Scope Creep

Over the past several years Real Estate Appraisers have been dealing with increased demands in the appraisal report.  This is affectingly called in the profession as “scope creep”.  Back in the good old days when the appraiser received an appraisal request it seemed a lot easier than it is now.  The appraiser would do the research put three or four comps in the report and send it to the client and very rarely would there ever be any questions.  Now days with “scope creep” the appraiser’s engagement letter reads like an instruction manual for a new gas grill.  Fannie Mae and Freddie Mac have made substantial additions to the appraisal guidelines.  In 2009-2010 the introduction of the Market Condition forms (1004MC) it requires the appraiser to report.  This report requires the appraiser to give marketing trends in increments:  7-12 months, 4-6 months and current – 3 months, Number of sales, absorption rates, active listings and months of housing supply.  Also the median sales price, days on market, listing prices and the medium sales price as a percent of average list price.  All of this information in the time increments listed above.  Appraisers were told that no additional fees were warranted as they were already researching this information.  This is just one of Fannie Mae and Freddie Mac new guidelines.  This new requirement is only part of the increased scope of work.  Lenders typically have overlay appraisal requirements. These may include:

• ·        Two comparable sales in the past 90 days

• ·        Aerial photo of subject property

• ·        If subject property appraisers for more than one million it requires 4 comparables and two listings

• ·        Urban properties report distances in blocks, suburban in miles.

• ·        Zoning-make the determination if property destroyed more than 50% can it be rebuilt.

• ·        Cost to cure on listed repairs.

• ·        Turnaround to complete appraisal 4 days from when it was assigned.

These are just a sample of the requirements from lenders and appraisal management companies.  Appraisers were very happy when they read the section of Dodd Frank that addressed appraisal fees.  Appraisers were to be paid a fee that is “reasonable and customary”.   The verbiage in the Dodd-Frank bill was very specific as to how to determine “reasonable and customary appraisal fees”.    Reasonable and customary was to be determined WITHOUT fees paid by appraisal management companies.  Simple stated only fees paid directly to appraisers by banks, mortgage companies, and other entities could determine what is “reasonable and customary”.   Appraisers however were in for a surprise when the Interim Final Rules were published.  Suddenly the small paragraph about R/C was 18 pages of verbiage with 2 presumptions of compliance.  Presumption one allowed for business as usual and that was the option that most AMC used.  For the appraisers it was a disappointing revelation of how our government works with lobbyist.

No one in the appraisal profession wants to set fees, however between 60 -70% of all residential mortgages and appraisals flow through 5 or 6 companies.  This represents an Oligopoly.  They set the appraisal fee market.  It is not reasonable to think an appraiser can effectively negotiate with one of these multi-billion dollar banks.  In my humble opinion the best way is more transparency.  AMC’s owned by banks have become profit centers for the bank.  More immediate profits are derived by paying the appraisers less money.  Again IMHO this is short sighted from the banks perspective.  The old adage of getting what you pay for is true.  If an appraiser is paid a reasonable market fee it is reasonable to believe the report will be a higher quality report. 

One of the quickest and best ways to fix this problem is transparency.  The AMC’s scope of work and their fee should be negotiated separately with the lender.  This way there is no incentive to pay the appraiser less money.   The appraiser’s fee should be determined as detailed in the Dodd-Frank bill.  Surveys commissioned by Universities, trade organizations and/or government entities are good way to determine what is “reasonable and customary”. 

The URAR was last updated in 2005.  There are several new valuation products on the market.  These products can analyze years of sales data in seconds.  An appraiser skilled in regression analysis can produce a statistically accurate property valuation with local market knowledge.  Fannie Mae and Freddie Mac are the drivers of the residential real estate appraisal reports and acceptable methods.  When they embrace this new technology our profession will once again be a trusted part of mortgage lending.  There is no shortage of opinions on how to fix our profession. 

There is no aspect of the mortgage business that is easy.  The Dodd-Frank bill is 2,300 pages of new regulations that touched every aspect of the financial sector.  We all have to deal with a difficult changing environment. 

J. Mark Chapman has been a certified appraiser since 1990.  Currently is the President/CEO of SouthEastern Evaluations a regional real estate appraisal management company.