Appraiser's Blog

Everyone knows the Dodd-Frank Act will supersede the HVCC.  Let’s face it, the HVCC (Home Valuation Code of Conduct) was a sum total of six pages long; it was never intended to dictate systemic appraisal guidelines.  It wasn’t a robust agreement, but those six pages permanently changed the face of our industry for the better.  The newest legislation - with over 60 pages dedicated to the appraisal industry - is sure to identify countless pain points that the regulators, AMCs, and independent fee appraisers will argue out until enforcement measures have been defined, right?  Wrong!  It seems there is only one aspect of the bill that has captured ALL of the industry’s attention…Every conversation about the newest wave of legislative changes circles like a shiver of sharks around the reasonable and customary fee discussion.  With that level of laser like focus on the topic of fees, even with countless other major changes outlined within the legislation, one starts to realize this may be a topic worthy of further analysis. 

So we’ll explore the legislation as it has been written into law, trying to give definitive guidance on the most probable implications.  How you interpret the legislation directly correlates to where you fit within the industry.  As an independent fee appraiser, your interpretation of the legislation is likely to result in a conclusion that is biased towards what would most positively benefit you.  AMCs will likely see it differently, giving thoughtful consideration to elements of the bill that favor their position.  In order to come to a reasonable and impartial opinion, we’ll have to examine both sides of the argument.  Only then will we be able to accurately define how the legislation should be enforced and what this means for all interested parties.

Concepts

The word reasonable can be defined as an implication of appropriate behavior as it pertains to a particular situation.  A few definitions as outlined within the American Heritage® Dictionary define its meaning as “capable of reasoning; rational; being within the bounds of common sense and not excessive or extreme; fair.”  Collins English Dictionary describes reasonable as “having modest or moderate expectations; not making unfair demands; moderate in price; not expensive; fair; average.”  In each case, the word implies the use of independent judgment.  Employing individual or even jurisdictional reason in concluding best practices is subjective by its very nature.  So how will we as an industry ever decide on what constitutes a reasonable fee?   

Use of the word customary is somewhat less subjective than its successor in the legislation, but its intent is still open to interpretation.  The American Heritage® Dictionary defines it as “commonly practiced, used, or encountered; usual; based on custom or tradition rather than written law or contract.”  Can customary fees be determined by conducting academic research studies focused on the topic?  The answer will depend greatly on the quality of the data obtained and the methodology employed when writing the rules. 

It may seem somewhat rudimentary to include definitions of the words “reasonable” and “customary” in this examination, but this language will likely lead to enforcement based on how the associated words are defined and ultimately interpreted.  The agreed upon methods that will be used to ascertain if a $200 fee for a URAR is unreasonable have been leveraged in other fields for some time.  For instance, the medical profession has guidelines for fees that would be considered customary and reasonable based on the type of procedure a given patient needs.  The concept isn’t new or revolutionary; it is in fact an old hat.  That being said, this will be a long standing point of contention between the independent fee appraisers and those engaging appraisers for collateral valuation.

Factors

Should customary and reasonable fees be considered a static concept, failing to move in unison with the greater economy?  Is the cost of an appraisal today going to remain the same tomorrow, once a determination of what is customary and reasonable has been made?  Prior to the HVCC (Home Valuation Code of Conduct), residential appraisal fees hadn’t been dramatically affected in the aggregate for almost as long as I’ve been in the industry (my memory isn’t quite what it once was, so weight this commentary accordingly).  That being said, I’m certain the cost of a gallon of gas or a gallon of milk has increased incrementally over that same period of time.  Are we now to assume the price of an appraisal will rise in tandem with the rate of inflation?  Maybe it will be based on quality in the near future.  The pendulum does appear to be swinging in that direction.  For the first time in countless years, quality is being included in the valuation services provider selection process.  This may bode well for independent fee appraisers as they continue their quest for fees they themselves deem to be customary and reasonable.  

What will be the deciding factor for those regulating appraisal fees?  I’ve often thought of the difficulties we as appraisal services providers have when determining fee schedules for the lender/clients of the world.  There is no hard and fast way for me to grasp the potential pitfalls our organization may encounter during the appraisal process.  It’s very plausible that our fees, as provided to the client at the relationship’s inception, will not cover the cost associated with facilitating that particular assignment.  Fees have been, are now, and will forever be moving targets.  Appraisers will gather together and caucus on this topic long after the rules have been written, but clarification will prove to be an elusive beast. 

It would be foolhardy of me to think lenders, AMCs, and independent fee appraisers will find common ground on this subject.  That being said, can we at least agree consideration should be given to the product type, property location and the assignment complexity when deciding on what constitutes “customary and reasonable?”  That last question is probably rhetorical…

I was discussing this topic with a colleague recently and we both agreed there are some analogous scenarios that should be included when attempting to expound on this subject.  Most of us have worked for other appraisers at some point during our careers; at the very least, we all worked with supervisory appraisers when accumulating the hours necessary for certification.  In this environment, a fee split was customary, the percentage oftentimes being based on the appraiser’s level of seniority within the organization.  Did you ever expect your company or supervisor to pass the entire appraisal fee on to you?  I’m guessing not.

