New Bill Would Ban All Settlement Cost "Markups"

[Francois K. Gregoire]

Hi All,

Interesting article by Ken Harney on the Realty Times site.

Real Estate Settlement Fairness Act

 

[Caterina Platt]

Knowing that there is often a direct relationship between legislation and the largest $$ and lobby (lenders), I won't hold my breath. I will, however, write my congress people urging them to support this bill and encourage all others inclined to agree with this to do the same. We can only try, right?

 

[JM2187]

And once this passes the next logical step will be to mandate that the local appraisal office does the same thing, right?

If you don't inspect the property and co-sign the report you can't split the fee without disclosure.

On a side note I just discovered my local convenience store is marking up the price of Pepsi. They pay less than half what they charge me! Time for a new law...

Joe

 

[Caterina Platt]

Joe,

I have not personally worked for your firm, but have heard positive feedback from others who have. My beef with the AMC setup has much less to do with the basic 'distributor of needed services' idea. I agree to a point with your analogy, and if your firm and all the other AMC's operated strictly to put buyers of services and sellers of services together, there would not be a problem.

Your Pepsi example, suppose the distributor decided that the going price for Pepsi directly from the source was the best the market could bear. The distributor would then need to negotiate a far lower acquisition cost from the source (wholesale), then recoup his profit through the markup (retail). If the manufacturer decides this can be accomplished, cost cutting measures need to take place to maintain a viable business. A real estate appraisal cannot be manufactured in the same manner as a soft drink. Each product has it's own research, issues, and considerations. Each report is unique and cannot be manufactured in an assembly line fashion to reduce costs. Thus, your product loses it's quality in an effort to cuts costs and production time. This aspect only applies to those AMC's that will pay the appraiser a fee that is typically 50-60% of the normal rate. If the bundle of services theory truly saves the lender time and money, is he increasing his profits? Yes. Is the distributor increasing his profit? Yes. What is happening to the provider of services? He is asked to cut his profit, increase his work load, reduce his output time, cut corners, and increase his liablity exposure for less money. If the appraiser can still make somewhere near a real fee, this problem would not occur. Our operating costs are not decreasing. E&O, phones, technology requirements, taxes, etc. are all taking larger chunks of us each year. So everyone in the picture is making more at the expense of the appraiser. :evil:

Further, my main beef. The Pepsi distributor decides that he will require the delivery of the product be through a specific method so that he may distill it's ingredients, know the recipe and eventually produce his own soft drink without the need for the original manufacturer. (ie. comps and data mining to produce AVM's).

Would the softdrink company stand by and allow this to happen to themselves? No, of course not. Why should the appraiser be expected to?

 

[JM2187]

Caterina,

What is the difference between the owner of a fee shop taking a split of the fee, versus a management company? Should the client be notified of every expense associated with providing reports? Toner, paper, express mail charges, computer equipment, employee expenses, phone charges, etc., etc.? Very quickly it's obvious that this idea becomes ludicrous. Do I care what the Pepsi cost the store? No. Do I care if they want to charge me too much for it? Yes, if I can buy the exact same thing for less somewhere else I'd be foolish not to.

My perspective is that appraisers cannot focus on fees and fees alone and expect any positive changes. Laws like this one will simply make the job harder and more expensive to do, and who is going to pay the price for it?

I've said many times that I believe the first priority has to be pressure on the state boards to enforce the existing laws, to get rid of the "make the value" as well as the obviously incompetent appraisers out there, and to focus on educating appraisers, promoting professionalism and ethics. Currently there is no way for a user of a report to even trust the appraiser who signed a given report without having some history with that individual. Licensing, designations, years of experience, fees, none of these are a guarantee of good quality work.

In regards to the “mining” of reports for AVM’s, is this even happening anywhere? Tax information is available for free (see http://pubweb.acns.nwu.edu/~cap440/assess.html) and in many counties includes the entire data set, not the random information that would come back with a sampling of appraisals. And the amount of available data grows each year. In my county not only is complete property information available (subject GLA, age, room count, sales history, etc.) photos of every home are online. For free.

Joe

 

[George Hatch]

Joe,

Since you asked...

It has long been federal regulation that a lending institution is not supposed to earn a profit outside of the primary services that they are providing, namely taking deposits and making loans. The whole reason AMCs evolved was so that a lender could move their in-house appraisal staff from being an (at best) break-even department to a separate profit center, ostensibly separate from the lending institution itself but actually still owned by the lender or their holding company. Voila, the AMC inserts themselves into the appraiser/client relationship and 'earns' a significant portion of the appraisal fee in exchange for basically nothing. Kinda reminds me of the slight of hand practices currently being attributed to Enron selling power to California.

Comparing mortgage lending services with general retail goods and services is interesting, but is not quite applicable. The federal and state governments have long exercised regulatory authority over certain types of commerce. Securities, insurance, telecom and consumer lending, to name just a few. These specialized regulations fall outside the laissez faire give and take of the free market. Truth is, making a loan is effectively a lot different than retailing sodas.

