Thanks again for taking the time to speak with Fred and I. As you can tell we are passionate about this issue. I hope I don’t overload you with information but I know you must be very busy and I want you to have as much information as possible. You will also be familiar with many of these items but just in case I wanted to provide some explanation.
I have attached the 2010-11 Uniform Standards of Professional Appraisal Practice (USPAP). It is the appraiser standards that were created from FIRREA in 1989 as a result of the Savings and Loan Crisis where it was determined that federally regulating appraisers would eliminate another housing crisis. Every two years we have required continuing education that includes classes on the most recent USPAP. It contains 415 pages of required rules which appraisers must follow.
The next attachment is the Home Valuation Code of Conduct (HVCC) which was imposed on Fannie and Freddie without Congressional oversight. I don’t think anybody really knows what the true impetus of HVCC was, because seemingly out of nowhere it was thrust upon the appraisal industry. As a reminder, Andrew Cuomo the Attorney General of New York and former HUD Secretary had sued E-Apprazit (an appraisal management company that was a subsidiary of Washington Mutual) for wrongdoings and was investigating the mortgage lending industry including Fannie Mae and Freddie Mac. Apparently to avoid further investigation the GSEs and OFHEO (in a huge abdication of responsibility) agreed to adopt his plan. The agreement is also attached.
Next I have included a very interesting flowchart with supporting documentation that appears to show collusion between our country’s largest banks, title insurers, GSEs, and regulators. Another appraiser produced these documents, so I cannot attest to their complete accuracy, but I do believe it is consistent with my own experiences.
The Title Appraisal Vendor Management Association (TAVMA) is an association with members who “provide all the back-office settlement services needed to close a residential real estate mortgage transaction. Some provide commercial settlement services as well. These services include: Title, appraisal, flood reporting, credit reporting, and closing management” and who further protect “our members right to compete on a level playing field free of unfair and anti-competitive laws and regulations that inhibit interstate commerce. Building and participating in coalitions, TAVMA coordinate our industry’s response to threats to our members rights to compete and to advance vendor management in the United States land title industry.”
While TAVMA and appraisal management companies have been around for years they had difficulty gaining traction for the same reason that there are no national appraisal firms. It is simply way too difficult to manage the ten of thousands of appraisers it would require to service the entire country. As the saying goes “all real estate is local” and understanding the nuances of every market is impossible for one firm. Regardless of whether or not TAVMA and their members colluded with the Attorney General, they were able to accomplish their stated goal through the implementation of HVCC and the mandating that the users of appraisal services, the loan origination staff, not have any contact with the provider of the service, the appraiser. I cannot think of any remotely similar relationship in the history of the United States.
They accomplished this under the guise of “appraiser independence.” While appraiser pressure was real, appraisal bias was already prohibited by USPAP and this could have been addressed in a number of ways including the elimination of business practices that had been encouraged by Fannie and Freddie. Instead of insisting on the enforcement of USPAP, Attorney General Cuomo forced upon America a scheme that has destroyed thousands of small businesses across our country and has monopolized the appraisal industry.
I believe it is interesting to note that the Administrations recent report “Reforming America’s Housing Finance Market” in the discussion of the fundamental flaws in the housing finance market, appraiser independence was not cited. It is attached.
Dodd-Frank codified HVCC into the landmark FIRREA legislation. I have attached Title XI of FIRREA as it was amended by Dodd-Frank. Please note that until Dodd-Frank there was no such thing as an “appraisal management company” in FIRREA. It appears that the vast majority of the changes to FIRREA were made to create a niche for this new appraisal entity. In fact, Section 1124 is a completely new section that defines what an appraisal management company is. (Please also pay attention to the sections that are crossed out). In support of my thesis of collusion, you will also note that there are two kinds of appraisal management companies, those that are operating subsidiaries of Federally regulated financial institutions and those that are not. You will notice that there are additional regulatory requirements for the appraisal management companies that are not subsidiaries of the regulated institutions. These additional requirements not imposed on the large banks include the registration and supervision of the activities of the management company; states must maintain a national registry of appraisal companies not affiliated with the large banks (Federal financial institutions are omitted Section 1124c); the states must report complaints, discipline, and maintain a national registry of appraisers and appraisal management companies (Section 1118); and the requirement that each person who owns more than 10% of an appraisal company must be approved by State agencies. (This would not apply to the public companies but would be another burden on small business).
