Dec. 26: Note on the current state of the residential appraisal biz; nifty poem about financing from banks & non-banks

Every lender knows that there are 5 C’s that go into the decision to lend money: Credit history, capacity, collateral, capital, and conditions. Of course different companies take different approaches to analyzing each one, but “collateral” has recently been in the news. Namely there are renewed questions about measuring it and assessing its value. The real estate lending industry is, of course, concerned about the requirements to become a licensed appraiser and the dwindling numbers of them. And what about the cost of having an appraisal done, and the AMC business structure?

Are the jungle drums saying this is the first AMC to be disciplined for customary and reasonable fees?

I asked Michael Simmons, SVP with Axis AMC, about this Louisiana issue to which he replied, “Interesting news from Louisiana. I think we can expect to see more of these instances. Louisiana’s regulation is the proverbial other side of the coin. In this case, iMortgage Services (an AMC) was fined $10,000 for failure to pay customary and reasonable (C & R) fees to appraisers. Louisiana’s state regulation holds the AMC responsible for paying customary and reasonable fees while under Dodd Frank (on the Federal level), it’s the lender who has the ultimate responsibility for seeing that an appraiser is compensated appropriately. Placing the burden of responsibility for paying C & R fees on the AMC may cause some management companies to change their approach in a specific state – and perhaps even make business decisions about what lenders they accept as clients – but it only addresses one of the symptoms.

“What do I mean by that? I think behaviors change when responsible parties are held accountable. In this case, an AMC is being held accountable for paying C & R fees to appraisers and I’m fairly certain their behavior will change … at least we know in Louisiana it will.  That other side of the coin involves lenders supporting the act of paying customary and reasonable fees by setting (or agreeing to) pricing that makes that possible – and obliging their AMCs to do the same on their behalf. I think it inevitable that the specter of Dodd Frank will find a way to ‘remind’ lenders where the final responsibility lies regarding C & R. That will go a long way to curing the underlying problem.

Mike’s note wrapped up with, “Understand that I find it difficult to be on the side of having appraisal fees set by regulatory fiat. But if that’s what it takes to ensure that appraisers receive fair compensation – sign me up! In a world where shifting data and the thrusts of economic forces put ever increasing pressure on ways for everyone to better understand our collateral, we need good appraisers and they need to be fairly compensated. And ultimately, whether we’re an AMC or a lender, the price we pay to be on the right side of the argument – the appraiser’s side – is a small price to pay for the value we’ll all receive.”

And thanks to Kim Perotti who sent along the result of the Louisiana AMC case. “LREAB completed an investigation and concluded that there was sufficient evidence to recommend a hearing so that IMortgage Services could explain their side of the alleged violations. “After 13 and 1/2 hours of testimony the LREAB concluded that IMortgage Services was NOT following the rules and regulations for determining R&C fees, but did pay the invoices within the time period of the rules. The LREAB enforced the following penalty for not following the rules of R&C fees: 1. a fine of $10,000, 2. Must Pay All Adjudication Costs, and 3. A 6 month suspension of their AMC License (on hold with conditions.) Conditions- They must pay all fines and cost by March 2016 and submit a plan of compliance for following the rules and regulations for determining R&C fees. If these conditions are met the 6 month suspension will be suspended.”

While we’re discussing appraisals I received this note from Dora Ann Griffin about the process. “I wonder if the CFPB will ever consider or realize the disadvantage some home owners suffer with the current AMC setup. I’m talking about mortgage brokers. A bank or a correspondent can set up and run its own appraiser panel. They get to choose who they want on the panel; they just need to rotate them. As a mortgage broker I am at the mercy of the lender I’m working with and who they choose to offer as an AMC. Often one they own, far, far away from the state I work in. One hundred percent of the time the worst appraisers in my market are on the AMC lists, all the lists, no matter what AMC they are using. I’m talking about the guys who would not do ten deals a year based on their ability, but are downloading business right and left because they are the cheapest.

“It is frustrating to see good, well qualified, professional appraisers who don’t happen to have a seat on the roster for local lenders lose their businesses. Or to see a report I just received where the appraiser counted two bedrooms not the three the home has. Equally frustrating is that the worst of the worst get rewarded with all the business they can handle. If there is one thing the CFPB could do it would be to wipe out the cash cow AMCs and let us do business locally. Particularly since the lenders have put in place processes to evaluate the appraisal. If they are depending upon the AMC to do QC they are sadly mistaken. A good review would have picked up on the wrong bedroom count I mention above. AMC reviews are next to useless.

“It makes no sense for me to order an appraisal from someone in Illinois, Michigan, California, etc. They have zero knowledge of the qualified appraisers. The intent is simply to get the cheapest. And, wouldn’t this be obvious to the CFPB? AMC’s serve the purpose of keeping mortgage brokers from communicating directly with appraisers, but that is what 10% or so of all the loans originated. I actually had an AMC tell me about a week ago they needed to raise their fees because the appraisers wanted more money. This whole mess is only going to cost home owners more and more so the AMCs/banks can keep a bigger piece of the pie.”

Another wrote, “Why in heaven’s name can’t brokers just go back to ordering appraisals from reputable appraisers? I had someone at an AMC tell me last week they were going to raise rates so they could pay appraisers more. I’m thinking, ‘Without the AMC they got more.’

