The New York State Attorney General’s Office reportedly asked many appraisers to submit a formal declaration if they have been pressured by the lending community to provide specific appraisal results, with the threat of withholding future business if the appraiser does not comply. As Sharon Crenson of Bloomberg News reports today, in the news story Cuomo Expands Probe as Appraisers Attest to Pressure:
New York Attorney General Andrew Cuomo is asking home appraisers to declare in writing that they were improperly pressured by mortgage brokers and lenders to inflate estimates…
Its a pretty basic statement since thats the state of the mortgage industry as it currently exists. I have written, spoke, blogged about appraisal pressure until I was blue in the face about the topic so it wasn’t hard to sign the AG’s declaration. In fact, it was a relief.
This has been an exciting time. Ok, maybe exciting is too strong, but its a top twenty right up there with birth of our 4 kids, my marriage to my wife, Yankees winning a World Series (lumping all 26 in one slot for space considerations) and getting a parking space in the commuter lot of my train station.
The AG is taking tangible actions. It seems to me that the first issue, in a strange way, is getting the victims (some appraisers) to actually state there is a problem. I suspect many appraisers are not committed to the idea of coming forward for fear of retribution from their existing clients.
One small step for man (appraiser), one giant step for the mortgage industry.
Interesting development, it seems to me that the AG and other regulators may become more and more interested in valuation techniques over the coming months and years as the industry matures and moves toward the use of more complex financial tools and derivatives. The current developments in the sub-prime market and appearance of derivatives will only hasten regulation and oversight. Exciting times ahead for the industry as the market matures and takes its place along side traded equity, debt and commodity markets. Cutting edge financial engineering will certainly change the status quo. What is your view?
I absolutely agree. As market users demand more precision in valuation of collateral (actually I think they assumed it already existed), regulation will, by proxy, increase. Look all the commotion in the current mortgage market and appraising? No teeth in oversight resulted an unholy alliance between the quality and sales functions. Its tough to create markets when there is a question market about the collateral.
What is interesting, of course, is that the government is in the appraisal business itself — for property tax purposes. And politicians also benefit from higher values.
While the overall tax burden is ultimately determined by the level of government spending, increases in taxes due to higher valuations are automatic, while those due to higher mill rates require a vote.
As an engineer I need to point out that the market users need accurate data. For a house with a real value (divined by magic) of $102,245.45, a lender is better off using the imprecisely estimated value of $105k rather than the precisely estimated value of $235,012.12.
I have been a Sr. Review Appraiser for a large mortgage company. I reviewed appraisals every day and on a national basis. First and foremost, the appraisal industry is doomed. The majority of the current stock of appraisers across the country have no experience in a down market. Even Detroit, MI appraisers are still telling lenders that market values are stable (some even check the increasing box), supply and demand are in balance, and marketing times are under 90 days. Oh my!! Appraisers are presenting reports with conclusions that not in any way supported by any market data. Adjustments don’t make sense, most needed are not even applied, and I can’t count the number of times I reviewed a report with a new comparble for a 75 year old subject property….of course no adjustment was applied because the two are equal. Most can’t even construct a sentance that makes sense much less provide a credible opinion of value. These are appraisers born from the gone (but not forgotten) boom years. These people are still appraising like we are in a consistent rising market. Hitting the mark the client requests just like times when value increases took care of many problems. Well, here is a news flash..the inherant fraud found in the appraisal community and known for a long time to be found in broker’s operations, is just as big a problem with the large lenders. Understand it is just a numbers game that did work when we saw monthly increases in many markets. They simply package the notes, sell them to Wall Street and other investors, then deal with the investor kickbacks when they occur. Problem now is that we are not in boom times and property values are decreasing in many areas of the country. The lenders are desperate for business. Lenders typically accept a tolerance when evaluating appraisals. What the means is, if the appraised value is within the lenders tolerance (for example, over-valued by 10%) the lender will accpet the report as is and use the inflated value for loan purposes. Consider you have a 100% loan and value is pushed by 10%!!! Beyond that, lenders evaluate review appraisers based on the number of accepted apraisal reports, so called “quality” of review work, and the number of reviews completed. Lenders are making USPAP violations in evaluating review appraisers i.e. the number of accepted reviews. Sales people (these are the folks who call on the brokers) put pressure on the entire process because they make a commission, just like the brokers. The actions of large lenders are criminal at best and many executives should be in prison. Lenders employ operations staff who they bully, scare, intimidate, etc to get loans through the process. I can’t count the number of times an underwriter told me they signed off on a stated loan knowing it was fraud but somehow “met” lender guidelines. I have been appraising for many years and now have come to the conclusion I am finished with real estate. The true appraisers of our industry, those who complete credible reports well supported by market data (I’m talking about the honest appraisers) have no place left in our business. Nobody, brokers, buyers, property owners, lenders, Wall Street, and other investors, wants to know the truth. As soon as you produce a report that doesn’t meet their needs, you are gone. It is a disgusting industry run by participants who care about nothing but making a buck. Is it a wonder we are in the mess we now have, I think not.