Appraiser Legislative Issues
National Appraisal Institute
Highlights of H.R. 1728 Appraisal Provisions
Truth in Lending Act Amendments
Requires written appraisal on all “subprime mortgages” (Section 601).
Requires second appraisal for loans sold within 180 days with no charge incurred by applicant Section 601).
Clarifies that licensing and certification are minimum requirements (Section 601).
Provides copy of appraisal within 3 written days of closing to applicant (Section 601).
Clarifies that the appraisal report is for the sole use of the creditor and that the applicant can choose to have a second appraisal conducted at their own expense (Section 601).
Violations of the applicant notification are subject to a $2,000 penalty (Section 601).
Requires that extension of credit adhere to appraisal independence standards (Section 602).
Adds “withholding or threatening to withhold timely payment for an appraisal report or for appraisal services rendered to the list of unfair and deceptive practices supporting appraisal independence (Section 602).
Adds consumers to the list of entities that are allowed to ask an appraiser to consider additional comparables provide further detail or correct errors (Section 602).
Adds conflict of interest section regarding appraiser interest in dwelling (Section 602).
Requires mandatory referral of USPAP violations by all parties in the transaction to applicable state appraisal board (Section 602).
Prohibits extension of credit by creditor who knows about a violation of the appraisal independence standard unless the creditor it has acted with reasonable diligence to determine the appraisal does not misstate or misrepresent the value (Section 602).
Requires regulations to be prescribed within 180 days of enactment with an effective date of no later than 1 year (Section 602).
Requires the rulemaking procedures establishing the appraisal independence standards to include the $10,000 penalty for violations of appraisal independence standard and $20,000 where civil penalties have been imposed (Section 602).
Testimony presented on behalf of the
Appraisal Institute
American Society of Appraisers
American Society of Farm Managers and Rural Appraisers
National Association of Independent Fee Appraisers
Before the House Financial Services Committee
On
H.R. 1728 The Mortgage Reform and Anti-Predatory Lending Act
Thank you for the opportunity to testify on H.R. 1728 “The Mortgage Reform and Anti-Predatory Lending Act.” The professional appraisal community applauds the work of this Committee and Representatives Miller and Watt on bringing this legislation forward. Mortgage fraud and predatory lending practices have contributed greatly to the near collapse of our mortgage finance system. As this Committee knows, professional real estate appraisers can assist Congress, the Administration and consumers with relevant information regarding the value of collateral and provide the analysis needed for lenders and consumers to make informed decisions regarding real estate investments. Armed with advanced methodologies, professional appraisers today provide real-time information on local real estate markets, which is vital in trying times. Appraisers provide impartial professional services in mortgage transactions. Our fees are not contingent upon whether loans go through, nor are they based on loan amounts. Independent, competent and qualified appraisers provide crucial safeguards in the process. Their objectivity, experience and ethics help participants in residential and commercial transactions understand the risks inherent in collateral lending. Appraisers should be the trusted advisor in the transaction. That is what is supposed to happen. We are here to work on restoring integrity to the process, which, too often, has been corrupted by mortgage fraud. The mortgage industry has long suffered structural problems. Much of it, including appraisal, has regulation in place, yet many regulatory gaps still exist today, which invites devious participants to skirt basic safety and soundness requirements. Further, government regulators have been asleep at the switch on matters of oversight and enforcement. Existing rules have not been enforced adequately. Underfunding cripples many government oversight agencies, and structural deficiencies and unwillingness to act contribute to their ineffectiveness. Structural reforms for regulatory regimes must emphasize and strengthen oversight. It is imperative that we return to the fundamentals of mortgage lending with the focus being on the capacity to repay the loan, credit worthiness of the borrower and underlying collateral value. These are the basic tenents of sound lending practices. Today, inadequate attention is paid to the collateral held in support of a loan. This oversight combined with loose credit policies and poor underwriting produced economic disaster. We no longer can continue to ignore the basics. Modeled after H.R. 3915 from the last Congress, H.R. 1728 goes further in the area of appraisal reforms and is in many ways a “Back to Basics” bill. We believe this bill will go a long way in restoring confidence in mortgage lending.
