Our Commercial Grade author John Cicero will be back in full form on March 2nd, assuming he doesn’t break something on the ski slopes. Lets hope he doesn’t.
John Philip Mason is a residential appraiser with 20 years experience and covers the Hudson Valley region of New York. He’s a good friend and a true professional who provides unique insight to appraisal issues of the day. Here is his weekly post called Solid Masonry. Jonathan Miller
“Ameriquest Mortgage Co.’s recent $325 million lawsuit settlement with 49 state governments suggests all isn’t well in [the] home-loan industry.” But if you read between the lines, it may also not be well for the venders who service these lenders.
As indicated in the recent article Cleaning Up Subprime Mortgages [Boston Herald] it becomes all too clear just how far some members of the lending industry might have to go to make things right. And the sad truth is Ameriquest isn’t alone. While Ameriquest denies any wrongdoing, the settlement attempts to correct numerous issues concerning the application, processing and settlement of mortgages.
For one thing Ameriquest has agreed loan officers must also provide good-faith estimates of closing costs in a timely manner – and can’t “disparage, discredit or otherwise encourage (borrowers) to disregard” these figures.” In short, Ameriquest will have to adhere to the estimates they provide. It’s well known throughout the lending industry that some banks and mortgage brokers understate the good-faith estimates when borrowers are applying for loans. The technique steers borrowers away from honest lenders who are unwilling to play the “bait and switch game”. Some individuals claim these fraudulent estimates represented less than half the funds needed to close the loan. In addition, lowball estimates can be used to make higher lending rates look more attractive.
To be sure, this deceptive practice is a major issue for both consumers and honest lenders. But wait, national lenders smell a marketing opportunity, especially in light of a slowdown in mortgage applications during the past several months. In Kenneth R. Harney’s A Good-Faith Effort To Clean Up Estimates [Washington Post] he spells out how SunTrust and LendingTree have recently announced programs where they too (without any allegations of wrongdoing) will guarantee good faith estimates, in an attempt to lure more borrowers.
So what does all this have to do with venders? Well if this trend catches on, either through legal settlements, revisions to the laws pertaining to lender requirements or from promotional programs aimed at increasing market share, it will force lenders to sharpen their pencils. And guess who they’ll turn to? The easiest and most cost effective option is to ask the outside venders to lower their fees, as it requires nothing of the lenders and only impacts the profitability of the venders themselves. Only as a last resort will the lenders consider reducing their internal fees or profit margins.
While increased efficiency and reduced costs are good for consumers, the race to the bottom, in terms of vender fees, could further compromise the quality of services provided. At a time when real estate deals are becoming more complex and technical and many real estate markets are in some sort of transition, this could prove unwise and lacking in good faith.
Webmaster’s Note: This is a weekly post by John Cicero, MAI who provides commentary on issues affecting real estate appraisers, with specific focus on commercial valuation.
Disclosure: John is a partner of mine in our commercial real estate valuation concern Miller Cicero, LLC and he is usually one of the smartest guys I know. Jonathan Miller
Yesterday I had the honor of meeting with a high level delegation from Korea. This group was comprised of economists, professors, government officials and appraisers, and was sent by the government to study the appraisal fee system in the United States. In Korea, the government is the largest buyer of appraisal services, and fees are set by the government. Fee are, essentially, a function of the property value. Low fee assignments are very low and are done by the appraisal firms at a loss, with the high fee assignment making up for them. Overall, though, the appraisal community seems satisfied with the current system and their compensation.
However, the government is contemplating a free market, competitive fee system such as we have here in the US. We discussed our system at great length. They were fascinated by the email solicitations for fee quotes, and the on-line bidding systems such as RIMS used by most major lending institutions. They were equally intrigued that, in the vast majority of cases, the appraisal assignment is awarded to those that are, in essence, simply willing to sell their labor cheapest; not who is the most qualified for the assignment. (In an attempt to be fair, I explained that many lenders would not agree with this point. The typical lender response is that “all appraisers on my approved list are competent, so why not select the lowest fee.”)
In Korea, the appraisal profession is highly respected, and they explained that the process of entering the profession is not unlike becoming a lawyer. So when I showed the group that New York State licenses appraisers together with beauticians and notary publics, they seemed genuinely horrified. (I couldn’t understand what they were saying amongst themselves, but it sounded heated!)
The delegation will be reporting their recommendations to their government later this year. I am anxious to see if they can come up with a better system than we have in the US.
John Philip Mason is a residential appraiser with 20 years experience and covers the Hudson Valley region of New York. He’s a good friend and a true professional who provides unique insight to appraisal issues of the day. Here is his inaugural weekly post called Solid Masonry.
