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New York State expected to unveil landmark appraisal management company rules in June

With an eye on an approaching federal deadline, New York State is drafting legislation that would require appraisal management companies — the firms that mortgage lenders enlist to hire appraisers — to register with the state. Despite their critical role in the generally highly regulated residential real estate industry, the companies currently have no oversight.

However, even as the state Board of Real Estate Appraisal is moving forward with developing the proposed legislation, it would not provide proposed language. Nevertheless, the federal legislation has several requirements. For example, states must license the firms; they must ensure that the appraisers working for the firms are licensed; and determine that no owner of such a firm has ever had an appraiser’s license revoked or denied in any state.

However, despite the new licensing, the proposed rules will likely have little impact on the companies’ place in the industry, which remains full of potential conflicts of interest, insider sources said.

State regulators are expected to present the proposed measure at a June meeting of the Board of Real Estate Appraisal, a quasi-governmental entity that advises the New York Department of State and helps craft regulations. The board could approve the language at that time, board member Carol DiSanto said at the most recent meeting on April 3.

Once approved by the board, the bill will go to the state legislature. A new law is expected to be approved by 2014, Stephen Roefaro, board chairman, said at the meeting. DiSanto and Roefaro’s statements were made as individuals, not as representatives of the board, a DOS spokesperson said. The DOS regulates appraisers, real estate brokers and will ultimately regulate appraisal management companies, known as AMCs.

States are required to regulate AMCs under the Dodd-Frank Act, the landmark financial reform legislation passed in 2010. Though the deadline is inexact, states are expected to have laws in place by 2015. Several dozen states have already passed similar legislation. New York’s Department of State regulates and licenses individual appraisers, but not AMCs.

AMCs grew in importance with the passage of Dodd-Frank, which was intended to place a firewall between banks and mortgage brokers on the one hand, and appraisers on the other.

Before the financial crisis, banks and mortgage brokers would reach out directly to appraisers or firms that employed appraisers to obtain a valuation on a home. But in 2009, the federal Home Valuation Code of Conduct took effect, prohibiting banks from contacting appraisers directly in an effort to remove conflicts of interest that were seen as a cause of the housing bubble and subsequent collapse. The Dodd-Frank rules supersede the 2009 law.

Now, banks reach out to the third-party AMCs which are intended to act as an unbiased intermediary that selects an individual appraiser based on price, turnaround time and sometimes market knowledge.

Yet, AMCs are not regulated and, insiders say, some of them are partly owned by affiliates of large national banks, posing yet another potential conflict of interest.

Jonathan Miller, CEO of appraisal firm Miller Samuel, said this legislation was a necessary but very small first step.

“You have to have this, like a license to drive a car, it is a bare minimum,” he said. “But the idea that they [have been able to] conduct business and not be subject to any kind of licensing when we just came out of the worst financial services crisis in the modern era — is odd.”


The Low Appraisal “Hassle” is a Symptom of a Broken Mortgage Process

September 16, 2013 | 3:58 pm | nytlogo |

Last week we saw a chorus of “appraisers are killing our deals” stories in some major publications:

  • When Appraisal Hassles Tank a Home Sale [WSJ]
  • When Appraisals Come in Low [NYT]
  • Appraisals Scuttle Home Sales Where Prices Rise Fast[IBD]

I’ve long been a critic of my own industry. Like any industry there are terrific appraisers, average appraisers and form-fillers. Post-Lehman there are a LOT more of the latter.

The scenario that prompted these articles and others like them occurs when a sale is properly vetted in the market place and an appraiser enters the transaction and subsequently appraises the property below the sales price. It supposedly is happening in greater frequency now, hence the rise in complaints.

My focus of criticism has largely been centered on appraisal management companies (AMC), who have tried to convert our industry to a commodity like a flood certification or title search rather than a professional service. AMCs serve as a middleman between the bank and an appraiser and they have thrived as a result of financial reform. Most only require an appraiser to be licensed, agree to work for 50 cents on the dollar and turn work around in one fifth the time required for reasonable due diligence. Appraisal quality of bank appraisals has plummeted in this credit crunch era and as a result has prompted growing outrage from all parties in a transaction.

