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Appraisal Waivers Up for Key Vote
By Isaac Peck, Editor
Appraisers continue to face a variety of threats to their livelihoods on a number of fronts. One of the latest does not come from Fannie Mae or Freddie Mac, but from Congress; specifically Congressional Bill S.2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act.
The Bill, which has a stated goal to “promote economic growth, provide tailored regulatory relief, and enhance consumer protections,” includes a number of provisions that relax regulations for the mortgage markets, including an appraisal exemption in rural areas if certain conditions are met.
The bill, which has broad bi-partisan support from both Democrats and Republicans, is expected to come up for vote in the U.S. Congress this week.
The proposed bill would grant an appraisal exemption in rural areas to a mortgage originator or its agent provided the following conditions are met:
1. If the mortgage originator has “contacted not fewer than three State certified appraisers or State Licensed appraisers, as applicable;”
2. The mortgage originator “has documented that no State certified appraiser or State Licensed appraiser…was available within a reasonable amount of time, as determined by the Federal Financial Institutions Regulatory Agency with oversight of the mortgage originator, to perform the appraisal in connection with the federally related transaction.”
3. The transaction value is less than $400,000.
4. The mortgage originator is subject to oversight by a Federal Financial Institutions Regulatory Agency.
All four conditions must be met for the appraisal exemption to apply.
Other conditions also apply. The loan can only be sold or transferred under one of the following conditions: (1) the bankruptcy of the original mortgage originator, (2) the loan is sold to another person regulated by a Federal Financial Institutions Regulatory Agency, so long as the loan is retained in the portfolio, (3) the sale or transfer occurs due to a merger, or (4) the sale or transfer is to a wholly owned subsidiary of the mortgage originator. In other words, the exemption appears targeted to banks that hold loans in their own portfolios, rather than selling them to Government Sponsored Entities (GSEs).
What is Rural?
For the purposes of this Bill, a “rural” county is defined by prior regulations as being neither in “a metropolitan statistical area nor in a micropolitan statistical area that is adjacent to a metropolitan statistical area” (1026.35.b.2.iv.A of title 12, Code of Federal Regulations).
While this definition seems complex at first, the Consumer Financial Protection Bureau (CFPB) keeps a helpful list of counties that are defined as “rural” across the United States. Out of a total of 3,142 counties, or county-equivalents that exist within the U.S. and its territories, the CFPB designated 1,608 counties as being rural in the year 2017. While the majority of real estate transactions (and appraisals) occur in metropolitan areas, it is significant that this waiver would apply to over half of the counties in the country. (For a full list of potentially affected counties, Visit WorkingRE.com, search “rural counties.”)
Julie Friess, SRA and SVP of Compliance, Operations and Valuations at Sedona Appraisal Research Associates LLC, warns that rural properties under $400,000 are some of the highest risk loans and potentially the worst candidates for appraisal waivers. “The majority of the loans that went into default and began the ‘snowball effect’ in the 2008 Mortgage Crisis were under $400,000 transactions,” Friess said. “Rural home appraisals are the most complex assignments that exist and they are also the most time-consuming. The easier appraisals are the ones where data exists in excess and are ‘cookie cutter’ type appraisals. In metropolitan areas, AVMs and algorithms can check how well an appraisal report conforms with other appraisers in a particular area, and with statistical references. But in rural areas, this quality check is unavailable, so bypassing appraisals completely removes any accuracy or credibility in the valuation process.”
There is also a major problem with how areas are classified as rural, according to Friess. “Many markets are labeled rural, when they are not, such as Sedona, Arizona, where I complete appraisal reports regularly. USDA Rural loans are often used here because the population is small, but the area has close to eight million visitors each year and growing. The idea that the term rural equals ‘only a few loans’ is so absurd it is frightening. Rural loans make up such a huge portion of the loans made in this country. This not only puts the entire country at risk but threatens to put out of work the highly qualified and competent appraisers who live and work in areas that most others won’t,” says Friess.
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Potential for Fraud
Richard Hagar, SRA, fraud expert and renowned educator, sees many ways that the vague language of the bill could be used to fraudulently dodge federal appraisal requirements. “The way this Bill is written, I can see numerous ways that lenders might avoid ordering appraisals and still pass the loans on to FNMA or other lenders in the Secondary Market. The statute is poorly written, lacking proper definitions and will burden regulators with more gray areas. The text is filled with loopholes big enough to drive a Mac Truck through,” says Hagar.
The potential for abuse and loopholes in the proposed law brings back memories of the practices that led to the real estate crash of 2008, Hagar says. “Loopholes and exemptions like this allowed bad loans and helped fuel the Mortgage Crisis that we all suffered through. Remember using 2055, 2070, and 2075 appraisal forms? Loan losses mounted as these no-inspection appraisals were utilized by lenders. Numerous lenders, even to this day, use AVMs and broker price opinions instead of solid appraisals based on inspections. Those who forget the past are doomed to relive it,” argues Hagar.
The specific issues that Hagar sees as problematic include many of the vague words that are left undefined, as well as the arbitrary time limits for ordering the appraisal. “Why are they only allowing three days after taking a loan application to order an appraiser, why not five or seven? What if they don’t even try to find an appraiser for the first three days? The law also fails to define contact,” Hagar says. “This leaves the door open for lenders to contact appraisers through a mass email blast and only offer to pay $50 for the appraisal. Would that be considered a valid contact for appraisal order?”
