BILL ANALYSIS
SENATE COMMITTEE ON BANKING, FINANCE,
AND INSURANCE
Senator Ronald Calderon, Chair
SB 1000 (Correa) Hearing Date: May 5, 2010
As Amended: April 27, 2010
Fiscal: No
Urgency: No
SUMMARY Would allow for the portability of appraisals between
loan applications for mortgages on owner-occupied, residential
real property, as specified.
DIGEST
Existing federal law , pursuant to Title XI of the federal
Financial Institutions Reform, Recovery, and Enforcement Act of
1989 (FIRREA; 12 USC 3331 et seq.), subjected the real estate
appraisal profession to federal oversight, required each state
to create a regulatory agency overseeing the regulation of
appraisers involved in federally-related real estate
transactions, and created the Appraisal Subcommittee, an entity
established to oversee the operations of all state appraiser
regulatory agencies, to ensure that they conform to Title XI.
Existing state law:
1. Provides for the Office of Real Estate Appraisers (OREA),
to oversee the regulation of appraisers in California. The
Real Estate Appraisers' Licensing and Certification Law is
found in the Business and Professions Code Section 11300 et
seq.;
2. Requires all appraisals performed in California by a
licensed or certified appraiser to be performed in
compliance with the Uniform Standards of Professional
Appraisal Practice (USPAP; Business and Professions Code
Section 11319).
This bill
1. Would provide that, except as otherwise specified in
federal law, if a person applies to a lender (Lender A for
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purposes of this analysis) for a mortgage loan on
owner-occupied residential real property, and an appraisal
is completed for Lender A in connection with that person's
loan application, the person may instruct Lender A to
provide a copy of that previously completed appraisal to a
second or subsequent lender (Lender B for purposes of this
analysis). Upon receipt by Lender B of a previously
completed appraisal:
a. Lender B would be required to accept the appraisal
for purposes of determining whether to approve the
person's mortgage loan application; and
b. Lender B would not be allowed to require the person
to purchase a new appraisal of the same property as a
condition of approving that person's loan application;
2. Would prohibit Lender B from requesting that an appraiser
change the name of the client within a previously completed
appraisal report, unless Lender B engages that appraiser to
conduct a new appraisal assignment. Would authorize a new
appraisal assignment to provide for a scope of work that is
limited to a client name change;
3. Would provide that, notwithstanding the requirements
described in Numbers 1 and 2 above, Lender B may require a
loan applicant to purchase a new appraisal of the property,
which includes more than just a client name change, in any
of the following circumstances:
a. The previously completed appraisal is more than 30
days old, as of the date it is received by Lender B;
b. An underwriter for Lender B determines that the
previously completed appraisal is not in compliance with
USPAP or contains other material deficiencies;
c. The appraiser that performed the previously
completed appraisal is on Lender B's exclusionary list of
appraisers;
d. Failure of Lender A to provide a copy of the
previously completed appraisal to Lender B in a timely
manner would cause a prejudicial delay in closing the
mortgage loan, posing potential harm to the borrower.
For purposes of this provision, potential harm to a
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borrower includes loss of interest rate lock, purchase
contract deadline, foreclosure proceedings, or late fees;
4. Would provide that the requirements of the bill do not
apply, if Lender B does not require the loan applicant to
pay for the preparation of a new appraisal.
COMMENTS
1. Purpose of the bill To prohibit lenders from requiring loan
applicants to pay for a second home appraisal, when those
loan applicants have already paid for an appraisal on the
same property, prepared for another lender.
2. Background California residential real property appraisals
must be performed by a California licensed or certified
appraiser, in accordance with USPAP. Essentially the
appraisal bible, USPAP is a several hundred-page document,
which contains the generally accepted standards for
professional appraisal practice in North America. USPAP
contains standards for all types of appraisal services,
including commercial and residential real estate, personal
property, business, and mass appraisal. Although it
provides a minimum set of quality control standards for the
conduct of appraisals in the U.S., USPAP does not attempt to
prescribe specific methods to be used. Instead, it requires
that appraisers be familiar with, and correctly utilize
those methods that would be acceptable to other appraisers
familiar with the assignment at hand and acceptable to the
intended users of the appraisal. OREA enforces compliance
with USPAP and other components of California appraisal law
in California.