Of course, the market value of the property may not be worth it. But the real estate industry doesn’t trust the appraiser anymore so we point them finger at them automatically.

Yes, it’s a hassle. So let’s decide what the problem really is and fix it.

A long time appraisal colleague and friend of mine once told me before the housing bubble burst:

“Jonathan, you as the appraiser are the last one to walk into the sales transaction. Everyone involved in the sale is smarter than you. The selling agent (paid a commission), the buyers agent (paid a commission), the buyer (emotionally bias), the seller (emotionally bias), the selling attorney (paid a transaction fee), the buyer’s attorney (paid a transaction fee) and the loan officer or mortgage broker (paid a transaction fee) all know more than you do.”

The appraiser in this post-financial reform world doesn’t have a vested interest in the transaction like they did during the housing boom – some could argue they are too detached. The vested interest I speak of occurred during the bubble when mortgage brokers and most banks generally used appraisers who always “made the number.” Incidentally, many of those types of appraisal firms are out of business now.

Let’s clear something up. The interaction an appraiser has with a lender when appraising below the purchase price now is not that much different than during the boom. When an appraiser kills a sale, the appraiser is generally hit with a laundry list of data to review and comments to respond to questions from the AMC, bank or mortgage broker who use the “guilty until proven innocent” approach even though the bank likely won’t rescind the appraisal. The additional time spent by the appraiser is a significant motivator to push the value higher to avoid the hassle if the appraiser happens to be “morally flexible.”

And by the way, sales price does not equal market value.

The sources for most of these low appraisal stories I began this post with come from biased parties so it makes it clear that low appraisals are the problem. In reality, the low appraisal issue is merely the symptom of a broken mortgage lending process. The problem is real and becomes more apparent when a market changes rapidly as it is now. Decimate the quality of valuation experts and you generate results that are less consistent with actual market conditions and therefore more sales are killed than usual. Amazingly the US mortgage lending infrastructure today does not emphasize “local market knowledge” in the appraisers they hire no matter what corporate line you are being fed. This is even more amazing when you consider that most national lenders have only a handful of appraisal staff and tens of thousands of appraisals ordered ever month.

The cynical side of me thinks that rise in low value complaints reflects an over-heated housing market – that the parties are getting swept up in the froth and the neutral appraiser is the voice of reason. The experienced me realizes that financial reform has brought new appraisers into the profession that have no business being here (and pushed many of the good ones out) and that the rise in the frequency of low appraisals has only seen the light of day because housing markets are currently changing rapidly.

Here’s my problem with the mortgage lending industry today as it relates to appraisers:
• Most of the people running bank mortgage functions are the same as during the bubble, only see appraisal as a cost, not as eyes and ears.
• Banks love the current state of appraisals because the values are biased low (banks are risk averse) and they fully control the appraiser.
• Appraisal Management Companies themselves have no real oversight (some are very good, most are terrible).
• Banks no longer emphasize local market knowledge in their appraisers or they pay lip service to it.
• Short term cost savings trumps emphasis on quality and reliability.

Every now and then (like now) everyone seems surprised and feels hassled when appraisal values don’t match market conditions. However the bank appraisal process has largely morphed into an army of robots on an assembly line – either because we are unaware of the problem until it affects us directly or we just want it that way.

Let’s focus on fixing the mortgage lending process or stop complaining about your appraisal.

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Broken Appraisal: Lack of Market Knowledge Overpowers Lack of Data

January 27, 2013 | 6:06 pm | nytlogo |

There was a really good appraisal story in the Sunday Real Estate Section this weekend by Lisa Prevost focusing on appraising high end properties whose theme is well-captured in the opening sentence:

As home sales pick up in the million-dollar-plus market, deals are being complicated by unexpectedly low appraisal values.

The higher the price strata of the market, the smaller the data set is to work with so the conventional wisdom seems to be that less data = more unreliable appraisals. However I believe the real problem is lack of market knowledge by more appraisers today as a result of May 2009′s Home Valuation Code of Conduct (HVCC) – the lack of data at the top of the market merely exposes a pervasive problem throughout the housing market.

