Proposed CFPB Rule Requires Lenders to Provide Free Appraisal Reports
New Rule Intended to Help Inform Mortgage Applicants of How Value Is DeterminedÂ
The Consumer Financial Protection Bureau (CFPB) released Wednesday a new proposed rule that would require mortgage lenders to provide home loan applicants with appraisal reports to determine how the value of a property was determined, reports Tory Barringer at DS News, an outlet that focuses on the mortgage default servicing industry. CFPB proposed the rule in response to a provision of the Dodd-Frank Act that requires creditors to provide mortgage applicants with a copy of written appraisals and home value estimates. The newly-proposed rule would require that creditors inform applicants of their right to receive a free copy of appraisal reports and home estimates.
â€śWhen looking to buy a home or refinance a mortgage, consumers need the best available facts and data,â€ť said CFPBÂ director Richard Cordray. â€śThis rule would guarantee consumers receive important disclosures on how a lender determines the value of the home, making it easier for loan applicants to make informed decisions.â€ť
Consumers are usually charged for the costs related to conducting appraisals. Currently, consumers must request appraisal reports from creditors, and they are sometimes charged a fee to obtain a report.
Under the proposed rule, creditors may still charge reasonable fees associated with conducting appraisals to assist in lending decisions. However, they may not charge fees for providing a copy of an appraisal report.
The proposed rule is open for commentary until October 15, at which point all comments will be reviewed and considered before the final rule is issued in January 2013.
JD SupraÂ providesÂ â€”Â neatly bulleted and without commentaryâ€” Â perhaps the clearest simple enumeration of the new CFPB proposals. Â Â
The proposals are Â receiving mixed reviews. Â Policy Shop, the blog run by left-leaning Demos, the organization that in the last year welcomed Van Jones (former Obama Green Jobs Advisor) to its board of trustees and Bob Herbert (former NYT columnist) as a fellow, notes the development with this post from David Callahan: Â Â No More Bogus Numbers? How Dodd-Frank Will Reduce Appraisal Fraud:
Washington is finally moving to better regulate the real estate appraisal industry, with regulators yesterdayÂ proposing new rulesÂ to strengthen appraiser independence.
It’s about time.
Seven years ago, when the housing bubble was still inflating, I wrote aÂ report for DemosÂ on the growing epidemic of appraisal fraud. Residential real estate appraisers, I reported, were being routinely pressured byÂ mortgage brokersÂ to inflate their estimates of home values — to “hit the number” needed to make a loan happen.
Appraisal fraud helped to fuel the go-go housing market and is one reason why so many homeowners ended up so deeply underwater. With appraisers signing off on bogus numbers, people could borrow more than their homes were worth, especially through refis.
The appraisers themselves weren’t the problem; most wanted to do their jobs honestly. Rather, appraisers found that if they didn’t come back with inflated valuations, or otherwise play ball, they could be blacklisted by brokers or not paid for past work.
This was yet another area where lax regulation made the mortgage crisis possible. The appraisal industry was overseen by a patchwork of government agencies that varied widely, often from state to state, in their capacity to enforce standards. And it was also difficult to sanction the mortgage brokers who were bullying appraisers.
National Mortgage News’ Paul Muolo, on the other hand wonders: Â Will the CFPB Destroy the Broker Industry?Â Â
Itâ€™s no secret thatÂ loan brokersÂ donâ€™t trust theÂ Consumer Financial Protection Bureauand feel the young agency is out to destroy their way of life and turn it over to the banks. The biggest complaint I hear is that hardly anyone at the CFPB has worked in the front lines of residential finance as aÂ mortgage loanÂ officer, broker, underwriter, take your pick. Next week (or the week after) the agency will finally issue its LO compensation proposalâ€”then the comment period and lobbying begins. The agency has many “point men” on LO comp, but the name we keep hearing isÂ Paul Mondor,Â a formerÂ Federal ReserveÂ official. Currently theÂ National Mortgage NewsÂ has coverage on its website about the topic. VisitÂ www.nationalmortgagenews.com.
We reported Friday that at least one wholesaler,Â Franklin American, will only use a “lender paid” compensation model for its brokers. As one reader noted:Â â€śItâ€™s not the loss of borrower paid, it’s the fixing of one premium on “lender paid” that going to killâ€ť brokersâ€¦
If the CFPB makes brokering impossible, how many brokerage shops can afford to convert into a mortgage banking firm? The capital requirement is currently $2.5 million, while rumors persist that it may be hiked to $3.5 million over the next few years. The net worth requirement is set byÂ Fannie Mae,Â Freddie MacÂ andGNMA/FHA
The Tampa Bay Times, reporting last year on the issues the new CFPB regulations are meant to address, in an article title Low Appraisals Blamed for Scuttling Real Estate Deals tells the story of a couple who almost completed a deal before an appraisal came in that quashed it. Â “Appraisals routinely come in under the negotiated sales price, often driven down by the glut of foreclosed houses and short sales with rock-bottom prices,” the article states:
Â Christopher and Susan Capetz put their St. Petersburg home on the market in April after spending $11,000 on a roof and an air conditioner.
In July, they gladly accepted a $142,000 offer. But the sale fell through after the appraisal came in at just $130,000.
