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Last week we saw a chorus of “appraisers are killing our deals” stories in some major publications:

• When Appraisal Hassles Tank a Home Sale [WSJ]
  
• When Appraisals Come in Low [NYT]
  
• Appraisals Scuttle Home Sales Where Prices Rise Fast[IBD]
  

I’ve long been a critic of my own industry. Like any industry there are terrific appraisers, average appraisers and form-fillers. Post-Lehman there are a LOT more of the latter.

The scenario that prompted these articles and others like them occurs when a sale is properly vetted in the market place and an appraiser enters the transaction and subsequently appraises the property below the sales price. It supposedly is happening in greater frequency now, hence the rise in complaints.

My focus of criticism has largely been centered on appraisal management companies (AMC), who have tried to convert our industry to a commodity like a flood certification or title search rather than a professional service. AMCs serve as a middleman between the bank and an appraiser and they have thrived as a result of financial reform. Most only require an appraiser to be licensed, agree to work for 50 cents on the dollar and turn work around in one fifth the time required for reasonable due diligence. Appraisal quality of bank appraisals has plummeted in this credit crunch era and as a result has prompted growing outrage from all parties in a transaction.

Of course, the market value of the property may not be worth it. But the real estate industry doesn’t trust the appraiser anymore so we point them finger at them automatically.

Yes, it’s a hassle. So let’s decide what the problem really is and fix it.

A long time appraisal colleague and friend of mine once told me before the housing bubble burst:

“Jonathan, you as the appraiser are the last one to walk into the sales transaction. Everyone involved in the sale is smarter than you. The selling agent (paid a commission), the buyers agent (paid a commission), the buyer (emotionally bias), the seller (emotionally bias), the selling attorney (paid a transaction fee), the buyer’s attorney (paid a transaction fee) and the loan officer or mortgage broker (paid a transaction fee) all know more than you do.”

The appraiser in this post-financial reform world doesn’t have a vested interest in the transaction like they did during the housing boom – some could argue they are too detached. The vested interest I speak of occurred during the bubble when mortgage brokers and most banks generally used appraisers who always “made the number.” Incidentally, many of those types of appraisal firms are out of business now.

Let’s clear something up. The interaction an appraiser has with a lender when appraising below the purchase price now is not that much different than during the boom. When an appraiser kills a sale, the appraiser is generally hit with a laundry list of data to review and comments to respond to questions from the AMC, bank or mortgage broker who use the “guilty until proven innocent” approach even though the bank likely won’t rescind the appraisal. The additional time spent by the appraiser is a significant motivator to push the value higher to avoid the hassle if the appraiser happens to be “morally flexible.”

And by the way, sales price does not equal market value.

The sources for most of these low appraisal stories I began this post with come from biased parties so it makes it clear that low appraisals are the problem. In reality, the low appraisal issue is merely the symptom of a broken mortgage lending process. The problem is real and becomes more apparent when a market changes rapidly as it is now. Decimate the quality of valuation experts and you generate results that are less consistent with actual market conditions and therefore more sales are killed than usual. Amazingly the US mortgage lending infrastructure today does not emphasize “local market knowledge” in the appraisers they hire no matter what corporate line you are being fed. This is even more amazing when you consider that most national lenders have only a handful of appraisal staff and tens of thousands of appraisals ordered ever month.

The cynical side of me thinks that rise in low value complaints reflects an over-heated housing market – that the parties are getting swept up in the froth and the neutral appraiser is the voice of reason. The experienced me realizes that financial reform has brought new appraisers into the profession that have no business being here (and pushed many of the good ones out) and that the rise in the frequency of low appraisals has only seen the light of day because housing markets are currently changing rapidly.

Here’s my problem with the mortgage lending industry today as it relates to appraisers:
• Most of the people running bank mortgage functions are the same as during the bubble, only see appraisal as a cost, not as eyes and ears.
• Banks love the current state of appraisals because the values are biased low (banks are risk averse) and they fully control the appraiser.
• Appraisal Management Companies themselves have no real oversight (some are very good, most are terrible).
• Banks no longer emphasize local market knowledge in their appraisers or they pay lip service to it.
• Short term cost savings trumps emphasis on quality and reliability.

