Foreclosure Update and New Appraisal Regulations

1. Foreclosure Update and New Appraisal Regulations

2. 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

3. 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.

4. 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

5. 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

6. 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.

7. 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.  

8. 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

9. 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

10. 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.

11. 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 District’s Recorder of Deeds.

12. 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.

13. 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

14. 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

15. 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

16. New Appraisal Regulations • Covered both: • Customary and Reasonable Fee Provision • Appraiser Independence Provisions

17. Customary & Reasonable Fee • 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

18. 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 18

19. 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, and preparing and submitting the appraisal report. 19

20. 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. 20

21. 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 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. 21

22. 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). 22

23. 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. 23

24. 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. 24

25. 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? 25

26. 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 26

27. 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 27

28. Appraisal Independence Appraisal independence requirements don’t 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 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 28

29. 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 Similar to HVCC Lesser firewalls for entities < $250 million 29

30. 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 30

31. 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 31

32. For more information: Jeffrey P. Naimon jnaimon@buckleysandler.com 202.349.8030 Clinton R. Rockwell crockwell@buckleysandler.com 424.203.1002