Appraisal management companies face the prospect of tougher regulations at a time when home lenders need their services more than ever.
Last week, Fannie Mae and Freddie Mac adopted valuation standards that, among other things, forbid commissioned loan officers or mortgage brokers to order appraisals. This is expected to drive more business to the management firms, which order appraisals on lenders' behalf. The companies are often owned by the lenders, though they are kept at arm's length from the sales force.
Appraisers, however, claim that the management companies demand faster turnaround, and lower costs, at the expense of quality. Hence, lawmakers on the federal and state levels are trying to rein in the firms.
The Appraisal Institute, a trade group, estimates that 60% to 70% of appraisals will now be ordered through management companies — roughly the share that mortgage brokers once ordered.
"The process has been turned overnight from a broker-originated appraisal to a process that involves the lender … taking more responsibility for the appraisal and delegating that to their appraisal department or their authorized agent," said Marko Berishaj, a vice president at DartAppraisal.com, an independent management company in Troy, Mich.
Among the major lenders that own appraisal management companies are Bank of America Corp., which acquired LandSafe Appraisal Services in its purchase last year of Countrywide Financial Corp.; Wells Fargo & Co., which owns Rels Valuation; and JPMorgan Chase & Co. and Citigroup Inc., which have appraisal management joint ventures with First American Corp. in Santa Ana, Calif.
An amendment that was attached last week to the mortgage reform bill in the House would require state appraisal boards and federal banking regulators to adopt systems for regulating appraisal management companies within three years.
These companies "are subject to little direct supervision" now, according to a summary of the amendment provided by the office of its sponsor, Rep. Paul Kanjorski, D-Pa. "We can no longer allow anyone to play in the dark corners of our financial markets."
The management companies argue that they are already indirectly regulated by the banking agencies.
"When I sign an 80-page contract with Wells Fargo, they are saying we need to rep and warrant the regulations on appraisals, and contractually we are acting on their behalf," said Mark Johnson, the chief operating officer of LSI, a Coraopolis, Pa., appraisal-management unit of Lender Processing Services Inc. "We have accepted the burden that all of the regulatory requirements have been superimposed on us. So if B of A is audited by a regulator for their appraisal process, that is us."
Arkansas, New Mexico and Utah have adopted legislation requiring state appraiser boards to regulate management companies. Five other states have such legislation pending, and another three are expected to introduce bills this year, the Appraisal Institute said.
Donald Blanchard, the deputy general counsel and chief compliance officer at Lender Processing Services in Jacksonville, Fla., said the state appraisal boards are "the wrong forum" for regulating the management companies.
"There is an inherent conflict of interest," he said. "The state boards are made up of appraisers who are the same appraisers who have complained about appraisal management companies. The better forum would be state banking commissions."
The Kanjorski amendment also would create a program to collect fees from appraisal management companies to support the Federal Financial Institutions Examination Council's appraisal subcommittee, which monitors industry practices. The fee would be $25 per appraiser on a management company's roster.
Jeff Schurman, the executive director of the Title/Appraisal Vendor Management Association, said this would be prohibitively expensive because the 10 largest appraisal management firms have more than 10,000 appraisers each.
Blanchard said it would be better to charge a flat fee of $5,000 to $10,000. Charging a per-appraiser fee would wipe out smaller management companies, he said.
The Kanjorski amendment also would require lenders to disclose to borrowers how much of an "appraisal fee" is actually being paid to an appraiser rather than to the management company that ordered the work.
"Consumers aren't aware that loan processing and administrative charges may be rolled into the appraisal fee," said Bill Garber, the director of government and external relations at the Appraisal Institute, which supports the amendment. "So lenders are charging consumers for administrative fees that are listed on the HUD-1" — the form presented to borrowers at a loan closing — "but aren't disclosing it."
Schurman said the provision's real intent is "to shame the lenders." Though the Real Estate Settlement Procedures Act bars lenders from profiting on an appraisal, he said, it does not prohibit them from earning profits through subsidiaries that order appraisals.
And by creating efficiencies, he said, appraisal management companies let lenders hire additional salespeople or charge lower interest rates. "When they are controlling the amount of volume, it offers a tremendous opportunity for volume discounts and to offer savings on to consumers."
Garber said management companies have asked appraisers to reduce their fees by as much as 60% in return for inclusion on the companies' rosters. Depending on the region and its scope, an appraisal can cost from $300 to $600, he said.
Since new home-valuation standards took effect, some consumers have balked at having to pay out-of-pocket for an appraisal, especially to refinance.
Brian Koss, the managing partner at Mortgage Network Inc., a privately held lender in Danvers, Mass., said consumers now are being asked to pay up to $350 for an appraisal, when lenders used to be able to get "a rough free opinion." Such informal opinions from appraisers were used with at least 20% to 25% of his lender's volume, he said.