Two will be published April 28th.

Proving Appraisal Adjustments
By Beverly A Bayer, SRA – Mvappraiser@yahoo.com

When I began appraising, I asked my mentor what adjustments to use- he said, “Figure it out for yourself.” So I did. Here’s what I learned.

When my mentor left the office, I studied his appraisals and began using his adjustments. Many years later, I wonder how many appraisers are using hand-me-down adjustments, a list picked up from somewhere or another, or those suggested by a client?

Let’s be honest:
(1)  How many appraisers have a set of adjustments that seem to work - that they might have used for years but have never tested?
(2)  How often do we guess at an adjustment either because we do not know how to determine the adjustment or just don’t want (or have the time) to do the research and analysis?
(3)  How often do appraisers, challenged on an adjustment and unable to defend it, bend to unreasonable requests?

It is possible to do an appraisal without adjusting but we have found by adjusting we can narrow the range of indicated values from the comparables. However, if our adjustments are wrong, we might find we are not narrowing the range but actually making it wider. I find that lot size and/or age adjustments might not be helpful because the market does not always account for those numeric differences.

Using Your Comparables to Determine Adjustments

                                    SUBJECT       Comp 1               Comp 2              Comp 3
Sales Price                                   $160,000             $171,000       $189,000
Year Built                   1985              1984                     1986                   1985
Square Footage       1,600            1,600                 1,800                   1,800
Pool                                YES                No                        No                         YES

Looking at the data we would expect the subject to have more value than comp 1 but less than comp 3. You can subtract the sales price of comp 1 from comp 2 to determine a square footage adjustment. You can subtract the sales price of comp 2 from comp 3 to determine a contributory value for a pool.

The more variables you have, the more comparables you may need to account for each difference but what do you do with a difference you cannot find in any of your comparables (such as a view)?

Using Paired Sales to Determine Adjustments
Subject is a 1,600 square foot house with a view but there are no sales in the past year of similar size homes with comparable views. However, there are four sales of the same plan without views in the past 120 days – ranging in sales price from $200,000 to $225,000. So first we would expect the subject property to have a value in excess of $200,000.

There is a 1,000 square foot house with a comparable view – that sold for $165,000 and a model match without a view that sold for $140,000 – for a difference of: $25,000. Now it looks like the contributory value of a comparable view might be $25,000 but that is for a smaller house.

There are two sales of a 2,000 square foot plan with views for $250,000 and $260,000 and model matches without the view for $220,000 and $230,000. So the range here is: $20,000 to $40,000 (average at: $30,000).

Using History and Percentages to Determine Adjustments
As a second test you find the subject property sold two years ago for $184,000 and model matches without the view were selling for $160,000 – now that difference is $24,000 (15 percent). So determining 15 percent of the two current model match sales at $200,000 and $225,000 will result in a possible view value range of $30,000 to $33,750. 

Conclusion for the View Adjustment Determination
Smaller homes with and without the view indicated a $25,000 premium for the view. Larger homes (on average) pull up to $40,000 more for the view (average at $30,000). Prior sales of subject with the view and comparables without the view found the view added 15 percent to value – which applied to the non-view current comparables equals a value for the view from about $30,000 to $34,000. View value adjustment of $32,000 is chosen.

Using Sale/Re-sale of the Same Property to Determine Adjustments
Condition Adjustment
Subject sold for $100,000 on January 1, 2000 as an REO in fair condition.

Re-sold for $140,000 on April 1, 2000 after a $20,000 rehab (in a stable market).

From that information we can conclude a condition adjustment of $40,000 – for nothing else has changed.

Time Adjustment
Subject sold for $100,000 on January 1, 2000.
Sold again on January 1, 2002 for $140,000, which equals $40,000 in 24 months or +$1,666 per month.  

Now you can take that $1,666 per month to current comparables to account for appreciation. Many appraisers are doing time adjustments wrong – by using the close of escrow date. Here is a quote from Fannie Mae: “Time adjustments must be representative of the market and supported by comparable sales or other market evidence. The adjustment must reflect the time that elapsed between the contract dates (the date of the meetings of the minds) for the comparable sales and the effective date of the appraisal for the subject property.”

Using Published Data to Determine Adjustments
Data shows the median home prices in the county were going down between January and April but started moving up in May. The city home prices hit bottom in March and began moving up in April but are still below the median from January. The monthly increase from June to July for the County is $6,000 and $5,000 for the city. The appraiser could choose a time adjustment of $140 per day applied to the contract (meeting of the minds) dates of the comparable sales.

Part Two will be published next issue: Using Mass Data to Determine Trends.

Editor’s Note: Kenneth W. Brown, SRA wants you to work the system- in a good way.

Appraisers- Working the System
By David Brauner, Editor

Kenneth W. Brown, SRA wants you to work the system- in a good way. Here’s what he means.

Brown, appraising since 1991, is sending and posting the following message (below) to fellow appraisers to encourage more “personal involvement by real estate appraisers in the future of their chosen profession.”

