House Financial Services Subcommittee on Insurance, Housing and Community Opportunity Hearing
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Introduction
Good morning Chairman Biggert, Ranking Member Gutierrez and other distinguished Members of the Committee. My name is
NCRC is an association of more than 600 community-based organizations that promote access to basic banking services, including credit and savings, to create and sustain affordable housing, job development, and vibrant communities for America's working families.
Members of the Committee, today the U.S. economy is mired in the worst economic crisis in more than a half century and valuation issues remain front and center in the financial reform debate. And while few would conclude the current economic environment is comparable to the Great Depression, today's economy has clearly earned its moniker, the Great Recession. Our housing markets are currently experiencing a self-perpetuating cycle wherein (1) foreclosures drive down home values; (2) sinking home values erode bank assets and household wealth; (3) loss of wealth leads to lower consumer spending and less lending activity by banks; (4) this, in turn, leads to lower productivity; (5) that creates more unemployment; and (6) more unemployment causes more foreclosures. The most dispiriting aspect of the current crisis is that we have yet to meaningfully address the cause of the foreclosure crisis, the core problems that caused the financial system to implode and drove the economy into a ditch.
This is not an equal opportunity recession. Although the national unemployment rate is an uncomfortable 8.2 percent as of May, that rate for African Americans exceeds 13.6 percent, and for Latinos unemployment is now 11 percent. The unemployment rate for non-Hispanic whites, by comparison, remains at 7.4 percent. n1
Because African Americans and Latinos have comparatively few savings, they are poorly positioned to survive a lengthy bout of unemployment. The median wealth of white households is 20 times that of black households and 18 times that of Hispanic households, according to a
Moreover, African Americans and Latinos were targeted disproportionately for deceptive high cost loans and non-traditional toxic prime option ARM loans coupled with home equity lines of credit at 110 to 120 percent loan to value. The result is that blacks and Latinos are over-represented in the foreclosure statistics.
Equally troubling are the following statistics:
* Roughly 11 million homes, 22.5% of homeowners, are currently mortgaged for more than they are now worth. n3
* According to
* Approximately 3.5 million homeowners are behind on their payments (RealtyTrac)
* Nearly 1.5 million homes are already into the foreclosure process (RealtyTrac)
* 3.6 million foreclosures will take place over the next two years n5
The time has come for members of
In
In 2006, NCRC founded
NCRC staff, including myself, personally met with over one hundred public and private sector leaders to request that they voluntarily accept the best practices that we had developed in cooperation with the appraisal, mortgage finance, and securitization industry.
Despite our best efforts, only a handful of responsible appraisers, AMC's and lenders joined the effort. Many industry trade associations actively pushed back against our efforts and preferred to support the status quo that was producing routine overvaluations that often were more than 20% above the actual value. The work of The Center concerning the Code of Conduct was ultimately superseded by the adoption of the Home Valuation Code of Conduct, which has been generally acknowledged by the
Prior to 2008, 60% of all appraisals were ordered by mortgage brokers. n6 Because of this, in 2007, the
The purpose of the HVCC was to prevent
Under the HVCC agreement, lenders were not allowed to use in-house staff for initial appraisals and are prohibited from using appraisal management companies that they own or control. The HVCC encouraged banks to engage third-party appraisal management companies (AMC's), in an effort to keep the appraisal process independent from mortgage brokers, banks, etc. The HVCC also required GSEs to set up a complaint hotline for consumers and industry alike and funded the creation of a new "institute" known as the
Unfortunately, the issues and related "contagion" of greed and malfeasance that inspired the creation of the HVCC at the height of the market, including appraisal independence, valuation fraud, rampant industry pressure upon appraisal professionals, open blacklisting or cherry picking of valuation professionals, and the absence of arms length transactions - coupled with the use of inaccurate and growing reliance on automated valuation systems in refinance lending - continue to infect our markets today even during a time of declining values and conservative underwriting. Instead of "flipping," the practice of overvaluing properties, we now have "flopping," a deceptive practice in which there is instead widespread pressure to undervalue by real estate agents and many Appraisal Management Companies are implicit in the process. In addition, there has been an over reliance on foreclosures as "comps" or the use of broker price opinions. Further, the appraisal industry is in crisis, with respected and expert licensees leaving the trade due to inadequate compensation for the critical valuation services they provide. The answer that many suggest - use inaccurate AVM's and/or create a national valuation database to compensate for the shortage of qualified and licensed appraisers. Compounding this is the fact that a majority of states are diverting revenues that are sorely needed to recruit and train valuation professionals to their general funds. Of course, many of these factors are market driven, but most, if not all, could have been addressed by FFIEC Subcommittee and the prudential regulators if they fulfilled their mandate.
