Download Foreclosure Update and New Appraisal Regulations

Foreclosure Update
and
New Appraisal Regulations
The “Robosigning” Issue


Employees of servicers admit in foreclosure depositions
that they signed up to thousands of documents per
month without necessarily reviewing the documents,
including affidavits of indebtedness filed with courts.
Affidavits often contain information on the loan, the
borrower, or the transaction that may be difficult to verify


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Marital status
Mental competence
Meaning of “Personal Knowledge”

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Reliance on Business Records
Verification of system
Notarial Oath and Presence
Servicers acknowledged that employees
signing documents that required
notarization may not have signed in the
documents in the presence of a notary,
and that, if required, an oath may not have
been given.
 These documents were filed with judicial
foreclosure actions.

Judicial vs. Non-Judicial States
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Certain servicers suspended foreclosure actions
in states using judicial foreclosure procedures.
Affidavits are less frequently used in non-judicial
foreclosures, but some documents still require
notarization
 SCRA
 Substitution
of Trustee
 Loss mitigation affidavit

Quasi-Judicial States – E.g. MD
Multi-State AG and Banking Dept.
Inquiries

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State Attorneys General partner with state bank and
mortgage regulators in 50 states to form a bi-partisan
multistate group to investigate individual mortgage
servicers.
Regulators investigate allegations that servicers
submitted faulty affidavits in support of mortgage
foreclosure proceedings.
According to the group, "The facts uncovered in our
review will dictate the scope of our inquiry.“
Some AGs have indicated that they would like to link
settlement of this issue with the servicers agreeing to
deep reductions to principal balance
Congressional Inquiries

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Senate Majority Leader Harry Reid called on
major lenders to halt foreclosures across the
country.
Senate Banking Committee will hold hearings
investigating the foreclosure paperwork morass
on November 16.
White House states that it is “not sure about a
national moratorium because there are in fact
valid foreclosures that probably should go
forward" because documents are accurate.
DOJ Criminal Division Inquiry



U.S. Justice Department announces a task force
to investigate foreclosure practices.
The Financial Fraud Enforcement Task Force
will probe foreclosure practices in 23 states in
which bank’s attorneys have been accused of
submitting falsified evidence to obtain
foreclosures.
The task force includes officials from more than
20 federal agencies as well as state and local
authorities.
Investors/ GSE Response

FHFA Issues Four-Point Policy Framework for dealing with
Foreclosure Process Deficiencies

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Fannie Mae and Freddie Mac urged lenders not to hold up
foreclosures.
Fannie Mae and Freddie Mac warned servicers to put paperwork in
order to keep the foreclosure process moving and to minimize
losses


Addresses actions for Pre-Judgment, Post-Judgment Pre-Sale, PostSale (Evictions) and REO
Most interpret these statements as indications that GSEs will apply
foreclosure timeline penalties to servicers unless an official moratorium
is put in place
May play into broader issue of loan repurchase claims by investors
Servicer Response Varied

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Major servicers reviewing their processes and
enhancing procedures
Some servicers suspended foreclosure activity,
mostly in judicial foreclosure states.
Others have continued foreclosures, stating their
procedures were appropriate.
Most major servicers are refiling affected
documents and restarting foreclosure cases
when necessary
Impact on REO
Title insurers state that banks and other
lenders must vouch for the accuracy of
their mortgage documents before title
insurers will write insurance for a REO
sale.
 Questions remain whether challenges will
be raised in connection with the sale of
REO property.

Standing Issues – MERS

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Questions regarding MERS’ capacity to pursue a
foreclosure or even be in the chain of title
Are recorded chain of assignments required?
 DC Attorney
General Peter Nickles announced that a
foreclosure may not be commenced against a D.C.
homeowner unless the security interest of the current
noteholder is properly supported by public filings with
the District’s Recorder of Deeds.
Impact of Crisis on Housing Market

The Treasury Department alleged that
uncertainty over the legal status of
foreclosed homes in the nation could
further depress home prices and delay the
recovery of the housing market.
New Appraisal Rules
CMLA did webinar on Dodd Frank
appraisal provisions last month
 Covered new provisions on:

 Appraiser
independence requirements
 Appraisal requirements for “High Risk
Mortgages”
 New Appraisal Management Company
requirements
New Appraisal Developments

In last 2 weeks, two major developments:
 Fannie
Mae and Freddie Mac issued New
“Appraiser Independence Requirements”
(“AIR”) to replace HVCC
 Fed issued Interim Final Appraisal
Regulations

Effective April 1, 2011
Appraisal Independence
Requirement (AIR)
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HVCC expired upon issuance of new Fed regs
Big question: Can Brokers Order Appraisals?
The new regs do not prohibit brokers from
ordering appraisals . . . BUT
The new AIR issued by GSEs to replace HVCC
continues the ban on brokers ordering
appraisals
 Likely
that the detailed GSE guidance on HVCC will
carry over to AIR, but must wait and see
New Appraisal Regulations

Covered both:
 Customary
and Reasonable Fee Provision
 Appraiser Independence Provisions
Customary & Reasonable Fee
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Wasn’t clear that Fed would implement Dodd
Frank controversial provision on “customary and
reasonable fee” requirement
Lenders argued that “customary and reasonable
fees” provision was not an “appraisal
independence provision” requiring interim final
rules within 90 of enactment of the Dodd-Frank
Act
FRB disagreed. The rule implements the
provision
Customary & Reasonable Fee

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Lenders and their agents must compensate fee
appraisers (as opposed to “staff appraisers”) at
a rate that is customary and reasonable for
appraisal services performed in the market area
of the property being appraised.
Lenders using AMCs will look to them, their
agents, to demonstrate compliance

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AMC's are responsible for over two-thirds of
residential appraisals ordered and produced
Lenders not using AMCs must implement
compliance on their own
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FRB’s Interpretation of
Section 129E(i)

FRB interprets the customary and reasonable fee
requirement to signify that the marketplace should be
the primary determiner of the value of appraisal
services, and hence the customary and reasonable rate
of compensation for fee appraisers.

