WASHINGTON -- When you pay $450 to $550 at settlement for an appraisal on a home purchase or refinancing, do you assume that all or most of the money is going to the appraiser who comes to the house and performs the valuation?
That's logical, but probably not correct. Despite new Federal Reserve regulations that took effect April 1 requiring lenders to pay appraisers fair fees, growing numbers of them say they still are being offered $200 to $250 -- even as low as $134 -- for work that gets billed out to consumers on settlement sheets at $450 and higher.
Last year's Dodd-Frank financial reform law mandated that appraisers receive fees that are "customary and reasonable" for their local market areas, yet the largest national appraisal organization -- the 25,000-member Appraisal Institute -- says that is not happening. Leslie Sellers, immediate past president of the group, said that "the average fees across the country today are about $225 to $250, nowhere near reasonable or customary" in most markets.
Who's getting the differential between what consumers are billed and what appraisers are paid? Sellers says management companies that connect lenders with local appraisers take a percentage for their services. But often lenders "turn [appraisals] into a profit center of their own off the backs of appraisers and consumers themselves."
Should you care?
Accurate appraisals are in your interest as a consumer. Performed competently, they are accurate measures of your equity when you refinance or seek a second mortgage.
Most experienced independent appraisers refuse to work for $200 to $250 because they can't pay their overhead at these rates.
Federal law prohibits home real estate settlement-related charges where no actual services are rendered.
Tom Kirchmeyer, president of Kirchmeyer&Associates, an independent appraisal management company based in Buffalo, with 8,000 affiliated appraisers around the country, favors mandatory disclosure of how much the appraiser is receiving and how much the appraisal management company that arranged the assignment is receiving. So does Richard Hagar of American Home Appraisals in Seattle, who says that major lenders who own or are affiliated with appraisal management companies oppose it, because they "know that if [the financial facts] are disclosed, consumers are going to riot."
In a hypothetical example, say the appraiser receives $250 and the management firm receives $100, how can the lender, which is charging $500 for "appraisal services" on the HUD-1 standard settlement sheet, justify the $150 difference?
It can't, according to Gary Crabtree, head of Affiliated Appraisers in Bakersfield, Calif. Worse yet, he said, employing "subprime" appraisers for low fees often leads to low-balled valuations that are harmful to homeowners and buyers.
Appraisers say the reason this occurs is party because the Federal Reserve created a giant loophole for lenders and management firms that wanted to keep playing low-ball games with fees. The Fed rule allows them to consider their own low payments in their calculation of what is "customary and reasonable" -- a concept never part of the Dodd-Frank legislation.