Another core issue that has yet to be addressed is the fact the lenders and specifically end investors, such as
1. Review and define a more modern, robust appraisal reporting process and not accept the Uniform Residential Appraisal Report form by the GSEs but rather to call on the industry to define more robust and standardized reporting that can be tailored to the lending situation. The recent changes by FHFA regarding the Uniform Appraisal Dataset have only added further confusion to the already inadequate mandated appraisal form.
2. Require full appraisals by licensed appraisal professionals for all residential mortgages above
3. The role and impact of Appraisal Management Companies (AMC) must be critically reviewed by the ASC to ensure that they are not negatively affecting appraisal quality and further
4. Appraisal professionals enhance safety and soundness and protect the interests of all the parties to a mortgage transaction--including consumers--and they must be appropriately compensated under any usual & customary fee standard that is developed
5. The banking regulators,
6. While Automated Valuation Models (AVM's) serve as a useful and cost competitive compliance tool and an effective check against fraud, they should never replace the use of an appraisal by a licensed appraiser for all mortgages that exceed
7. There is a need for more effective Consumer Protection, Transparency & Education.
8. Responsible Appraisal Practices Ensure and Expand Housing Opportunities in an
9. Inappropriate appraisal undervaluation is equally damaging to homeowners, communities, the tax base, investors & insurers.
10. States must suspend redirecting funds intended for appraisal compliance, professional development and licensing, to their general funds.
Requiring Professional Appraisals Regardless of What Institution Originated the Loan:
The United States Government Accountability Office (GAO) found in its 2012 report to
The report notes that in recent years, however, the threshold has had limited impact on the proportion of mortgages with appraisals because mortgage investors and insurers such as
While these entities currently dominate the mortgage market, many of the proposed Federal and private sector plans to scale them back could lead to a more privatized market, and whether this market would impose similar requirements is unknown. Therefore, it is NCRC's recommendation to the
Further, the
In contrast, the Guild notes real estate agents, lenders and mortgage brokers are all incentivized by the size of the loan and sale price of the property, which in some cases may prompt participants to advocate that the consumer buy more home then they can afford. Similarly, consumers are encouraged by mortgage or real estate professionals who are more interested in a personal gain than ethical professional practice, to apply for a larger mortgage, refinance, or obtain a reverse mortgage for a larger amount then they need. Of course, we acknowledge that most industry participants are ethical and professional, yet millions of Americans are now upside down in their home due to irresponsible practices across the nation, as is evidenced by the chart below.
This incentive may also lead some of the stakeholders to attempt to influence the appraisal. This undermines the very purpose of an independent, objective and accurate valuation. For the marketplace, investors and insurers, determining the true market value is critical to sustain safe & sound lending. As incentivized players advocate for an inflated value - or, often in the case of short sales or REO today, lower values to move properties off the books of servicers, this leads to riskier lending and compromised protection for the consumer or where there is no equity in the real estate leading to higher loan losses. Alternatively, it also lowers property values in impacted communities and undermines the tax base. The unintended consequences of this tampering behavior are readily observable in that as
Role and Impact of Appraisal Management Companies:
Greater use of AMCs has raised serious questions about oversight of these firms and their impact on appraisal quality. Title XI of FIRREA was enacted to protect federal financial and public policy interests in real estate related transactions by requiring that real estate appraisals be performed by individuals having demonstrated competency in the profession. However, the regulatory framework that developed as a result of the Dodd Frank Act has become more complex, inconsistent from state to state, and is in need of a thorough review by the ASC and the
Despite NCRC's well-intentioned effort of making the appraisal industry truly autonomous, our Center's Code of Conduct and the subsequent HVCC received heavy criticism from industry trade associations and other governmental agencies. Critics of the HVCC were concerned that the HVCC imposed significant changes on the mortgage industry as a whole but still would not lead to an increase in appraiser independence. n12 Today, we must acknowledge that while the HVCC has realized many of its goals to ensure responsible underwriting, some of the concerns may have been warranted as there were a number of unintended consequences as a result of the HVCC including the emergence of AMC's that are owned by lenders and title companies, as well as, expanded use of Broker
AMC's now order more than 80% of all appraisals. n13 The indirect effect of this policy is that the AMC's typically take a percentage of the appraisal fee, as well as, the bank or other lender that owns the AMC, resulting in the individual appraiser being paid less. With little incentive to perform to the highest standards, the appraisers' quality of work has greatly diminished as they are now faced with covering larger market areas and completing more paperwork for less money. The tacit concern is how do the aforementioned affect the homebuyer or seller? With shoddy appraisal work, the mortgage lender is more frequently requesting "second appraisals;" this means that not only is the home buyer responsible for the cost of the initial appraisal (generally a few hundred dollars), they are then responsible for a second appraisal, which requires the appraiser to start from scratch.