“Ending Mortgage Abuse: Safeguarding Homebuyers”
We believe that much of the mischief grows in the boundary dividing those segments of
the real estate industry that are regulated from those that operate without effective oversight.
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Real estate appraisers call your attention to three problem areas in this context:
1) Disparate oversight and regulation of mortgage brokers and mortgage lenders;
2) Systemic appraiser coercion, and
3) Weak regulation of real estate practitioners.
Let me describe these issues in more detail below, with suggestions for remedies.
Disparate oversight
Our organizations are deeply concerned with the disparity of oversight and regulation of
the appraisal process in the mortgage market today. There are rules governing federally
regulated financial institutions, but virtually none for all other mortgage originators in the
marketplace. Greater appraisal problems spring up in the unregulated wilderness.
Pursuant to the Financial Institutions Reform, Recovery, and Enforcement Act of 1989
(FIRREA), federally regulated financial institutions must maintain independent appraisal
processes. Individuals within these institutions responsible for making final loan decisions are
prohibited from playing a role in the appraisal management function. For example, a loan officer
signing off on a loan decision cannot also be the person ordering and reviewing the appraisal.
These rules attempt to enact an effective institutional “firewall” for appraisal independence.
After identifying widespread breakdowns in appraisal independence, lately federal bank
examiners have been forced to issue guidelines reminding federally regulated institutions of their
appraisal independence obligations, reemphasizing the need to maintain independent appraisal
processes in mortgage transactions. The federal bank regulatory agencies are to be commended
for identifying and addressing this issue. Yet our members still report problems with bank staff
with a vested interest in a transaction controlling the appraisal process inappropriately. To work,
the guidelines must be rigorously enforced.
Appraisal Institute Comments on “The Identification of Contributory Assets and the Calculation of Economic Rents” Exposure Draft
when there is a business component in special real property fixed assets such as nursing homes, restaurants, golf courses, billboards, etc., real property valuation experts are also well suited to value those business value components as a residual, after all market-based returns and costs are applied to the real property fixed assets. On the other hand, specialists in business valuation who take the “company” approach consider the values of all intangible assets and personal property assets with real property components as a residual, which is variable according to the values assigned to intangible assets. Of course, we believe that the first approach results in more accurate and reliable opinions of value.
In the present economic and political climate, where the underlying value of real property fixed assets has become an international issue, there is a need to exercise extreme caution in allocating non-market based, unsupportable values to real property fixed assets, contributory asset charges, and economic rents. It is no longer acceptable to assign hypothetical values and CAC for real property fixed assets based on going rates and costs “of working capital” (Lines 251 and 252). The report cites a “paucity of data on asset specific returns” (Lines 483-484). However, there is an abundance of data available from real estate professionals to support those charges.
“Close counts only in horse-shoes!” A little bit off here, and a little bit off there, then a compounding of the partially flawed values for sale as investment packages, and pretty soon you have the present financial breakdown. The last thing TAF and its supporting professional valuation organizations want to be accused of is a continuation of the status quo.
Recovery and Reinvestment Act Provides Tax Breaks for Small Businesses, Appraisal Firms
The American Recovery and Reinvestment Act of 2009, signed into law earlier this year, includes several tax incentives and provisions for small businesses — including appraisal firms — designed to provide economic relief. The Act was passed in response to the negative impact the current economic downturn has had on small businesses across the country.
As outlined in the Act, companies making less than $15 million over a three-year period can take advantage of a carryback loss provision that allows them to write off current losses against profits earned up to five years ago instead of two years ago as was previously permitted. The legislation also includes a bonus depreciation clause that permits tax breaks for capital expenditures made in 2009 and a separate tax break related to cancellation of debt. Another tax provision doubles the tax break for capital investments made by small businesses in 2009.
Moreover, small businesses are eligible to expense up to $250,000 of the cost of qualifying property, and some small businesses may be eligible to defer paying a larger part of their tax obligation until the end of the year. The monthly tax exclusion for employer-provided commuter benefits also has been increased to $230 per month, and the work opportunity tax credit has been expanded to include unemployed veterans and disconnected youth.