To the New York Times’ credit, they are the only national media outlet that has been consistently covering the appraisal topic since the credit crunch began and I appreciate it since so few really understand our challenges as well as our our roles and relationship to the parties in the home buying and selling process. Appraising gets limited coverage in the national media aside from NAR’s constantly blaming of the appraisers as preventing a housing recovery (in their clumsy way of articulating the problem, they are more right than wrong).

Here’s the recent NYT coverage:

January 27, 2013 Appraising High-End Homes
January 11, 2013 Understanding the Home Appraisal Process
October 12, 2012 Scrutiny for Home Appraisers as the Market Struggles
June 14, 2012 When the Appraisal Sinks the Deal
May 8, 2012 Accuracy of Appraisals Is Spotty, Study Says
September 16, 2011 Decoding the Wide Variations in House Appraisals

The general theme and style of coverage comes about when Realtors start seeing an increase in deals blowing up that involve the appraisal. The Prevost article indicates that higher end sales are more at risk because the market at the top (think pyramid, not as in ponzi) is smaller and therefore the data set is smaller.

This may be true but I don’t think that is the cause of the problem but rather it exposes the problem for what it really is. I contend that the problem starts with the appraisal management company (AMC) industry and how it has driven the best appraisers out of business or pushed them into different valuation emphasis besides bank appraisals by splitting the appraisal fee with the appraiser (the mortgage applicant doesn’t realize that half their appraisal fee is going to a bureaucracy).

My firm does a much smaller share of bank appraisals than our historical norm these days but it is NIRVANA and we’re not likeley to return to our old model anytime soon.

Since the bank-hired AMC relies on appraisers who will work for half the market rate and therefore need to cut corners and do little analysis to survive, they generally don’t have local market knowledge often driving from 2 to 3 hours away.

Throw very little data into the equation as well as a very non-homogonous housing stock at the luxury end of the market and voila! there is an increased frequency of blown appraisal assignments.

There is always less data at the top of the market – the general lack of expertise in bank appraisals today via the AMC process is simply exposed for its lack of reliability. Unfortunately the appraisal disfunction affects many people’s financial lives unnecessarily such as buyers, sellers and real estate agents (and good appraisers not able to work for half the market rate and cut corners on quality).

The appraisal simply is not a commodity as it is treated by the banking industry. The appraisal is a professional service so by dumbing it down through the AMC process, they have succeeded in nearly destroying the ability to create a reliable valuation benchmark on the collateral for each mortgage in order to be able to make informed decisions on their risk exposure.

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Understanding the Home Appraisal Process

BEFORE anyone can buy a house with a loan from a bank or refinance a mortgage, the lender needs an objective assessment of the property’s value — after all, the home is the bank’s collateral for the loan. Assessing the value is the job of the appraiser.

Appraising a home, particularly in New York City, is not simple. Similar apartments just a few blocks from one another can have very different values. The floor that a home is on, the kind of view or light it gets — each factor contributes to its value. The best appraisers are intimately familiar with the neighborhoods they work in.

Jonathan J. Miller, the president of the real estate appraisal firm Miller Samuel, says that with a co-op, he begins by examining the building’s financials: if there is likely to be an increase in maintenance or a special assessment, it might lower the appraisal.

Apartments on higher floors are generally worth more than those on lower floors, particularly when they clear the tops of surrounding buildings, thus affording better views and more privacy, he says. Appraisers record the square footage, the number of bedrooms and bathrooms, and other basics, but they also consider the overall condition, deeming it poor, fair, average or good.

Owners who put in high-end finishes may be disappointed, because “there is no category for superexcellent,” said Roberta Axelrod, the director of residential sales and rentals for Time Equities. While some buyers may be willing to pay more for those finishes, she said, “there is a difference between what the market will perceive as adding value and what an appraiser will determine.”