NCRC is very concerned that many AMCs are gaming the original intent of the HVCC and now Dodd-Frank, to ensure an arms length transaction and that they are prioritizing low costs and speed over quality and competence even under the scrutiny of the GSE's and the FHA. While there are many responsible AMC's who celebrate compliance with FIRREA, USPAP, and the HVCC and Dodd-Frank, overall, the growing number of complaints from industry and not for profit providers alike indicate emerging compliance and safety and soundness issues that need to be addressed. It is NCRC's position that neither the ASC nor the prudential regulators are adequately supervising the AMCs, the GSE's or the FHA. While NCRC notes that Title XI of the Act places the day-to-day supervision of AMCs with state appraiser licensing boards and requires the federal banking regulators, the
Five years ago professional appraisers would spend a full day or more researching and completing a valuation package on behalf of a lender. Today, many AMC's expect them to produce two or more reports in one day. Valuation professionals are fearful that AMC's and lenders will inappropriately report them to the
Notably, it was also never the HVCC's intent to create AMC's to be appraisal gatekeepers. The ASC should consider recognizing or certifying state or regional appraisal companies as local providers who can serve as AMC proxies in their communities with appropriate national and state rule substantial equivalence. While a number of states began regulating AMCs in 2009, the regulatory requirements vary. Setting minimum standards and a goal of national and state "substantial equivalence" that address key functions performed by AMCs would enhance oversight of appraisal services, provide greater assurance to lenders, the enterprises, and others of the credibility and quality of the appraisals provided by AMCs.
Specific areas of concern that have been brought to NCRC's attention regarding AMC's include 1) Inadequate ASC and prudential regulator AMC oversight; 2) AMC selection of appraisers for assignments who are not familiar with the communities where the property is located; 3) Limited or insufficient knowledge or sensitivity of Federal, State and Local fair housing laws; 4) Review and inappropriate rejection of completed appraisal reports; 5) Inappropriate placement of licensed professionals as a means of coercion on AMC "do not use" lists; 6) Establishing artificial qualifications for appraisal reviewers; 7), Reliance on inaccurate or illegal use of broker price opinions in short sales or other transactions and 8), Paying the appraisers who perform appraisals a fraction of what would fairly be considered a reasonable and customary fee in violation of
Further, many AMCs are directly or partially owned by mortgage wholesalers, large national banks, or title companies raising serious and ongoing conflict of interest questions. These originators cloak themselves behind the firewall of an independent AMC company, but if they own that company, either in whole or as a partial investor, undue influence can be exerted.
Many appraisal management companies are also deemphasizing the critical role and importance of the home valuation checks and balances while profiting from AMC appraisal fees or the up sale and marketing of related settlement products, such as title insurance, filing services, etc.
To quote one NCRC Center advisory board member, "imagine needing a medical doctor and having to go through an intermediary tasked with deciding which doctor you may visit, and that doctor is chosen primarily on his fee charged, not expertise."
In addition to the aforementioned concerns, it is imperative for
The
Compensation for Appraisal Professionals:
The Dodd-Frank Act requires that Appraisal Management Companies (AMCs) pay "customary and reasonable fees" to their appraisers. Responding to evidence that appraisal management companies have been dominating the market and pressuring appraisers to accept assignments with unreasonable requirements and unreasonably low fees, the law specifically prohibits basing fees on the current practices of appraisal management companies.
Unfortunately, the
Appraisal professionals who support the work of the
To quote the
Certainly fees are a component of the issue but so is the fact that the mandated appraisal forms created by the GSEs and widely used have turned appraisers into merely form-fillers. And while the forms accommodate addendum commentary, the FHFA/GSE UAD does not digitize this portion of their appraisal report. Only the first 6 template pages are digitized in the UAD stream for analytics and review purposes.
