Back in June of 2005, I was interviewed by Bob Moon of American Marketplace. I was very PO’ed about the pressures placed on the appraisal profession because the structure (the relationship between the independence of the appraisal process and mortgage origination) was inherently flawed. About a month later I launched Soapbox as well as Matrix and the interview became my first post.

This past Friday, several people told me about an NPR radio piece called: Inflated home appraisals? Rings a bell where they referenced my warning of two years ago.

It was back in June of 2005 when we heard from a leading property appraiser in New York City, Jonathan Miller. He told us lending institutions were colluding to get people loans that they were going to have big trouble paying back.

New York State Attorney General Andrew Cuomo’s office is suing eAppraisiIT, the appraisal management company, for yielding to reported pressure from Washington Mutual (‘WaMu’) to inflate appraisal values. (Apparently the AG can’t sue WaMu because the bank is federally chartered.)

This is action is unprecedented, and Cuomo suggests there are more cases to follow. In fact, the Office of Thrift Supervision [OTS] is getting in on the action which suggests a turf war may even develop as the states took more vigorous action before the feds did.

Kevin L. Petrasic, managing director of external affairs for the Office of Thrift Supervision, the Treasury Department agency that oversees Washington Mutual, says the agency is “looking into the allegations that were put forth in the [New York] complaint.” He added that it “concerns us” that the attorney general “had information that consumers were not protected…but didn’t bother to contact the federal regulators. Isn’t that the whole point of regulation?”

Whether or not the parties in this particular case are guilty, the complaint drafted by the AG’s office is one of the best presentations of how portions of the lending industry think of the appraisal profession and how the appraiser is readily placed in a position that compromises their neutrality.

You gotta pay to play” becomes “You gotta play to get paid.”

If you want to understand the topic of appraisal pressure, the following documents are a must-read:

NYS AG Cuomo Press Release
AG Complaint against eAppraisIT [essential reading – pdf]

The AG Complaint is very well written. It lays out the systemic problem of appraiser independence in a clear and logic way. I feel its essential reading for everyone involved in real estate in some capacity.

It’s going to be interesting to see how the AG tries to prove that the defendant actually carried out its client’s wishes and was guilty of systematic fraud (i.e. the appraiser intentionally appraised a property 7 or 8 or 10% too high). This particular measurement is the key metric required to flush out this fundamental problem.

While I don’t work for either of these two companies and therefore cannot comment on their guilt or innocence, I can say, in the larger perspective, that it is refreshing that something is finally happening to on the appraisal pressure front. The appraisal profession is not flashy, has limited lobbying influence in Washington and is not very well understood by the public. It is also not well compensated, and yet it is at the center stage in the mortgage-origination process where trillions of dollars are at stake.

WaMu used to have an in-house appraisal review function that served to insulate appraisers from the pressures of the sales function within the bank. Last year, however, in a cost cutting move, Miller Samuel, as well as many other independent appraisers, lost WaMu as a big client when they closed all their in-house review functions and went with appraisal management companies, eAppraisIT and Lenders Service.

As evidenced by the charges, it would appear that this change called into question the independence of the appraisal process exposing it to more pressure, especially given this situation in which 267,000 appraisals per year from one client were at stake. That’s the proverbial “all eggs in one basket” scenario and places such a large firm even more dependent on the whims of a client, not less as WaMu suggests.

The $50,000,000 in appraisal fees paid out by WaMu at that volume level, makes the average appraisal fee $187.27. Combine this with a 48 hour turnaround time and I start wondering about quality.

WaMu has stated that they have no incentive to pressure appraisers. While I am not passing judgement on WaMu, I don’t see how that’s possible when the risk inherent in the mortgages can be offloaded to unwitting investors. As Floyd Norris mentions in his blog:

But maybe, just maybe, it is not a good idea to arrange for a lender to have no stake in whether the loan is repaid.

Certainly a big part of the unwillingness on the part of the secondary market investors are reluctant to buy any mortgage paper right now is a direct function of their skepticism about the credibility of the appraisals underlying the loans.

After the dot-com bubble crash in 2000, investment banks were forced to erect much tougher “Chinese Walls” to insulate equity analysts from the pressures of investment banking clients who could only imagine that all their stocks were a ‘buy’ and never a ‘hold’, much less a ‘sell’. Maybe this is an important precedent for the mortgage lending industry if they want to (or are told that) they must reestablish the credibility of the appraisal function.

Check out:

The Trouble With Appraisals [New Developments Blog – WSJ]
New Headache For Homeowners: Inflated Appraisals [Page One – WSJ]
WaMu faulted on home loans Colluded to inflate property values, N.Y. attorney general says [SeattlePI]


8 Responses to “Finally, A Different Appraisal Pressure, And Its A Good Thing”

  1. L'Emmerdeur says:

    To quote one of the traders at work: “If the bank’s name starts with a ‘W’, short it”.