Once an appraiser has evaluated a home, he or she compares it with similar ones that have sold recently, known as comparables, or “comps.” These should be in the same building, or in one nearby in similar financial condition and with similar maintenance fees, Mr. Miller said. But in Manhattan, similar apartments a few blocks apart can have different values based on proximity to the subway or a park, or whether the building has a doorman or a gym.

In Bedford Stuyvesant, Brooklyn, for example, sales within a few-block radius can range from $250,000, for a dilapidated home. to $1 million for a renovated brownstone with original woodwork, said Sam Heskel, the executive vice president of the appraisal management firm HMS Associates.

Market trends, also a factor in a home’s value, can be hard to pin down, especially if prices in a specific neighborhood rise quickly. Because it can take two or more months from the time a contract is signed on a home to the time appraisers learn of the offer, such fluctuations are not always reflected in the available comps. Appraisers can make what is called a time-adjustment to account for market shifts, but it may be hard to get a lender to accept it, Mr. Heskel said.

The best thing a homeowner or broker can do to help the appraisal process is to prepare a one-page sheet for the appraiser that outlines the changes and repairs that the home has undergone since it was bought, Mr. Miller said.

Given the complexities of New York City real estate, having appraisers familiar with the neighborhoods in which they work is crucial. Unfortunately borrowers don’t always get them. When Shane Koss, a 38-year-old musician, and his wife, Dagmar Kostkova, a 38-year-old farmers’ market coordinator, had their offer accepted on a one-bedroom in Greenpoint, Brooklyn, in February 2012, they didn’t anticipate any problems. Then Mr. Koss received a call from the appraiser. He needed directions to Greenpoint.

The appraisal came in $15,000 under the $400,000 sale price that seller and buyer had agreed on. The loan officer at Quontic Bank suggested that the couple put down $15,000 more, but Mr. Koss and Ms. Kostkova refused. Discussions dragged on as the loan officer tried to get the appraisal amended. George Lazaridis, the president of the mortgage lending division of Quontic, says there is little a bank can do when an appraisal comes in low. Finally, after four months, the couple went to another bank and, with their Quontic loan officer working closely with the new lender to speed the process, closed two weeks later.

These cases have become more common in recent years. In response to the housing crisis, Freddie Mac, the Federal Housing Finance Agency and the New York attorney general’s office created the Home Valuation Code of Conduct, which prohibited loan officers from selecting and communicating with appraisers — a provision that has since become a federal regulation. Now most banks use appraisal management companies, which in turn bid jobs out to appraisers.

Appraisers, brokers and even some lenders say this has only created more problems. David Fuller, the president of the New York State Society of Real Estate Appraisers, says that rather than being paid $400 for evaluating an apartment, an appraiser may receive only $250, with the appraisal management company keeping $150. This has driven experienced professionals out of the business. And the management companies, many of them national operations, have bid out jobs to appraisers unfamiliar with the nuances of New York City real estate.

Allyson Knudsen, a senior vice president for national underwriting of Wells Fargo, says that it uses seven appraisal management companies, including one called Rels Valuation, in which it owns a minority stake. She says appraisers are generally familiar with the markets in which they work. She adds that Rels’s appraisals come in below purchase price about 9 percent of the time, versus an industrywide average of 12 percent.

Yet problems seem to persist. Last summer Alexandra Penfold and her husband decided to refinance their New York City apartment. Though the home is a legal two-bedroom, the appraiser recorded it as a one-bedroom. Even though a similar two-bedroom in the building had just sold for $25,000 more than Ms. Penfold and her husband had paid for their apartment in 2008, the appraisal came back shockingly low — $110,000 less than their original purchase price.

Ms. Penfold notified the bank of the mistake and sent a copy of the offering plan to prove that her apartment had two legal bedrooms. The bank never responded, and she eventually refinanced with another lender.

After researching Ms. Penfold’s refinance application, Amy Bonitatibus, a spokeswoman for the bank, JPMorgan Chase, said, “We fell short in serving this customer and are refunding her fees.”

The best way to challenge an appraisal is to provide evidence as to why it is wrong, be the evidence an offering plan or relevant comps. But that can be an uphill battle. “You have a better chance of winning Powerball than getting a lender to abandon the first appraisal,” Mr. Miller said.