“Everyday I read posts (at various social networking blog/sites) by appraisers who don’t seem to understand why their businesses are so bad right now. They want to know why no one is looking out for their businesses but they seem to have done little to look out for it themselves,” Brown said.

His purpose is two part: “I want to make appraisers aware of proposed legislation being considered by Congress which addresses many, if not most, of the concerns being expressed by appraisers,” said Brown and “I want to make it quick and easy for appraisers to express their concerns directly to those who have the power to correct the issues that have so adversely affected the profession.”

Brown created a summary of H.R. 1728, which he adopted from information provided by the Appraisal Institute, and sent it to fellow appraisers with a link to a U.S. Senate lookup. He also includes talking points for appraisers to use, borrowed from a letter by Jim Amorin, MAI, SRA, Immediate Past President of the Appraisal Institute.

According to the Appraisal Institute, H.R. 1728 has been rolled into H.R. 4173. As you may know, H.R. 4173, which passed the House (see HVCC: Appraisers Last Laugh), has numerous appraisal provisions including the termination of the HVCC (Home Valuation Code of Conduct) and language in support of appraiser independence and customary and reasonable fees for appraisers.

The Senate is taking up its own bill, the Restoring American Financial Stability Act of 2010. However, none of the appraisal provisions from 4173 have made it into the Senate version, according to Bill Garber Director of Government and External Relations, Appraisal Institute. The hope is that the appraisal-related provisions will be added back to the Bill in the House-Senate Conference Committee. This is a critical time for appraisers.

“We continue to urge the Senate to include the strong appraisal reform provisions found in H.R. 4173 in its version of the regulatory reform legislation,” said Garber. “We expect appraisal reform will be a point of discussion as the Senate considers the bill on the Senate floor or as part of the House-Senate conference committee negotiations.”

Brown sees this as an opportunity for appraisers to take back control of their destiny. “Ultimately, I hope for change that will permit the entrepreneurs in the profession to develop their businesses to the maximum of their abilities and desires. This will create an environment that will provide an incentive for experienced appraisers to remain in the profession and to hire and develop the next generation of appraisers. My fear is that if Congress does not pass legislation to help the appraisal profession, as described in H.R. 1728 and other bills, residential appraisal, as we have known it, will cease and the residential appraiser will become extinct,” said Brown.

Letter from Brown
In his letter, Brown urges appraisers to contact their state Senators in support of appraiser-friendly legislation and includes links to locate and contact them (see below).

He also includes suggested verbiage: I support the Mortgage Reform Act, H.R. 1728/H.R. 4173 not only because they return to the fundamentals of mortgage lending and protect the independence of the appraiser from undue third-party pressure, but also because they ultimately seek to safeguard the best interests of consumers. The American public needs and deserves a healthy mortgage lending system.

“Let’s not let this issue die beneath a stack of paper on some assistant’s desk,” Brown urges.

What are you supporting? Full summaries and complete text are available here:
H.R. 1728: www.govtrack.us/congress/bill.xpd?bill=h111-1728
H.R. 4173: www.govtrack.us/congress/bill.xpd?bill=h111-4173

Summary of the pertinent information from the Appraisal Institute:
appraisalinstitute.org/newsadvocacy/downloads/HR1728AppraisalProvisions.pdf

Find your Senator: www.senate.gov/general/contact_information/senators_cfm.cfm

BIO: Kenneth W. Brown, SRA has been an appraiser since 1991 with a focus on servicing the needs of residential clients until 2007. He has experience as an independent contractor, staff appraiser with a mortgage lender, and as an appraisal business owner. In 2004, he began preparing himself for a transition to commercial appraisal. He attained an SRA designation in 2007 and began appraising commercial property full time that same year. He has a Bachelors Degree in Leadership and Management from Mary Washington College, in Fredericksburg, VA and a Graduate Certificate in Real Estate and Land Development from Virginia Commonwealth University, in Richmond, VA. He is currently working towards his MAI designation and has recently passed the Appraisal Institute’s General Comprehensive Examination. He is a member of the South Florida Chapter of the Appraisal Institute where he has volunteered to be a member of the Chapter’s Associate Guidance Committee. He has a keen interest in the overall future of the appraisal profession and in assisting others in attaining their goals as professional appraisers and entrepreneurs.

Editor’s Note: A desktop appraisal product introduced last month is the subject of concern among many Working RE readers and OREP.org members. Below is guidance issued by the North Carolina Appraisal Board.

AMC-Desktop Product: USPAP Compliant?
By David Brauner, Editor

A new desktop product from a large, national appraisal management company (AMC) is drawing questions and concerns from appraisers on many fronts including whether the product is complaint with the Uniform Standards of Professional Appraisal Practice (USPAP).

The concerns many have are the (limited) Scope of Work laid out in the requirements and the fee ($55), neither of which seem to some to be compatible with a professionally prepared report. As one appraiser posted on an online appraisers’ forum, “If lenders are concerned about the viability of real estate appraisers (read appraisals) they would see to it that appraisal fees are increased and appraisers allowed to take the time required to complete adequate research and analysis. But every new announcement is headed the other way; faster and cheaper estimates of value dressed up with an appraisal license,” said Edd Gillespie.

