On April 19, 2011, Kate Rogers from FOX/Business published an interesting article exposing the collateral damage caused by the Frank/Dodd bill. She explains just how Appraisal Management Companies (AMCs) have exploited a loophole, at the expense of appraisers and borrowers. While some of her numbers may not be representative of the costs associated with appraisals in the Philadelphia Market; they do effectively illustrate the disparity between what some appraisals costs and what the appraiser may be getting paid when AMCs are involved. Below are some excerpts from Ms Roger’s article.
If you’re about to close on a home, whether you are buying or selling, you may want to pay special attention to how much you are paying for the appraisal – and exactly where that money is going.
According to Ken Chitester, director of Communications at the Appraisal Institute, new Federal Reserve regulations that went into effect earlier this month have created a loophole for appraisal management companies (AMCs), allowing them to pocket more on appraisals—ultimately hurting the consumer. Appraisals typically average around $500, but appraisers themselves are being paid about half that cost, with the other half going into the AMC’s pocket, according to the Appraisal Institute.
Chitester said the loophole when it comes to the Federal Reserve’s new regulations — which mandate that “customary and reasonable” fees be paid to appraisers – is that the AMCs determine what these customary and reasonable fees are, including in the portion they intend to take. The fees look higher and are not broken down to explain who is getting what portion of the money. This was never a part of Dodd-Frank, he said, which was signed into law in July 2010 with the goal of improving the financial regulatory system after the recession, and intended to bring back the most qualified appraisers into the field.
“This would seem to gut the spirit and intent of Dodd-Frank,” Chitester said. “The best appraiser would produce the best work, whether you are buying or selling—you want a credible opinion of value. You want someone to defend it six ways to Sunday and back, and the best and brightest doing that work are (paid) much more.”
So why are consumers paying more than double the real cost for appraisals? Jeff Kaufman, partner at KEL Attorneys, said the answer is simple—they don’t realize it. Kaufman said all consumers need to ask for a breakdown of the fees and where each dollar they are spending is going, before they get to the table at a closing.
“If you ask for the appraisal costs upfront and you get to the closing and it’s more, you can walk away,” he said. “If you have it in writing, then that is wrong. I wouldn’t pay it. Do not trust the financial counselor or whoever is handling this for you because if you do not pay attention, they will figure out a way to take advantage of you.”
Also, be involved from the start, so you know what the appraiser, AMC and lender are doing every step of the way.
“It’s not like you’re holding a crappy Gucci bag and thinking, ‘Oh, this isn’t Gucci,’” Kaufman said. “You won’t know if you aren’t there.”
AMCs are trying to make more on the back end, according to Chitester, and are paying appraisers less and less. The most qualified appraisers are not willing to do their job for $200, he said.
“It’s a basic dumbing down of the profession,” Chitester said. “The most competent appraisers have refused to accept those fees and have found other ways to make a living.”
Kaufman said having lender-appointed appraisers appraise your home will lead to cutting corners and ultimately damage the deal, regardless of if you are buying or selling your home.
“It’s kind of like getting your medical treatment done in Mexico,” Kaufman said. “You are getting the worst possible person to appraise your house. Some of these guys won’t even inspect it; they may just drive by the house. And it can cost you a deal if they low-ball.”
All is not lost for consumers, Kaufman said. There are several ways you can be more involved, and make sure your home is getting the appraisal it deserves. The most important thing is to get involved in the appraisal and closing process. Look at your closing statement before the deal is done, and see where your money is actually going. Chitester also said consumers need to be present at the inspection, and point out all the features of the home.
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