[eAppraiseIT Lawsuit] Cuomo Can Proceed Action Over “Inflated”, “Bogus” Appraisals

June 10, 2010 | 10:04 am | nytlogo |

Ahhh, 2007 seems like only yesterday when I wrote about NY AG Cuomo’s lawsuit against First American‘s appraisal unit, eAppraisIT

Please note: eAppraisIT’s tagline is “redefining value.”

“The attorney general claims that defendants engaged in fraudulent, deceptive and illegal business practices by allegedly permitting eAppraiseIT residential real estate appraisers to be influenced by nonparty Washington Mutual,” presiding justice Luis Gonzalez wrote in today’s unanimous decision. “We conclude that neither federal statutes, nor the regulations and guidelines implemented by the OTS, preclude the Attorney General of the State of New York from pursuing litigation.”

The institutions in my 2007 post have seen change:

  • WAMU…gone!
  • OTS…soon to be gone!
  • First American…renamed CoreLogic.
  • eAppraisIT…business as usual.

New York can proceed with a lawsuit accusing title insurer First American Corp of colluding with Washington Mutual Inc. to fraudulently inflate home values, a state appeals court unanimously ruled on Tuesday.

Attorney General Andrew Cuomo had accused First American and its eAppraiseIT unit in a November 2007 lawsuit of having “caved” to pressure from Washington Mutual to use a list of pre-approved appraisers who provided inflated appraisals, in an effort to win more business.

I have to confess I’m not too neutral here on this issue – a few years ago, I decided not to renew one of our FirstAmerican subscription resources (floorplans) since we had access to more cost effective resources. Despite the cancellation at the end of the contract period, FirstAmerican continued to bill us every month for a year despite dozens of calls by me, then proceeded to threaten us with collection and then ultimately sent us to collection. This was because I opted not to renew my subscription. They couldn’t get us out of their billing system. Scary. On top of that, they never sent the product (they always send the product and then bill you).

I finally resorted to screaming and yelling until I finally got it resolved. I’ve never experienced anything like that before.

Double Whammy
So its hard to believe an appraisal management company owned by FirstAmerican was above reproach but the courts will decide, not a disaffected (you should see the emails between Wamu and FirstAmerican presented in the Cuomo lawsuit. The link to the original lawsuit document is broken now but trust me, the emails were a doozy – here’s the Wamu 10k filing).

A False Premise and a Certain Irony
Here’s irony I can’t shake. Cuomo’s Home Valuation Code of Conduct agreement between Fannie Mae and his office change the landscape of bank appraisal work forever. What started out as good intentions to stop the conflict of interest between mortgage brokers and appraisers, ended up enabling the appraisal management company (AMC) institution which is what eAppraisIT is. The lawsuit shows that AMC are MORE exposed to bank pressure than individual appraisers are.


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Citi Suspends Correspondent Lending – Missing Appraisals, Income Verification

June 25, 2009 | 4:36 pm |

HousingWire.com (a terrific real estate news resource) reported that Citi has stopped accepting mortgage applications from mortgage bankers this week.

A spokesperson confirmed to HousingWire the company entered the temporary suspension over “quality control” issues surrounding documentation of appraisals or income verification seen in — or missing entirely from — previous mortgages purchased through the channel.

In other words, up until this past Tuesday, mortgages applications were still being processed without appraisal and income verification docs. It doesn’t necessarily mean that their loans aren’t being closed without these documents, but for this activity to be suspended and their massive size, things must have become very serious. Disturbing.

Citi is encouraging its correspondent clients to take the time to also review documentation processes to ensure the quality of loans originated for the lender to purchase.

Ok, so Citi has to tell the companies that submit loan packages to actually review them? Thats like a book publisher reminding an experienced book author to spellcheck.

CitiMortgage uses about 5 different appraisal management companies to handle their appraisal ordering and review process nationwide. Combine that with missing appraisal docs from mortgage applications submitted by mortgage bankers and you’ve got worries.

