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Tags: Soapbox Blog
Palumbo On USPAP is written by Joe Palumbo, SRA, a long time appraisal colleague and friend who is also an Appraisal Qualifications Board (AQB) certified instructor and a user of appraisal services. Joe is well-versed on the ever changing landscape of the Uniform Standards of Professional Appraisal Practice [USPAP] and I am fortunate to have his contributions on Soapbox.
…Jonathan Miller
If there is one thing that is NOT debatable about USPAP, it is that everyone knows (and agrees) that sales that occur 3 years or less from the effective date of the appraisal need some “attention and addressing”. That is the easy part. Now for the hard part: SR 1-5 (b) indicates that such sales need to be “analyzed”. At a minimum, that translates to “making sense out of the prior sale with whatever information is available in the normal course of business” and beyond if you seek a higher standard of quality.
Analyze like many other words used in USPAP is not defined but is taken as the “normally used context in the English language.
ANALYZE: to study or determine the nature and relationship of the parts of by analysis. synonyms analyze, dissect, break down mean to divide a complex whole into its parts or elements. analyze suggests separating or distinguishing the component parts of something (as a substance, a process, a situation) so as to discover its true nature or inner relationships. dissect suggests a searching analysis by laying bare parts or pieces for individual scrutiny
I realize appraisers are always under the gun when it comes to the search for critical info. Sometimes information conflicts with fact, is available in bits and pieces, does not make sense, is sometimes wrong, and sometimes even raises more questions.
When all is said and EVEN beyond the course of normal business when extra efforts are made there is very little to be found. In those cases where a effort has been made, narrative commentary would likely suffice for the reader to ensure the report contains sufficient information (2-2 ( b)) for the users to understand the report.
Problem is most times appraisers do a great job of STATING sale prices and dates and doing little if anything to “dissect” these sales (if the do, they do not tell me in the report).
There is a whole advisory opinion (AO-1) on what the language can be used as it relates to the normal course of business and prior sale information. In keeping with my previous articles mantra (thou shall not be boring), I will not recite the AO or even aggregate. Maybe there is nothing to say on a prior sale maybe there is? In today’s environment one would be prudent to investigate concessions (they are giving away vacations and 4-wheelers with homes these days people). Some sales have limited exposure to the market and may not be arm’s length some sales take MONTHS to close and some are not even in line with “market prices” (my wife to me for $1).
Here is the point: an appraisal is like a story and the reader (often a client) is seeking to connect the dots. In relocation appraisal both past and future price trends are part of the analysis; in a market value (mortgage appraisal) the historical trend is inherent in the (dated) sales if they exist. When you present your conclusion, and the analysis unfolds, there should be some consistency with the market trends, or the story you told. If Mr. X paid $100,000 10 months ago and you have indicated the market has been stable for the past 12 months and conclude $80,000 I need to understand more about that $100,000to make a business decision. And by the way.NO, I am not asking for two appraisals (someone accused me of that once) just the info THIS one is supposed to have. Sadly the last discussion I had that spurned this blog article (we get two appraisals on every file) went this way. Client: “Hi Mr. Appraiser #1 & Appraiser #2 , I see in your report the subject sold 2 years ago. You have stated the price and sale date (thank you) but have not analyzed that sale”. Appraiser #1 response: “I can not comment on value without doing an appraisal per USPAP”. Appraiser #2 response: “I did not do the appraisal on the home 2 years ago so I can not comment”. Just for the record, these appraisals were “ok sans this issue” and the appraisers are long-time partners that we have worked successfully with for several years, so please refrain from the “your using the wrong guys” thought. This problem is PERVASIVE in the appraisal industry. I have personally experienced this dozens of times.
Here is the wrap. This home sold new 2 years ago and was the builder’s last model prior to a subsequent price decline for such model. It contracted and closed new in less than one month and included a laundry list of “extras” that increased the purchase price substantially. The sale included a concession and a copy of the (major lender’s) appraisal the we received (later) once the owner screamed of his “recent purchase” revealed no way was the sale price market at that time (all 3-bedroom comps, 1-bedroom home). That’s a whole other story but isn’t that how we got here?? Now the appraisers would not have the appraisal but my simple research from 1000 miles away got me the other information. Second disclaimer: 3-year sale analysis is ONLY a requirement for Market Value Appraisals and a relocation appraisal is not market value. Still though, the report did not contain sufficient information (2-2 (b)) and the prior sale issue is just plain common sense and a prudent practice in all appraisals.