Am I the only one who does not see how messed up the appraisal process is? I just got one today from an AMC I had not used heretofore. There was one appraiser specifically I told them was horrible in my market. He gets most of the orders because he is the cheapest in the market. Sure enough he got the assignment and it came back with bunches of requested corrections, very basic stuff. For the love of God, if we are going to collect money to sue anyone, make it about appraisals. I don’t see the end game for this AMC setup. Who wants to work for peanuts except the sloppy guys? Fix that and maybe someone will WANT to appraise for a living because they could actually make a living. And level the playing field since banks and bankers get to order from whomever they choose. Do you think there is no hanky-panky going on there? There is. Not to mention those lenders often own the AMCs.”

From North Carolina Pete Gallo, owner and president of HomeSight Real Estate Appraisers and Consultants, wrote reminding me of the meeting held back in October. The Network of State Appraiser Organizations met in Washington DC to discuss issues affecting working appraiser professionals and their businesses. The all-day event took place at the National Association of REALTORS® offices and attendees were able to discuss appraisal issues with visiting representatives from the Mortgage Bankers Association. The regular biannual meeting of the 21 state organizations who currently make up the “Network” continues to foster communication between working appraisers on a national basis. Appraisers have flocked to these grass-root, state-based groups as issues affecting their everyday business operations continue to grow, impeding their ability to function. Many who attended today’s meeting have also registered to attend the Association of Appraiser Regulatory Officials (AARO) Conference that took place in Washington DC City Center. We just added the Michigan Coalition of Appraisal Professionals to our network. We now have 22 state organizations participating in our grass-root networking effort on behalf of appraisers.”

He followed up with his thoughts on AMCs and MSAs. “Rob, if the CFPB bulletin on MSAs isn’t a good reason for lenders to be running away from the AMC model, I don’t know what is. Out of all the examples the CFPB could have used in this bulletin, they chose an example of an AMC. Rotations of appraisers off of an in house approved panel and keeping the fees paid to appraisers separate from other fees is the way to go. Handing this responsibility off to a third party might often feel initially like a good move, but all you are doing is multiplying your vulnerabilities as the OCC still holds you accountable for your vendors’ behavior.  It is even worse if you have any link to ownership or are mixed up in an obscure fee relationship with the vendor that would be fuzzy to the borrower.  Appraisers have been screaming for years to separate out their fee.  Eventually this issue will come home to roost in one form or another.  This bulletin could be the first shot over the bow by the CFPB in regards to the multiple issues use of AMCs present. When we (NAIHP) met with Corday on issues including HVCC and ‘appraisal independence’, he was the one that brought up RESPA on the AMC issue.”

(Thank you to Julie C. who sent in this timely piece about banks and financial technology.)

Twas the night before Christmas,

And money was flowing

to Big Finance and Big Banks

With no sign of slowing

Fees and surcharges

Were applied with care

With hopes that Regulators

Would stay out of their hair

When up popped a startup

Then two and then three

Nibbling at the edges

Where the Banks’ business should be

“We don’t need to worry”

“They can’t compete with us Banks”

“Who would trust a new startup?”

“Thanks, but no thanks”

But from Alternative Lending

Arose such a clatter

Suddenly acquiring customers

In numbers that matter

There is Lendio and Kabbage

Funding Circle and OnDeck

SoFi and LoanNow

The Banks said, ‘What the heck?”

Yet before the Big Banks

Rose and collected themselves

Came new ways to pay

O’er the Net, off the shelf

Emerged Square and Stripe

And WePay and Dwolla

Klarna and Braintree

The Banks started to holler

“Stop right there you startups!

With your beards and cool glasses

Bringing dogs into work

And noontime yoga classes”

“Un- and under-banked

Have no place at our table

Your ‘alt credit ratings’

Make the whole thing unstable!”

But stop they did not

In fact they kept coming

VCs sent more money

The growth metrics were humming

Wallets open to fintech

Were Spark, TTV and Kleiner

Fintech Collective and Andreessen

Dealflow couldn’t be finer

Now the Old Guard was nervous

Some started to fret

“Is that it? Is it over now?”

But they ain’t seen nothing yet

Hitting right at the heart

Of FinServ’s bread and butter

Personal Finance and Wealth Management

Came one after another

Wealthfront made a splash

Betterment did as well

Credit Karma & Nav arrived

With services to sell

“At least there’s one area

That won’t cause pain in our butts

That’s cryptocurrency and Bitcoin

Because those guys are nuts”

So they ignored Coinbase and Xapo

Align Commerce and BitPay

“They have nothing to offer

Fiat currency’s here to stay”

But along with Bitcoin

Came a tech called blockchain

“We don’t get how that works

But it’s a threat just the same!”

“Woe is me!” some moaned

“Our branch network means we’re sunk!”

But a few Banks were not done yet

They said, “This is bunk!”

“There are things we do well

Certain processes we know

And these guys need a place

To park all that dough”

And so they set about partnering

Investing in and acquiring

These startups and quick growth firms

Whose customers they were desiring

So is there room at the table?

Is there a happy ending

For Fintech Startups and Big Banks

in payments and lending?

We have no crystal ball

Just remember, play nice

However it turns out

We’ll leave you with this advice

Recognize what’s important

May your blessings be many

And wear more comfortable shoes

All the way to 2020!

Rob

(Copyright 2015 Chrisman LLC. All rights reserved. Occasional paid job listings do appear. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Rob Chrisman.)