The Capetzes fault the appraiser.
“It all hinges on one person,” said a disappointed Christopher Capetz. “What if that person was in a bad mood that day? It seems like a broken system. It’s a roadblock.”
Experts say the Capetzes’ experience is a cautionary tale. Appraisals routinely come in under the negotiated sales price, often driven down by the glut of foreclosed houses and short sales with rock-bottom prices.
And like the Capetzes found out, would-be sellers should think twice before pumping cash into upgrades or a remodeling project. There’s no guarantee that appraisers will value them as highly as buyers and sellers, a fact that scuttles deals.
Frank Gregoire, a St. Petersburg Realtor and appraiser who headed the Florida Real Estate Appraisal Board for eight years during the housing boom, advised sellers to stick with new paint and carpet.
“If you make a major improvement, you should expect to enjoy that improvement. Don’t treat it as an investment,” he said. “It’s unlikely you’ll get what you paid for it.”
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The National Association of Realtors says low appraisals are killing deals across the country. An August survey of the group’s members found that 11 percent saw contracts collapse and an additional 13 percent saw prices negotiated downward because of low appraisals.
Distressed sales take only part of the blame for declining home values.
Homeowners, buyers and real estate agents point an accusing finger at appraisers. They helped create the housing boom, the critics say, by working with mortgage brokers and real estate agents to deliver unrealistically high appraisals.
The subsequent crash led to new federal regulations that prohibited lenders from dealing directly with appraisers. An unintended consequence, according to critics: The appraisal process has become far less thorough.
New Rules on Appraisals are Proposed by the CFPB
Bankrate’s Mortgage blog, on the other hand, fully approves, opining: “If only these rules had been in place seven or eight years ago. Better late than never.” Â
City Journal is skeptical:
The CFPB is equally unlikely to make tough, simple rules in another area under its control: home mortgages. In the three decades leading up to 2007, mortgage debt exploded, quintupling (after inflation) even as the population grew only by a third. Thatâ€™s a real crisisâ€”the one that led to the 2008 blowup, in fact. So Congress invested the CFPB with the authority to write a rule that will require banks and other mortgage lenders to offer home loans only to borrowers likely to repay them.
But what kind of rule, exactly? One that requires home buyers to pay a minimum-percentage down payment would be a simple, effective option. People who have been able to save, say, 10 percent of a houseâ€™s value demonstrate financial discipline. Further, a family that has equity in a house can refinance easily to get out of a bad mortgage; such a family also has the flexibility to move, if a breadwinner has the opportunity to take a better job in another city or state. And creating a minimum down-payment rule would be fast and easyâ€”a major benefit, since continued uncertainty about financial rules is contributing to banksâ€™ reluctance to lend and thus to todayâ€™s sluggish economy.
Yet the CFPB almost surely wonâ€™t take such an obvious step, and again, the fault lies with Congress. The Dodd-Frank bill didnâ€™t specify a down-payment rule because such a rule would push house prices down furtherâ€”anathema to Congress. Moreover, a down-payment requirement would run afoul not only of Americaâ€™s debt-carrying middle class but of the affordable-housing and minority-group advocates who want poorer Americans to enjoy the same dream of indebtedness that the middle class enjoys. As Orson Aguilar, executive director of the nonprofit Greenlining Institute, puts it, any mortgage rules that would require homeowners to have a good job, good credit, and a hefty down payment are â€śproblematic.â€ť
So Dodd-Frank, instead of imposing minimum down payments, instructed the CFPB to tell banks to lend only to borrowers with the â€śability to payâ€ť the mortgage back. Such a rule sounds good, but it crucially depends on how the CFPB defines â€śability to pay.â€ť A family that canâ€™t afford an overpriced house in practice may neverthelesstheoreticallyÂ have the â€śability to payâ€ť for itâ€” if the family never takes a vacation, never allows a spouse a few years off to care for a small child, never invests money for retirement, and so on. If banksâ€™ lending criteria are that loose, mortgage debt could rise instead of fall, and homeowners could remain locked into an overvalued housing market for decades to come.
Mortgage debt exemplifies yet another problem with the CFPB: in some of the areas under its jurisdiction, itâ€™s outmatched. The CFPB has no jurisdiction over the government-controlled mortgage merchants Fannie Mae and Freddie Mac, which (along with smaller government agencies) are now responsible for most home lending. Nor does the CFPB have any control over the tax code, which encourages indebtedness by letting mortgage holders reduce their tax burden as they increase their debt burden. Similarly, the CFPB canâ€™t fight the Federal Reserve and the Federal Housing Administration as they continue to entice Americans into a still-plummeting housing marketâ€”the former by indirectly setting todayâ€™s low mortgage rates, the latter by insuring mortgage loans even when theyâ€™re backed by tiny 3 percent down payments. Finally, the CFPB has no authority over the real-estate industry itself. Even the simple, one-page mortgage agreements that Elizabeth Warren has long touted will be no protection against an effusive real-estate broker who insists that home prices have nowhere to go but up, so just ignore those warnings.
The Wall Street Journal reportedÂ just last monthÂ that the housing market has finally bottomed. Â Â
Last year, Inc. reported that opportunities in the appraisal industry are growing. Â