So again I askhelp out an old friend, leave the macro paragraph about the future uncertainty of the bailout, economy and the stimulus effect (blah, blah, blah) out and give me a few sentences on that prior sale..just a few quality sentences..please?
Tags: Joe Palumbo, Soapbox Blog, USPAP, Palumbo on USPAP
Jim MacCrate, MAI, CRE, ASA has his own firm, MacCrate Associates, but has worn many hats as a Director at PricewaterhouseCoopers in New York City and Chief Appraiser at European American Bank. He is a prolific writer on valuation issues and teaches a number of the real estate appraisal classes through the Appraisal Institute and New York University. I have had the pleasure of taking a number of courses taught by Jim.
…Jonathan Miller
By James R. MacCrate MAI, CRE, ASA
Appraisers are often confronted with an extremely difficult task in New York City and that is to estimate the market value of the excess development rights or air rights associated with an improved parcel of real estate. Point estimates of value are provided by appraisers that may far exceed the potential value contributed by the air rights as of the date of valuation. In fact, in most instances these excess development rights have little or no value as of the date of value, and more importantly, if these rights possess any value there is no exact point estimate of value for a variety of reasons.
In order to have value, in the basic courses of the Appraisal Institute state four factors influence value:
In order to have adequate demand to create a market in which to estimate value, there must be a number of buyers that are interested in the excess development rights. But, generally, this is not the case. In most locations in New York City, there must a “receiving site” nearby that meets the exact specifications of the New York City regulations to qualify to acquire and benefit from receiving the additional development rights. A market is required in order to estimate market value.
A market is defined by the Dictionary of Real Estate Appraisal as:
The restrictions placed on the transfer of air rights or excess development rights are limited by the New York City regulations. In most instances, the demand for excess developments rights is limited, if they exist at all. Therefore, there is no market as defined by the Appraisal Institute. So, I pose a question as to how can real estate appraisers give added value to a parcel of real estate when there is no market as defined above for air rights or excess developments rights?
Appraisers often, incorrectly, add additional value when in fact there is no market or demand. What’s worse is that financial institutions lend on the higher value that includes a speculative assumption that a market exists for these rights when, in fact, there is no market. Improperly trained review appraisers and loan underwriters fail to catch this situation. (Oh well, we are bailing out the financial institutions).
In the Appraisal Journal, October 1982, an article appeared “Valuing Real Estate under Conditions of Bilateral Monopoly” which addresses many of these issues. In most instances, only one potential buyer exists and possibly several potential sellers, if any and this is known as “monopsony.” This is a classic bilateral-monopoly problem where both the added value to the receiving parcel (buyer) and the diminution in value to the seller can only be estimated after negotiation between the two parties involved. The appraiser does not know the value of the excess development rights to the seller as of the date of the appraisal unless those rights have been sold. And, just because the rights may be sold and under contract does not mean that the price paid represents market value.
Assuming that the owners of the excess development rights and the “receiving site” are well informed or well advised, and acting in what they consider their own best interests, individual specific values for the excess development rights or air rights can be determined that establishes the negotiating range between the parties. The final transaction price is determined by the negotiating skills of the two parties to protect their own interests.
Tags: Soapbox Blog, James MacCrate, Appraisal Process, Straight from MacCrate
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).
Sent from a reader of Soapbox – from a college course offering book. Competitive and rewarding field?
Tags: Soapbox Blog, Jonathan Miller
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).
A few weeks ago I was asked a question by a local real estate agent referencing something my local appraisal competitor was doing. The agent was wondering if our firm could do the same thing for her. This same matter had been brought up to me before by another agent from a different brokerage firm so I didn’t think it was simply a misinterpretation by the agent.
Alarmed, I dropped my colleague a quick email mentioning what the last agent had told me and suggested they look into it and see if one of their employees might be doing something they shouldn’t. I wasn’t accusitory (I didn’t think) and thought tone was more like “I’m sure it isn’t true but you might want to check into it.”