Every now and then (like now) everyone seems surprised and feels hassled when appraisal values don’t match market conditions. However the bank appraisal process has largely morphed into an army of robots on an assembly line – either because we are unaware of the problem until it affects us directly or we just want it that way.

Let’s focus on fixing the mortgage lending process or stop complaining about your appraisal.

Tags: Lowball, Appraisal Management Companies, AMC, local market knowledge, Lehman

23 Comments

There was a really good appraisal story in the Sunday Real Estate Section this weekend by Lisa Prevost focusing on appraising high end properties whose theme is well-captured in the opening sentence:

As home sales pick up in the million-dollar-plus market, deals are being complicated by unexpectedly low appraisal values.

The higher the price strata of the market, the smaller the data set is to work with so the conventional wisdom seems to be that less data = more unreliable appraisals. However I believe the real problem is lack of market knowledge by more appraisers today as a result of May 2009’s Home Valuation Code of Conduct (HVCC) – the lack of data at the top of the market merely exposes a pervasive problem throughout the housing market.

To the New York Times’ credit, they are the only national media outlet that has been consistently covering the appraisal topic since the credit crunch began and I appreciate it since so few really understand our challenges as well as our our roles and relationship to the parties in the home buying and selling process. Appraising gets limited coverage in the national media aside from NAR’s constantly blaming of the appraisers as preventing a housing recovery (in their clumsy way of articulating the problem, they are more right than wrong).

Here’s the recent NYT coverage:

January 27, 2013 Appraising High-End Homes
January 11, 2013 Understanding the Home Appraisal Process
October 12, 2012 Scrutiny for Home Appraisers as the Market Struggles
June 14, 2012 When the Appraisal Sinks the Deal
May 8, 2012 Accuracy of Appraisals Is Spotty, Study Says
September 16, 2011 Decoding the Wide Variations in House Appraisals

The general theme and style of coverage comes about when Realtors start seeing an increase in deals blowing up that involve the appraisal. The Prevost article indicates that higher end sales are more at risk because the market at the top (think pyramid, not as in ponzi) is smaller and therefore the data set is smaller.

This may be true but I don’t think that is the cause of the problem but rather it exposes the problem for what it really is. I contend that the problem starts with the appraisal management company (AMC) industry and how it has driven the best appraisers out of business or pushed them into different valuation emphasis besides bank appraisals by splitting the appraisal fee with the appraiser (the mortgage applicant doesn’t realize that half their appraisal fee is going to a bureaucracy).

My firm does a much smaller share of bank appraisals than our historical norm these days but it is NIRVANA and we’re not likeley to return to our old model anytime soon.

Since the bank-hired AMC relies on appraisers who will work for half the market rate and therefore need to cut corners and do little analysis to survive, they generally don’t have local market knowledge often driving from 2 to 3 hours away.

Throw very little data into the equation as well as a very non-homogonous housing stock at the luxury end of the market and voila! there is an increased frequency of blown appraisal assignments.

There is always less data at the top of the market – the general lack of expertise in bank appraisals today via the AMC process is simply exposed for its lack of reliability. Unfortunately the appraisal disfunction affects many people’s financial lives unnecessarily such as buyers, sellers and real estate agents (and good appraisers not able to work for half the market rate and cut corners on quality).

The appraisal simply is not a commodity as it is treated by the banking industry. The appraisal is a professional service so by dumbing it down through the AMC process, they have succeeded in nearly destroying the ability to create a reliable valuation benchmark on the collateral for each mortgage in order to be able to make informed decisions on their risk exposure.

Tags: New York Times, Appraisal Management Companies, HVCC, AMC, local market knowledge, NAR, National Association of Realtors

3 Comments

Ahhh, 2007 seems like only yesterday when I wrote about NY AG Cuomo’s lawsuit against First American‘s appraisal unit, eAppraisIT

Please note: eAppraisIT’s tagline is “redefining value.”

“The attorney general claims that defendants engaged in fraudulent, deceptive and illegal business practices by allegedly permitting eAppraiseIT residential real estate appraisers to be influenced by nonparty Washington Mutual,” presiding justice Luis Gonzalez wrote in today’s unanimous decision. “We conclude that neither federal statutes, nor the regulations and guidelines implemented by the OTS, preclude the Attorney General of the State of New York from pursuing litigation.”

