Rapid growth in home prices is likely to continue for some time. The most recent quarterly Zillow Home Price Expectations Survey, conducted by consulting firm Pulsenomics LLC, showed an average prediction for annual appreciation in 2013 of 6%, down from 6.7% reported in the previous survey in August. While the economists, market and investment researchers, and real estate experts surveyed expect appreciation to slow in 2014 and beyond, the survey mean still predicts above-average home price appreciation through 2018.
In a previous post, we discussed how inflated appraisals can contribute to unsustainable growth in home prices. This post discusses some of the regulatory changes in the appraisal and mortgage underwriting industry that are being implemented to help reduce these problems.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was intended to promote the financial stability of the United States by improving accountability and transparency in the financial system. Some of the Act’s reforms contained in Title XIV, the Mortgage Reform and Anti-Predatory Lending Act, should increase the reliability of appraisals by requiring the following industry changes:
- Creditors must obtain appraisals based on physical site visits before issuing a high-risk mortgage. In some cases, a second appraisal may be required.
- Borrowers must be provided with a free copy of any appraisal reports.
- As of July 1, 2013, state licensed appraisers must meet or exceed the Appraiser Qualifications Board (AQB) qualifications.
- New Appraiser Independence Regulations prohibit coercion and conflicts of interest, clarify allowable communication, and require “reasonable and customary compensation” for appraisers.
- Appraiser misconduct must be reported to state appraiser licensing authorities.
- The Appraisal Subcommittee (ASC) has a new consumer protection mandate, including auditing state agencies’ regulation of appraisers and establishing a National Appraisal Complaint Hotline.
- New minimum standards and ASC oversight will be implemented for appraisal management companies (AMCs).
- New quality control standards are mandated for automated valuation models (AVMs).
- Broker price opinions (BPOs) may not be used as the primary basis to determine the value of a home.
- A problematic industry agreement known as the Home Valuation Code of Conduct (HVCC) has been retired after implementation of the Federal Reserve Board’s interim final rule on appraisal independence.
AMCs aren’t new, but they did gain a larger share of the appraisal business when the HVCC was implemented. Critics claim that these middlemen often take a sizable cut of appraisers’ fees and sometimes send appraisers on assignments to properties far from the neighborhoods they know well. Because of Dodd-Frank, the ASC will eventually monitor the States’ regulations of AMCs and maintain a National Registry of AMCs that are either registered with and subject to supervision of a State agency or are operating subsidiaries of a federally regulated financial institution.
Lenders and their agents (i.e., AMCs) are now required to compensate fee appraisers at a rate that is “customary and reasonable for appraisal services performed in the market area of the property being appraised.”3 In addition, the amounts paid to the appraiser and AMC will be disclosed as separate items on the HUD-1 settlement statement, which shows the closing costs of a real estate transaction. However, there is still considerable confusion about how to determine whether a fee complies and how this rule will be enforced.
Title X of the Dodd-Frank Act created the Consumer Financial Protection Bureau (CFPB) to regulate consumer financial products and services and establish new federal rules to implement many of the Act’s reforms. Many of these rules are still being developed and/or have not taken effect yet, so the industry will still see many changes. Future posts in this series will discuss some of these other changes.