In addition to the tax provisions, several energy incentives have also been extended to small businesses. Businesses that generate renewable energy are able to take advantage of the renewable energy production tax credit and businesses that meet certain criteria have the option to elect the energy investment credit in lieu of the production tax credit. Moreover, businesses that have placed energy investment credit property in service prior to 2014 are eligible to receive renewable energy grants.
For detailed information regarding ARRA tax incentive provisions for small businesses, visit www.irs.gov/newsroom/article
$12 Billion in TALF Deals Now in Pipeline
The Federal Reserve’s Term Asset-Backed Securities Loan Facility, or TALF, program continues to run strong, with about $12 billion in consumer loan-backed deals already in the pipeline ahead of the upcoming loan application deadlines. The TALF program, which has the potential to generate up to $1 trillion in lending for businesses and households, has its next deadlines scheduled for Sept. 3 for the consumer asset-backed securities portion of the program and Sept. 17 for the commercial mortgage-backed securities portion.
According to an article in The Wall Street Journal, TALF program issuers include Ford Motor Co. unit Ford Motor Credit, Chesapeake Funding LLC, Nissan Motor Co. and American Express. Other issuers include Discover, Hyundai Motor Co. and General Electric Capital Corp.
Last month, $8.26 billion worth of TALF-eligible consumer-loan-backed deals were sold; in July, that figure was $12.7 billion.
Also last month, TALF loans against newly issued ABS and existing (legacy) CMBS were extended through March 31, 2010, under a joint Fed- and Treasury-approved extension. The Fed and Treasury also extended the TALF program for newly issued CMBS, which take a significant amount of time to put together, through June 30, 2010.
Since the launch of the TALF program, $85.45 billion in consumer-loan-backed deals have been sold, the bulk using non-recourse loans at attractive rates from the Fed.
FDIC Problem Banks Top 400, Losing $3.7 Billion; Experts Predict List will Grow
In its quarterly report issued last Thursday, the Federal Deposit Insurance Corporation reported that despite hopeful economic signs the banking industry lost $3.7 billion in the second quarter amid a surge in bad loans made to home builders, commercial real estate developers and small and midsize businesses. In addition, the FDIC reported that it has added more than 100 lenders to its “problem list” of banks at a high risk of insolvency.
As it stands, at the end of June the FDIC had 416 banks, or 5 percent of the nation’s banks, on its “problem list.” This is a substantial increase from the 117 banks that were on the sick list at the end of the second quarter in 2008. And that number could grow according to the FDIC.
Federal banking regulators and industry experts are expecting upwards of hundreds of small and medium-size banks to fail before year end—all compounded by growing foreclosures, a near 10 percent national unemployment rate and climbing credit-card losses.
The failure of 81 banks this year, coupled with expectations that additional banks will go under, is putting great stress on the government’s deposit insurance fund, which guards $6.2 trillion in U.S. deposits. Whereas last year its second quarter reserve stood at $45.2 billion, this year the FDIC’s reserve fund was at $10.4 billion.
In order to refill the coffers, the FDIC may consider imposing a special assessment on the banks it regulates. If the agency does impose a special fee, it would be the second time this year. Through a special fee assessed earlier in the year, the FDIC added nearly $9.1 billion. If another special fee were to be assessed, it would be predicted to raise about $5.6 billion.
Another option for the FDIC to shore up its funding would be to borrow money from the Treasury, which the agency last did when it found itself in the red during the savings and loan crisis in the late 1980s. However, any move by the FDIC to seek Treasury assistance could jeopardize the appearance of the agency and lead to consumer and investor uncertainty.
To access the FDIC’s second quarter report, visit www2.fdic.gov/qbp/qbpSelect.asp?menuItem=QBP .
