The Federal Housing Administration’s new guidelines for ordering appraisals won’t have some of the unintended consequences that those put in place by Fannie Mae and Freddie Mac in May did, the National Association of Realtors says.
But NAR continues to push for suspending enforcement of the Home Valuation Code of Conduct, rules governing appraisals adopted by Fannie Mae and Freddie Mac on May 1 in the wake of an investigation by New York Attorney General Andrew Cuomo.
NAR was one of several real estate industry groups testifying at a congressional hearing Wednesday on extending the $8,000 first-time homebuyer tax credit. The groups used the occasion to voice concerns about other issues as well, including problems with the appraisal process and a proposal to create a Consumer Financial Protection Agency that would have jurisdiction over mortgage lenders and title insurers.
FHA announced its new guidelines for ordering appraisals on Sept. 18, saying it wanted to be in "full alignment" with Fannie and Freddie’s appraisal policies. FHA’s new guidelines take effect Jan. 1, along with tightened credit standards (see story).
Testifying on behalf of NAR before the House Committee on Small Business, Joseph Canfora, broker-owner of Century 21 Selmar Realty in East Islip, N.Y., said Fannie and Freddie’s appraisal rules have led to an increased use of appraisal management companies (AMCs).
Those companies have often assigned appraisers to work in neighborhoods in which they lack experience, and given appraisers less time to complete their work, Canfora said.
NAR says that the 40 percent of the association’s members who work as appraisers are reporting that more than half of their assignments now come from appraisal management companies, compared with 13 percent before the new rules were implemented. More than 70 percent of Realtors surveyed by NAR in June said they’d encountered appraisers lacking "geographic competency" for their assignments, Canfora said in his written testimony.
Joe Robson, president of the National Association of Home Builders, said appraisal management companies tend to pay appraisers less and are allowing only two days or less to complete an appraisal.
"While such actions obviously reduce AMC costs and increase their profit margins, we feel they are having an adverse impact on the quality of appraisals," Robson said.
Since the new rules were implemented, they have delayed or derailed many sales, Canfora maintained, to the point that "current appraisal practices threaten to undermine the efficacy of the tax credit," which NAR believes is directly responsible for 355,000 to 400,000 additional sales this year.
A moratorium on enforcement of the Home Valuation Code of Conduct would allow more states to put laws in place regulating appraisal management companies, Canfora said — regulation that NAR sees as "a critical need." …CONTINUED
Lawmakers in at least 10 states have introduced measures to regulate AMCs, Canfora said, and other states will consider such measures in upcoming legislative sessions.
Another reason NAR cites for suspending implementation of the code is that the Independent Valuation Protection Institute — an independent body that is supposed to receive complaints from appraisers and consumers — has yet to be established. The Federal Housing Finance Agency has promised the institute will be up and running by the end of the year. But in the meantime, no interim process for handling complaints has been established, Canfora said.
Canfora said that because FHA’s proposed guidelines for ordering appraisals were developed in consultation with the real estate industry, the proposal "enhances appraisals in many ways … without causing harm to the industry." FHA has taken into consideration the unintended consequences that burdened Fannie and Freddie’s guidelines, he said.
The Appraisal Institute and other groups representing appraisers have complained that experienced appraisers have little incentive to take FHA assignments from appraisal management companies because of a policy limiting what the companies could charge (see story).
FHA’s new guidelines for ordering appraisals attempt to address the issue by allowing separate fees be paid to appraisers and appraisal management companies, and for those fees to be determined by the market.
The FHA guidelines reaffirm "geographic competency" requirements for appraisers, and prohibit mortgage brokers and commission-based loan originators from ordering appraisals.
NAR is "pleased with the progress that has been made so far in sorting out appropriate appraisal requirements and practices," Canfora said, but standardizing "rational" appraisal rules would contribute to a housing market recovery.
FHA intended that the changes to its appraisal guidelines would make them fully compatible with the Home Valuation Code of Conduct. But Fannie and Freddie have each issued their own "Frequently Asked Questions" (FAQ) documents on implementing the code. NAR would like to see a single FAQ document that applies to Fannie, Freddie and FHA, Canfora said.
Although NAHB is not among the groups calling for a repeal or suspension of the code, homebuilders want FHA, Fannie and Freddie to issue procedures for using distressed or foreclosed properties as comparables in valuations, Robson said.
Appraisers should be encouraged to expand the area and time frame for selecting comparable properties, if needed, to locate nondistressed comps and to investigate and consider the overall condition of a property used as a comp.
NAHB would also like to see an appeals process for appraisals that is similar to the one employed by the Department of Veterans Affairs. …CONTINUED
In situations where an appraiser believes an appraisal would result in a value less than the sale price of a property, the VA allows the appraiser to contact the lender, and allow two working days for the lender to provide additional information, Robson said. Lenders can also specify another point of contact for the appraiser, such as a builder or Realtor, when ordering appraisals.
The title insurance industry listed another set of grievances in its written testimony to the House Committee on Small Business.
Title insurers — already regulated by state insurance commissioners and the federal Real Estate Settlement Procedures Act (RESPA) — don’t want to be one of the businesses under the jurisdiction of a proposed Consumer Financial Protection Agency, said Mike Pryor, president and CEO of Lenders Title Co.
Draft legislation introduced by Rep. Barney Frank, D-Mass., would exempt Realtors from the agency’s purview, but vest the agency with the authority to enforce RESPA (see story).
Testifying on behalf of the American Land Title Association, Pryor said settlement services providers such as title agents, abstracters, escrow officers, attorneys and appraisers tend to be small businesses.
The title insurance industry is "extraordinarily local," dominated by small businesses with two to 15 employees. There are about 50,000 small title businesses in the U.S., "and each one has been impacted directly by the housing sector’s collapse," Pryor stated.
Small businesses already spend about $6,975 per employee annually to comply with current federal regulations and mandates, he also said, citing a study by the Small Business Administration’s Office of Advocacy.
New RESPA rules taking effect Jan. 1 "will place additional stress on these small businesses’ already strained resources," Pryor said.
HUD has estimated that it will cost the title industry $62 million for software expenses and training to comply with the rule change, of which $46 million will be borne by small businesses, Pryor said. Another $37 million in legal expenses are anticipated, of which $18 million will be paid by small businesses.
Title insurers are concerned that the proposed Consumer Financial Protection Agency would have broad powers to write new regulations, imposing a third layer of regulation and an additional federal bureaucracy on the title insurance and settlement services industry, Pryor said.
Without an exemption like the one proposed for Realtors, one- and two-person title insurance operations will be forced to "get into the habit of reading the Federal Register to check for new rulemaking intended for major bank and nonbank financial institutions, but which also applies to their work in searching local courthouse records," Pryor said.
The title industry was not the cause of the problems that led to the push for the agency, Pryor said, and extending the agency’s regulatory authority to the title industry would have "no measurable benefit in achieving the bill’s purposes," he said.
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