This past Sunday the New York Times ran an article Talk About Renting a Hole in the Wall in which a group of architectural students stumble upon an experiment which reveals just how hot, or desperate, the New York City housing market really is. Up late one night (perhaps a little too late) the three students amuse themselves by stuffing a mattress into a transom over a bedroom doorway. Having decided it was “not half bad” in terms of comfort; one of them posts an ad on Craigslist to see if anyone else would find interest in the “elevated mattress” at $35. In a city where most of us think we’ve seen it all, it should be no surprise that about a dozen people responded to the ad. While the students never followed through on actually renting out the space, they are clearly on to something.
And like others in real estate, I’ve seen my share of “creative” housing, including:
To be clear, we never completed any of these appraisal assignments, as the loan was dead once the lender realized there was illegal use of the properties. (Or more likely, once they realized we were not willing to overlook the illegal use.)
But this brings the meaning of “highest and best use” to a whole new level. Let’s face it, the motivation here is much higher rates of return, legal or otherwise. As and example, an apartment can be rented at $1,800 per month to one tenant, or it can also be rented at $3,225 per month to six individuals ($125 per week x 6 people x 4.3 weeks per month = $3,225). It makes sense some landlords are willing to take greater risks in return for equally greater rates of return, especially in light of the high price of investment properties, when compared to the low rates of return on investment under a conventional (legal) rental analysis.
The fact is there is an urgent need for truly affordable housing, no matter how unsafe or unreasonable the conditions might be. When the incomes of poor individuals and families are unable to keep pace with legal rents, the market has demonstrated they are clearly willing to accept less in return. Much less! Wouldn’t a city like New York be better off promoting the development of safe and clean SRO’s, rather than ignoring such sheer demand? Shouldn’t there be consideration for the development of smaller units, even if they don’t meet current “standards”? I’m talking about building new complexes with single rooms, no bigger than 5′ x 10′, with small Pullman style kitchens and maybe a toilet in a closet.
At some point we need to stop debating about what people want and start providing them what they need. If three architectural students in a late evening lark can create such a simple test to demonstrate how desperate the housing crisis is, shouldn’t we as a society rise up to the challenge and meet such a glaring need?
This week John Cicero discusses the disparity in fines for administrative versus substantive violations.
Disclosure: John is a partner of mine in our commercial real estate valuation concern Miller Cicero, LLC and he is one of the smartest guys I know (although I don’t get out much).
I just received my January 2006 newsletter from the New York Department of State [DOS]. Picture of Pataki on the cover…very official looking. Nearly two pages of the four page newsletter are devoted to identifying individuals who have violated some aspect of our state licensing laws. Here are some of the punishments meted out:
I find this fascinating
To the DOS, a violation is a violationdoesn’t seem to matter that one violation refers to maintaining files and another refers to doing low quality work and violating ethics rules. In my opinion, the fines for the first three examples above are probably appropriate, a fine to remind the culprit that as professionals we are obligated to abide by a certain administrative process…
But $750 for communicating a misleading appraisal? That’s about as serious as it gets in our business. And while there are appraisers who do get their licenses/certifications revoked, I suspect that the vast majority of the violators get off with a similar fine.
I know that the State Licensing board works hard but has limited resources at their disposal, in fact, I believe that funds generated from license fees are earmarked to other areas of the government. I think the licensing laws needs to be revised to separate out the adminstrative errors from those that are negligent.
Of course, I don’t know the details of these violations and I am not singling out New York as I can imagine there are other states with the same license law structure, however…
…to the impartial observer the implementation of the licensing law seems to give a green light to those appraisers that would bend their ethics when convenient. Chances are, if caught, they’ll only have to pay a fine that amounts to nothing more than a fraction of the appraisal fee…its simply the cost of doing business.
Webmaster’s Note: This is the first in a series of weekly posts by John Cicero, MAI who will provide commentary on issues affecting real estate appraisers, with specific focus on commercial valuation.
Disclosure: John is a partner of mine in our commercial real estate valuation concern Miller Cicero, LLC and he is one of the smartest guys I know.
We commercial guys like to think that we are sophisticated financial analystswe analyze real estate as an investment vehicle, similar to an equities or bond analyst would. We spend our days cash flow modeling wirh Argus and Dyna. Our training includes advanced capitalization theory, in order to understand the relationship between cap rates and yield rates, and we need to understand theories that, frankly, we’ll never use again (remember the J-factor and the Hoskold premise?). We analyze assets worth hundreds of millions of dollars, and advise clients on managing their real estate risk.
That’s why it’s particularly disheartening that, in these days of appraiser licensing, the state doesn’t quite know what to do with us. I recently went onto the New York State Department of Licensing web site and found the other “professions” that are similarly licensed:
Don’t get me wrong. I have the utmost respect for notary publics, cosmetologists and telemarketers, all of whom work hard to make an honest living. But if this is the public perception of the commercial real estate appraiser, I suspect that attracting bright and talented people to this field will continue to be a struggle.