I’m not singling out Citi here (yet it is surprisingly easy) but the state of the national retail bank mortgage lending process is still being run by the same people that ran them during the credit boom. Plus all national retail banks almost exclusively rely on appraisal management companies for their appraisal services.

I am hopeful they have the wear-with-all to get it right. Mets fans are worried too.



[Fly On Wall] Mortgage Lending Status Quo – Appraisal As Nuisance

June 17, 2009 | 12:18 am |

Here’s a communique we received yesterday from a national lender (who took TARP money). The focus of this dialogue is only on the customer, and not assessment tools to measure risk – aka the appraisal. Of course, if we complied with this request, it would be a direct violation of appraisal licensing law.

Good grief.

From: [redacted]
Sent: Tuesday, June 16, 2009 11:38 AM
To: Orders
Subject: RE: Need unti Analysis letter

Hi ,
I need a reply back asap please by today…Our underwriter is ONLY need ing a rough estimate on how much is the specific unit is worth. Appraiser’s opinion will be acceptable on the given subject’s size and location on you company letter head for the property located at [redacted]. We are trying to save our client extra fees on any and everything so if you can let me know how much will be your fee ,the cheapest as possible pls..Let me know if this request is possible. i was told that it maybe No Fee involve at all. Please let me know asap.

Thank You,
[redacted]


Remember this is from a LARGE national lender in serious financial distress. We do work for them occasionally, but they rely nearly exclusively on appraisal management companies.

As I have said before – not much has changed with the interaction between appraisers and lenders.

Sad, really.

Important: Fixing this situation is as easy as this.



[Now Appraisals Are Obstacles?] Talking Out Of Both Sides Of Our Mouths

June 15, 2009 | 10:53 pm | wsjlogo |

The lending business has a love-hate relationship with appraisers – now appraisers seemed to be blamed for preventing the housing recovery. The following WSJ article from about a week ago has been making the rounds through the real estate world.

The orientation of those interviewed in this article come strictly from those heavily involved in the process of making deals during boom times. If someone prevents a deal from happening, they are an “obstacle.” Literally that is true, but there needs to be context applied.

Appraisals are becoming one of the biggest obstacles for Americans trying to sell their homes, refinance their mortgages or tap into home-equity credit lines.

During the housing boom, appraisers often complained of pressure from lenders to inflate home-value estimates to justify dubious mortgage lending. Now, some people in the mortgage business — and some borrowers — say the pendulum has swung too far the other way.

Hmmmm….the old on-off switch.

  • Neutral observer v. party to the transaction
  • Protector v. deal impeder
  • Watch dog v. cost center
  • Risk Management Tool v. Tool

Back in the day (I love that phrase, especially now because it is only 2 years ago), appraisers were marginalized because of our lack of organized political influence. We were treated as a commodity – like a flood certification rather than as a housing expert. Rubber stamping brought in a lot more business to those who played ball..

Valuation disputes are becoming more common now (translation: appraised value falls below purchase price).

Lenders are licking their wounds from billions in losses and the majority of appraisers, raised on a 7 year dose of housing boom, tend to more conservative about market value knowing they won’t be removed from a list because they won’t play ball. Most national retail banks are using AMCs. AMC appraisers are doing just what independent appraisers with integrity never stopped doing during the boom: estimate market value.

The problem is, many of the AMC “appraisers” (who are really form-fillers), are simply reading into the minds of their clients, and giving them what they think they want – low values. In other words, AMC appraisers are all over the map, depending on what their client wants and right now, lenders are not overwhelmingly excited about lending (measured by tightened underwriting) so these appraisers tend to be biased low – just the opposite of 2 years ago.

How about removing bias altogether and estimate market value?

The appraisal management company (AMC) phenomenon, which delivers some of the worst elements to the valuation process, enables legions of inept appraisers to thrive.

Kris Berg, a real estate agent in San Diego pens a perfect picture of the robotic nature of AMC appraisers and lack of competency when meeting them at the inspections for property sales. That’s because most lenders have found the AMC religion and appraisals are being ordered in conveyor-belt fashion, rather than matching up the appraiser with the assignment.

