Matrix 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].

This week Joe recalls his time at WAMU. It looks like the stock price could use a wing or two. …Jonathan Miller

October 6th 2006 was my last day as a First Vice President and NE area Manager at Washington Mutual. It was bitter sweet, having attained what I desired all my professional life: a high visibility, well respected position in a major company where I could be an appraiser and a manager all in one. With the help of my staff we managed appraisers both in house and on our vendor list. We had proven efficiencies with regard to cost of service, turn around and quality. We were appraisers talking with appraisers, solving problems, getting the business done while never compromising our standards or ethics. We had the numbers to prove it and the plan “b” solution as well if “cuts” needed to be made. No one was listening, minds were made up.

Still, the bank had grown very fat over the “boom years” and the efficiencies got lost in the fact that we “cost too much”, especially since mortgage volume was way down. Hey what do you do when it stops raining? Yeathrow out your umbrella? The solution was supposed to be simple: replace 323 staff appraisers including management with two large behemoth outsource companies (that take a slice of the action on the APPRAISER Side, while charging the lender even MORE than typical). Why not? Appraisals are all the same, appraisers are all the same and as long as you can get someone to sign the form you can make a loan. Who needs management of appraisals?

Well well, now the bank is in the headlines for collusion with the very business partners that were supposed to save the day. Something about “things wrong with these values: fix it or no more work” per the New York Attorney General. As a result there were “inflated appraisals”.

Some of the appraisals I saw from the Appraisal Management Companies were a far cry from inflated but rather conservative. What happened on October 7th to change all that? Nothing. What did happen was that Washington Mutual decided to remove an integral communication piece within the banking operation that made sense out of these “value” things and replaced it with a “message service”. The AMC “clerk” leaves the appraiser a “message”: “The bank does not like the value.please call us back”. No translation of information or discussion on the complexity of the issue.

Today as I see the WAMU stock price I can not be so naïve as to think it is ALL attributable to the demise of the in-house appraisal department. I do think that there are some things in business that you can not try to “wing”.

Like my friend, (also an appraisal manager for 17 years there) at a major national lender says. those in the ivory tower sure know the cost of everything..and the VALUE of nothing.

Tags: Joe Palumbo, Appraisal Management Companies, Soapbox Blog, Appraisal Pressure, Appraisal Process, USPAP, Palumbo on USPAP

3 Comments

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.

Now when the lending community really needs to know what the values are…
…Jonathan Miller

No one orders a real estate market analysis anymore or they are poorly done!

Not the banks, not Wall Street and clearly not home builders. Yet home builders today are feeling the pain that results from a poor or missing market analyses. Wall Street analysts, rating agencies, and their advisors, including the accounting firms that report on the financial conditions at similar companies, do not seem to understand the residential real estate industry. Either that or they have been looking at the wrong data for two years or so.

The following chart summarizes how publically traded home builder stocks have fared this year.

Ouch!

Wall Street analysts who report on these companies and recommended their shares, as well as company management and their advisors, would have to give back a large portion their pay, bonuses, benefits, stock options, etc. to their shareholders to offset the losses that were incurred as a result of overly optimistic forecasts. In fact, New York State Comptroller, Thomas DiNapoli, estimated a 10% drop in Wall Street bonuses this year. With average year to date home-building stock prices down well below 50%, management equity (not to mention job security) would be similarly off. Yet this doesn’t come close to the losses incurred in the housing market. Regrettably, many of these losses could have been avoided by obtaining a properly prepared real estate market analysis.

The overall weakness in the residential real estate market was well known going into 2006: demand was falling and an inventory glut was beginning to take place. There is only limited demand at any one time; nevertheless, supply kept coming and the residential property cycle turned down. Current market indicators show that the housing recession will worsen in coming months, which may further impact the underlying value of the assets owned by many of these companies.

As demand peaked, poorly planned additions to supply continued. This was caused by many factors, including incorrect market analysis of potential supply and effective demand. Many inexperienced investors, analysts, appraisers and accountants, seeing the soaring profits in residential development, recommended entering the market in 2004-2006. They purchased vacant land outright, and began construction, thinking that effective demand would remain forever. Prices for land were increasing so fast that developers moved to lock up property without completing the proper market studies. Lenders were all too accommodating for the fee income. Similar to the stock market, investors became speculators in residential development, but lost due to their fear of poor timing and shades of greed.