Fed, Treasury Try to Preempt Potential CRE Downfall
Federal Reserve and Treasury Department efforts to keep the commercial real estate sector from suffering the same collapse as the residential sector are being undermined by rising foreclosure rates of commercial properties that were packaged and sold by Wall Street as bonds, according to The Wall Street Journal. The commercial mortgage-backed securities market, which was once seen as a stable investment for Wall Street, has been faltering in the wake of declining occupancy and rental rates, the newspaper said.
Further compounding the situation has been the difficulty property owners have faced when trying to refinance loans that have been bundled into CMBS. Of the $153 billion in CMBS set to come due by the end of 2012, Deutsche Bank reports that upwards of $100 billion of that will have a hard time getting refinanced.
All this indicates bad news for the government, which has been fiercely battling the global economic recession caused by the risky business practices of the residential mortgage-backed securities sector. The Fed and Treasury desperately want to stave off another blow to the nation’s fragile economy, but are limited in the steps they can take.
According to industry players, the Treasury is considering guidance that would allow servicers to start talking about ways to avoid defaults and foreclosures sooner , but is facing opposition from investors in CMBS bonds, who argue that the servicers are ultimately bound contractually to the bondholders. The complicated nature of CMBS makes it difficult for property developers and investors to know who the outside investors are who hold their debt.
As foreclosures mount in the CMBS sector, the government may react by enacting bailout programs. However, with the economy showing signs of getting back on track, politicians would far more likely see more jobs created and occupancy rates rise than another government handout that’s sure to rile many voters.
Extremely Distressed CRE Loans Rises to $11 Billion
For the first time since August 2008, the delinquent unpaid balance for commercial mortgage-backed securities dropped in July to $25.68 billion from the previous month’s figure of $28.65 billion, according to Realpoint’s latest monthly delinquency report. However, the decline was recorded after nearly $4.8 billion of General Growth-sponsored loans were updated to current status following a 30-day delinquent status filed in June. The $25.68 billion figure is now 12 times higher than its low point of $2.21 billion reached in March 2007 and represents a 511 percent increase from the same period a year ago.
While the overall delinquency volume dropped, the improvement was mainly in the 30-day delinquency category. The remaining four categories all registered increases in delinquencies. Foreclosures, REOs and 90-day delinquencies all recorded increases for the 20th consecutive month. The volume of loans in these categories increased $2.15 billion from June and is now up 377 percent from the same period a year ago.
As of July, the total unpaid balance for all CMBS loans reviewed by Realpoint totaled $819.2 billion. July’s resultant delinquency ratio dropped 3.5 percent from the previous month to 3.14 percent. The rate is now more than six times higher than its low point of 0.283 percent reached in June 2007. According to the delinquency report, loan workouts and liquidations totaled $152.4 in July, which encompassed 34 loans with an average loss severity of 31.3 percent. Overall, Realpoint still anticipates the delinquent unpaid CMBS balance to continue along its current trend, which is expected to approach $50 billion before the end of 2009.
S&P: Second Quarter Home Price Index Shows Improvement
While still registering a negative annual return, the second quarter U.S. National Home Price Index improved versus the same period a year ago with a decline of only 14.9 percent, according to June 2009 data reported in the latest Standard & Poor’s/Case-Shiller Home Price Indices. The first quarter recorded a 19.1 percent decline. Although both the 10-city and 20-city composites recorded annual declines of 15.1 percent and 15.4 percent, respectively, both are improving from their first quarter declines of 19.4 percent and 19.1 percent, respectively. Both indices increased 1.4 percent in June as compared to May. On average, home prices recorded in June were down 30.2 percent from their 2007 peak.
“For the second month in a row, we’re seeing some positive signs,” said David Blitzer, chair of Standard & Poor’s Index Committee. “The U.S. National Composite rose in the second quarter compared to the first quarter of 2009. This is the first time we have seen a positive quarter-over-quarter print in three years. Both the 10-city and 20-city composites posted monthly increases, as did most of the cities.”
With all metropolitan statistical areas – as well as the 10-city and 20-city composites – registering negative annual returns, the overall figures remain low. Las Vegas and Detroit logged in as the weakest performing cities in June, with prices down 54.3 percent and 45.3 percent, respectively, from their peaks. On a brighter note, both Dallas and Denver both reported four consecutive months of positive returns. Moreover, 13 of the MSAs in June reported positive monthly returns greater than 1 percent.