The institutions in my 2007 post have seen change:

• WAMU…gone!
• OTS…soon to be gone!
• First American…renamed CoreLogic.
• eAppraisIT…business as usual.

New York can proceed with a lawsuit accusing title insurer First American Corp of colluding with Washington Mutual Inc. to fraudulently inflate home values, a state appeals court unanimously ruled on Tuesday.

Attorney General Andrew Cuomo had accused First American and its eAppraiseIT unit in a November 2007 lawsuit of having “caved” to pressure from Washington Mutual to use a list of pre-approved appraisers who provided inflated appraisals, in an effort to win more business.

I have to confess I’m not too neutral here on this issue – a few years ago, I decided not to renew one of our FirstAmerican subscription resources (floorplans) since we had access to more cost effective resources. Despite the cancellation at the end of the contract period, FirstAmerican continued to bill us every month for a year despite dozens of calls by me, then proceeded to threaten us with collection and then ultimately sent us to collection. This was because I opted not to renew my subscription. They couldn’t get us out of their billing system. Scary. On top of that, they never sent the product (they always send the product and then bill you).

I finally resorted to screaming and yelling until I finally got it resolved. I’ve never experienced anything like that before.

Double Whammy
So its hard to believe an appraisal management company owned by FirstAmerican was above reproach but the courts will decide, not a disaffected (you should see the emails between Wamu and FirstAmerican presented in the Cuomo lawsuit. The link to the original lawsuit document is broken now but trust me, the emails were a doozy – here’s the Wamu 10k filing).

A False Premise and a Certain Irony
Here’s irony I can’t shake. Cuomo’s Home Valuation Code of Conduct agreement between Fannie Mae and his office change the landscape of bank appraisal work forever. What started out as good intentions to stop the conflict of interest between mortgage brokers and appraisers, ended up enabling the appraisal management company (AMC) institution which is what eAppraisIT is. The lawsuit shows that AMC are MORE exposed to bank pressure than individual appraisers are.

Tags: Cuomo, Appraisal Management Companies, eAppraisIT, AMC

Comments Off on [eAppraiseIT Lawsuit] Cuomo Can Proceed Action Over “Inflated”, “Bogus” Appraisals

HousingWire.com (a terrific real estate news resource) reported that Citi has stopped accepting mortgage applications from mortgage bankers this week.

A spokesperson confirmed to HousingWire the company entered the temporary suspension over “quality control” issues surrounding documentation of appraisals or income verification seen in — or missing entirely from — previous mortgages purchased through the channel.

In other words, up until this past Tuesday, mortgages applications were still being processed without appraisal and income verification docs. It doesn’t necessarily mean that their loans aren’t being closed without these documents, but for this activity to be suspended and their massive size, things must have become very serious. Disturbing.

Citi is encouraging its correspondent clients to take the time to also review documentation processes to ensure the quality of loans originated for the lender to purchase.

Ok, so Citi has to tell the companies that submit loan packages to actually review them? Thats like a book publisher reminding an experienced book author to spellcheck.

CitiMortgage uses about 5 different appraisal management companies to handle their appraisal ordering and review process nationwide. Combine that with missing appraisal docs from mortgage applications submitted by mortgage bankers and you’ve got worries.

I’m not singling out Citi here (yet it is surprisingly easy) but the state of the national retail bank mortgage lending process is still being run by the same people that ran them during the credit boom. Plus all national retail banks almost exclusively rely on appraisal management companies for their appraisal services.

I am hopeful they have the wear-with-all to get it right. Mets fans are worried too.

7 Comments

Here’s a communique we received yesterday from a national lender (who took TARP money). The focus of this dialogue is only on the customer, and not assessment tools to measure risk – aka the appraisal. Of course, if we complied with this request, it would be a direct violation of appraisal licensing law.

Good grief.

From: [redacted]
Sent: Tuesday, June 16, 2009 11:38 AM
To: Orders
Subject: RE: Need unti Analysis letter

Thank You,
[redacted]

Remember this is from a LARGE national lender in serious financial distress. We do work for them occasionally, but they rely nearly exclusively on appraisal management companies.

As I have said before – not much has changed with the interaction between appraisers and lenders.

Sad, really.

Important: Fixing this situation is as easy as this.

