Lenox Financial Mortgage Only Allows Appraisers to be Paid at Closing

Readers have written in to inform us that Lenox Financial Mortgage has sent out a reminder that it is their policy to only pay appraisers at closing. The notice emphasizes the importance of not paying appraisers "up front at the door" as (they contend that) doing so will reduce the appraisers job to "work as hard to attain the true value of the property". Per the notice:

Effective immediately, it is against Lenox Financial Mortgage Policy to have any appraiser collect their check at the door of the customer. Given the fact that diminishing property values are crippling the industry, when an appraiser is paid up front at the door, there is no incentive for the appraiser to work as hard to attain the true value of the property. Not only does the appraiser have no incentive to assist the client in obtaining the true value of the property, in many instances the appraiser will take an extremely conservative approach to limit their exposure. Taking an extremely conservative approach at this time only exacerbates the problems our clients are experiencing with respect to refinancing or purchasing a home.

Please take immediate action to:

1) ensure that all appraisal requests clearly indicate that the appraiser will be paid at the closing,

2) adjust your fee sheets accordingly so that the appraisers do in fact get paid at the closing,

3) in instances where value may be an issue, ensure that the appraiser does a comp check before proceeding to the property to complete a formal appraisal, and

4) in instances where an appraisal is completed and for some reason the loan does not close, make arrangements with the appraiser to pay him twice out of the proceeds of your next deal.

We find this notice curious. Isn't it in the best interest of the lender that the appraiser reaches the most accurate estimate of the home's value, one neither aggressive nor conservative? Why would a mortgage lender not want their appraisers to be conservative? If appraisers are aggressive, how does that affect the value of a loan on foreclosure?

If appraisers only get paid at closing, doesn't this incentivize appraisers to value the house at an amount that is more likely to foster refinancing? What if the true value of the house isn't enough to justify refinancing? If that were the case, under this policy, the appraiser would not be paid at all!

Don't these types of policies create conflicts of interest for appraisers?

Not surprisingly, the Appraisal Foundation, which created the Uniform Standards of Professional Appraisal Practice (USPAP), has written on this subject in their USPAP Q&A [PDF]:

Question:

I have a potential lending client that wants to arrange for my appraisal fees to be paid at the closing of each financing transaction. Does USPAP permit this fee arrangement?

Response:

USPAP does not address the time frame for payment of fees. In the situation described there must be a clear agreement that the fee cannot depend on the closing of the financing transaction. Accepting an assignment where the appraisal fee is paid only upon successful closing of the transaction is a violation of the Management section of the ETHICS RULE:

It is unethical for an appraiser to accept an assignment, or to have a compensation arrangement for an assignment, that is contingent on any of the following:

1. the reporting of a predetermined result (e.g., opinion of value);
2. a direction in assignment results that favors the cause of the client;
3. the amount of a value opinion;
4. the attainment of a stipulated result; or
5. the occurrence of a subsequent event directly related to the appraiser's opinions and specific to the assignment's purpose.

(Bold added for emphasis)

Though it is by no means clear that USPAP runs contrary to the policy of Lenox Financial Mortgage, it is sufficiently unclear as to why such a policy would be supported by a lender given the unavoidable conflicts of interests such a policy creates.

We felt that MLI readers might want to know Lenox Financial Mortgage's policy on paying appraisers; furthermore, we have created a forum topic to discuss the matter for anyone so inclined (Go here. If you are not yet a member of the forum, please join. Tell us if you agree or disagree and why? Joining is free!