The new Consumer Financial Protection Bureau, or CFPB, is working on a real estate issue that gets to the core of the agency’s purpose: the often opaque and costly fees that buyers, sellers and refinancers are hit with at closings. The bureau is reviewing ways to bring more clarity and better disclosure to this process.
One of the fees being scrutinized might surprise you: appraisal charges. Why do they need clarifying? Doesn’t just about everybody who applies for a mortgage, whether it’s to buy a house or refinance, have to pay $450 to $600 — sometimes more — to find out what the property is worth?
Correct. But the reality is a bit more complicated. Start with the fact that in three of every four cases, according to industry estimates, the person who visits, inspects, measures and puts a market value on your property is receiving only a fraction of the money you pay. Some receive less than half of the fee, with the balance flowing to an enterprise you’ve never heard of, an appraisal management company that assigns the job to the appraiser. That company may be wholly owned by or otherwise connected with your lender, which may be pocketing a significant portion of your appraisal dollars.
Current federal disclosure forms don’t tell you where that money is really going. There is just a single line item for appraisal charges on the standard HUD-1 settlement statement.
Say you’re charged $550. There is no hint that the appraiser may be getting $250, with the rest going to the management company and the lender. The CFPB is considering whether to shed light on this by mandating two disclosures: what the appraiser is paid and what the management company is taking.
Should you care about this? Absolutely. Although banks and mortgage lenders maintain that there is no need for additional disclosure, appraisers, builders, realty brokers and others say the costs of appraisals to consumers have increased during the past two years, while the quality and accuracy of the work have declined. In a random sample of 3,600 of its members last year, the National Association of Realtors found that 70 percent reported that consumers were being charged higher appraisal fees — sometimes an additional $100 or more — than was the typical charge previously.
At the same time, NAR members who are appraisers reported sharp reductions in their compensation: cuts of 40 percent to 50 percent per assignment. Many of the Realtors polled said they saw significant increases in the number of appraisers who were unfamiliar with local market conditions because they were from another geographic area. The same poll also found a growing incidence of sales transactions being derailed by appraisals that came in below the contract price agreed upon between the seller and the buyer.
Critics say the drops in fees to appraisers combined with higher charges to consumers are byproducts of the rapid spread of management companies, whose growth during the post-boom years has been fueled by rules from Fannie Mae, Freddie Mac and Congress aimed at ensuring “appraiser independence.”
Frank Gregoire, a past chairman of the Florida Real Estate Appraisal Board, which oversees and regulates the industry in that state, says that while appraiser independence is important, banks and their affiliated management firms are raising the costs of appraisals to consumers without improving services.
“The borrower receives no benefit from the [appraisal management] ‘service,’ ” he said in an e-mail. “The lender is able to outsource a significant responsibility” — the selection of an appraiser — “to an affiliated subsidiary, and profit from that task by making the consumer and the appraiser pay for the privilege. [This] business arrangement is concealed from the consumer/borrower, and the charge is misrepresented as an ‘appraisal fee’ on the HUD-1. This is dishonest, deceitful and unfair.”
Defenders of management firms, such as Donald E. Kelly, executive director of the Real Estate Valuation Advocacy Association, strongly disagree. Kelly says management firms perform the “back office” functions — including reviews and quality control — “that in the past were done by lender staff and employees.” In other words, they earn the money they get. And there’s no pressing need for consumers to see additional disclosures. They just need to know the bottom line.
Which brings the matter back to the Consumer Financial Protection Bureau. Though it can’t comment on pending rules, the agency has a statutory deadline in July to produce an improved version of the HUD-1 settlement form. How it comes down on real estate appraisal fee disclosures — more transparency for consumers or not — will be a revealing early test.
Ken Harney’s e-mail address is firstname.lastname@example.org.