The new Consumer Financial Protection Bureau is working on a real estate issue that gets to the core of the agency’s purpose: Bringing clarity and better disclosures about the often opaque and costly fees that homebuyers, sellers and refinancers are hit with at closings.
One of the disclosures now under review might surprise you: appraisal charges. Why do they need clarifying? Doesn’t just about everybody who applies for a mortgage, whether it’s to buy a house or refinance, have to pay $450 to $600 – sometimes more – to find out what the property is worth?
Correct. But the reality is a bit more complicated. Start with the fact that in three out of every four purchases or refinancings, according to industry estimates, the person who visits, inspects, measures and puts a market value on your property is receiving only a fraction of the money you are paying. Some are being paid less than half of the fee, while the balance flows to an enterprise you’ve never heard of – an appraisal-management company – that assigns the job to the appraiser. That management company, in turn, may be wholly owned by or in a joint venture or affiliate relationship with your lender, which in turn may be pocketing a significant portion of your appraisal dollars.
Current federal settlement disclosures give you no hint of where that money is really going. There is just a single line item for appraisal charges on the standard HUD-1 settlement statement. Say you’re charged $550. There is no hint that the appraiser gets $250 and the rest goes to the management company and the lender. The CFPB is considering whether to shed light on this by mandating two disclosures – what the appraiser is paid and what the management company is taking.
Should you care about this? Absolutely. Although banks and mortgage lenders maintain there is no need for additional disclosure, appraisers, builders, realty brokers and others say the costs of appraisals to consumers have increased in the past two years, while the quality and accuracy of the work have declined. In a poll of its members last year, the National Association of Realtors found that 70 percent reported consumers were being charged higher appraisal fees at closing – sometimes $100 or more than was the typical charge previously.
At the same time, appraiser members reported sharp reductions in their own compensation by 40 percent to 50 percent per assignment. Many of the Realtors polled said they saw significant increases in the number of appraisers who were unfamiliar with local market conditions because they were from another geographic area. The same poll also found a growing incidence of sales transactions being derailed by appraisals that came in below the contract price agreed upon between the seller and the buyer.