Foreclosure Update and New Appraisal Regulations

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Foreclosure Update and New Appraisal
Regulations
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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
• Marital status
• Mental competence
• Meaning of Personal Knowledge
• Reliance on Business Records
• Verification of system

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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.

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Judicial vs. Non-Judicial States

• 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

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Multi-State AG and Banking Dept. Inquiries

• 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

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Congressional Inquiries

• 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.

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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
  banks 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.  

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Investors/ GSE Response

• FHFA Issues Four-Point Policy Framework for
  dealing with Foreclosure Process Deficiencies
• Addresses actions for Pre-Judgment, Post-Judgment
  Pre-Sale, Post-Sale (Evictions) and REO
• 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
• 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

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Servicer Response Varied

• 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

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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.

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Standing Issues MERS

• 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 Districts Recorder of
  Deeds.

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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.

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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

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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

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Appraisal Independence Requirement (AIR)

• 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

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New Appraisal Regulations

• Covered both
• Customary and Reasonable Fee Provision
• Appraiser Independence Provisions

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Customary Reasonable Fee

• Wasnt 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

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Customary Reasonable Fee

• 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
• 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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FRBs 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, and
  preparing and submitting the appraisal report.

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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.
• 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

• Amount reasonably related to recent rates paid
  for comparable services performed in the
  geographic market. Adjustment based on
• Type of property
• Scope of Work
• Time in which services are required to be
  performed
• Fee appraisers qualifications
• Fee appraisers experience and professional
  record
• Fee appraisers 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 creditors or its
  agents 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
• VA fee schedule
• Ala Mode study
• HUD guidelines
• Question
• 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

• 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

• Why is this important?
• Section 129E sets forth substantial civil
  penalties for violations of customary and
  reasonable fee restrictions
• 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
  consumers?

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Appraisal Independence

• Appraisal independence required
• Closed and Open-end loans (HELOCs)
• Consumers 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 dont
  prohibit
• Asking appraiser to
• 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 appraisers 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 gt
  250 million
• Similar to HVCC
• Lesser firewalls for entities lt 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
  Non-Independence 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
• jnaimon_at_buckleysandler.com
• 202.349.8030
• Clinton R. Rockwell
• crockwell_at_buckleysandler.com
• 424.203.1002