Considerable attention has been paid to the quality of
appraisals, and to undue influence of appraisers, during
recent years. California, other states, the federal
government, Fannie Mae, and Freddie Mac have enacted laws
and issued binding guidance documents, intended to ensure
that mortgage brokers, mortgage lenders, real estate agents,
and homeowners do not inappropriately influence the value
conclusion reached by an appraiser, and to ensure that
mortgage loans are made by lenders, based on accurate,
rather than inflated or otherwise inaccurate appraisals.
Despite the requirements of USPAP and enactment of recent laws
and guidance documents intended to ensure the accuracy of
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appraisals, appraisals are an art, rather than a science.
They represent expressions of opinion, rather than fact.
For that reason, they are highly subjective. Most lenders
and appraisal management companies maintain lists of
appraisers whose work they have come to trust, and will only
accept work products from the appraisers on their lists.
3. FHA Appraisal Portability Much of the language of the April
27th version of this bill is based upon Federal Housing
Administration (FHA) Mortgagee Letter 2009-29, which allows
for the portability of appraisals, when a borrower switches
from one FHA-approved lender to another, and an appraisal is
ordered by, and completed for, the first lender. The FHA
requires the first lender to transfer a borrower's entire
case, including the appraisal, to a second FHA-approved
lender, at a borrower's request. However, the FHA does
allow a second appraisal to be ordered by a second
FHA-approved lender, in any of the following three
circumstances: a) the second lender's underwriter finds
that the first appraisal contains material deficiencies, b)
the appraiser who performed the first appraisal is on the
second lender's exclusionary list of appraisers, and c)
failure of the first lender to provide a copy of the
appraisal to the second lender in a timely manner would
cause a delay in closing the mortgage loan, posing potential
harm to the borrower.
FHA Mortgagee letter 2009-30 states that, effective for all FHA
case numbers assigned on or after January 1, 2010, the
validity period for all appraisals on existing, proposed,
and under-construction properties is 120 days.
FHA loans are growing in popularity among borrowers, in large
part because they allow down payments as low as 3.5%. These
loans are popular among lenders, because the loans' federal
insurance ensures that the lenders who make them will be
repaid, even if a borrower defaults. FHA loans carry both
an up-front mortgage insurance premium (currently 2.25%) and
an ongoing monthly mortgage insurance premium (currently
between 0.50% and 0.55%, depending on the loan to value
ratio). The FHA recently raised its premiums to these
levels, to help build back its capital reserves, which had
fallen dangerously low, as a result of high delinquencies
among FHA borrowers. According to the Office of the
Comptroller of the Currency (OCC) and the Office of Thrift
Supervision (OTS), as of the fourth quarter of 2009,
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government-guaranteed mortgages performed worse than all
other types of loans. According to the OCC/OTS Mortgage
Metrics Report, only 83% of all government-guaranteed
mortgages were current and performing at the end of 2009.
4. Unintended consequences The stated intent of this bill is
to lower the costs of prospective borrowers whose mortgage
loan application with one lender falls through, and who seek
a mortgage loan from another mortgage lender. The bill
attempts to accomplish this aim, by prohibiting the second
or a subsequent lender from requiring the prospective
borrower to pay for a second appraisal on the same property,
if the prospective borrower has a relatively recent
appraisal prepared for the first lender. However, the bill
does not prohibit the second lender from ordering a second
appraisal, paying for that appraisal, and factoring the cost
of that second appraisal into the mortgage loan it offers to
a borrower.
If the second lender is uncomfortable accepting an appraisal
done for the first lender, it is highly likely that the
second lender will order its own appraisal, at a cost of a
few hundred dollars, rather than lend a few hundred thousand
dollars to a borrower, based upon an appraisal it doesn't
trust. It is also likely that the second lender will pass
that additional cost on to the borrower, either at closing,
or in the form of a higher interest rate spread out over the
life of the loan. The passed-through cost is unlikely to be
identified as an appraisal fee. However, borrowers who use
a portable appraisal may find themselves paying higher
points at closing than borrowers who don't use portable
appraisals, or paying higher interest rates on their loans
than borrowers who don't use portable appraisals. Because
borrowers who use portable appraisals may end up paying for
that privilege, this bill may not achieve its intent. Some
borrowers may not realize any cost savings; others could end
up paying more than they would have, if they had simply paid
for a second appraisal.