Literally, a minute later I got a flurry of emails, viscious in tone, attacking me and to “get over myself.” This is from the same person who goes out of his way to say hi to me at appraiser functions. I can’t wait to see him at the next one – should be interesting.
This vindictive tone has been played out in the review appraisal scenario across the entire appraisal profession for years and perhaps this is why the appraiser was so sensitive – some appraisers feel the need to unreasonably criticize another appraiser’s work when reviewing a report for a client – in hopes of winning over the client. Nothing wrong with legitimate criticism but often times the line is crossed.
It looks like a private comment to alert someone of a possible transgression is on par with ripping someone to pieces for no legitimate reason.
I’m no Victim here, but why do we as a profession do this?
Professional mores indicate I was wrong so I won’t make that mistake again.
Tags: Soapbox Blog, Jonathan Miller
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Jim MacCrate, MAI, CRE, ASA has his own firm, MacCrate Associates, but has worn many hats as a Director at PricewaterhouseCoopers in New York City and Chief Appraiser at European American Bank. He is a prolific writer on valuation issues and teaches a number of the real estate appraisal classes through the Appraisal Institute and New York University. I have had the pleasure of taking a number of courses taught by Jim. His wife Judy is an SRA and is an accomplished appraiser in her own right, having managed an appraisal panel for a large lending institution throughout its various mergers for a number of years. I can only imagine the riveting conversations at dinnertime.
…Jonathan Miller
By James R. MacCrate MAI, CRE, ASA
I have had the opportunity to review many real estate appraisal reports over the last two years and I am amazed by the number of real estate appraisers who only use
to develop overall capitalization rates. Commonly known as the Ellwood formula. No wonder why folks question real estate appraisals on commercial properties. This formula does not reflect the actions of informed real estate investors. In fact, in 1971, Max Ramsland, MAI pointed this out succinctly in his article “Ellwood: A Practitioner’s Observations” in The Appraisal Journal. In English, this formula basically states that an indication of the overall capitalization rate can be developed by taking the following steps:
The Ellwood formula was designed as an analytical tool for real estate appraisers, investors and other real estate professionals. Its misuse was clearly evident during the real estate collapse of the 1970’s and 1980’s. The model above is for a level income stream over a specific number of years. Who buys real estate expecting the income to be level over the projection period? If income and value are expected to change over time, the Ellwood J or K factor must be applied and incorporated into the formula. It appears that it is being misused again by real estate appraisers. Mr. Ramsland points out several weaknesses that are worth revisiting at this juncture.
First, it is extremely difficult to verify the equity yield rate required to attract investors to real estate investments. Many real estate investors will not disclose their “hurdle rates” to invest in real estate. Abstraction of the required information to properly apply this methodology is difficult. During the last several years many transactions that occurred were the result of a 1031 or tax-deferred exchange which created aberrations in the observed overall rates, sometimes below 4.00%. These transactions were driven by after tax returns and appraisers generally do not have access to the information required to develop a proper analysis. Many of the transactions were not economically justifiable and this is becoming evident now. If this information is abstracted from historical transactions it can be very misleading without proper consideration of the market conditions as of the date of sale. Mr. Ramsland points out that investors have various reasons for making an investment decision: some of which are well thought out and others who dream about the future and hope, but are incorrect.
Appraisers often assume that investors will hold the property for ten years and that the property will appreciate in value. The market indicates that values do not always go up and, in fact, can decline for long periods of time and/or stay stabilized. Finally, what investors use this analysis to make an investment decision? I have been in this business for more than 25 years and the last time investors used this model the real estate market collapsed.
Mr. Ramsland further points out that “the allowance for depreciation can have a measured affect on the final value estimate if not realistically applied. A more serious problem could exist, however, if the appraiser projects an equity-yield and depreciation factor inconsistent with safe investment practices.”
Terry Grissom, PhD, at the University of Ulster, Ireland points out that the issue of stable income and the assumptions behind an accumulated sinking fund growth factor is an accrual valuation measure that is inconsistent with discounted cash flow analysis and the cyclical nature of real estate investments. Valuation needs to explicitly cope with changes over time to return to equilibrium or growth assumptions during down phase. Don’t misunderstand me, the Ellwood formula is an excellent tool in the arsenal that appraisers have to utilize to develop overall rates if applied correctly; but with computers available today, appraisers should apply the methods employed by investors who acquire real estate. In addition, more than one method should be used to support a capitalization rate. The appraiser can consider the following methods to develop an appropriate overall rate:
All techniques to develop a capitalization rate should produce similar results if properly constructed with the correct assumptions.
