Where does your appraisal fee go?
WASHINGTON — When you pay $450 to $550 at settlement for an appraisal on a home purchase or refinancing, do you assume that all or most of the money is going to the appraiser who performs the valuation?
That's logical, but probably not correct. Despite new Federal Reserve regulations that took effect April 1 requiring lenders to pay appraisers' fair fees, growing numbers of them say they are still being offered $200 to $250 — even as low as $134 — for work that gets billed to consumers on settlement sheets at $450 and higher.
Last year's Dodd-Frank financial reform law mandated that appraisers receive fees that are "customary and reasonable" for their market, yet the largest national appraisal organization — the 25,000-member Appraisal Institute — says that is not happening. Leslie Sellers, immediate past president of the group, said "the average fees across the country today are about $225 to $250 — nowhere near reasonable or customary" in most markets.
Who's getting the difference between what consumers are billed and what appraisers are paid? Sellers says management companies that connect lenders with appraisers take a percentage. But often lenders "turn (appraisals) into a profit center of their own off the backs of appraisers and consumers themselves."
Should you care? Absolutely. Accurate appraisals are in your interest as a consumer. They can be deal-breakers on a purchase if they're lowballed. But performed competently, they are accurate measures of your equity when you refinance or seek a second mortgage.
Federal law prohibits home real estate settlement-related charges where no actual services are rendered. What additional services are being supplied when an appraiser is paid half of what you're being charged by the lender at closing?
Tom Kirchmeyer, president of Kirchmeyer & Associates, an independent appraisal management company in Buffalo, N.Y., with 8,000 affiliated appraisers nationwide, says consumers often have no idea what they're really paying for because "there's no transparency" in the process. Kirchmeyer favors mandatory disclosure of how much the appraiser is receiving and how much the appraisal management company that arranged the assignment is receiving. So does Richard Hagar of American Home Appraisals in Seattle, who says that major lenders who own or are affiliated with appraisal management companies oppose it because they "know that if (the financial facts) are disclosed, consumers are going to riot."
For example, say an appraiser receives $250 and the management company gets $100; how can the lender, which is charging $500 for "appraisal services" on the settlement sheet, justify the $150 difference?
It can't, says Gary Crabtree, head of Affiliated Appraisers in Bakersfield, Calif. Worse yet, he says, employing "subprime" appraisers for low fees often leads to lowballed valuations.
As a recent example, Crabtree says an unhappy homeowner showed him a valuation from a low-cost appraiser hired by the appraisal management affiliate of a large national bank. The house was 4,000 square feet, next to a country club, and the owner had just spent $250,000 in renovations.
Crabtree, who refuses to do appraisals for the low fees the bank's affiliate pays, said the house should be valued around $600,000. But the appraiser hired for the assignment valued it at $320,000, using distressed sales and properties outside the area as comparables.
How is this happening when Congress clearly mandated higher "customary and reasonable" fees? Appraisers say much of the blame goes to the Federal Reserve, whose regulations created a giant loophole for lenders and management companies. The Fed rule allows them to consider their own low payments in calculating what is "customary and reasonable" — a concept that was never part of the Dodd-Frank legislation.
The Appraisal Institute's Sellers says his group and others hope to persuade the Fed to tighten its rule. Until then, consumers should demand transparency: Of my $500 appraisal fee, who got what? And why?
Kenneth R. Harney can be reached at firstname.lastname@example.org.