5. Support . The California Association of Realtors (sponsor of
this bill) believes that borrowers whose loan applications
fall through with one lender ought to be able to take the
appraisal they purchased in connection with the first,
unconsummated loan, and use it in connection with the
application they make to a subsequent lender for a loan on
the same property. Commonly, if a prospective borrower's
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loan with one lender falls through, the borrower is required
to pay for a second appraisal on the same property, when he
or she applies to another lender for a loan. CAR believes
that valid appraisals ought to be portable, from one lender
to another. "The cost to have an appraisal prepared is
between $200 and $500 and it is unfair to require the
homebuyer to pay for a second appraisal when they have a
perfectly good appraisal in hand - particularly given the
cumulative total of the price, costs and fees associated
with purchasing a home."
Consumers Union supports SB 1000, because the bill would remove
a costly burden placed on some homeowners, when lenders
require duplicative appraisals on the same property, in
connection with an application for a mortgage loan.
Consumers Union believes that, because SB 1000 provides
benefits for consumers and protection for lenders, the bill
will benefit all stakeholders.
6. Opposition A coalition of lenders, title companies, and
the Chamber of Commerce are opposed to the bill for the
following reasons:
First, the bill would apply the same requirements used by FHA on
its insured loans to non-FHA loans, a policy the coalition
believes is unworkable. As proposed, the bill could
negatively impact secondary market transactions involving
Fannie Mae and Freddie Mac, as well as private investors.
To the extent that these entities reject the purchase of a
residential mortgage underwritten using a portable
appraisal, liquidity within the mortgage market will
diminish.
Second, given the frequency with which mortgagee letters are
issued by the FHA, and the fact that the FHA can swiftly
revise their policies through these letters, the collation
believes that codifying such letters, as SB 1000 proposes to
do, is ill-advised and will create inconsistencies between
FHA rules and state law.
Third, by negatively interfering with sound underwriting
practices, SB 1000 could bring negative regulatory scrutiny
onto the insured depository institutions which would be
subject to its requirements. Insured depository
institutions that are deemed by their regulator to be
operating in an unsafe or unsound manner are subject to
SB 1000 (Correa), Page 7
corrective actions.
Fourth, the coalition believes that SB 1000 fails to
acknowledge, and is contrary to the Home Valuation Code of
Conduct (HVCC), a document issued by Fannie Mae and Freddie
Mac in 2009, to enhance the integrity of the home appraisal
process in the mortgage finance industry. Any lender who
makes a loan it wishes to be guaranteed by or sold to either
of the Government Sponsored Enterprises must comply with the
HVCC, for all single-family, residential mortgage loans it
originates on or after May 1, 2009. The HVCC already
permits one lender to accept an appraisal prepared for
another lender in appropriate circumstances. SB 1000 would
mandate this practice.
Fifth, the coalition raises questions about the impact of the
bill on the borrowers it proposes to help. The measure
appears to be designed to address circumstances in which
financing with an initial lender is unsuccessful, or cannot
be completed in a timely manner. Yet, the bill is not
limited to these circumstances. As drafted, SB 1000 would
allow a prospective borrower to shop a single appraisal to
multiple lenders simultaneously. The coalition is concerned
that this would result in additional borrower costs and
fees, regardless of whether the first lender declined the
borrower's loan application or was unable to act on the
borrower's loan application in a timely manner.
Similarly, the coalition observes that the bill is silent on
which party (loan applicant or lender) would pay for an
appraisal ordered for the purpose of changing a client's
name on an appraisal report.
First American Corporation is also opposed, for three reasons.
First, the bill would force a lender to accept an appraisal
from an appraiser with whom they have no experience working.
Most lenders maintain lists of approved appraisers based on
recommendations or past working relationships. Thus, the
concept proposed in the bill is flawed.