4 Comments

The lending business has a love-hate relationship with appraisers – now appraisers seemed to be blamed for preventing the housing recovery. The following WSJ article from about a week ago has been making the rounds through the real estate world.

The orientation of those interviewed in this article come strictly from those heavily involved in the process of making deals during boom times. If someone prevents a deal from happening, they are an “obstacle.” Literally that is true, but there needs to be context applied.

Appraisals are becoming one of the biggest obstacles for Americans trying to sell their homes, refinance their mortgages or tap into home-equity credit lines.

During the housing boom, appraisers often complained of pressure from lenders to inflate home-value estimates to justify dubious mortgage lending. Now, some people in the mortgage business — and some borrowers — say the pendulum has swung too far the other way.

Hmmmm….the old on-off switch.

• Neutral observer v. party to the transaction
• Protector v. deal impeder
• Watch dog v. cost center
• Risk Management Tool v. Tool

Back in the day (I love that phrase, especially now because it is only 2 years ago), appraisers were marginalized because of our lack of organized political influence. We were treated as a commodity – like a flood certification rather than as a housing expert. Rubber stamping brought in a lot more business to those who played ball..

Valuation disputes are becoming more common now (translation: appraised value falls below purchase price).

Lenders are licking their wounds from billions in losses and the majority of appraisers, raised on a 7 year dose of housing boom, tend to more conservative about market value knowing they won’t be removed from a list because they won’t play ball. Most national retail banks are using AMCs. AMC appraisers are doing just what independent appraisers with integrity never stopped doing during the boom: estimate market value.

The problem is, many of the AMC “appraisers” (who are really form-fillers), are simply reading into the minds of their clients, and giving them what they think they want – low values. In other words, AMC appraisers are all over the map, depending on what their client wants and right now, lenders are not overwhelmingly excited about lending (measured by tightened underwriting) so these appraisers tend to be biased low – just the opposite of 2 years ago.

How about removing bias altogether and estimate market value?

The appraisal management company (AMC) phenomenon, which delivers some of the worst elements to the valuation process, enables legions of inept appraisers to thrive.

Kris Berg, a real estate agent in San Diego pens a perfect picture of the robotic nature of AMC appraisers and lack of competency when meeting them at the inspections for property sales. That’s because most lenders have found the AMC religion and appraisals are being ordered in conveyor-belt fashion, rather than matching up the appraiser with the assignment.

Here is one quote in the article that is absolutely ridiculous and speaks for the AMC phenomenon:

Jeff Schurman, executive director of the Title/Appraisal Vendor Management Association, said AMCs typically take about 40% of the fees and appraisers get the rest. Mr. Schurman said he has seen no evidence that AMCs’ practices lead to lower quality.

This trade group continues to claim the average fee is 40%. My experience and my colleagues rule of thumb is about a 50% discount in fees or more. Put that aside and consider this real world translation:

If you posted a job listing at a company for $100k over the past several years. Due to budget cuts, you offered the same position, when it became vacant at $60k. And hundreds of companies did this, do you think the experience and educational backgrounds of the majority of applicants would be exactly the same in either salary scenario?

Yet that’s the message being conveyed by Title/Appraisal Vendor Management Association. As Warren Buffet once said, “Never ask a barber if you need a haircut.”

Good grief.

Kris Berg and many good agents like her are seeing the adverse impact of AMC appraisers first hand. After all we have been through, the appraiser function as it relates to lending remains as it was, unreliable.

Tags: Pending Home Sale Index, Appraisal Management Companies, HVCC, AMC, PHSI, NAR, National Association of Realtors

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In other words, the institutional entities that are responsible for ordering, reviewing, approving and managing licensed appraisers, aren’t held to the same or similar standard – Appraisal Management Companies (AMCs).

One of the byproducts of New York State Attorney General Cuomo’s agreement with Fannie Mae (HVCC), was to prevent mortgage brokers from ordering appraisals for conforming mortgages that would be purchased by Fannie Mae. That’s a good idea in general. But by doing that, most national retail banks and many regional banks, are forced by necessity to manage the appraisal process directly. Few have the overhead to do this and therefore resort to appraisal management companies. Call an 800 number and order a report anywhere in the country.