Here is one quote in the article that is absolutely ridiculous and speaks for the AMC phenomenon:

Jeff Schurman, executive director of the Title/Appraisal Vendor Management Association, said AMCs typically take about 40% of the fees and appraisers get the rest. Mr. Schurman said he has seen no evidence that AMCs’ practices lead to lower quality.

This trade group continues to claim the average fee is 40%. My experience and my colleagues rule of thumb is about a 50% discount in fees or more. Put that aside and consider this real world translation:

If you posted a job listing at a company for $100k over the past several years. Due to budget cuts, you offered the same position, when it became vacant at $60k. And hundreds of companies did this, do you think the experience and educational backgrounds of the majority of applicants would be exactly the same in either salary scenario?

Yet that’s the message being conveyed by Title/Appraisal Vendor Management Association. As Warren Buffet once said, “Never ask a barber if you need a haircut.”

Good grief.

Kris Berg and many good agents like her are seeing the adverse impact of AMC appraisers first hand. After all we have been through, the appraiser function as it relates to lending remains as it was, unreliable.


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[Appraisal Management Companies] An Accident Waiting To Happen

May 20, 2009 | 12:51 am | nytlogo |

In other words, the institutional entities that are responsible for ordering, reviewing, approving and managing licensed appraisers, aren’t held to the same or similar standard – Appraisal Management Companies (AMCs).

One of the byproducts of New York State Attorney General Cuomo’s agreement with Fannie Mae (HVCC), was to prevent mortgage brokers from ordering appraisals for conforming mortgages that would be purchased by Fannie Mae. That’s a good idea in general. But by doing that, most national retail banks and many regional banks, are forced by necessity to manage the appraisal process directly. Few have the overhead to do this and therefore resort to appraisal management companies. Call an 800 number and order a report anywhere in the country.

Appraisal management companies are generally paid the same fee as an independent appraiser would be, so they have to find appraisers who will work for 1/3 to 1/2 the market rate (or 2/3 the rate as their trade group claims). To differentiate, they generally require 24 to 48 turn time per assignment, yet an appraisal is not a commodity like a flood certification – it’s a professional analysis by an expert.

Here’s a classic example of the new breed of unregulated appraisal oversight. It’s worth the read. Same problem as the mortgage boom days – pressure, sloppy work, crank it out – just a different type of institution doing the ordering.

And AMCs have a trade group called TVMA (The NAR of AMCs), which does all it can to further their mission. Here’s their recent blog post saying their fees are 60% of the market rate rather than 50% as has been my experience as well as the appraisal organizations who testified in front of Congress.

Think about it - their argument is essentially this: Taking a 40% pay cut is a whole lot better than a 50% pay cut.

Whether it’s 40-20-10 [yet even more spin] or whatever percent the fee reflects what willing sellers (appraisers) and willing buyers (AMCs) in the local marketplace are willing to accept based upon their own self-interests. To try and draw a cause-effect relationship between fee and quality before congress is a little bit disingenuous, absent hard data.

Here’s the AMC fee logic in a nutshell:

If an employer posted a job listing with a starting salary 40% below the last hire’s salary – this will result in no measurable differences in the quality of job applications received? Forget the correlation/causation argument, what about common sense?

Good grief.

For once, I agree with NAR.

Appraisal management companies are not currently regulated at the federal level and regulation at the state level varies. Regulation would ensure that AMCs operate within the same basic guidelines and standards as independent appraisers. Further, this allows AMCs to be regulated within the existing appraisal regulatory structure, which avoids the need to create additional layers of government bureaucracy.

The Appraisal Institute announced the House version of bill 1728:

Furthermore, the bill requires separation and clear disclosure of fees paid to appraisers and fees paid for appraisal administration (i.e., fees paid to appraisal management companies); prohibits the use of broker price opinions in loan origination; and requires registration, and a regulatory framework, for Appraisal Management Companies, with mechanisms to prohibit infiltration by appraisers sanctioned by state regulatory agencies.

That specific wording “and a regulatory framework, for Appraisal Management Companies, with mechanisms to prohibit infiltration by appraisers sanctioned by state regulatory agencies” reflects the situation discussed in the St. Petersburg Times article.