Second, most lenders require appraisers to comply with the
lender's specific requirements, with regard to quality and
timing of appraisals. SB 1000 would force lenders to accept
an appraisal that may meet only minimum standards.
Finally, First American believes that SB 1000 will result in
SB 1000 (Correa), Page 8
appraisals, which are less accurate and do not fit the needs
of the lenders who will be forced to use them.
7. Suggested Amendments
a. The author will propose the following
amendment, when he presents the bill in Committee.
The amendment is proposed, to address a concern that
the 30-day time limit in the bill is inconsistent with
FHA requirements, which provide that portable
appraisals are valid for up to 120 days.
Page 3, line 12, after "old," insert: "or more than the
number of days allowed by the Federal Housing
Administration, whichever is longer,"
b. Committee staff also recommends two technical
amendments:
i. The first recommended amendment
clarifies that an appraiser may undertake a new
appraisal assignment whose scope of work is
limited to a client name change, only to the
extent that such action is consistent with USPAP.
Rationale: As noted above, much of the language
in the current version of this bill was borrowed
from FHA Mortgagee Letter 2009-29. However, some
California licensed residential appraisers have
identified a potential inconsistency between the
FHA's Mortgagee Letter 2009-29 and USPAP
requirements. Letter 2009-29 states that Lender
B and the original appraiser may engage in a new
appraisal assignment, whose scope of work is
limited to a client name change. Appraisers
contacted by Committee staff have indicated that,
under certain circumstances, USPAP could prohibit
an appraiser from entering into a new appraisal
assignment whose scope of work was limited to a
client name change. Depending on the length of
time between the appraiser's last inspection of
the property and the date of the new appraisal
assignment, the appraiser could be obligated
under USPAP to check whether anything had
happened in the interim, to change the property's
SB 1000 (Correa), Page 9
value. In other words, the appraiser might not
be able to agree to an appraisal assignment for a
simple name change; depending on the
circumstances, USPAP might require that appraiser
to re-evaluate his or her original value
conclusion, and alter it, if necessary.
Suggested language: Page 3, line 4, after the
period, insert: "To the extent consistent with
the Uniform Standards of Professional Appraisal
Practice,"
ii. The second recommended amendment
would clarify that the clock starts ticking on
the age of an appraisal, as of the date of
valuation.
Rationale: This bill limits the age of a portable
appraisal to 30 days (or, as proposed to be
amended by the author, to 30 days or the length
of time used by FHA, whichever is longer).
However, the bill fails to identify the date on
which the 30-day clock starts ticking. Appraisal
reports typically contain two dates - a date of
valuation and a date of issuance. Appraisers
contacted by Committee staff in connection with
this analysis suggest starting the time clock
based on the date of valuation, because it more
accurately reflects the age of the appraisal.
Staff believes that this change is also
consistent with FHA's practice.
Suggested language: Page 3, line 12, after the
comma, insert: "measured from the date of
property valuation to the date the appraisal" and
delete the words "as of the date it"
8. Prior and Related Legislation
a. SB 237 (Calderon), Chapter 173, Statutes of
2009: Defined the term "appraisal management
company," required appraisal management companies
operating in California to be registered with OREA,
and incorporated several portions of the federal Home
Valuation Code of Conduct into California law.
SB 1000 (Correa), Page 10
b. SB 223 (Machado), Chapter 291, Statutes of
2007: Prohibited a licensed appraiser from engaging
in any appraisal activity in connection with the
purchase, sale, transfer, financing, or development of
real property, if his or her compensation is dependent
on or affected by the value conclusion generated by
the appraisal. Prohibited anyone with an interest in
a real estate transaction involving an appraisal from
improperly influencing, or attempting to improperly
influence, the reporting, result, or review of a real
estate appraisal sought in connection with a mortgage
loan.
POSITIONS
Support
California Association of Realtors (sponsor)
Consumers Union
SB 1000 (Correa), Page 11
Oppose
California Bankers Association
California Chamber of Commerce
California Credit Union League
California Financial Services Association
California Independent Bankers
California Land Title Association
California Mortgage Association
California Mortgage Bankers Association
First American Corporation
Consultant: Eileen Newhall (916) 651-4102