Compounding the sudden leaps in price was the much slower permit process. Obtaining the necessary permits to develop residential real estate often takes one or two years, and as long as five or six years in certain markets. If one entered into a contract to purchase vacant land in late 2003, the market was in a down-turn by the time all entitlements were obtained. Yet, bankers provided the money and developers continued to move forward, being optimistic opportunists. The result? A repeat of the 1970’s and 1990’s debacles in residential real estate!

It appears that no one, neither Wall Street, company management, their accountants, advisors nor the lenders learned anything from the earlier cycles in real estate development. (Everyone over fifty was fired or let go for youth, many who are still learning. But that’s another article.)

A proper real estate market analysis would have predicted the change in market conditions based on analyzing the following factors correctly:

This list is only a partial catalog of factors that should have been considered by all of the players in the real estate market. Until real estate market analysis is bought back by company management, accountants, Wall Street analysts and lenders, we should expect ratings to be reduced and dividends to be cut and more losses and loan write-offs to occur in the real estate and banking industry.

Special thanks to Noreen Whysel who provided some input and assistance.

Tags: Soapbox Blog, James MacCrate, Straight from MacCrate

4 Comments

Jim MacCrate, MAI, CRE, ASA, has worn many hats in his career. He taught a number of the appraisal classes I have taken through the Appraisal Institute and I think he is one of the few people who actually understands the “J-Factor.” 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.

This week Jim gets a bit DCF’ed about how Wall Street does not fully explain how it values real estate. He believes its a looming problem.
…Jonathan Miller

The Global Equity Research Department of Lehman Brothers recently published the REIT NAV Handbook which summarizes the valuation methodology employed to estimate NAV which is defined as “an estimate of the private market value of a company’s assets.”

Anyone who understands real estate clearly sees the risks inherent in the valuation process that Lehman Brothers has used to estimate the private value of the companies assets. The process does not appear to conform to the Standards of the Appraisal Institute or the American Society of Appraisers. If they use the same procedures to value investments that they have made in real estate companies or real estate investment trusts, they may very well have to take some hits too when they have to “mark to market.”

Consider Lehman’s methodology, outlined as of June 2007:

“We first calculate a forward 12-month cash net operating income (NOI) based on annualized 1Q07 GAAP net operating income (real estate NOI plus joint venture NOI, adjusted for partial contributions, less lease termination fees where included in rental revenue), multiplied by an appropriate growth rate for the next 12 months, minus annualized straight-line rents. In cases in which joint venture NOI was not available, we used the equity in unconsolidated subsidiaries reported on the company’s income statement. (Please note that, for malls and outlets, a rolling four quarters of NOI is used to account for the quarterly fluctuations in revenue driven by percentage rents.)

The resultant cash NOI is then capitalized at an appropriate cap rate (adjusted for the quality of a company’s assets) to determine the implied value of owned properties. We next add capitalized management fee/service income (using between a 12% and 20% cap rate, in most cases), cash and cash equivalents, construction in progress at 110% of cost, any land being held for development, other assets, and, in some cases, the value of tax-exempt debt in order to arrive at the gross market value of a company’s assets.

To determine the net market value of assets, we then subtract all of the company’s liabilities and obligations, including preferred stock at liquidation value and the REIT’s share of joint venture debt.

Our NAV estimates make no adjustment for any mark-to-market on company debt.”

The blog format does not lend itself to an all-inclusive discussion of all the issues and standards. One must remember, however, that Wall Street is not subject to the Uniform Standards of Professional Appraisal Practice (USPAP). Perhaps they should be to protect the general public. For starters, are the individuals who prepared this analysis competent? According to USPAP, to be competent, the analyst must be familiar with the type of property, the subject market, the geographic area and the appropriate analytical methods for determining value for that type of property. Their qualifications have not been provided.

The second problem deals with scope of work which, according to USPAP, should be clearly delineated so that investors can ascertain the risks associated with this type of analysis. This includes but is not limited too:

* “the extent to which the properties are identified;
* the extent to which tangible properties are inspected;
* the type and extent of data researched; and
* the type and extent of analyses applied to arrive at opinions or conclusions.”

I presume that the information was provided by the individual companies which would tend to be biased, as history and common sense have indicated. The credibility of the results is always measured in the context of the intended use. I will let the individual judge whether the scope of work is adequate to make an investment decision in any of the REITs discussed. In fact, the term “private market value” is not even defined.