According to sources, the desktop product is intended for use by appraisers to replace BPOs for default work (only), where appraisals (and appraisers) are not required.

Below is guidance from the North Carolina Appraiser Board. You can find the announcement for this desktop product at WorkingRE.com (Sidebar: Wells Fargo RVS Desktop Appraisal Instructions and Requirements).

>>>
Subject: Important Message from the NC Appraisal Board

GUIDANCE CONCERNING DESKTOP APPRAISAL ORDERS

A new desktop appraisal product was released in February 2010. The Appraisal Board has received numerous telephone calls and emails about this product and others that are similar. Although the Board does not approve or prohibit specific forms or software used to deliver appraisal results, the Board does have several concerns about this type of assignment.

An assignment is an agreement between an appraiser and a client for a valuation service. Once an appraiser accepts an assignment, USPAP applies to the appraiser’s actions. Even if an appraiser ends up not completing the assignment or does not get paid, the appraiser must still comply with USPAP. If an appraisal report is created and sent to the client, a workfile must be produced and maintained. USPAP requires that the work file must contain enough information to produce a summary appraisal report from the workfile contents.

This is a valuation service regarding the subject property that would have to be disclosed under the 2010 change to the Conduct Section of the Ethics Rule of USPAP, even if no report was transmitted and/or no payment was received. According to the instructions for this product, if an appraiser accepts an assignment to do this type of appraisal but subsequently discovers that the subject property does not meet minimum requirements, the appraiser will not get paid. This is referred to as a “no-hit.” Since an assignment that results in a “no-hit” may not be tracked in invoicing software, the assignment would have to be entered into some other type of tracking software to make sure one complied with the new disclosure requirement in USPAP.

The Scope of Work Rule of USPAP states that the appraiser, not the client, must determine the scope of work necessary to develop credible assignment results. In addition, the Scope of Work rule states that “An appraiser must not allow assignment conditions to limit the scope of work to such a degree that the assignment results are not credible in the context of the intended use.” There are several assignment conditions in this product that are referred to as “appraisal report minimum requirements.” Some may be unacceptable.

This product requires appraisers to use MLS as the primary data source. In many areas of our state, MLS is not available or is unreliable. A better source of data might be the county tax office or a private data collection system. The product also requires that appraisers must use a minimum of three closed comparable sales and a comparable listing and/or pending sale. At least two of the comparable sales must be less than 120 days old, and at least two must be located within one mile of the subject. The GLA of the comparable sales must be within 20% of the GLA of the subject. Appraisals of condominiums with more than 15 units must include at least two comparable sales from the development within the last 12 months and at least one comparable listing and/or pending sale from the development. Condominiums with 15 units or less must include at least one comparable sale from the development within the past 12 months and, when available, a comparable listing or pending sale from the development. This product does not allow the appraiser to use the best data available and may well limit the amount of work performed to such an extent as to violate the Scope of Work Rule.

Of major concern is the assignment condition that the appraiser will not receive a fee if the appraiser cannot meet all the product requirements. As noted above, this is referred to as a “no hit”. “No-hits” are produced when the appraiser cannot produce a credible value due to insufficient subject data, the subject is an ineligible property type, the appraiser cannot meet all of the minimum report requirements, the subject is zoned commercial/industrial, or the subject is not at its highest and best use.

It appears that the assignment conditions may violate the Management Section of the Ethics Rule. For example, if the appraiser searches for comps but discovers there have been none within the last 120 days, the appraiser will not get paid. If the subject is located in a transitional area and the highest and best use would be as an interim or commercial use, it is a “no-hit” and there is no fee. The fee for the assignment is contingent on a predetermined result - the reporting of comps that meet certain criteria, or a finding that the subject meets the product requirements. This type of assignment may result in the loss of objectivity. An appraiser may be tempted to use sales that he or she would not otherwise use, or to simply concur that the current use is the highest and best use, in order to receive a fee. The fact that an appraisal may not be completed (a “no-hit”) is irrelevant. The Ethics Rule prohibits accepting such an assignment.

There are appraisal products on the market now that allow or even require the appraiser to choose comparable sales from a database maintained by the software vender or client. Most of the comps in those systems are datamined from other appraisal reports. These services are not connected directly to a local MLS system. Sometimes an employee of the software company may contact local real estate brokers to obtain comparable sales. If an appraiser uses this database for sales, the database must be listed as the source for comparable sales, with MLS or another source used for verification of those sales. In addition, if the appraiser is given comparable sales by the client or vendor, the appraiser must disclose that he or she received significant assistance in choosing comparable sales.

Some of these products give an appraiser a discount if the appraiser voluntarily “contributes” appraisal reports to the software database so that subject and comparable information can be mined. Keep in mind that doing so is a violation of the Confidentiality Section of the Ethics Rule of USPAP, as assignment results are also communicated to the database.

A final note – the low fee paid for this assignment does not in any way lessen the appraiser’s legal requirement to comply with USPAP.

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.

Epilog
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 dbrauner@orep.org or (888) 347-5273. Calif. Insurance Lic. #0C89873.