A Loos Blog

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On September 18, 2009 FHA published Mortgagee Letter 2009-28 entitled “Appraiser Independence. “  The letter reaffirms existing regulation and creates new rules regarding the appraisal process.

The rules take affect January 1, 2010.

In this letter, the FHA:

• Adopted the HVCC rule that commission based loan sellers can not be a party to appraiser selection or appraiser ordering.  
• Makes the lender responsible for assuring the appraiser who actually performed the appraisal is correctly identified in the appraisal order on FHA Connection.
• Reminds the mortgagee that they are responsible for the quality and accuracy of the appraisal (not the third party appraisal management company.)
• Reaffirms the 1996 rule prohibiting undue influence on the appraiser by any party.
• States that fees paid to the appraiser must be reasonable and customary for the market. 
• States that the service fee charged by an appraisal management company may not be deducted from the fee paid to appraiser for the performance of the appraisal. 
• States that the appraiser is allowed to publish the fee paid to the appraiser in the appraisal report.
• Reminds the appraiser of the USPAP rule requiring competency in both the type of property being appraised and in the geographic area in which the appraisal is being performed. 

It is not surprising the FHA adopted the HVCC rule that commission based lenders can not order or manage appraisals.  It is unfortunate that the few bad apples spoiled the barrel, but in reality this was a crisis on a national scale and in the end the Feds had very few alternatives.

The FHA seems to be expressing a high level of disapproval in the current use of appraisal management companies (AMC.)  The rule that allows appraisers to publish the appraisal fee in the report is almost shocking in its clarity, and is clearly a cannon shot over the bow of the good ship AMC. 

These new rules will be a challenge to the appraisal management companies, and may cause lenders to reconsider the use of third party management companies. 

On all FHA loans (we are hopeful that FNMA will follow suit) the AMC must pay the appraiser the full customary fee and cannot deduct any charges for appraisal management from this fee.  Therefore the management company must prove to the lender that their services are worth the extra cost, beyond the fee for the appraisal.  

More importantly, the AMC must prove to the lender that the management process will include procedures that assure appraisal quality and USPAP compliance.  The FHA went out of its way to reaffirm that the lender and appraiser are ultimately responsible for appraisal quality; surely lenders will demand the same level of responsibility from the management company. 

Perhaps, finally, the often repeated myth that the HVCC requires the use of third party appraisal management companies will be laid to rest.  Repeated by me for the umpteenth million time:  nothing in the past or current language of the HVCC, FHA or FNMA required the use of an appraisal management company. 

The HVCC in its original form (which has not changed, yet) clearly states that lenders can retain control over the appraisal process and be compliant with regulation through the use of in-house appraisal management departments that are separate from loan production.  Direct lenders and loan correspondents can order appraisals directly as they have “skin in the game.”  Mortgage brokers can use the appraisal management services of the lender. 

It appears the pendulum is slowly swinging back to a point of sanity in the residential lending and appraisal regulation.  We hope this trend continues.

The FHA Mortgagee Letter can be found at:

FHA Morgagee Letter 2009-28

Thank you. 

Steve Loos

State Certified General Appraiser