While there are many criticisms that will be left unresolved, I would like focus on the second paragraph and specifically the following statement:

“We next add capitalized management fee/service income (using between a 12% and 20% cap rate, in most cases), cash and cash equivalents, construction in progress at 110% of cost, any land being held for development, other assets, and, in some cases, the value of tax-exempt debt in order to arrive at the gross market value of a company’s assets.”

No justification or support has been provided for the 12% to 20% capitalization rates selected for the management fee/service income. They have also added construction in progress at 110% of cost. That could be overstated. Some developers are having trouble selling properties; therefore, the value of construction in progress may be falling and is certainly well below cost. Land values are dropping as construction costs rise, capitalization rates and mortgage interest rates are increasing, thereby reducing the potential value of the finished product. I doubt that the big four accounting firms are making the appropriate adjustments that are required to properly mark the assets and liabilities to market value.

The final sentence is also quite interesting in that Lehman Brothers is not adjusting the debt to market. Many real estate companies have short-term debt and other obligations that will have to be refinanced within the next five years. The cost of the refinancings will most likely be higher over this period, which means the cost of borrowing will increase.

Clearly, anyone involved with real estate knows that real estate investing requires a long term commitment to minimize the cyclical variations occurring in the market place. DCF analysis takes the long term into account, and is regarded as one of the best methods of replicating steps taken to reach investor buy/sell/hold decisions, and is often a part of the exercise of due diligence in the evaluation of an investment.”

Moreover, USPAP states that “DCF (discounted cash flow) analysis is becoming a requirement of advisors, asset managers, fiduciaries, portfolio managers, syndicators, underwriters, and others dealing in investment-grade real estate. These users of appraisal services favor the inclusion of DCF analysis as a management tool in projecting cash flow and return expectations, capital requirements, refinancing opportunities, and timing of future property dispositions. If pension funds and investors apply a discounted cash flow analysis to truly reflect the actions of buyers and sellers in the market place, then, why does Wall Street ignore the same? They too have a fiduciary responsibility, as well as an ethical obligation, to provide investors with meaningful conclusions that are explained, justified and supported by market evidence.

If other Wall Street firms are following similar procedures, expect further hits to some of the REIT shares as interest rates rise, construction costs increase and profits decline as indicated in my previous posting, “Is The Stock Market Signaling A Warning Sign To The Private Commercial Real Estate Market Or Was The Reverse True?” Wall Street appears to have forgotten many lessons that were learned in the 1970’s.

Thanks to Noreen Whysel who provided some input and assistance.

Tags: Soapbox Blog, James MacCrate, Straight from MacCrate

1 Comment

Jim MacCrate, MAI, CRE, ASA, has worn many hats in his career. He taught a number of the appraisal classes I have taken through the Appraisal Institute and I think he is one of the few people who actually understands the “J-Factor.” 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. This week, he ponders taking the red eye to Las Vegas or searching the real estate classifieds and risk another purchase. …Jonathan Miller

Real estate investment risk is the probability that an investment’s actual return will be different than expected. Measuring risk is difficult, especially when a turning point in the market is apparent. Yesterday, Bill Gross, bond investment guru at PIMCO Funds, became bearish on bonds, and predicted that rates on ten-year treasury bonds, while expected to dip a bit in the next few years, may approach 6.5% over the next five years or so. That does not bode well for real estate investors, who can no longer expect the high favorable returns achieved during the last five years.

But should investors ever really expect high returns? Smart investors may be able to, if they manage their risks effectively. A qualitative risk profile must be developed for a real estate investment to properly assess the inherent risks before committing equity or debt.

Risk 101

The Appraisal Institute and several textbooks generally list the following types of risks that lenders and investors must consider.

• Business risk
  
• Financial risk
  
• Liquidity risk
  
• Inflation risk
  
• Management risk
  
• Interest rate risk
  
• Legislative risk
  
• Environmental risk
  

Each of these risks is a different piece of the puzzle that makes up the whole investment picture

Saggy sectors; Loose lenders? Fix those trouble spots!

At the same time that rents are rising, growth is slowing in many sectors. This is an example of business risk. If a local market relies on an industry that is losing jobs, retail and services will suffer. This makes it more difficult to lease already vacant space. Landlords must decide if it is worth it to release the space to get the higher rents, when there may not be another tenant to take over the space.