While NCRC is sensitive to the fact that any new requirement to pay appraisers a customary and reasonable fee could increase consumer costs, we believe that such a result is far from inevitable. Since the appraiser who performs an appraisal is legally required to assume full responsibility for compliance with all appraisal standards under USPAP, the AMCs cannot be adding material value to the appraisal work product. If lenders value the administrative services that AMCs provide to lenders, they should decide how much value such services provide and pay for them accordingly. In most markets, when an appraisal is ordered through an AMC, the fees for the appraisal paid by lenders and ultimately passed on to the borrower, are generally the same as when the appraisal is ordered directly from an appraiser. If lenders value additional services provided by AMCs, they are free to contract for them but such fees should be separated from the appraisal fee and not be the responsibility of the borrower.
There are many in the industry that doubt that the AMCs are generally adding significant value. NCRC believes that the importance of arms length valuation in the absence of conflict of interest is critical, but that the current approach should be improved upon through new rulemaking.
Currently, AMC profits result from under compensating the appraisers who do the work. Further, it is our hope that with greater mortgage disclosure or new substantially equivalent rules for local appraisal companies, AMC's will be prompted to lower their fees in order to make their services more efficient and competitive while ensuring reasonable and customary fees are paid to the licensed appraiser in the community.
In the
Limited Use of AVM's:
The Automated Valuation Model or AVM technology emerged in the late 1990's and was used primarily by institutional investors to determine risk when purchasing collateralized mortgage loans. Given the wavering state of the housing market and economy alike, many mortgage companies, banks, lenders, etc., began looking for ways to cut costs and improve their operational efficiency, leading to the increased use of the AVM in the appraisal process.
An AVM is a residential valuation report that can be obtained in mere seconds. AVMs are statistically based computer programs that typically calculate the value of particular properties using a combination of hedonic regression and repeat sales index data. The results of this are weighted/ analyzed and then reported as a final estimate of value based on a request date. Due to the many limitations of AVMs, the Interagency Guidelines for Real Estate states: "An institution should establish standards and procedures for independent and ongoing monitoring and model validation, including the testing of multiple AVMs, to ensure that results are credible. An institution should be able to demonstrate that the depth and extent of its validation processes are consistent with the materiality of the risk and the complexity of the transaction. An institution should not rely solely on validation representation provided by an AVM vendor. n18 The guidelines illuminate and stress the importance of using AVMs as a supplement to a traditional walk-through appraisal conducted by an unbiased, competent individual appraiser.
NCRC's major concern with the use of an AVM is that the age of the data that undergoes the AVM analysis is not always clear. Many AVMs use transactional data that may lag anywhere from three to six months thus, automated valuation tools cannot clearly indicate the differences between the value of a home in 2005 versus its current value in 2012. n19 Furthermore, AVMs often provide inaccurate reports, as it is possible, in fact probable, for an AVM to come up with a value based on a previous foreclosure sale or short sale, or to produce a value based on a property that was sold to a family member at a price far below the market value-when, in fact, the true value of these homes may be thousands of dollars more. n20
Though AVMs are increasingly being used by mortgage lenders to determine the value of a property in order for them to lend against the valuation, and they present helpful real estate sales data, fraud alerts, and compliance indicators, they will never replace a full walk through, but have the potential to complement a full walk through appraisal. Until "I Robot" becomes reality rather then fiction, 1) An AVM cannot determine whether or not a property actually exists; 2) An AVM does not include the condition of the property which is necessary information for an effective valuation; and 3) An AVM cannot tell a requester if a specific property is located in an area with a declining market or an area that is becoming increasingly more popular.
A Need for More Effective Consumer Protection, Transparency & Education:
While the ASC is charged with developing a new complaint portal, it is targeted at industry stakeholders and whistle blowers. It is NCRC's position that a new and objective consumer complaint process should be developed by the
Responsible Appraisal Practices Ensure and Expand Housing Opportunities in an
The age of homes, predominant value, and use of comparables should be considered very carefully under our nation's fair housing laws.
Age: The age of the housing stock can have a realistic relationship to value. However, it can also be used inappropriately to devalue property based on the residents of the neighborhood. This has been a factor in redlining cases filed against
Predominant value: Like many American markets, the housing market is measured against a norm. Appraisers, underwriters, and even the secondary market prefer that the property in question fit into a recognizable slot. This leads to what many find as a depressing sameness of products - and of neighborhoods. One aspect of valuation is to consider how the property relates to its setting - the neighborhood. To do this, the age, style, and value of the property are compared. When a newly improved property is compared to the rest of the neighborhood, the lower value of the neighborhood can put a ceiling on the value of the improved property, effectively discounting the value of the improvements. This practice can have a negative effect on neighborhood renewal and may also have an impact on a prohibited basis.