Note – Thanks to Max Ramsland, MAI, Duluth Minnesota and Terry Grissom, PhD, University of Ulster.
Tags: Soapbox Blog, James MacCrate, Appraisal Process, Straight from MacCrate
Also posted on our Matrix blog.
It was fun to open the New York Times this morning and see Samantha Storey’s well written real estate cover story And the Blog Goes On on 6 real estate bloggers – with the added bonus of an above the fold photo. Even better that I was one of the bloggers profiled.
Aside from moi, others covered include Lockhart Steele of Curbed, Jonathan Butler of Brownstoner, Doug Heddings of TrueGotham, Noah Rosenblatt of UrbanDigs and Property Grunt of PropertyGrunt are all long time bloggers who have been on my blog roll nearly since day1 and continue to provide their unique take on all things real estate and whatever else is on their mind. All of us have different approaches, purposes, styles and audiences… thats what makes the blogosphere so cool.
On a personal note, I’ve never been superimposed on a mouse, especially as a long time trackpad user. I wonder if the “upside down” position of my photo could have some sort of hidden meaning? Like… “turning real estate on its head”, “being upside down on a mortgage”, “looking at things in a different way”?
Probably not.
Ok, back to work.
Tags: Soapbox Blog, Jonathan Miller
Fee Simplistic is a regular post by Martin Tessler, CRE whom after 30 years of commercial fee appraiser-related experience, gets to the bottom of real issues by seeing the both the trees and the forest. Marty has never been accused of being a man of few words and his commentary can’t be inspired on a specific day of the week.
…Jonathan Miller
From illiquidity to insolvency, to default, to unemployment, to declining demand for space and consumer spending, to falling rents, growing vacancies and overall economic gloom coupled with looming mortgage refinancing in the face of a continued credit market freeze-up. Is it time to realize that this might well be the perfect storm? What lessons have we learned? It does not take Advanced Appraisal 501 to have foreseen that the frenzied market produced by low interest rates, CMBS securitization that off-loaded risk, easy credit and lax underwriting standards, if not their complete absence as in the residential sector, was a disaster waiting to happen (archival Soapbox postings would confirm).
The appraisal world however, true to its role in reporting what the market was experiencing as of the valuation date, could only report back market metrics of sales prices/square foot, going-in cap rates, cash-on-cash yields, expected investor yields, rental growth, and vacancy trends. And if the appraisal lived up to its fundamental requirements, it would include a section on supply and demand metrics for the particular use of the subject property. Anecdotally, I can count on the fingers of one hand the number of appraisal reports reviewed in my previous financial institution days that truly measured supply and demand factors in apartment sale and rental scenarios, shopping center appraisals where share of the market sales ratios were calculated, office space supply and absorption vs. employment growth. This is not to say that these metrics were not presented in the appraisal report but the manner of presentation was generally “boilerplate” filler to convey the feeling that these factors were being addressed.
We have gone from a capital driven market back to what will be prevailing supply and demand metrics in the specific geographic market of the subject property. In essence we will be forced to return to market analysis as the basis of valuation rather than rely on the frenzied deals of the past created by easy credit. Nowhere is this more evident than in an overview of the capital markets where in 2007 commercial property sales generated $500 billion in financing that declined to $150 billion in 2008. For 2009, loans projected for maturation refinancing total between $80-90 billion. The present closure of the securitization market will mean that valuations are going to have to be dead-on in their opinion of value and absent bonafide market analysis measuring supply and demand the appraisal will likely not be worth the paper it is written on.
This brings to mind the question of estimating value in a market that is virtually shut down and is stuttering along to find itself in volatile economic circumstances. Should the FIRREA/USPAP protocols be amended to mandate that every appraisal look at a downside risk scenario? Thus not only would the appraisal report the opinion of value as of the date of value but it would also include the lower end of value if economic and market assumptions did not pan out. If investors and lenders are exposed to the downside would it enable a thawing of the credibility and credit freeze prevailing today? My opinion is-yes it would at least help.
