Rural and resort borrowers may pay thousands of dollars for appraisals
By Jeff Lazerson | firstname.lastname@example.org | MortgageGrader.com | June 26, 2021
A perfect storm is upon America. Caution ahead if you need a residential appraisal.
Appraisers are aging out and retiring. Fannie Mae and Freddie Mac have developed sophisticated, automated appraisal processes resulting in property inspection waivers for more and more borrowers. The residential appraisal industry will go the way of the horse and buggy soon enough.
In the meantime, you might just end up paying a lot more than expected when applying for a mortgage and receiving a loan estimate (an estimate of all charges).
“We are getting absurd requests from appraisers to take appraisals for $2,000, $3,000, $4,000,” said Joe Lydon, a managing director at San Diego-based Lendsure Mortgage Corp.
One of my clients was charged $600 for a refinance appraisal last September. Nine short months later, the same appraiser bid the second refinance job on the same house at $900. After our protest to the wholesale lender, the appraiser agreed to do the work for $650. (With the exception of FHA and VA streamline refinancing and Fannie, Freddie property inspection waivers, each new loan application requires a new appraisal.) So, in essence, the borrower was charged more money for less work as the measurements were already done.
How about paying $5,000 for a purchase appraisal? This just happened in a rural area of Colorado for one homebuyer, according to a wholesale lender I work with. What’s a buyer to do? No appraisal. No mortgage. In case you’re wondering, the average appraisal cost at my shop is $550, and I estimate the average consumer fee locally is $600.
Beyond higher fees, what about no available appraisers? One of my wholesale lenders told me she cannot find an FHA appraiser for a Yucca Valley purchase. I will note that Southern California doesn’t have anywhere near the appraiser shortage that I’ve heard of in central and northern California.
Appraisals are the only unregulated piece of the real estate settlement services pie. Largely, mortgage loan originators must charge everyone equally. Title insurance companies must post their prices with the insurance commissioner and stick to them. Real estate agents are required to have signed commission contracts upfront.
Here’s how it happens: Mortgage lenders are required to provide mortgage applicants with loan estimates within three business days of loan application outlining all charges including the appraisal fee. Lenders have fee schedules from either their appraisal panel or designated appraisal vendors — called appraisal management companies or AMCs. Lenders rely on those fee schedules when issuing the loan estimate to the borrower.
The AMC’s management fee incorporated into the total appraisal charge runs about $150, according to Lance Siegel, president of HVCC Appraisal Ordering Service in Lake Forest.
Bids come back from the independent appraisers to the AMC, for example, estimating their delivery timeline and agreeing to a certain price. Appraisers do not have to agree to the price provided to the consumer. They can demand add-ons for distant trip charges, complexity or anything else they want.
I polled several lenders, asking whether the lender or the borrower pays for the ever-increasing surprise fees. Just one lender I spoke with assumes the difference between the disclosed appraisal charge and the actual charge. All other lenders pass it on to the borrower under what’s called the “change in circumstance rule.” This allows lenders to change the loan terms or the loan costs (or both) for unforeseen issues, all of which require consumer consent.
Mortgage industry attorney Ray Snytsheuvel, COO of Firstline Compliance believes the lender should eat the extra fees. “Unless the information the lender relied on (to provide the appraisal quote) was incorrect, the lender has to stick with it,” he said.
But borrowers beware: You may be stuck with paying for the surprise fee, especially if they have a purchase contingency deadline.
Big price surprises come up more often where there are smaller populations of appraisers such as rural areas and resort destinations. Think Big Bear.
So are these appraisal fee hikes legitimate or more like a predatory “gotcha fee”?
Let’s go back to 2010 when the home valuation code of conduct (HVCC) was enacted as part of the Dodd-Frank Act. The idea behind the code was appraiser independence. HVCC also mandated appraisals have a lot more data and information as part of their report. AMCs made their way in, too, acting as an intermediary between the lender and appraiser.
More or less the workload for appraisers doubled and their income was chopped in half. In the 1990s and 2000s, appraisers earned about $175,000 to $225,000 annually, according to Lance Siegel. Since the advent of HVCC, salaries have slumped.
“Appraisers make about $100,000 to $150,000 today,” Siegel said.
In 2014, I wrote about this, citing 2009 appraisal fees of $375, which then jumped to $500. Appraisers previously had relationships directly with lenders and mortgage brokers, receiving all of the fees. In its infancy days, the AMCs were taking about one-third to one-half of the total appraisal fees. This was partly due to a much slower market and many more appraisers competing for the orders. Today, the market is hot and the appraiser population is much smaller. So the appraisers have the upper hand on consumers, lenders and AMCs.
Mark Schiffman, executive director of Real Estate Valuation Advocacy Association, also points to supply and demand and the market at play. “We’re hearing it too — thousands of dollars,” he said, referring to rising fees. Should there be a limit on compensation? “No. Set a floor but not a ceiling.”
The whole idea behind appraisal independence was appraisers would no longer have to grovel for the work. Too many times in the past, they had to agree upfront to hit a certain number in order to get the job. Now, it feels more like reverse extortion. If you want me to take this appraisal order, you are going to have to pay me X more.
What can you do to protect yourself from these surprise charges?
Ask your lender if he or she can confirm the appraisal bid price before submitting an application. If not, get a written assurance from your lender that you will not have to eat any differences incurred.
I asked the Consumer Financial Protection Bureau if it would initiate a rulemaking process to close the appraisal loan estimate loophole. The agency declined to comment.
Freddie Mac rate news
The 30-year fixed-rate averaged 3.02%, 9 basis points higher than last week. The 15-year fixed-rate averaged 2.34%, 10 basis points higher than last week.
The Mortgage Bankers Association reported a 2.1% increase in mortgage application volume from the previous week.
Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $548,250 loan, last year’s payment was $33 more than this week’s payment of $2,317.
What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with one point cost: A 30-year FHA at 2.25%, a 15-year conventional at 2%, a 30-year conventional at 2.625%, a 15-year conventional high balance ($548,251 to $822,375) at 2.25, a 30-year high balance conventional at 2.75% and a jumbo 30-year fixed at 2.875%.
Note: The 30-year FHA conforming loan is limited to loans of $477,250 in the Inland Empire and $548,250 in LA and Orange counties.
Eye catcher loan program of the week: A 15-year fixed at 2.5% without cost.
Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or email@example.com.
Jeff Lazerson - Mortgage Columnist since 2011