To access the Standard & Poor’s/Case-Shiller Home Price Indices, visit www.homeprice.standardandpoors.com .
Hanley Wood: Sales Increase, Demand Expected to Taper
New and existing home sales increased in July for the fourth consecutive month, suggesting that the housing market may be stabilizing. But with the homebuyer incentive program set to expire and the employment outlook remaining weak, demand is expected to taper. As reported by Hanley Wood Market Intelligence, both housing starts and building permits in July fell 1.0 percent and 1.8 percent, respectively, from the previous month as a result of a decrease in multi-family activity. However, single-family starts in July rose 1.7 percent from the previous month while single-family permits jumped 5.8 percent.
New home sales jumped 9.6 percent in July from the previous month to a seasonally adjusted annual rate of 433,000 units, its highest level since September 2008. Median new home prices in July fell 0.1 percent to $210,100 from June’s revised figure of $210,400, and are currently 11.5 percent lower than the same period a year ago. On a non-seasonally adjusted basis, new home inventory dropped to its lowest level in over 14 years in July to 272,000 units from June’s figure of 281,000 units. On a seasonally adjusted basis, new home inventory declined to its lowest level since March 1993 to 271,000 units. Based on the current sales pace, there is now a 7.5-month supply of new homes on the market on a seasonally adjusted basis.
For the fourth consecutive month, annualized sales of existing homes moved up in July to 5.24 million units, a 7.2 percent jump from June’s level, and are up 5.0 percent from the 4.99 million units recorded the same period a year ago. Sales of existing condos and co-ops climbed 12.5 percent from June’s figure to 630,000 units while single-family homes moved up 6.5 percent to 4.61 million units. Median existing home prices in July dropped from June’s figure of $182,000 to $178,400. Existing home inventory rose 7.35 percent in July to a preliminary figure of 4.09 million units from June’s figure of 3.81 million units. Based on the current sales pace, there is now a 9.4-month supply of existing homes on the market.
Mortgage rates rose to 5.14 percent in Freddie Mac’s Primary Mortgage Market Survey released on August 27, from the prior week’s 5.12 rate for a 30-year fixed mortgage The Mortgage Bankers Association’s seasonally adjusted Purchase Index for the week ending August 28 decreased 1.0 percent from the previous week.
Jones Lang LaSalle: Retail Could Rebound in 1Q10
The suffering retail sector may begin to bounce back as early as the first quarter of 2010 following an anticipated fourth quarter 2009 bottoming out of the recession, according to Jones Lang LaSalle’s Mid-Year Retail Outlook for 2009. The report points to key factors that signal an approaching end to the recession: housing sales have risen; the pace of job losses has decelerated; and the GDP performance, which decreased by 1 percent during the second quarter, beat the 1.5 percent that had been widely predicted by economists. Furthermore, there is increased stability among financial institutions, demonstrated by stress tests performed in May and consumer sentiment has improved, according to the report.
However, in an interview with cpexecutive.com, Greg Maloney, president and CEO of Jones Lang LaSalle Retail said this recession recovery will be different. “Since 1959, we’ve been used to recessions taking a sharp ‘V-shaped’ recovery, but as you look at all the indicators today, the difference is the credit market; it’s still in a freeze, and that’s why the recovery is going to be ‘U-shaped,’” Maloney said.
In its report, JLL said that the pace at which the economy and the retail industry recover will depend on consumer mindset. Consumer sentiment varies according to geographic area. For instance, residents of Los Angeles, Phoenix, Las Vegas, Atlanta, southern Florida and Detroit are dragging down the perception of the state of the economy’s vitality.
The JLL report said the discounters will be at the head of the recovery. JLL concluded: “It is becoming increasingly critical for retailers and shopping centers to strategize to produce the best combination of quality products, affordable prices and intelligent merchandising to woo consumers. Retailers that offer a significant value proposition to consumers are the ones that will survive and thrive.”