The Wall Street Journal, in a recent article reporting on the mezzanine debt that financed the acquisition of the John Hancock Tower, quoted a lawyer specializing in real estate that “tranche warfare” is starting in the battles over who will sustain losses or retain equity from overleveraged debt and how these are going to be battles never previously encountered. The article went on to point out how mezzanine debt was sliced and diced among different investors similar to the tranching of CMBS debt. Compounding the problem is the fact that if there was a default an appraisal was to be undertaken to determine which investors retained equity and who were wiped out. Needless to say, arguments over the appraised value have started. A major factor contributing to the cash flow shortfall was that in the two year period from the time of the purchase vacancy in the building went fro 0 to 15%. Whether this was on the radar screen of the appraisers or attributable to the market would have been something that turned up in a definitive market analysis. This will be a very interesting period for lawyers if not appraisers who may well discover that the slicing and dicing may well have produced values (or prices) greater than the sum of the tranched parts.
All hands on deck man your battle stations
Tags: Soapbox Blog, Martin Tessler, Absorption, Fee Simplistic
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.
Tags: Appraisal Management Companies, Soapbox Blog, Jonathan Miller
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).
Also posted on Matrix
The appraisal world changes on May 1, 2009.
I have been on a mission over the past year to creat awareness of the continuing issue of appraisal pressure and to prevent the enabling of appraisal management companies via the Cuomo/Fannie deal to dominate the mortgage appraisal business. It appears a foregone conclusion that appraisal management companies will dominate the mortgage appraisal process and as a result, will end up with a system worse off than before the credit crunch began.
Earlier this year, Mr. Cuomo threatened to sue government-sponsored mortgage investors Fannie Mae and Freddie Mac for allegedly failing to ensure that appraisers were shielded from pressure to inflate their estimates. Appraisers have long maintained that many loan officers or brokers, whose pay depends on how many loans they complete, pressure them to come up with value estimates high enough to ensure approval of the loans.
In March, Fannie and Freddie, eager to avoid a legal battle, agreed with Mr. Cuomo on an appraisal code of conduct. That plan drew fire from mortgage-industry groups and some federal regulators. Among other things, they said the code could raise costs for consumers and cause unnecessary disruption in the appraisal business.
One of the key issues facing appraisers was the pressure we were placed under to “hit the number” during the recent mortgage/housing boom. 20 years ago our clients were stodgy financial institutions with a separate appraisal departments surrounded by a firewall to keep loan officers away from the appraiser. Just before the onset of the credit crunch, the mortgage system originated something like 3/4 of its volume via mortgage brokers, who are paid when the loan closes. They select the appraiser {red flag} to perform the appraisal for the mortgage. If the appraiser comes in low, eventually, maybe not initially, the mortgage broker would find someone “better” {wink}. I can tell you, 75% of the appraisals completed for mortgage purposes are not worth the paper they are written on.
New York State Attorney General Cuomo opted to start with the appraiser and follow the mortgage. He ended up striking a deal with then GSEs Fannie and Freddie to curtail some past practices called Home Valuation Code of Conduct or HVCC. Some appraisers lovingly call the agreement “Havoc” because of the chaos it created. It enabled appraisal management companies.
One of the main changes was removing the ability of mortgage brokers to order mortgage appraisals directly if the mortgage was to be sold to Fannie and Freddie. If a mortgage application has an appraisal order through the mortgage broker, then Fannie Mae and Freddie Mac won’t buy it from the bank. This is a significant incentive for a lender because many banks need to sell their loans rather than retain them in portfolio in order to recapitalize and lend more.
I thought this was a terrific idea because stopped this tainted relationship structure between the person setting values and the person being paid on a commission if the value was high enough. But with this solution, a problem was created and that new problem outweighs the former problem.
Because of the way the HVCC is being implemented, most lenders are effectively incentivized to order appraisals through appraisal management companies. The best way I can describe much of this cottage industry is:
a centralized appraisal ordering and management organization run by 19 year old kids without any real estate experience who focus nearly exclusively on turn time and half market rate appraisal fees.
Kenneth Harney, of the nationally syndicated column, The Nation’s Housing in the Washington Post writes in his article: An Appraisal Upheaval
When you apply for a mortgage to buy or refinance a house, should you be concerned that your appraiser is being paid much less than the $300 to $600 you’re charged, perhaps half?