To increase loan volume, many lenders reduced their debt coverage ratio requirements and have permitted higher loan to value ratios during the last two years. Lenders reduced requirements in order to take advantage of favorable market conditions and affordability so they can increase the volume of transactions. This has been going on for two years. Combine this with an interest rate increase and financial risk will skyrocket.

Sink or swim?

Then there is liquidity risk. Real estate isn’t soda pop. It is a relatively illiquid asset. In a downturn, you can’t just switch to a healthier asset class without a lot of time, paperwork, fees, oh and lawyers. The real risk is the cost of selling and the missed opportunity. If you are desperate, you can always call up your local real estate broker and who may very well offer to buy the assets at a substantial discount, say 50- 60% of market value.

The Feds have stated clearly that they are very concerned with inflation. If construction costs rise, but rents do not, then, land values must fall. The materials that go into construction have risen, such as copper, aluminum, etc. Some investments that have properly drawn leases may be partially protected from inflationary risk. However, the interest rates that are charged are directly influenced by the inflationary expectations in the marketplace.

Dilbert’s boss buys land

Inexperienced investors have acquired real estate during this financial cycle. These investors often have insufficient liquid assets to ride any dip in the market. Since many lenders have reduced their underwriting criteria, the investor’s profile may not reveal the extent of their financial history or current financial position. This is a big risk, not only to the borrower, who may not be able to pay back the loan, but also to the lender who may end up stuck with a portfolio of non-performing loans.

The talking heads all have opinions. Whether you agree with Bill Gross, or not, you should keep an eye on interest rate risk and hedge your portfolio. Increases in interest rates will negatively impact the value of commercial real estate, all other factors remaining neutral

Also, don’t take Gross’ word for it and don’t follow herd mentality. The “wisdom” of the talking heads is one thing that inexperienced investors are too willing to follow, and often the advice is too late and a dollar short. A lot of people have opinions about where rates are going, but no one knows for sure. Since fed adjustments affect everyone in a single bound, it’s more telling to look at what Bernanke is doing. If he isn’t fixing it, maybe it ain’t broke. .but historically, the Fed has made mistakes.

Sharks in the pool

Legislative risk is always present. Politicians do not always act in our best interests, even though they claim they do. No change noted, but one must always be on the watch for political actions that can adversely affect real estate, such as the Tax Reform Act of 1986, insurance legislation in the Gulf states and real property taxes increasing at an alarming rate in some locales.

while California burns

Accidents happen, and sometimes they are real doozies. Environmental risk is always present. Some environmental risk can be controlled, but most is truly unexpected, so you have to have a contingency plan.

Safety in numbers

So, looking at eight risk factors, six have a real negative impact for all investors and two are anyone’s guess.

Three tools, if properly used, can assist investors and lenders to make informed decisions and minimize risk in the current changing economic environment:

• Real property appraisals that include a sensitivity analysis
  
• Professionally prepared by qualified and licensed individuals, proper structural and environmental due diligence, and
  
• A thorough market analysis of the critical factors impacting the local market.
  

These tools, if prepared by ethical professionals, will help a lender or real estate investor make sound decisions about the investment. In addition value and opportunistic investment strategies should be employed to maintain adequate returns on real estate investments.

Thanks to Noreen Whysel who provided some input and assistance.

Tags: Soapbox Blog, James MacCrate, Straight from MacCrate

1 Comment

Here’s something you might have heard at some point:

Ok, that compliment means different things to different people. I am going to try to rank them by what I perceive to be the majority thinking on it. Although my rankings may be biased or completely wrong, the concepts are not:

1. Speed — This is the number one priority of many consumers of appraisal services. The appraisal is often the last item to be completed on a mortgage approval. It can make or break the deal if it is done too slowly. The proliferation of appraisal management companies, who essentially are only able to rate appraisers by their turnaround time, have created a legion of form-fillers, who can’t afford, nor do they have time, to do a credible job.

2. Cost – Keeping appraisal costs low, is perceived as a way to make the lender or mortgage broker more competitive. Of course, the assessment of collateral of a $1M mortgage can be decided by a $100 difference in fee and a world of difference in quality. Actual payment of fees to the appraiser are often used as leverage for making the number. If the fees are require in advance, less leverage is available. In the current environment, the appraiser has been relegated to a form-filler and the process is really seen as a “have to do” with little relevance to the overall objective, hence downward pressure on fees continues.