Comparables: The comparables should be taken as closely as possible from the same price range, age, and location as the property being appraised. Choice of comparables can have a significant effect on the valuation of the property. Fair housing advocacy groups have alleged that appraisers have chosen comparables to reflect a lower value for the property being appraised.
Inappropriate Appraisal Undervaluation Is Equally Damaging To Homeowners, Communities, the Tax Base, and Investors & Insurers:
Also, NCRC has documented numerous instances where real estate brokers have intentionally undervalued short sale or REO properties in order to facilitate a purchase by a colleague in the same office who later sells it for its true fair market value - aka flopping. NCRC has requested the prudential regulators to address this issue and called upon industry trade associations to police and educate their own members to prevent this troubling activity that inhibits the return of strong real estate markets.
Regarding mortgage servicing and REO, the
The GAO's monthly report notably cites the need to prevent abandoned foreclosures from blighting neighborhoods. This finding has particular resonance in urban and suburban communities were foreclosure is prevalent, such as Metro Chicago,
Last, the issue of AMC undervaluation and rejection of reasonable valuation reports is well known in the building, real estate and appraisal trades, and HUD Certified Housing Counselors are documenting the issue while working with consumers to facilitate short sales in lieu of foreclosure or who are attempting to refinance their existing mortgage. In one recent matter that NCRC documented, an African-American couple who resided in
States Must Suspend Redirecting Funds Intended for Appraisal Compliance,
The GAO reports that most state regulatory entities do not have sufficient funding, staff, or other resources to enforce the basic regulatory provisions of FIRREA. The problem is not a lack of money. The problem is that the states are siphoning off appraiser registration and regulatory funding fees. Appraiser regulatory fees are put into state general funds for other expenditures instead of the enforcement of the federal mandate to regulate real estate appraisers and appraisal activities. This practice must stop.
Conclusion
In conclusion, I reiterate that the time has come for members of
1. Review and define a more modern, robust appraisal reporting process and not accept the Uniform Residential Appraisal Report form by the GSEs but rather to call on the industry to define more robust and standardized reporting that can be tailored to the lending situation. The recent changes by FHFA regarding the Uniform Appraisal Dataset have only added further confusion to the already inadequate mandated appraisal form.
2. Require professional appraisals by licensed appraisal professionals for all residential mortgages above
3. The role and impact of Appraisal Management Companies (AMC) must be critically reviewed by the ASC to ensure that they are not negatively affecting appraisal quality and further
4. Appraisal professionals enhance safety and soundness and protect the interests of all the parties to a mortgage transaction--including consumers--and they must be appropriately compensated under any usual & customary fee standard that is developed
5. The banking regulators,
6. While Automated Valuation Models (AVM's) serve as a useful and cost competitive compliance tool and an effective check against fraud, they should never replace the use of an appraisal by a licensed appraiser for all mortgages that exceed
7. There is a need for more effective Consumer Protection, Transparency & Education.
8. Responsible Appraisal Practices Ensure and Expand Housing Opportunities in an
9. Inappropriate appraisal undervaluation is equally damaging to homeowners, communities, the tax base, investors & insurers.
10. States must suspend redirecting funds intended for appraisal compliance, professional development and licensing, to their general funds.
n1
n2 Kochhar, Fry & Taylor "Wealth Gaps Rise to Record Highs between Whites, Blacks, Hispanics," Pew Social & Demographic Trends.
n3 Corelogic Reports Negative Equity Increase In Q4 2011,
n4 Zillow Negative Equity Report,
n5
n6 Testimony of
n7
n8 Ibid.
n9 "Real Estate Appraisals--Appraisal Subcommittee Needs to Improve Monitoring Procedures." The United States Government Accountability Office (GAO). 2012.
n10 "
n11 Zillow Negative Equity Report,
n12
n13
n14 "The FDIC Suffers a Setback in Case Against Lender Processing Services and LSI Appraisal."
n15 Ibid.
n16 "
n17
n18 Interagency Guidelines for Real Estate. Interagency Guidance, 75 Fed. Reg. at 77, 469.
n19
n20 Ibid.
n21 The United States Government Accountability Office (GAO).
n22 Ibid
Read this original document at: http://financialservices.house.gov/UploadedFiles/HHRG-112-BA04-WState-DBerenbaum-20120628.pdf
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