Not to digress in a protracted sidebar, but the same point can be made for the AMCs that occupy the market space.  They are in fact providing you-the independent fee appraiser-a service.  Actually, they are providing a number of services.  AMCs market, collect, pay, review, and facilitate on the fee appraiser’s behalf.  Sounds a lot like the services provided to you when working with/for another appraiser, right? 

Perspective

Fee Appraiser

Let’s look at this from the independent fee appraiser’s point of view.  As a group, they have been dealing with some major changes over the past couple years.  First, the previously booming real estate markets fell off a cliff, and then they got regulated out of accepting work from broker/banker relationships they’d developed over years.  

In order to survive, fee appraisers have been forced to expand their coverage areas and reduce their fees.  These have been tough times for most, but the appraisers made the necessary changes to ensure mitigation of their revenue losses through increasing their market share.  This widespread reaction from a notoriously amorphous group is proof positive that fee appraisers had few viable options left to consider.

Knowing what the fee appraisers have experienced in the recent past gives us perspective.  As industry leaders, we have to acknowledge their concerns and support the collective.  I have to refer to an “Ism” that our organization (TSI Appraisal Services®) lives by – “We are the They”.  This is just one of many guiding principles that make up the DNA of our family of companies, but it is the part of our culture I find myself reflecting on most often.  It is also directly applicable to this subject.  When the independent fee appraiser is adequately compensated, they are more likely to buy in to the process.  I would expect the appraiser’s level of engagement would increase in correlation with a customary and reasonable fee.  Might this lead to higher quality appraisal reports?  Only if the industry focuses on regulating quality at a disproportionately high level compared to an appraiser’s turn-time and fee structure. 

AMC

From the AMC’s perspective, the topic will either send shivers down your spine or give you the warm fuzzies, depending on your business model.  As a valuation services provider, the challenges are equally as daunting.  The costs associated with managing the appraisal process successfully are significant.  For those of us that are paying a commensurate wage, the margins are razor thin to begin with.  This is not garrulous commentary; it is in fact germane to the topic.  Managing income to profitability should be squarely leveled over the shoulders of an AMC’s leadership, not on their appraiser panel.  I’m not suggesting that we adhere to a minimalist philosophy.  Whatever fees are decided on must make sense to all affected parties. 

The fee appraisers are the lifeblood of an AMC.  It’s a symbiotic relationship, each being mutually dependent on the other.  This shouldn’t have to be restated for effect, but it hasn’t always been communicated effectively from the AMC to the fee appraiser and vice versa.  As a valuation services provider, I rely heavily on the appraisers we employ to provide feedback from their perspective.  I expect the same collaboration when attempting to define what the market perceives as a customary and reasonable fee.  Prohibiting the AMCs from participating in the academic studies that will be used to determine appropriate fees is concerning.  If 70% of the valuation services being facilitated today are driven by AMCs, how can we exclude them from the discussion and hope to arrive at statistically meaningful conclusion?  Can we canvas <30% of the industry and come up with enough data to derive a fee baseline and acceptable tolerances?  I think not.

Conclusion

This is going to get contentious!  But a little “revolution” and spirited discussion may actually prove to be a really good thing.  Moreover, let’s take this opportunity to become more cohesive as an industry and attack this issue to the best mutual satisfaction of all interested parties.  

The first thing we must “come to grips” with is admit no perfect solution exists.  There is no proverbial silver bullet!  Appraisers will want to be paid more, lenders will want the lowest fees for market competitiveness and the AMCs desire a stabilization of an ever changing fee schedule.  The mortal sin would be for all to sit on the sidelines and continue our fragmented sniping and do nothing at all.  It is imperative we formulate a game plan which affords every opportunity for input and debate.  I would propose identifying and agreeing on a central body that would act as the gatekeeper for information and input.  It could emulate the “comment period,” during the HVCC discussion and debate.  The key would be the ability to have open access to submit your ideas and assemble a think tank group comprised of individuals representing each of the vested industries.   This group could filter and synthesize both the data and questions from the masses, to ultimately produce a forum for further comments, Q & A, and actions items.  The key is transparency.  We should all have the opportunity to review the findings that will be used as guidance for those promulgating fees.

This is an imperfect process that is ambiguous by design.  That is actually the greatest gift the legislators could have given us.  As an industry, we have been empowered.  Collectively, “we” will drive the process.  The decision of what is customary and reasonable has ultimately been left up to those participating at the ground level.  We can all be involved, even if we begin by creating ad hoc committees to cull through the data that will be provided to those responsible for writing the regulatory guidelines.  This is our chance to do the right thing.  That’s our organization’s motto.  We focus on doing the right thing, so too should the regulators that are charged with defining the indefinable.  At the end of the day, I will simply ask that we all take the highroad and agree on a reasonable and customary method for defining what is customary and reasonable!