Dodd-Frank also lumped into Title XI (Real Estate Appraisal Reform) two new products that are not appraisals, the Automated Valuation Models (AVM) and the Broker Price Opinions (BPO). It just so happens that these are both products that the TAVMA companies have been promoting for years. Although Dodd-Frank does not allow these products to be used for loan origination their inclusion without controls allows these institutions to use these products in other situations such as foreclosures, short sales and equity lines.
In short, Dodd-Frank with little debate created a new entity called an appraisal management company that must by definition oversee a network of more than 15 certified or licensed appraisers in a State or 25 or more nationally (another burden for small business). These appraisal management companies are separated into two classes with different requirements. The States must regulate the management companies that are not federally regulated, the States must ensure that “appraiser independence,” the lifeblood of appraisal management companies is maintained. Dodd-Frank places considerable additional regulatory burdens on the States, and adopted two non-appraisal activities which are the cash cows of management companies instead of using Certified Appraisers who are trained in property valuation.
It is difficult to imagine that such a carefully crafted bill was not heavily influenced by the huge banks and title companies.
We have already seen what this legislation will do. HVCC has been in implementation since 2008. The result is the complete destruction of the professional appraisal industry. Because professional local appraisers are prohibited from associating with the users of their product they can no longer effectively market their business. Appraisers that have spent decades developing professional relationships and building teams of highly qualified and trained appraisers have been forced out of business. The appraisers that were diligently trained by business owners are now reluctantly the competition of their mentors. The only practical way of obtaining bank related appraisal business is for everyone to sign-up online, accept half the fee of the established rate, cover multiple counties that you may not be familiar with, and hope that you may receive an order or two a week. By some estimation the massive Appraisal Management Companies already control 90% of bank related appraisal assignments.
It has been reported that the average age of an appraiser is 54. By definition Appraisal Management Companies cannot train new appraisers. With no way of earning business and fees in the $150-225 range, no professional appraiser would even consider the extraordinary effort of training a new appraiser. This legislation will kill what little remains of a once proud profession.
Although I could go on and on about the net affect of HVCC, the overreaching of the Federal Government, and the Crony Capitalism at play, I will focus on the overall affect on Congressman Bilirakis’s constituency. The total revenue collected by all appraisers in the Congressman’s district is approximately half of what it would be. The remainder goes only to those few districts where these large companies are located. The consumer pays more for the appraisal and any Realtor or loan officer will tell you that the quality of appraisals has declined. All the support staff for the local appraisers has been laid off and these bailed out institutions have a new profit center. Furthermore, instead of these institutions employing appraisers, they avoid the burdens of employment tax, unemployment, health care, Errors and Omissions Insurance, etc. These companies have effectively created their own appraisal firms without any of the normal burdens.
My plan of action in the order that they should occur.
1. Immediately rescind the portion of Dodd-Frank that affects Title XI of FIRREA. The self-correcting mechanisms of the market was already working. The unethical players were being driven from the business and the State regulators were in pursuit. Make it clear that the HVCC is no longer in effect.
2. Require that anyone involved in the appraisal process must be a Certified Appraiser in that state and that the majority owner must be an appraiser (this is the spirit of FIRREA circa 1989)
3. Require the “Customary and Reasonable Fee” to be established by the fee structure that has been in existence through the Veterans Administration. In Dodd-Frank Section 1472 requires that the fee paid to appraisers is customary and reasonable outside of the influence of appraisal management companies. It states “Evidence for such fees may be established by objective third-party information, such as government agency fee schedules, academic studies, and independent private sector surveys.” The VA’s fees are consistent with the market outside of the AMCs. If we could codify the use of these fees it would go a long way toward saving this profession. I believe this is by far the easiest but less comprehensive route.
4. Require the federally regulated appraisal management companies to be subject to State regulation like any other management company. In addition, it should be required that the AMCs maintain a significant commercial presence in the States where they practice.
I really appreciate your time. As a small business owner, I just want the opportunity to compete on a level playing field and not have the Federal Government pick the winners and losers in our economy. I have additional information I could share at a later date if necessary, but I hope this provides you a good starting point.
Marsh Bilby Appraisers & Consultants, LLC