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Complying With FHA Appraisal Requirements

Recent Webinar addressed reasonable fees

Jan. 25, 2010

By MortgageDaily.com staff


A recent event about new appraisal requirements at the Federal Housing Administration covered several issues including the meaning of reasonable and customary fees. The event's panelists included an appraiser for the U.S. Department of Housing and Urban Development and representatives from two appraisal trade groups.

MortgageDaily.com hosted the Webinar, Preparing for Changes to FHA Appraisals, on Jan. 20. The event was moderated by Michael Waldron, partner, Patton Boggs LLP.

New FHA requirements are similar to requirements under the Home Valuation Code of Conduct. The guidelines were originally set to go into effect on Jan. 1, but the implementation was delayed until Feb. 15 because of software issues.

Panelist Milton H. Corson, a HUD appraiser, said the Oct. 1, 2009, requirement that all FHA appraisers have to be state-certified has caused a "controversy." Around 51,700 appraisers remain on the FHA roster as of this month.

Corson said mortgagee letters related to new FHA appraisal requirements include 2009-28, Appraiser Independence; 2009-29, Appraisal Portability; 2009-30, Appraisal Validity Periods; 2009-41, Appraisal Performance Standards; 2009-48, Second Appraisal Reporting; and 2009-51, Appraisal Updates.

The new requirements prohibit originators and mortgage brokers from communicating with appraisers. Brokers can, however, order appraisals as long as a blind system is used and the broker has no ability to influence appraiser selection.

Corson noted that prohibited practices include threatening to withhold payment for appraisals, checking comparable sales for a value prior to the completion of the report and utilizing second appraisals unless the first appraisal is deficient.

Appraisals should not be ordered by a second lender unless the first appraisal is materially deficient, the first appraiser is on FHA's exclusionary list or the first lender's failure to transfer the appraisal would jeopardize the transaction. But transferred appraisals can't be over 120 days old -- a reduction from six months previously. It is possible, however, to obtain a 30-day extension.

Corson said that a previous requirement for second appraisals on loans higher than $417,000 secured by properties in declining markets has been rescinded in its entirety. Second appraisals will still be required when the property has been sold within 180 days and the price is 100 percent or more higher.

Another way to update an appraisal is for the original appraiser to complete Fannie Mae Form 1004D or Freddie Mac Form 442 -- though Corson warned the value could change using these forms.

Corson said more appraisers will be reviewed by HUD -- with extra attention given to high-volume appraisers, previously sanctioned appraisers or those who have received complaints by lenders.

The HUD official said that contracts are being procured to utilize automated valuation models on a "very large percentage of all appraisals." The AVMs will utilize an algorithm that "I really can't talk about in public" to flag appraisers for field reviews.

Before sanctioning an appraiser, FHA can require remedial education.

Panelist Bill Garber, director of government and external relations at the Appraisal Institute, said his organization includes more than 26,000 members worldwide -- including around 2,500 who are users of appraisal services.

Garber said Mortgagee Letter 09-28 was necessary because the prior authorative mortgagee letter, number 97-46, treated the appraisal function and the AMC function the same. But he noted that AMCs had a far smaller market share than they do today.

"As early as two years ago, mortgage brokers constituted 60 percent of the market, and roughly 15 to 20 percent of the market was appraisal management companies," Garber stated. "That's changed quite a bit since the Home Valuation Code of Conduct has been released and mortgage brokers have basically been replaced by appraisal management companies."

The mortgagee letter recognizes that two functions being performed include the administrative and appraisal management function that have previously been borne by lenders, Garber explained -- acknowledging that AMCs have take over this function. But he called for such a fee to "be allowed to float at a market rate."

Panelist and Appraisal Vendor Management Association Executive Director Jeff Schurman explained that FHA has said the appraiser can't be prohibited by the lender or the AMC from recording fees on the appraisal. He noted it was a "non-issue" whether the appraiser wants to list their fee as far as AMCs are concerned.

But Schurman said that while appraisers might consider the "reasonable and customary fees" required by FHA and listed on the appraisal to be the appraiser's retail fee, AMCs say that transaction costs are involved in obtaining the appraisal such as marketing, information technology and other administration. The AMC also handles communications that the appraiser doesn't need to manage.

"An AMC would say, 'What we're paying you, appraiser, is customary and reasonable for what you're doing -- the development and reporting of the appraisal,'" Schurman stated. "'We'll handle the customer interface. We'll handle the connectivity issues. We'll ... review your appraisal before you send it.'

"And there's value there on both sides to the appraiser as well as to the lender."

He said further clarification is needed for the definition of reasonable and customary.

HUD's Corson said AMC fees can only include services directly related to ordering, processing or reviewing an appraisal. He also clarified HUD's position on reasonable and customary fees.

"What we're looking at is two fees for two discrete services -- the appraisal service and the appraisal management, appraisal management company or third-party fee," Corson stated. "How we define reasonable and customary ... the fee that they charge must commensurate with the level of services that they provide."

Fees should reflect the amount of research, the level of difficulty and necessary due diligence required in the production of a "credible, reliable and accurate appraisal," Corson explained.

GlobalDMS President and co-founder Vladimir Bien-Aime, another of the event's panelists, said lenders are frequently asking what is reasonable and customary. He explained that a trend is developing where AMC fees are being itemized, and GlobalDMS's offering enables users to comply with requirements that vary between lenders.

Garber, of the Appraisal Institute, called for lenders to staff up their appraisal departments, including hiring a chief appraiser.

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