Appraiser Independence: Fact or Fiction

Our interview today is with Tony Pistilli, (Chief Appraiser, Computershare)

Buzz: Tony, congratulations on your new role as Chief Appraiser at Computershare. Can you give us an update on life at as a chief appraiser in a post-Dodd Frank era? Where are we on a few of the important topics in the industry. Let’s start with the Customary and Reasonable fee issues?

Pistilli: After nearly six years, Customary and Reasonable Fees seem to be a non-issue with appraisers, Appraisal Management Companies (AMC’s), and the federal regulators. As we all know, there have been a few well-noted instances where states have taken action against AMC’s, but for the most part, I believe appraisers are receiving the appraisal fees they requested. Appraisal fees seem to be on the rise as compared to past years and in some areas, they are much higher than they were just a few years ago.

Buzz: Describe what you are seeing related to increasing appraisal fees?

Pistilli: In certain areas of the country, appraisal fees are $700+ per appraisal and turnaround times approach 30 days which seems to be a simple supply and demand issue. However, many of the major appraisal groups disagree that there is a shortage of appraisers causing the increasing fees. If fees continue to rise in these areas, it won’t be long before other valuation methods are tested as a quicker and cheaper alternative.

Buzz: Years ago you created the term “cost plus.” Have you seen much movement towards this type of fee arrangement?

Pistilli: Unfortunately, there has not been widespread adoption of the “Cost-Plus” model since it was first discussed back in 2007/2008. I believe AMC’s, appraisers and financial institutions would all benefit from such a pricing model. In this pricing model, fees for appraisers and AMC’s are independent of each other and allow for a true market to exist, without the leverage of AMC’s to retain higher administrative fees. Appraiser fees and services are competitive among appraisers. At the same time, fees and services for AMC’s are competitive among AMC’s. This approach has been tested and works very well.

There are also some very good compliance reasons to utilize a “Cost-Plus” model as well. It is difficult to have a one price fits all pricing scheme at a state level without disparate pricing to consumers. Certain neighborhoods, regions, and parts of states all can have much different appraisal fees. Complying with TILA-RESPA Integrated Disclosure (TRID) requirements can be challenging in a varied appraisal fee market or state, so institutions have relied on AMC’s to “normalize” pricing, rather than adjusting appraisal fees and incurring the notification burden. Because of this, institutions may find themselves charging borrowers less or more than what the 3rd party appraisal fee is. This can be particularly important when considering the demographic makeup of all lending areas.

Buzz: If a lender wants to institute a “Cost-Plus” model, how would you suggest they begin?

Pistilli: First thing to do is identify Customary and Reasonable appraisal fees, or “Cost” in all markets of operation. This might seem like a daunting task, but there are many resources available to meet this need. The next step would be to identify a reasonable administrative fee, or “Plus” to pay the AMC’s. A good way to develop a reasonable administrative fee is to survey AMC’s to understand what services are offered and at what price. Combine these fees and you have the total fee for that area for the typical, non-complex appraisal. Federal regulations allow for volume discounts and require additional fees to be paid to appraisers for complex assignments. As a best practice, any additional fees for complexity should all go to the appraiser.

Buzz: What do you think of “broadcast ordering” and how does that fit within the context of Customary and Reasonable fees?

Pistilli: Banks, mortgage companies and AMC’s all have the responsibility to assign orders to appraisers who are qualified for the assignment. Fannie Mae’s appraisal selection requirements state the lender or the AMC must know the appraiser is qualified before the order is assigned.

Broadcast ordering doesn’t lend itself well to meeting this requirement. If there are multiple appraisers equally qualified to accept an order, this can be accomplished within the requirements. However, as a best practice, I would suggest avoiding the practice altogether.

Buzz: Our last question might be the most controversial, 30+ years after FIRREA, 7 years after the Interagency Appraisal and Evaluation Guidelines, 6 years after the Interim Final Rule on appraisals, 6 years after the Fannie Mae and Freddie Mac issued the Appraisal Independence Requirements and numerous state appraisal board appraisal independence laws later….where do you see Appraisal Independence?

Pistilli: Appraisal Independence or non-independence is alive and rampant, despite the very clear rules. There is a trend of some lenders to create their “own panels” comprised of loan production recommendations. There are also some AMC’s that will accommodate “internal panels” from loan officer and mortgage broker referrals of appraisers. Some lenders are establishing what appears to be a compliant ordering process utilizing appraisal ordering platforms to create a “round-robin” of the loan officers favorite appraisers. These types of appraisal ordering processes are clearly prohibited by Appraisal Independence Requirements. The issue here is, there is little, if any, enforcement by the regulators to stop this practice from occurring. It doesn’t do any good to have laws that aren’t enforced.