Should you know who pockets the rest, or that cut-rate fees are too low to attract the most experienced appraisers?
Should you care that the appraiser might be pushed to come up with a number so quickly — almost overnight in some cases — that he or she doesn’t have the time to do a proper inspection and accurate evaluation of comparable properties, pending sales contracts and local market trends?
Without realizing it, Cuomo has moved the problem from “values biased high” to “values unreliable”
But some prominent appraisers are scathing in their criticism of management firms. “Their quality is terrible — all they want you to do is crank it out at the lowest cost,” said Jonathan Miller, president and chief executive of Miller Samuel, one of the largest appraisal companies in the New York City area. Only “the least experienced people” are willing to do the work, he said, “and the product is unreliable.”
In recent issue of American Banker, Kate Berry wrote an article Re-Appraisal: How Revision is Recasting Expectations
“You’re creating a situation where a lender is going to have to order a lot of appraisals from an AMC,” said Jonathan Miller, the president and chief executive officer of the New York appraisal firm Miller Samuel Inc.
Mr. Miller said, “Appraisal-management companies are subject to the same pressure as mortgage brokers; only there’s actually more at stake. They’re almost more vulnerable” because most of the companies depend heavily on a few lender clients.
Do you remember the AMC known as eAppraise-it?
Cuomo sued them for all the reasons this agreement shouldn’t be implemented without modification.
Tags: Jonathan Miller, Soapbox Blog
Appraisal Contemplations is a column written by native Californian and a certified real estate appraiser, Aaron O. Thomas. He began appraising in Arizona and eventually ended up in San Diego where he owns and runs San Diego Appraisers. His firm specializes in greater San Diego County area residential properties and his clients include mortgage brokers, CPAs, lawyers, businesses and homeowners. Aaron is very outspoken and passionate about real estate appraising. Colleagues on Appraisers Forum have long known him as “Tucson Appraisals.” Good thing it’s too warm in San Diego to have the wool pulled over his eyes to the unethical business practice of the day: “comp checks.” Like me, he experienced a growing frustration in recent years with the form-filler mentality that many appraisers and users of appraisal services have embraced.
…Jonathan Miller
There is a lot to be said about the growing pains and transitions that the housing industry is currently experiencing. Surely there is enough blame to go around. The borrowers exceeded their budgets, mortgage brokers coerced/pressured Appraisers for value to make the deal work (regardless of the moral implications), banks offered faulty sub-prime packages with minimal qualifications or safeguards and Appraisers promised/pushed values like a rocket to the moon. But through it all, there has been one main complaint from the honest Appraisers who saw the light…comp checks.
Comp checks were visible at the heart of all these problems. Even throughout the housing crisis, instead of the focus being placed on risk management, it was always placed on value, i.e. “making the deal work”; whereas common sense should have indicated an attitude of making sure certain assets are protected. Surely, there are a good sum of Appraisers that are bitter and worn down on the comp check issue because it seems like we speak out constantly and nothing happens.
But is that really true? I think not.
When the original HVCC was written it addressed pressure, but not comp checks. We rose to the occasion and made our voices heard and now there is specific verbiage about comp checks included. Not only were our voices heard, but they were taken seriously well after the initial comment period of the original draft. Is this not proof that our voices are indeed powerful? That if we but simply do our small part and write a letter or two each, that we can accomplish great things?
For several years it seemed like Appraisers were split on how to resolve the many flaws in the industry. For the most part, we could not agree on any course of action. However, it does appear that we could agree on sending an endless stream of letters to our leaders and the people in charge of drafting these rules that would ultimately regulate us. The HVCC is not perfect, but one thing is clear, we brought about some of the changes that we so desperately wanted.
I think the power that has been lent to our collective voices has been augmented by that of the housing crisis and it still is. So why not take advantage of this great advantage (augmentation) and push the envelope this next month. We can push our law makers to not only make rules, but make comp checks downright illegal.
Over the past several years there’s been arguments among Appraisers on whether comp checks were in compliance with or against USPAP. There was arguments whether it was right or wrong. Or if it’s a disservice to the client or an actual service to the client. All of those arguments in my opinion should be moot, for I must point out that the bigger picture here is that comp checks were and still are being used for mortgages, thus focusing on hitting values; instead, the focus should remain on honest opinions of value in order to protect the banks assets.