There is also no definition for a “reasonable amount of time,” which is a bright line used in the law. “No regulatory agency currently defines this term and now they are being tasked with defining it? What is a reasonable amount of time for an appraisal order on December 24? Would that also be reasonable for May or any other time? The potential for abuse here is very real,” argues Hagar.
While Hagar acknowledges that there are some rural areas that do have a legitimate shortage of appraisers, appraisal exemptions are not a good solution, he argues. “I understand that there is a shortage of Tier 1 appraisers in numerous rural areas and the need for more competent appraisers. However, the very entities that created this shortage by switching over to the AMC model and underpaying appraisers are now seeking to create an exemption to using appraisals. They created the shortage and instead of allowing the American Way to rebalance the supply/demand issue with higher appraisal fees, they want an excuse to sidestep the need for appraisals,” says Hagar.
The result is a law that will drastically weaken the regulations designed to protect consumers and ensure the safety and soundness of the real estate market. “While there are some exceptional lenders, the majority of the lending industry is ALWAYS thinking of how to eliminate anyone and anything that slows down the lending process – including appraisals, credit checks, flood zone or hazard designations (earthquake, military, and contamination), title search and escrow. Many of the large lenders just don’t care; they want the loan to exist long enough for their stock to increase and senior management to make it to retirement. If this is passed, it will be just the beginning. Each year there will be numerous additions and clarifications, each weakening the very protections that consumer laws have enacted over the past 20 years,” says Hagar.
Friess echoes Hagar’s comments, arguing that the push for appraisal exemptions is just the banking system using its money, power and control to push their agenda at the expense of consumer protection. “There is never a time when an appraisal cannot be completed in any area for the appropriate market fee and in the time needed to have one properly done,” Friess said. “These are myths being fed to regulators and the legislature. Title XI of FIRREA is being altered with tragic consequences to the public and American economic system. The removal of appraisers removes the ‘fully independent and objective opinions of value’ and leaves the foxes sitting in the hen house, sharpening their forks and knives,” says Friess.
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AI Urges Changes to Bill
The Appraisal Institute also is concerned that the system could be easily “gamed” by banks in a variety of ways, including contacting out-of- market appraisers, offering below market fees, or unreasonable assignment conditions.
Bill Garber, Director of Government and External Relations with the Appraisal Institute (AI), reports that AI has directly engaged the sponsors of the Bill to express concern over how the language could be gamed by banks trying to avoid appraisal independence. “Certainly the current language is better than an outright $400,000 residential exemption, which was an idea advanced recently by FDIC Chairman Martin Gruenburg. However, without further definition or guideposts, the provision’s intent could be bastardized. For instance, a lender could offer a below market fee or unreasonable turnaround time to out-of-market appraisers, and having not placed the assignment, check the box and move onto an internal valuation,” says Garber.
In terms of what kinds of provisions the Bill needs, Garber says that further limitations and definitions are needed surrounding turn times and fees. “The assignment conditions should be typical for the market area. We have also suggested that government agency fee schedules, such as the one administered by the VA, could help establish some basic thresholds on assignment conditions for appraisers in the market area,” reports Garber.
The Bill is primarily backed by independent community banks and their trade groups, according to Garber. “These smaller banks have been expressing concern about rural appraiser accessibility for years. Some of those complaints in certain markets may have merit (Dakota region for instance), while others are likely overblown,” says Garber.
The response to AI’s concerns has been positively received by the Bill’s sponsors, according to Garber. “We hope that clarifying provisions will be included in amended versions of the Bill over the coming months. We recognize that a good deal of effort went into developing the Bill, and it does have strong bipartisan support, so while we currently oppose the Bill as-is, we could get behind it with stronger perfecting language,” reports Garber.
In a congressional hearing by the Committee on Banking, Housing, and Urban Affairs on January 30, 2018, Steven Mnuchin, United States Secretary of the Treasury, gave testimony and called the Bill “a balanced and thoughtful approach that better aligns our financial system to support economic growth in our communities.”
The Bill is a clear push towards deregulation, and has been described by mainstream press as a move towards rolling back key elements of Dodd Frank. Currently the Bill has wide bipartisan support, with sponsors that include the Tim Kaine (D) and Tom Cotton (R). The bipartisan support for the Bill could mean that it has a fighting chance of being passed in today’s increasingly partisan political environment.
Garber urges appraisers to contact their Senators and oppose the Bill as it is currently worded. “For appraisers, this is an important issue, and we encourage them to contact their Senators about concerns they may have with the Bill. We have set up an action alert to support appraiser grassroots engagement,” urges Garber.
AI has set up an action link where appraisers can look up their elected officials and find out the names and phone numbers of their Senator. Click here to visit AI’s link.
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About the Author
Isaac Peck is the Editor of Working RE magazine and the Director of Marketing at OREP, a leading provider of E&O insurance for home inspectors, appraisers, and other real estate professionals in all 50 states and D.C. He received his master’s degree in accounting at San Diego State University. He can be contacted at firstname.lastname@example.org or (888) 347-5273.
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