I don't think that comparing an AMC to a regular fee shop is applicable, either. The IRS has already decapitated the concept of independent contractors in a fee shop, except under very strictly defined conditions. As a result, most legitimate fee shops now have employees, not vendors. Such a company would have no trouble with the proposed regulation. Those few that still have independent contractors will have to change their organization to be like every other fee shop. Doesn't matter much in a practical sense. A deficient appraisal from a fee shop is generally attributed to the fee shop because one of the principals always countersigns. The fee shop thus has to supervise and take responsibility when things go badly. In other words, a fee shop actually earns its portion of the fee by providing a real service. Not so with the average AMC.

So this would only affect an AMC or other 'service bundler' using vendors and providing no true service or product of its own to the consumer. If this goes through, an AMC will only be able to exist by having employees, providing some extra service or product, and then taking some responsibility for their product. Just like any other company providing any other service. The only entity this would adversely affect in the long run is a company that profits off of the efforts of others without taking any responsibility or providing any significant services of its own. No more easy 40% splits.

Joe, I've always been curious and I genuinely don't know the answer to this question. How did your company get its start? Did it start out as a fee shop and then get big by soliciting bigger and bigger clients? This would put it in the minority among AMCs. Or, as in several other notable cases, did it start out as an in-house operation for a lender? Does your AMC have a parent company and, if so, does that parent company own any banks?


George Hatch

 

[Joe Birrell (NY)]

Wow, those postings are better than an a economics course at Harvard (and a hard act to follow, I might add). Here's my 2 cents worth - large coporations view everything as being the equivalent of "selling soda pop" - they like the concept of uniformity, labling, exact ingredients, one size fits all, one price, big profit margins, instant gradification, and a 1-800 number. Therefore, AMCs have great appeal to large nation lenders.

The fact that they were started by appraisers is the thing that irks me (thinking of the early days of Lenders Services). What was his name ? Carl somebody or another, he was also in on the FIRREA debacle back in the 80's, when the great "sell out" was being planned. Nothing personal, just ranting. I think I'll get back to work now, a full fee.

 

[JM2187]

The history of AMC’s is generally traced back to credit reporting companies (one in particular) that expanded their services to eventually include appraisal and title products in the 1980’s. Lenders had traditionally done this work “in house” through branch offices (many still do) however as lending grew nationally the need for professional management grew significantly. Today, obviously, there are at least a dozen large management companies, some that are subsidies of larger lending instructions, and some that are not. I believe that there is a huge difference between a lender mandating the use of their subsidy AMC to acquire a loan, as opposed to the assignment of an appraisal request through an independent company based on their quality and service, something this law does not address.

I really think appraisers and regulators need to become more educated about what actually goes into making a successful management company work. You’ve stated: “If this goes through, an AMC will only be able to exist by having employees, providing some extra service or product, and then taking some responsibility for their product,” and “…a fee shop actually earns its portion of the fee by providing a real service. Not so with the average AMC.” How are you defining “real service?” My company offers a single point customer service, on site representatives, spreadsheet reporting, 100% EDI delivery, quality review, 24/7 online reporting, and these are only a few of the services that tie into each order. These have no value?

In order to be successful we need to have a staffing that is up to date on USPAP, Fannie Mae, FHA, as well as the appraisal and title regulations for every state. We have to keep up to date on every approved appraiser’s license, have to pass client audits, and realistically have to be better informed about the appraisal and title industry than any one client or appraiser. None of this is easy or cheap. National lenders demand high quality and service, and for all the bashing that goes on about AMC’s, I’ll stack our product up against any other ordered direct from the same number of appraisers in terms of service, quality, ethics, and price. I see the work completed outside of a management structure and frankly it’s very poor.

“A deficient appraisal from a fee shop is generally attributed to the fee shop because one of the principals always countersigns.” Not true. Most reports I see from larger shops are not co-signed, although possibly this is due to our policy of not accepting work from trainees.


Nationwide Appraisal Services was founded in 1994. The original staffing included appraisers as well as appraisal and title professionals, created for the purpose of providing appraisal and title services for national lenders. Nationwide is not affiliated with any lender, has no parent company, and does not own any banks.

Joe

 

[Dee Dee]

Most of us have had to contend with lenders who twist our arms for lower fees, only to find out that they've tacked on an extra $50-$100 onto the appraisal fee in the homeowners/borrowers closing costs. The cheaper the appraiser, the higher the profits for lenders who hire them. Very few will pass the discount on to the borrowers.
I think we all should be hoping that this practice is eliminated. Not only is it more fair to the consumer, but it also may help to cull out some of the riff-raff appraisers who are hired solely for their low fees rather than their ability to do the job in the most professional manner.

Joe,
Keep in mind that if you don't like the cost of Pepsi at your local convenience store you have the option of going to Sam's Club and buying it for a price that is more fair, and you would be furious if someone told you that you didn't have that choice.
Borrowers don't have that freedom because the lender chooses the appraiser that they are willing to use. The price for appraisal services are insignificant compared to the bigger financial picture in a loan package, so it's easy for a little padding to be added by the lender. I resent that the consumer is being misled into believing that I'm getting the entire amount quoted in their closing costs.

 

[JM2187]

The borrower always has the option to go to a different lender.

Joe