It is bad enough we have this constant threat from borrowers and mortgage brokers looming over our heads if we don’t hit value, so with that in mind; it might just be the perfect time to hit a home run with illegalizing comp checks.
Tags: Soapbox Blog, Appraisal Pressure, Aaron Thomas, Appraisal Contemplations
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Columns
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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).
On November 19, 2008, to little fan fare, a joint agency request for comments on proposed Interagency Appraisal and Evaluation Guidelines was made. Comments are due by January 20, 2009.
I called on Jim MacCrate to get his thoughts on this initial foray by the federal government to fix what is broken in the appraisal industry. Jim is a highly respected appraiser and teacher in the valuation community and who holds the MAI, CRE and ASA designations. He also contributes to this blog in his widely read “Straight from MacCrate” column.
Like many things in my life, I was delayed in posting his commentary to Soapbox.
I asked Jim to run down the document as presented and I throw in a few observations of my own:
Jim
First, the government has acted in haste with outlining the causes of the collapse in the credit markets. I believe, based on my experience, it was poor underwriting standards and lack of enforcement by the FEDS, state governing agencies, accounting firms and others who were responsible for sound underwriting practices. This was a repeat of the 1970’s but it will be far worse.
The OCC regulations and the regulations from the other duplicate agencies had similar guidelines after the bust of the seventies and eighties. Why were they ever changed?
Licensing weakened the quality of reports nationwide. It established minimum qualifications, not experience and expertise.
Jonathan I agree. Appraisal quality diminished with licensing because it was used as a placebo for competence.
Jim
Professional organizations, whether it be appraisers or lawyers or accountants, can not self regulate. That was a joke of the nineties and in to the 2000 error.
Jonathan I remember in 2005 when the Mortgage Bankers Association said there was no real issue with appraisal pressure and the solution was to have appraisers simply do a better job at self-regulation. Of course now 60% of mortgage brokers are gone.
Jim
My understanding is that the employees of the regulatory agencies have very little experience in valuation. For example, there is only one MAI at the Federal Reserve. Economists do not understand what we do. See article from the FED on the value of an acre of land in NYC in 2006.
Real estate lending was always a credit decision first. You look to the collateral when the credit fails.
Jonathan Exactly.
Jim
Personal guarantees are meaningless. AVMs are part of the problem. Economists and statisticians believe in them. The databases are screwed up. They are reportedly using BPOs and that further weakens the reliability. Brokers have a conflict of interest. See Wall Street for Support. Of course no conflicts of interest between Goldman, AIG and others.
Independence
Jim
You know ethics, honesty, etc. are more important than independence. It is this generation that has done anything for a buck and failed to consider the consequences.
Jonathan Absolutely, but if the appraisal industry can not work without being pressured to “make the number” as has been past practice, then honesty and ethics fade away as those individuals are driven out of business. How can I compete with someone who is fast, cheap and always comes in with the exact number needed to make the deal?
Selection of Persons Who May Perform Appraisals and Evaluations
Jim
There is no comment on years of experience. That is caused by the licensing. Back in the seventies (and there were problems too) appraisers were selected because they had the MAI or SRA. Those standards were way above today’s. States do not have the money, knowledge or resources to enforce compliance [with state licensing]. Folks who order appraisers should be knowledgeable and qualified to do the appraisal; otherwise how do they know who to hire?
Jonathan I agree with you – Take Appraisal Management Companies: We are often dealing with kids just out of high school who have no real estate valuation experience, let alone understand the problems with valuation. And revenue collected from state licensing boards for oversight is often diverted to other areas of the government. The problem with “pure” enforcement is that it becomes an argument of semantics because valuation is an opinion. Fraud aside, how legally viable is it for a state agency to reprimand an appraiser who estimated the value of a property as $500,000 when the state employees think its $475,000, especially when there is limited market data? It’s tough to say anything a certain percentage below or above the state value is unethical. And what if the state is wrong? It’s not a realistic solution.
Minimum Appraisal Standards
Jim
The Appraisal Foundation weakened its standards with the latest version and previous version. Economic principles drive valuations. Three approaches to value are the support to a supportable, defensible estimate of value. You knock off one leg of a three legged stool and what happens. The stool falls over.
