Sounding Bored is my semi-regular column on the state of the appraisal profession. Valuation Review gets me to spill the beans on the Brave New World our profession has entered. Believe it or not, I am optimistic.
Here’s my interview with Matt Smith, managing director of Valuation Review [1], one of the best real estate appraisal publications out there, IMHO:
As Valuation Review has reported, lenders have grown much more conservative in underwriting, and appraisers are feeling it in the form of growing demands for more in-depth market analysis and the inclusion of more recent comps in reports (see “Conditions, stips reach fever pitch for appraisers [2]“).
“I hope it continues forever. It should never have gone away,” said Jonathan Miller, president and CEO of appraisal firm Miller Samuel. “The appraisal profession from 2004 to 2006 which was when the bar for underwriting dropped to the floor became an army of form fillers. The people who were competent either did not fare well during the housing boom or were effectively shut out of their trade. It’s a shame. That will take a while to rebuild.”
He estimated that the appraisal industry has fallen from “80 percent competent to just the opposite.” Miller recently shared his thoughts on how the GSE conservatorship and Wall St. crisis might mean for appraisers.
The most important factor, he said, is the housing market won’t get better until credit is fixed.
“The GSE takeover, in the long run, is a good thing for two reasons. One is they no longer serve two masters — the taxpayer and the shareholder. So they may be able to work out some of the foreclosure volume,” Miller said. “There may be more empathy.”
Also, no one knew how much of their balance sheet contained overstated assets.
“Until all the dirty laundry comes out, you’re not going to see much of a resolution of credit,” Miller said. “There’s no trust in the market whatsoever.”
What’s it all mean?
As the industry purges itself of unscrupulous practices and “professionals,” mortgage lenders might place a new premium on skilled, experienced appraisers at least temporarily.
“I’m skeptical that lending institutions are going to find the new religion tasteful for an extended period of time because it means lower revenue,” Miller said.
In addition, many of the executives and leaders who pushed for reckless behavior are still in place. There’s also another wildcard appraisers must face: The Home Valuation Code of Conduct.
Miller offered no guesses at a possible outcome for the HVCC, but said, “The biggest concern I have in all this and I can tell because I’m being heavily marketed to by them is the proliferation of appraisal management companies.”
Representatives from the mortgage broker industry have reported that with new rules preventing them from ordering an appraisal directly, 60 percent of their members will go under, according to Miller.
“Yes, because that is part of the systemic problem with valuations,” he said. “Lenders have essentially severed their relationships with local appraisers. They’ve gone national (with AMCs). You’re moving from an appraisal product that is biased to make the deal to one of incompetence. Generally, the appraisers willing to work for appraisal management companies are those willing to work for half or less than the market rate and therefore cut corners and turn the product around in 24 hours. The reviews I’ve done for banks suggest those reports generally aren’t worth the paper they’re written on. So how are we better?”
There has been no great solution for making sure appraisers are protected but viable, he said. Real improvements to the system would have to incentivize quality and trust.
“That won’t be accomplished by just making a new laws or regulations saying you can’t pressure appraisers. That’s been the tact in the past, and that really does nothing,” Miller said.
Rather, there has to be incentive on the demand side so that loan products aren’t purchased and securitized until they meet rigorous new standards. The larger trend in the appraisal community is that the intellectual knowledge base is leaving mortgage business for other types of valuation work.
“At some point, you decide whether you’re going to sell your soul or not. I don’t want to sound too cynical, but once you make the business decision to say, ‘I’m going to push the number,’ it’s over. You’re going to be doing that the rest of your career, because that’s what your reputation will be,” Miller said.
His own business has evolved in recent years from 50 percent mortgage-based to just 20 percent or work coming from mortgage companies.
“People that take the long-term view will probably leave the mortgage business as an appraiser and certainly are doing little work with mortgage brokers,” he added.