The bulk of this week’s commentary seemed to revolve around the erosion of the appraisal profession despite licensing (lack of independence breeds robots), broker incentives (commissions are incentives aren’t they?) and making sense of housing futures (we can’t even make sense of the past).

Appraisal Quality Erosion

  • The quality of appraisals has diminished since licensing was enacted and thats because the states view the appraisal license as a revenue source. There are no significant funds for enforcement and the fact that the state says an appraiser licensed, gives them entre into the lending community. At the same time, retail banks have shuttered their in house appraisal operations and have shifted emphasis on mortgage brokers as the source of origination as well as appraisal management companies. The appraiser whose sole focus is on the combination of speed and making the number are thriving. It will serve to make the profession largely obsolete if things don’t change soon because all players at the party know the bulk of the reports generated or only for the file and don’t have a lot to do with value.
  • I’ve been in the business a few years, and the amount of real economic analysis I do is quite minimal. I wonder at times how complicit we are in what seriously appears to be an overvalued market. It is true, the only value an appraiser has these days is how fast he can write a consistent report without glaring errors, and whether or not the value achieves the client’s expectations.

Real Estate Broker Incentives

  • Well, yes, there is good and bad in every industry, but I don’t think industry standards are as low as in real estate brokering. In what other industry can a representative be “dually loyal”? Can you imagine a lawyer doing such a thing? My wife and I are searching for a house, and right in a recent listing (on the internet, for a major residential brokerage, for all to see) was the promise of a several thousand dollar bonus for the buyer’s broker if a buyer closed by such and such a date. Almost anywhere else this is called a kick-back, but nobody seemed taken aback.
  • It’s called an incentive not a kick back. In a market where there are more sellers than buyers, a seller will often offer an additional incentive to attract more brokers to bring their buyers for a look. It would be a good idea for you and your wife to engage a buyers broker to help you in your search. After all, they know the product and you don’t. You sound angry and frustrated with the market so you diss the broker. Not productive.
  • I had a situation where there was a buyer’s agent incentive, and it made me very uncomfortable, as a real estate agent. My client liked the property, so he bought it. I took the first $1,000 of the incentive, and gave the buyer the rest ($2,000), because of the appearance of a conflict of interest. I would do the same thing, again, if it happened. $1,000 for my trouble, the rest to the buyer. It definitely is an ethical dilemma.

Housing Futures Trading Made Simple?

  •’s article was accurate in so far as that if the CME listed only a spot futures contract, then yes, all you are doing is number gaming an event (the yet to be calculated index value)that has already occurred. The CME in fact lists out to May 2007. This allows a trader to transfer housing price risk on an event which has not yet occurred (the Q1 2007 cash housing trades). When the CME lists multiyear futures for the housing indexes, then the market will most certainly be looking forward with an index that looks back 2 months at settlement.

4 Responses to “[Matrix Commentary] Ethics, Money and Risk”

  1. Laura B. says:

    Ya gotta keep it ethical. Too many kind people get burned by other’s greed.

  2. Re “Real Estate Broker Incentives,” In New York State there is no set amount on how much commission can be charged for the sale of a residence. So,if a seller’s broker lists an extra 2k or so above and beyond the requisite 5 to 6% usually charged in a sales transaction to generate interest among buyers’ brokers there’s nothing illegal (e.g. “kickback”) about doing so as long as he states that it is part of the “commission” (it’s unclear in your scenario if that’s the case — that the extra money offered was stated as a “commission”). By the way, if you were so troubled by the possible impropriety of the situation, why would you accept any of the “bonus” offered, even if you gave two-thirds of it to your buyer, if you thought that the money might be tainted!?

  3. Environmental Friendly says:

    Hi Jonathan,

    Hope all is well with you. Your blogs are getting more interesting. I think the appraisal process has become a major farce, and the only real value is that we get a measurement of our square footage, somewhat accurately.

    Anyway, coming back to Manhattan prices, in the Upper East Side, I went to several open houses yesterday, and I was amazed to see the turnout at most of these places. Its like people are returning from the summer holidays (although that really happens in early September) and bidding on properties. Maybe, Bernake’s speech gave people some hope of interest rates leveling off. Who knows? Or maybe, Manhattan is Manhattan.

    I can’t wait until your 2 Q report comes out.


  4. BC says:

    I’m sure you’ve seen the WSJ article this past Saturday on homeowners and appraisals. The specific problem seems to be people looking to refi and find that their appraisals do not match the money they ‘need’ to refi and either avoid the downside of the ARM or just pull out some cash. Don’t have subscriber access, but the headline was “New Headache for Homeowners: Inflated Appraisals”. Not to be combative, but I have personally seen some of the bad behaviors mentioned in the article, and certainly remember walking through some Manhattan projects with an appraiser in an effort to sell the vision. In light of today’s round up of commentary, I’d be particularly interested in your perspective.

    Obviously this weekend’s NYT article about people re-upping on ARMs, basically using an ARM to avoid new adjustments plays into this story as well. It touches on a few long term trends that I’m finding very intriguing.

    The most significant is the recognition of our mobility and the likelihood that very few of us will actually pay off a mortgage. Americans move too much (or at least feel they do) to worry about how long it will take to pay off a mortgage. In a related vein, and left unexplored, is the role of the mortgage interest tax deduction. One of the mortgage brokers mentioned that people stopped asking him about the fastest way to pay off a mortgage 15 years ago. ARMs or interest-only can increase the amount of the tax deduction. Does the lack of other reasonable, easily-understood and accessed tax deductions favor an increase in the more ‘exotic’ mortgage vehicles? Does ones willingness to take on an ARM change with age, marital or family status, or previous homeowning experience?

    Finally, saw an article in the Sun-Sentinel about cutbacks in the Florida real estate market. I was offered a couple of positions down there earlier this year, and although a Florida native, did not find any comfort in the rose-tint outlooks espoused by recruiters, financiers, and developers.


    “Builders, real estate firms feel market’s decline: Cuts made from construction to sales”