The comment on AVMs should be stronger.
The Scope of Work is correct. It is up to the agencies and the financial institutions to determine the scope of work; not an appraiser. Risks are determined by the financial institutions who then should determine the scope of work required to protect the financial institution if the credit fails. The collateral is the default to protect from losses.
Tract Developments with Unsold Units
The appraiser should include and analyze the developer’s projections. The appraiser can not work in a vacuum. They need the information to properly analyze these types of projects. See what was written in the 1990’s by Prittenger and others for the OTS. Why are we reinventing the wheel? We spent tax payers dollars on this issue in the 1990’s and late 1980’s.
What happened to a market analysis? That led to failures in the 1970’s, 1980’s and now with REITs. I guess supply and demand are not important criteria that determine pricing.
market analysis should be performed by state-certified or licensed appraisers in accordance with requirements set forth in the appraisal regulation..
experience is the key. A license does not make you qualified.
Transactions That Require Evaluations
All transaction should be evaluated to prevent fraud.
the reputation and qualifications of the person(s) who perform evaluations are the key.
Reviewing Appraisals and Evaluations
Who is doing the review for the financial institution? A check is needed. They cut costs and relied on unqualified appraisers to the work. Knowledgeable folks in the appraisal process must do the review. I know it’s a pain but it is a safeguard that the system had and it was eliminated by many financial institutions. A loan officer has a conflict of interest because how they may be paid or compensated.
USPAP sets minimum standards. The financial institution must set the standards that exceed USPAP and they must be enforced at all levels, including the CEOs who tell lending officers oh, it is not necessary this time around..
Referrals
Jim
They will not do it. That is a joke. It is up to the regulatory agencies to sample the loan documentaion and if they see a problem, they should make a referral.
I think the first part indicates that the authors do not have experience or knowledge of the past or what has been written by the OCC, OTS, FDIC, etc. in their regulations. The real culprit was greed by CEOS and Wall Street who had no interest in the future but only current earnings now. The MBS market allowed lenders to off load loans without recourse by the investors in the final packages put together by the likes of Goldman Sachs, etc. who indirectly got bailed out by lending and supporting AIG.
This document does not address what has caused the problem and that is to hold those at the top, lending officers, accountants, etc. accountable financially and responsible over the life of a loan.
The Addenda
Jim
Item 2 Page 41- In today’s day and age with bankruptcies increasing appraisals are needed. Abundance of caution you need all the tools to be used to protect against defaults. In the current environment there is no certainty of repayment. Personal guarantees, etc do not exist once an individual or company falls on hard times. During audits at old PW the staff was directed not to consider personal guarantees at all.
Item 5 Page 43 same comments. Taxpayer funds are at risk. Fraud occurs at all levels. Appraisals should be required even on loans $500,000.
Item 8 Page 47 “These transactions should have been originated according to secondary market standards and have a history of performance.” Standards were not enforced so that’s a dumb statement. How does one know in the current environment without proper due diligence which would include a thorough review of all appraisals.
Item 10 Page 49 Freddie and Fannie made mistakes. Why should these transactions be exempt? Do not exempt them and it becomes a check of the system and does not cost the taxpayers a dime. There was fraud in the appraisal and lending process that Freddie and Fannie did not catch. Now it can passed on to others?
Item 13- Page 50 Same as above. Why? It is a check on the system. Fraud has occurred in the same organization transacting business with subsidiaries.
Page 52- AVM’s – The databases are not perfect. Statistics are not always correct – look at what the FEDS have done relying on statistic modeling. You know what is wrong with AVMs.
Now, good I see a definition of market value again and some other terms.
Jim
There ya go sorry I can’t spend more time right because no one is bailing me out and our retirement accounts. I guess I am small and can fail at no cost to society.
Jonathan Thanks Jim!
Tags: Soapbox Blog, Jonathan Miller, USPAP
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Jonathan Miller is President and CEO of Miller Samuel Inc., a real estate appraisal and consulting firm he co-founded in 1986. He is a state-certified real estate appraiser in New York and Connecticut, performing court testimony as an expert witness in various local, state, and federal courts. He holds the Counselors of Real Estate (CRE) designation, is an Appraiser “A” Member of the Real Estate Board of New York, and is a member of RAC.
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