Appraisal management companies are generally paid the same fee as an independent appraiser would be, so they have to find appraisers who will work for 1/3 to 1/2 the market rate (or 2/3 the rate as their trade group claims). To differentiate, they generally require 24 to 48 turn time per assignment, yet an appraisal is not a commodity like a flood certification – it’s a professional analysis by an expert.

Here’s a classic example of the new breed of unregulated appraisal oversight. It’s worth the read. Same problem as the mortgage boom days – pressure, sloppy work, crank it out – just a different type of institution doing the ordering.

And AMCs have a trade group called TAVMA (The NAR of AMCs), which does all it can to further their mission. Here’s their recent blog post saying their fees are 60% of the market rate rather than 50% as has been my experience as well as the appraisal organizations who testified in front of Congress.

Think about it – their argument is essentially this: Taking a 40% pay cut is a whole lot better than a 50% pay cut.

Whether it’s 40-20-10 [yet even more spin] or whatever percent the fee reflects what willing sellers (appraisers) and willing buyers (AMCs) in the local marketplace are willing to accept based upon their own self-interests. To try and draw a cause-effect relationship between fee and quality before congress is a little bit disingenuous, absent hard data.

Here’s the AMC fee logic in a nutshell:

If an employer posted a job listing with a starting salary 40% below the last hire’s salary – this will result in no measurable differences in the quality of job applications received? Forget the correlation/causation argument, what about common sense?

Good grief.

For once, I agree with NAR.

Appraisal management companies are not currently regulated at the federal level and regulation at the state level varies. Regulation would ensure that AMCs operate within the same basic guidelines and standards as independent appraisers. Further, this allows AMCs to be regulated within the existing appraisal regulatory structure, which avoids the need to create additional layers of government bureaucracy.

The Appraisal Institute announced the House version of bill 1728:

Furthermore, the bill requires separation and clear disclosure of fees paid to appraisers and fees paid for appraisal administration (i.e., fees paid to appraisal management companies); prohibits the use of broker price opinions in loan origination; and requires registration, and a regulatory framework, for Appraisal Management Companies, with mechanisms to prohibit infiltration by appraisers sanctioned by state regulatory agencies.

That specific wording “and a regulatory framework, for Appraisal Management Companies, with mechanisms to prohibit infiltration by appraisers sanctioned by state regulatory agencies” reflects the situation discussed in the St. Petersburg Times article.

Here’s usually the way the process works:

• To be approved, the appraiser submits a state license and in some cases, submits a couple of sample reports.
• The appraiser agrees to the half market rate fee structure and 24-48 hour turn time requirements (market rate is 5-7 days).
• The appraiser is placed in a computerized queue and is given an assignment
• The appraiser gets 1-2 calls by young kids out of high school making sure the appraiser will turn around the assignment in 24-48 hours
• The appraiser has to be very pushy to be able to get into the property in order to turn the assignment around in time.
• If there is a valuation problem or issue that needs interpretation by the AMC, the solution is often to just disclaim the problem in the addendum somewhere.
• Little if any interaction available from qualified appraisal professionals on AMC staff
• The appraiser gets more work if the jobs are turned around faster because the queue is set to have maximum amounts allowed by an appraiser at any one time.
• Remember, the fees are half market rate. In higher cost housing markets, the fees can be as low as 1/3 the market rate because the AMC appraisal fees are often set at national rates. In other words, appraisers in Manhattan would be paid the same as North Dakota even though the cost of doing business is 4x higher in Manhattan.

Now imagine the quality and reliability of this product, which is not a commodity, but an expert opinion prepared by a professional. It’s hard imagine much professionalism squeezed in this process, isn’t it?

HR 1728 H.R. 1728: Mortgage Reform and Anti-Predatory Lending Act was just passed by the House and Senate and is ready to be signed by POTUS. Here’s the appraisal portion.

It looks as though AMCs will be licensed just like appraisers will:

‘(7) maintain a national registry of appraisal management companies that either are registered with and subject to supervision of a State appraiser certifying and licensing agency or are operating subsidiaries of a Federally regulated financial institution.’

However, this will be more of a revenue opportunity by the states – licensing doesn’t have much to do with competence. Plus, I don’t see how states will have the manpower to provide meaningful oversight other than clerical aspects.

Mark my words here – this is an accident waiting to happen.