  2. clark says:

    Outstanding description of the situation. It’s refreshing to see an ‘insider’ step back and make such an objective appraisal of his industry’s major problem.

  3. Hi Johnathan, lovereading your articles Esther

  4. Jim says:

    Well stated. I too did work for WAMU Appraisal Dept. prior to switch to AMC. Their Appraisal Dept. was very concerned with quality and tried very diligently in this regard. When the Appraisal Dept. closed and AMC took over there was no longer a buffer between the appraiser and production. The new concern appeared to be who would complete assignment for the lowest price and shortest turnaround time. After working for over 2 yrs. with WAMU Appraisal Dept. and completing numerous review as well as standard assignments I was advise earlier this year that I was not on their new “Prove Appraiser List”. I have been in the business some 30 yrs. and was quite concerned and given no reason for this. Now I think I understand the reason.

  5. There are tens of thousands of appraisers all across the country who were “conditioned” to help deals work from the beginning of their careers.

    The licensing of appraisers may well have attracted criminal minds into starting up businesses including nationwide appraisal management companies who gave loan originators what they wanted.

    Things are worse than anyone knows yet. An international financial crisis will come of this problem.

    The Federal FIRREA legislation that came from teh S&L Crisis of the 1980’s was supposed to put a firewall between appraisal and lending. It got circumvented by many regulated lenders via the AMC route, but others like Ameriquest or Countrywide were never subject to it, they could always pressure appraisers directly.

  6. 2007 November 10 says:

    […] Finally, A Different Appraisal Pressure, And Its A Good Thing -  Posted by Jonathan J. Miller - Miller Samuel  […]

  7. G Troescher says:

    I never could understand with technology today, a Lender could get in touch with any market and or appraiser with a stroke of the mouse. I believe some lenders would love to make interest, rather than good strong and healthy collateral loans. That is why management companies exist.

  8. Sal says:

    As a long time fee appraiser for WaMu since the early 1990’s I have always tried to provide quality work and not make the number, just state value as it is. The problem with management companies is they SAY they eliminate lender pressure but obviously they do not. They are concerned with the bottom line. Look at the letter by the NYS Attorney General, one of the complaints in an email by an Eappraisit employee, was they have to pay the WaMu proven appraiser 80% of the fee they collect to the appraiser, they only keep 20%. As opposed to when Eappraisit used their own preferred appraiser’s list, they would get paid a big $165. Oh by the way didn’t you know that Eappraisit has their own preferred list and the main way to get on the list is be licensed and work for their predetermined flat rat fee. There flat rate fee in NY was $165. Why wound Eappraisit be opposed to the WaMu list is very simple, do the math. Eappraisit and most Appraisal Management Companies state they are concerned about eliminating lender pressure. This maybe stated as a concern but the real concern is how cheap we can get the appraisal done and how much can we keep in our pockets. ROV was WaMu ways of trying to get a higher value; however when WaMu controlled the appraisal process the person you talked to was very knowledgeable. The pressure that I experienced when dealing with both Eappraisit and Lenders Service for WaMu was great. A few times I was told that I was talking to a licensed appraiser and they could not understand why I would not change my value. They would make it very easy if you changed your value and ask you to provide a statement in which they gave an example as to why value was reconsidered. However, if you did not change value you needed to comment on why the additional info they provided was not used. The impression was that if you agree to change value it was easy and if you didn’t than you were required to spend some time as to why you disagreed. All this was to be done at no fee being paid to the appraiser. I cannot think of one time I changed value, still got work but the feeling they leave as a company is little to be desired. Other lenders maybe not so concerned with the appraisal cost have done this through the AMC. Case in point, I was the third appraiser on a residential loan for Bank of America, I did not know this at the time, but only after I met the homeowner. It appears that instead of having an ROV for this lender the AMC would get two appraisals and possibly a third, then use the highest and submit this to the lender. Question comes to mind was the lender aware of what was going on? Did they allow this to happen and do you think they used the lowest value report when selling the loan to an investor? AMC have long talked about raising standards but I do not think this is the case. Many appraiser who would never say this if you knew who they were have an expression when doing work for AMC and that is only do the needed MINIMUM requirement necessary to complete the report to USPAP and not go the extra mile. Does anyone think that AMC are helping the industry, I as an appraiser certainly do not. They are forming monopolies as appraiser cannot get on lenders lists unless they go through the AMC and work for their fees. With this pressure existing in the most important part of the loan process appraisal reports will no doubt suffer. We have so called experts looking at market they would never know existed if it wasn’t for google earth maps.