3. Service – Overlaps speed and cost. Making appointments with sensitivity, handling the applicants professionally, client has easy access to appropriate appraisal staff to get the report turned around in a reasonable period of time. Moral flexibility (aka having business savvy) is very important. Being able to reach out to the appraiser or their superior to negotiate the value is key.

4. Miscellaneous. Anything can be inserted here. You name it.

5. Miscellaneous. Anything can be inserted here. You name it.

6. Miscellaneous. Anything can be inserted here. You name it.

7. Miscellaneous. Anything can be inserted here. You name it.

8. Miscellaneous. Anything can be inserted here. You name it.

9. Miscellaneous. Anything can be inserted here. You name it.

10. Competence in a specific market – This is a distant placement in the rankings because the person who typically orders an appraisal for mortgage purposes has a financial incentive to get a desired result in a predetermined time frame. Clients rarely ask an appraiser what their experience is in a specific market because the perception is that the process is formulaic and its simply a matter of gathering data, inserting it into a form and the result is automatically determined.

A wise appraiser I know once told me:

Everyone in a sales transaction knows the value before the appraiser does. The buyer, seller, listing agent, selling agent, seller’s attorney, buyers attorney, bank, bank’s attorney, mortgage broker, and title company already know the value. The appraiser is simply late to the party.

Here’s a sample of appraisal firms who market themselves as fast. No real discussion of quality/competance other than brochure-speak.

• 24HourAppraisal.com Note the frequent mention of religious background for added proof of integrity. I am not questioning a religious conviction here, but does this make up for the loss of quality that a guaranteed appraisal turn time “or your money back” could result in? I don’t see how. The clients are nearly all real estate brokers and mortgage brokers. I wonder how many have received a “low” appraisal? Its also a very large coverage area.

• 48 Hour Appraisal More of the same but less personal and more brochure-speak. Large coverage area.

• Next Day Appraisal Covering all of Rhode Island and parts of Massachusetts. Discounts to loan officers (why would they be speaking with them directly?) Same day service on request.

• Aggressive Appraisals Offers 24 hour turn time. Covers most of the New York region. I have linked to them before on Matrix. I still can’t believe they use that name…Aggressive = High. So you get the best of both worlds, a high, fast appraisal.

Good grief.

2 Comments

Much of the housing boom can be attributed to the current lending environment. Housing prices are an indicator of where things are going. But its tough to analyze lending since the stats are few and far between.

In other words: the cart before the horse.

I have long vented about the perils of weak underwriting standards and the pressures placed on appraisers by the structure of the lending system, namely collateral valuation (appraisals). A double hat tip to Barry Riholz for articulating this point so clearly in his post Is a Housing Crisis Approaching? [Big Picture] via the very good Roger Nusbaum post in SeekingAlpha.

Barry’s post is based on a seminal piece in Barrons about loosening underwriting standards by Lon Witter [subsc]. Roger adds another related link with great info [RGE Monitor] as well.

the U.S. has is a lending bubble. His evidence is how loose the lending standards have become, and why not? The banks ultimately just flip the loans to the Fannie Mae (Federal National Mortgage Association, on the NYSE: FNM), where foreclosures and defaults become the headache of buyers looking for greater risk and return.

(And if that doesn’t make you squeamish, simply look at the recent accounting scandals at Fannie Mae.)

Traditionally, Mortgages have been low risk lending, as the loan is securitized by the underlying property. When banks were lending less than the value of the property (LTV), to people with good credit, who also were invested in the property (substantial down payments) you had the makings of a very good business: low risk, moderate, predictable returns, minimal defaults.

Lenders have encouraged people to use the appreciation in value of their houses as collateral for an unaffordable loan, an idea similar to the junk bonds being pushed in the late 1980s. The concept was to use the company you were taking over as collateral for the loan you needed to take over the company in the first place. The implosion of that idea caused the 1989 mini-crash.

The problem here is: what happens if the values of homes begin to decline as inventory builds and rates rise? What does the lender do? They had better decide to start caring about values as well as credit in order to make intelligent loans. Underwriting standards have to rise to avert a lending crisis.

