The Department of Housing and Urban Development's tough new campaign against home finance kickbacks and settlement overcharges could be heading to a new area ripe for investigation: unreasonably large appraisal mark-ups.

A top official for HUD disclosed in an interview with RealtyTimes that appraisal "upcharges" may be one of the next targets for enforcement actions in the department's crackdown on violations of Real Estate Settlement Procedures Act (RESPA).

Last week HUD announced $2.25 million in legal settlements with 44 firms around the country, including prominent mortgage bankers, title and escrow companies, home builders, credit unions and others. The legal actions were the first by the department in more than 10 years, and were intended to symbolize HUD Secretary Mel Martinez's personal commitment to consumer protection reforms.

All of the companies that signed the agreements promised to terminate the alleged kickback and overcharge practices identified as abusive by investigators, but admitted no wrongdoing.

One of the settlements -- with Folsom, California-based Central Pacific Mortgage Corp. -- involved what HUD calls illegal "upcharges" on hundreds of consumer credit reports. Upcharging means tacking on extra fees to settlement services performed for and paid by a home buyer or refinancer. A commonplace example in the credit field involves charging a borrower $45 or $60 at settlement for a credit report that actually cost the lender or mortgage broker $15 or less.

None of the recent settlements announced by HUD dealt with appraisals, but a HUD official said the agency is taking a hard look at allegations of upcharging on home valuations. He cited the example of a settlement where the appraiser was paid $300 for a valuation, but the borrower was charged $450 at closing. The lender, broker or an appraisal management entity pocketed the $150 extra for "doing essentially little or nothing," said the official, "and that constitutes an unearned fee" that violates Section 8(b) of RESPA.

Although the official, who requested anonymity, declined to discuss specifics of any cases under investigation or negotiation, he suggested that a $150 upcharge tacked onto a $300 appraisal "to cover shipping and handling" would not be considered a reasonable add-on for bona fide services by the upcharge recipient.

Many appraisals in today's home real estate market involve add-ons by appraisal-management companies. The management firms maintain national lists of licensed appraisers, monitor quality standards, and provide lenders with appraisal services wherever they need them. Fees added on by management companies vary, but HUD has never issued specific guidelines regarding what constitutes a "reasonable" percentage mark-up.

Some appraisers complain that when they work for management companies they perform their traditional valuations for less -- $175 instead of $250, according to a Virginia appraiser -- while the consumer pays $350 or more. Another appraiser said he has worked for a management company affiliated with a well-known national mortgage lender for three years, and gets paid $200 per valuation while homebuyers are charged $400 at settlement.

"A 100 percent mark-up can't be right," he said in an interview. "Where's the value being added (by the management company) that's equal to my own fee? That's not fair to the home buyer."

The hint from HUD on this issue? We just might agree, and we're coming to investigate.

For more articles by Ken Harney, please press here.

Published: December 3, 2001

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.