Tags: Conforming Mortgage, Fannie Mae, Appraisal Management Companies, HVCC, Appraisal Institute, AMC, TAVMA, REVAA, NAR, National Association of Realtors

17 Comments

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

3 Comments

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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Sometimes it’s the little things that give you a sign that something is amiss.

Our firm had been approached recently by IndyMac to perform appraisals for their growing mortgage presence in our market.

Over the weekend, IndyMac was seized by regulators.

As many as 150 banks may fail in the next 12-18 months. IndyMac was the second largest failure in history.

We were wary of IndyMac because of a previous experiences 5-7 years ago when we found them to be mainly focused on paying below market appraisal fees, much like an appraisal management companies did and still does. There were some good people at IndyMac who had moved from other banks who recommended us for work back then, but the low fee mentality prevailed.

From IndyMac’s perspective, its pretty obvious that the cost of doing business in Manhattan is EXACTLY the same as Bismark, ND, no? Appraisal fees should be the same across the country, no? [tone: sarcastic]

Last summer, after American Home Mortgage imploded, IndyMac hired most of AHMs sales force. I repeat: IndyMac hired the sales force of a lender that went out of business.

This go ’round we could charge our standard fees and turn appraisals around in our normal times for IndyMac. But eventually (in May) they began to want our turn times to be 48 hours – I am paraphrasing:

“We’ll give you a lot of work if you can turn the reports around in 2 days.”

Sigh.

Since we were unable to comply, we had to give up on what had been a steady client.

Think of a 3-5 day appraisal turn time differential to a lender in the context of a 30 year mortgage.

Today it’s a reasonable argument to suggest that IndyMac was not reasonable in their appraisal turn time expectations. One year ago that would have been described as progressive thinking on their part.

I am hopeful that the small amount we have in arrears ($1,800 – happily we received payment today for a bunch of other outstanding invoices). Hopefully FDIC will pay their bills.

Monday morning quarterbacking (literally)
My first instinct was to get down on IndyMac for their old school, rush the appraiser approach.

Then it dawned on me – the employees we were dealing with in May/June could have known that the bank was going under very soon and that is why we were being rushed. Admittedly I am reaching here but it makes sense.

I would bet mortgage processors and loan officers were pretty confident that IndyMac was headed for trouble and needed to get the deals in faster in order to make their commission.

I am so glad we got that bad vibe in May and opted not to continue the relationship. I guess those decision makers are out of the picture now. Still, their depositors are worried.

FDIC is trying to help homeowners out a bit.

How about paying back the little ‘ol appraisers?

Note: I must have been half asleep when I posted last night (correction: I was). So many typos, bad links and grammar errors (ok, I know this is not far from my usual delivery) that even I was mortified. I revised keeping the same message, but easier to follow.

Tags: FDIC, Indymac

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New York State Attorney General Cuomo is close to striking a deal with the two mortgage GSE’s Fannie Mae and Freddie Mac to instill some separation between the quality and sales function of banks that do business with them. Although this was initiated by New York, the deal would have ramifications for all lenders of conforming loan products that sell their mortgage paper.

Its not a done deal yet but its being reported as “close” by the Wall Street Journal’s Amir Efrati in this morning’s article Deal Nears to Curb Home-Appraisal Abuse. Here’s my contribution:

Jonathan J. Miller, a veteran New York appraiser and longtime critic of industry practices, said the proposed deal “sounds like a promising step, and that Mr. Cuomo’s office is addressing some of the key problems that appraisers have had to deal with and that have led to the disconnect between value and risk in the mortgage markets.” He estimates that home values are overvalued nationwide by at least 10% because of inflated appraisals.

My 10% estimation is very conservative and was based on my New York area experience and interactions with colleagues across the country.

Reuters and American Banker have also issued stories on the negotiations.

The deal proposes the following actions by Fannie and Freddie:

• They will not do business with lenders that use in-house appraisers.
• They will not buy mortgages from lenders that who use appraisals from wholly owned subsidiaries. (I believe this would apply to Landsafe, Countrywide’s Appraisal Management company).
• Require lenders not to use appraisals arranged by individual mortgage brokers.
• Create a clearinghouse for appraiser information and provide reports to the public.

Note: I will be updating this post throughout the day – the ramifications are huge

Tags: Conforming Mortgage, Fannie Mae, GSE, Sub-Prime, Freddie Mac

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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]

Tags: Radio

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