WAMU is the posterboy for weak underwriting. They built their growth and aquisition engine around mortgage lending during the housing boom. As mortgage rates increased and the housing market started to cool in the way of lower transaction volume, what department did they cut to save money? You guess it: The appraisal department. Recently they pulled completely out of the valuation process [Soapbox] and have begun to rely on appraisal management companies [Soapbox] exclusively, which are notorious for attracting the worst element in valuation. The appraiser who work for them are usually form-fillers and provide no analytical service. [Disclaimer: My firm worked for WAMU from the first days of their expansion in New York and saw the problems first hand. They recently jettisoned every appraisal firm across the country (we were one) as part of their cost-cutting move.]

Barry’s post analyzes WAMU’s market position in his post.

Right now, many mortgage lenders are still hanging in there, any way they can. I yearn for the day they actually want to understand what their risk is. Unfortunately, only a select few actually get this point.

Tags: Fannie Mae

5 Comments

Well, the shockwaves have reverberated through the appraisal industry. This email was sent from management to all WAMU appraisal vendors. [Inman ran a story about the announcement as well referring to my post about the WAMU decision].

The email is polite and respectful, perfect pr speak, shows the disconnect between cost-cutting efforts of upper management in periods of declining mortgage volume and risk management by using [appraisal management companies].

This message is intended for all Fee Appraisers

July 13, 2006


Dear Valued Partner:

Washington Mutual is a dynamic, growing company focused on delivering optimum results to our customers and shareholders.

We’re contacting you today to let you know that after a thorough review of our current appraisal processes, we made the decision to outsource the management of appraisal services to national appraisal management companies.

We will begin transitioning our appraisal needs to two vendors exclusively, throughout the remainder of 2006.

With the formation of this new long-term relationship, we will be reducing the volume of new appraisal orders that we send to you during this transition. We ask that you continue to complete your current assignments following normal processes.

We thank you for your hard work and your continued support of Washington Mutual.

Please know that we have valued your work and contributions to Washington Mutual and we wish you great success in the future.

If you wish to contact LSI or First American, you may reach them at:
LSI – Rick Prosser
rprosser@lsi.fnf.com
1-800-722-0300 ext 79084

First American (eAppraiseIT)
StaffAppraiser@eAppraiseIT.com

We thank you for your hard work and your continued support of Washington Mutual.

We wish you great success in the future.

Thank you,
Michelle White
Washington Mutual Residential Appraisal, Senior Manager
Greg Hoefer
Washington Mutual National Appraisal Production Manager

Tags: Appraisal Management Companies, Soapbox Blog, WAMU, Appraisal Process, Washington Mutual, LSI, First American

1 Comment

John Taylor is the president and chief executive officer of the National Community Reinvestment Coalition in Washington who wrote How to Insulate Appraisers from Production Staff [American Banker]. He states that:

We believe that appraisal inflation is so pervasive that it requires this type of action. Over 8,000 appraisers have signed a petition circulated by the Appraisal Institute alerting the public to this pressure and warning them that their home may be overvalued. A recent survey of appraisers found that half had been pressured to increase appraisals by 10% or more.

His suggestions to reduce appraisal pressure is to:

• Restructure internal operations so that loan officers do not select or interact at all with appraisers or approve them for rotating lists.
  
• Isolate mortgage brokers from the appraisal process in the same manner.
  
• Hire independent appraisers or appraisal management companies. Do not hire an appraisal company that is a subsidiary of the lender ordering the appraisal or of the title company supplying the title, because all stand to gain financially from a higher home price.
  
• Never depend solely on automated valuation for an appraisal; each home must be seen by a qualified appraiser.
  
• Sign a code of conduct developed by the Center for Responsible Appraisals and Valuations, agreeing to resolve differences between themselves and appraisers through the center’s arbitration pro-cess.

Federal regulators, such as the Office of the Comptroller of the Currency, have urged lenders to ensure the independence of appraisers from their loan production staff. Creating this independence, however, requires more than a few superficial steps that an aggressive loan production staff can easily dodge. Lenders must build a corporate structure that does more than simply hide the conflict of interest.

Currently, there is no promising solution for this problem. Associations that represent lenders and appraisers generally tout self-policing or the pending Responsible Lending Act (HR 1295) bill (which is currently stalled in Congress), but these issues amount to window dressing since the problems are inherent in the structure of the lending system and don’t address appraiser indepenedence.

A potential solution is not politically popular since few representatives want to go on record with a solution that will potentially increase loan application costs (near-term) and reduce turn around times.

Tags: Soapbox Blog, Appraisal Pressure, Appraisal Process, Mortgage Fraud

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