Here’s usually the way the process works:

  • To be approved, the appraiser submits a state license and in some cases, submits a couple of sample reports.
  • The appraiser agrees to the half market rate fee structure and 24-48 hour turn time requirements (market rate is 5-7 days).
  • The appraiser is placed in a computerized queue and is given an assignment
  • The appraiser gets 1-2 calls by young kids out of high school making sure the appraiser will turn around the assignment in 24-48 hours
  • The appraiser has to be very pushy to be able to get into the property in order to turn the assignment around in time.
  • If there is a valuation problem or issue that needs interpretation by the AMC, the solution is often to just disclaim the problem in the addendum somewhere.
  • Little if any interaction available from qualified appraisal professionals on AMC staff
  • The appraiser gets more work if the jobs are turned around faster because the queue is set to have maximum amounts allowed by an appraiser at any one time.
  • Remember, the fees are half market rate. In higher cost housing markets, the fees can be as low as 1/3 the market rate because the AMC appraisal fees are often set at national rates. In other words, appraisers in Manhattan would be paid the same as North Dakota even though the cost of doing business is 4x higher in Manhattan.

Now imagine the quality and reliability of this product, which is not a commodity, but an expert opinion prepared by a professional. It’s hard imagine much professionalism squeezed in this process, isn’t it?

HR 1728 H.R. 1728: Mortgage Reform and Anti-Predatory Lending Act was just passed by the House and Senate and is ready to be signed by POTUS. Here’s the appraisal portion.

It looks as though AMCs will be licensed just like appraisers will:

‘(7) maintain a national registry of appraisal management companies that either are registered with and subject to supervision of a State appraiser certifying and licensing agency or are operating subsidiaries of a Federally regulated financial institution.’

However, this will be more of a revenue opportunity by the states – licensing doesn’t have much to do with competence. Plus, I don’t see how states will have the manpower to provide meaningful oversight other than clerical aspects.

Mark my words here - this is an accident waiting to happen.


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[Sounding Bored] Appraisal Management Companies are enabled but not required

January 22, 2009 | 1:44 am | Columns |

Sounding Bored is my semi-regular column on the state of the appraisal profession. There have been more changes made to the profession in the past several years than in the entire history of the profession, and most of the changes have not resulted in a more credible service. Still, I’d like to hope that the latest financial services sector turmoil will bring a clean slate approach to better regulatory oversight (devoid of insanity).


While appraisers face tough economic conditions in 2009, there is a lot of nervousness invading the insulated land of adjustments and contributory value. I can’t tell you how many people and several clients we have are under the impression that lenders are required to order appraisals through appraisal management companies effective May 1, 2009 under the new Cuomo/Fannie Mae Deal. Related news coverage makes the whole thing sound very scary.

Here’s the Fannie Mae Home Valuation Code of Conduct Frequently Asked Questions (FAQs) on Fannie Mae’s web site that answers many of the questions currently on appraiser’s minds. Here are the comments specific to AMCs:

Appraisal Management Companies
Q25. Is a lender required to use an appraisal management company for ordering appraisals?

No. A lender may order appraisals directly from an individual appraiser.

Q26. May an appraisal management company affiliated with, or that owns or is owned in whole or in part by the lender or a lender-affiliate, order appraisals?

Yes, an appraisal management company affiliated with, or that owns or is owned in whole or in part by the lender or a lender-affiliate, may order appraisals if the appraisal management company meets the criteria of Section IV.B. of the Code.

Q27. When a lender uses an appraisal management company, the appraisal management company is responsible for retaining and paying the appraiser. Is it likewise permissible for a mortgage broker to use an appraisal management company, since the mortgage broker does not technically retain or pay the appraiser?

No. The Code prohibits lenders from relying on an appraisal where the broker had a role in selecting, retaining, or compensating the appraiser.

Q28. May a mortgage broker provide the lender with an approved appraiser list for the lender to use when ordering appraisals for that particular broker?

No.

Please read the entire FAQ. There is a lot of useful information.

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