Does it violate Appraiser Independence to pay more for properties over $1 million?
The Appraiser Independence Rules are new. Just came in 2010. So we don't have a ton of information on how they will be interpreted. But here's one issue - one that may have come up during your TRID preparation - that you may be able to get ahead of before it becomes a problem.
I know we (hopefully) have a couple of extra months to iron things out with TRID. So maybe we take a break from that for just this one week??
Appraisal Independence Rule
Remember that this is no longer just a Fannie/Freddie Rule, the new Appraiser Independence Rule (available here) is a Federal rule that applies to all residential mortgages.
So a basic part of the new rules is this:
"no covered person shall or shall attempt to directly or indirectly cause the value assigned to the consumer's principal dwelling to be based on any factor other than the independent judgment of a person that prepares valuation, through coercion, extortion, inducement, bribery, or intimidation of, compensation or instruction to, or collusion with a person that prepares valuations or performs valuation management functions."
The rules also say that an appraiser must be paid a "customary and reasonable" fee. How to determine whether a fee is "customary and reasonable?" The rule has us look at the following permissible factors:
The type of property
The scope of work
The time in which the appraisal services are required to be performed
Fee appraiser qualifications
Fee appraiser experience and professional record
Fee appraiser work quality
Note that it does not list "property value" as a permissible factor!!
Question: Higher Fee for $1 Million Properties Permissible?
It appears to be fairly common for appraisers - at least in New England - to charge a higher fee for properties valued at over $1 million. So if the appraiser returns a property value of $999,000, she gets $475, but if the value comes in at $1.01 million, she gets $625. Sound familiar?
This may be a long-standing practice, but the rule is new. The question is whether this is still appropriate after 2010?
Answer: No, We Think It's Not
We put in a request to the CFPB to discuss this, and the attorney we spoke to felt that this fee arrangement would violate the appraiser independence rules. And we agree.
If we apply the test from above, it seems clear. Might the $1 million fee arrangement "directly or indirectly cause" the appraised value to be assigned "based on any factor other than the [appraiser's] independent judgment?" Sure! You have to admit that it's based, even if only "indirectly" and in part, on the fee earned by the appraiser.
Distinguish: the appraiser's fee in our example was based off the borrower's estimated property value, that would be safe from this problem--in that case the appraiser's ultimate valuation doesn't affect her fee, that fee was already set by the borrower's estimate (which you may not always trust, but hey - you win some and lose some!).
Alternatives: What can we do instead? Safer fee arrangements may be based on the number of bedrooms, square footage, and/or other factors that relate to how difficult it will be to appraise the home. **But as we prepare for TRID, we don't want to make this too complex ... appraisal fees will have a 0% tolerance and we will need to be able to disclose accurately within 3 days of application.
In other news:
The CFPB has announced plans to delay TRID until October 1. Officially, they were forced to delay it by 2 weeks because they forgot to file the necessary paperwork with Congress. The extra 1.5 months? They say it's to help people whose kids are going back to school. Interesting .... But the important point is just a word of caution-- this is not official yet ... it is just a "proposed" rule - lenders should still be preparing as if TRID were to start in August.
For anyone who wants to read about the new Flood insurance rule that will take effect in 2016, here's the link to the rule that was posted this week.
We knew this already didn't we? A new study estimates that the largest tax on low-income families is the lottery. (Where does Mass. rank on this list? #3, with $2,000 spent per household on lottery tickets every year).
Whether designing a mortgage department or hiring a person into it, flexibility ranks high in importance. You need to be able to flex to capture gains in high volume markets, and contract to minimize losses during periods of low volume. You need people who will put in the extra hours when necessary, and stay productive (or just not go crazy) when things get quiet. As John tells me ... you're not looking for an oak tree, you're looking for a palm tree that will bend with the breeze. Hey I read "The Oak and the Reed" too.
"The oak one day says to the reed:
-You have a good right to blame the nature of things: A wren for you is a heavy thing to bear.
The slightest wind which is likely To wrinkle the face of the water Compels you to bow your head-
While my brow, like Mount Caucasus, Not satisfied with catching the rays of the sun,
Resists the effort of the tempest.
All for you is north wind, all seems to me soft breeze.
Still, if you had been born in the protection of the foliage The surrounding of which I cover,
I would defend you from the storm.
But you come to be most often
On the wet edges of the kingdoms of the wind.
Nature seems to me quite unjust to you.
-Your compassion, answered the shrub, Arises from a kind nature; but leave off this care.
The winds are less fearful to me than to you. I bend and do not break. You have until now Against their frightening blows
Stood up without bending your back;
But look out for what can be. -As the reed said these words, From the edge of the horizon furiously comes to them
The most terrible of the progeny
Which the North has till then contained within it.
The tree holds up well; the reed bends.
The wind doubles its trying; And does so well that it uproots
That, the head of which was neighbor to the sky, And the feet of which touched the empire of the dead."
- The Oak and the Reed, by Jean de la Fontaine (translation by Eli Siegel)
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**These are our opinions. We're not authorized, or willing, to express those of others.**