On appraisals, follow the money?
WASHINGTON — Among the disclosures now under review by the new Consumer Financial Protection Bureau are the appraisal charges. Why do they need clarifying? Doesn't everybody who applies for a mortgage have to pay $450 to $600 — or more — to find out what the property is worth?
Correct. But the reality is more complicated. In three out of every four purchases or refinancings, according to industry estimates, the person who visits, inspects, measures and puts a market value on your property is receiving only a fraction of the money you are paying. The balance flows to an appraisal management company that assigns the job to the appraiser. That management company, in turn, may be wholly owned by or affiliated with your lender, which in turn may be pocketing a significant portion of your appraisal fees.
Current federal settlement disclosures give you no hint of where that money is going. The CFPB is considering whether to mandate two disclosures: what the appraiser is paid and what the management company is taking. Although banks and mortgage lenders maintain there is no need for additional disclosure, appraisers, builders, realty brokers and others say the costs of appraisals to consumers have increased in the past two years, while the quality and accuracy of the work have declined.
At the same time, appraiser members reported sharp reductions in their own compensation by 40 to 50 percent per assignment. Many of the realtors polled said they saw significant increases in the number of appraisers who were unfamiliar with local market conditions because they were from another geographic area. The same poll also found a growing incidence of sales transactions being derailed by appraisals that came in below the contract price agreed upon between the seller and the buyer.
Critics say the drops in fees to appraisers combined with higher charges to consumers are by-products of the rapid spread of management companies, whose growth during the postboom years has been fueled by rules from Fannie Mae, Freddie Mac and Congress aimed at ensuring "appraiser independence."
Frank Gregoire, a past chairman of the Florida Real Estate Appraisal Board, which oversees and regulates the industry in that state, says that while appraiser independence is important, banks and their affiliated management firms are raising the costs of appraisals to consumers without improving services.
Industry defenders of management firms, such as Donald E. Kelly, executive director of the Real Estate Valuation Advocacy Association, disagree. Kelly says management firms perform the "back office" functions — including reviews and quality control — "that in the past were done by lender staff and employees."
Kenneth R. Harney can be reached at email@example.com.