In one of the more poorly thought out layers of legislation being proposed in Congress to help the housing market and credit problems pertains to the appraisal element within the Homeownership Preservation and Protection Act of 2007. This bill is being championed by US Senator Dodd. The whole concept of bonding the appraiser demonstrates a lack of understanding of how we fit into the lending process.
I’ve touched on this legislation in a previous post about how the act misses the mark because it provides no tangible solution to the appraisal element of the mortgage lending process (emphasis added: no). The legislation seems to be stuck at the moment but I am not so sure how long that will last.
Because I am familiar with the topic (it’s my profession), it really scares me to think of the thousands of pieces of legislation that are crafted in bills by Congress every year that are probably just like this one. I am sure Senator Dodd’s intentions are honorable, but the bill completely misses the issue at hand.
A key concern brought up by this bill is the cost of bonding an appraiser. As if obtaining a bond makes an appraiser suddenly ethical and/or not subject to intensive, economically incentivised pressure?
Since I have never had to obtain a bond, I am not completely confident of my thinking here, but I suspect I am on the right track:
The Dodd legislation says:
Appraisers must obtain bonds equal to one percent of the value of the homes appraised.
Ok, so if I say Miller Samuel appraises $5,000,000,000 worth of Manhattan real estate in a year, that amounts to a $50,000,000 bond (1%).
I couldn’t find any published quotes for appraisal surety bonds, but if we say the cost is 2% of face value of the bond, then $50,000,000 x 2% = $1,000,000. In other words, our firm will need to spend $1,000,000 this year in order to comply with legislation that does nothing to address the problem (insulating appraisers from pressure).
Issue 1: If appraisers wish to remain in business, they will have to pass along the costs to their clients (ultimately the consumer in most cases). Common sense says that most appraisers will be forced out of business or no longer perform appraisals for lenders if this interpretation is correct.
This means I have to pass costs of $1,000,000 to my clients (appraising is a razor thin margin business). That really means I am going to have to raise my fees many times just to break even and I am doubtful that my client base will readily absorb the significant increase in fees. As I mentioned in the prior post, I think this will actually make more good appraisers leave the profession.
Issue 2: Appraisers may have to obtain these bonds individually, not in lump sum as in the example above. Try doing this thousands of times in the course of a year. Additional staffing costs, paper work and time has costs associated with it. Total it up and the bill makes appraisals cost prohibitive and will lengthen the appraisal process.
Issue 3: Appraisers may have to violate their appraisal license when obtaining the bond for each assignment. In order to get mandated coverage, they have to provide the value before doing the appraisal (it’s called “cart before the horse”), a direct violation of the licensing law mandated by Congress in 1989 via FIRREA/USPAP. I would think the appraiser’s value estimate for the bond would error on the high side to make sure the property is covered, adding even more costs.
Admittedly I am not familiar with the cost and process of obtaining a bond so I would welcome feedback and insight on this. I am amazed how little information exists out there. Nothing of significance has been written about bonding appraisers that I am aware of.
Appraising is my profession. Lack of common sense is now my bond.
UPDATE: I have been told that the cost of the bond is based on the prior year’s valuation.
Mr. Miller….Thank you for your comments on this rediculous provision in the Dodd bill, which fortunately has not seen the light of day yet as far as committee hearings go. If I read the bill correctly, the bond would apply to the prior year’s total value of appraised homes. Still, it makes no sense, and threatens to destroy a profession charged with protecting the nation’s mortgage values. Please send your comments to the members of the Senate Banking Committee, of which Sen. Dodd is the chair.
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The idea that an appraiser’s work should be sufficiently reliable to support a bond is fine with me whether we are talking character, ability or another essential ingredient of our product. It is obvious that residential mortgage appraises can’t absorb the cost of bonding and have absolutely no way to pass the cost on to their clients. The clients will not permit it. What is ridiculous is the idea that appraisers are charged with “protecting the nation’s mortgage values.” That thought must be ripped out by the roots and discarded. We are not the cops, are not paid to be the cops and don’t have the equipment to be the cops. I’d be satisfied if the profession would just wake up and focus as much on training its own to appraise real estate as it does on encouraging competition in business.
Another sleeper in the bill is this standard “true market value.” What is that? Where is it found? Is it something some appraisers have access to and others do not? It seems it would be better to require appraisers to subscribe to “true market value” than pay for a bond.
I tried to tell the Senator what is wrong with appraiser bonding. Your turn.
Mr. Miller, As a real estate construction and and property management professional I can assure you that I deal all the time with legislations regarding my own industry which are crafted with good intentions but don’t work in real life. As a country we keep passing good and bad laws in all areas of life but can’t tell the difference between laws that help and laws that just complicate life for nothing while sucking on our pocketbook.