FRB relied on HUD Mortgage Letter on same topic

FRB requires customary and reasonable compensation
for “appraisal services” which is limited to the services
required to perform an appraisal, including defining the
scope of work, inspecting the property, reviewing
necessary and appropriate public and private data
sources, developing and rendering an opinion of value,
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and preparing and submitting the appraisal report.
Scope of Customary and
Reasonable Fee Requirement

“Fee appraiser” definition: (not an employee of lender/AMC
engaging the appraiser; is state licensed or certified; performs
appraisals under USPAP; includes companies who act as AMCs
but are too small to meet the definition of AMC)

According to the FRB, whether a person is an “agent” of the
creditor is determined by applicable law.
 A “fee appraiser” is not an agent of the lender
 FRB notes that it believes that Congress was especially
concerned that AMCs be covered by this provision
FRB interprets “market area” to be geographic area.

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FRB defines AMCs based on definition of AMC in FIRREA but
without an exemption for smaller AMCs.
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First Presumption of
Compliance
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Amount reasonably related to recent rates paid for comparable
services performed in the geographic market. Adjustment based
on:
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Type of property;
Scope of Work
Time in which services are required to be performed
Fee appraiser’s qualifications
Fee appraiser’s experience and professional record
Fee appraiser’s work quality.
And creditor/agent do not engage in any anticompetitive acts in
violation of state or federal law that affect compensation paid to fee
appraisers (price fixing; market allocation; acts of monopolization or
other antitrust laws).
Generally, “recent” rates would include rates charged within one
year of the creditor’s or its agent’s reliance on this information to
qualify for the presumption of compliance.
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Alternative Presumption of
Compliance

Rely on information about rates that:

Is based on objective third-party information,
including fee schedules, studies, and surveys
prepared by independent third parties such as
government agencies, academic institutions, and
private research firms;
 Is based on recent rates paid to a representative
sample of providers of appraisal services in the
geographic market of the property being appraised
or the fee schedules of those providers; and
 In the case of information based on fee schedules,
studies, and surveys, such fee schedules excludes
compensation paid to fee appraisers for appraisals
order by AMCs (as defined by the rule).
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Fee Studies

Excluding AMCs, no reliable and objective fee
studies exist across the appraisal spectrum:
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Question:

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VA fee schedule
Ala Mode study
HUD guidelines
How should fee studies be conducted to ensure
accuracy and reliability?
FRB concludes that a creditor/agent may, but is
not required to, use or perform a fee survey.
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No Presumption for Fee
Appraiser Certification

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Signed document of “agreed” rate does
not itself create a presumption of
compliance. Need objective factors.
Volume-based discounts not prohibited,
so long as compensation is customary
and reasonable.

The FRB requests comment on whether
further guidance is needed concerning the
permissibility of volume-based discounts.
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Penalties
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Why is this important?
Section 129E sets forth substantial civil
penalties for violations of customary and
reasonable fee restrictions:
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$10,000 per day violation continues for a first
violation
$20,000 per day violation continues for a
subsequent violation.
Civil penalties are in addition other enforcement
provisions referred to in section 130 of TILA.
Will this provision result in higher income to
appraiser and thus higher appraisal fees to
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consumers?
Appraisal Independence

Appraisal independence required

Closed and Open-end loans (HELOCs)
 Consumer’s principal dwelling
 Valuation includes BPO, not AVM

Prohibited – Creditor or settlement service provider
must not attempt to cause value to be based on any
factor other than the independent judgment of the
appraiser

Through compensation, coercion, extortion, collusion,
instruction, inducement, bribery, or intimidation
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Appraisal Independence

Acts or practices that violate appraisal independence
include

Mischaracterizing or falsifying value

Influence the reporting of a targeted or minimum value

Implying future orders are dependent on targeted value

Withholding timely payment (or threatening to) when the value
does not meet targeted amount
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Appraisal Independence

Appraisal independence requirements don’t
prohibit:

Asking appraiser to:
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Consider additional, appropriate property information,
including the consideration of additional comparable
properties to make or support an appraisal
Provide further detail, substantiation, or explanation for the
appraiser’s value conclusion
Correct errors in the appraisal report
Obtaining multiple valuations to select the most
reliable
Withholding compensation for a breach or poor
performance
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Prohibitions on Appraiser
Conflicts of Interest

No person performing valuation may have
a direct or indirect interest in the property
or transaction

Lender-affiliated AMCs still permitted
 Performing additional settlement services
permitted
 Firewalls from loan production for entities >
$250 million

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Similar to HVCC
Lesser firewalls for entities < $250 million
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Appraisal Independence

Mandatory Reporting of Violations

Creditor or other settlement service provider having
a reasonable basis to believe appraiser is not
complying with USPAP or applicable laws, or is
engaging in unethical or unprofessional conduct,
must refer the matter to the applicable State
appraiser agency


For non-compliance that likely affects value
Includes AMC and lender / broker employees
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Appraisal Independence

No Extension of Credit in Case of NonIndependence of Appraiser

A lender that knows of a violation of the appraisal
independence standards must not close the loan
unless it acts with reasonable diligence to
determine the appraisal does not materially misstate
or misrepresent the value of the dwelling

Practical result: Order new appraisal
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For more information:
Jeffrey P. Naimon
[email protected]
202.349.8030
Clinton R. Rockwell
[email protected]
424.203.1002