Matrix Blog

The appraisal world changes on May 1, 2009.

I have been on a mission over the past year to creat awareness of the continuing issue of appraisal pressure and to prevent the enabling of appraisal management companies via the Cuomo/Fannie deal to dominate the mortgage appraisal business. It appears a foregone conclusion that appraisal management companies will dominate the mortgage appraisal process and as a result, will end up with a system worse off than before the credit crunch began.

Earlier this year, Mr. Cuomo threatened to sue government-sponsored mortgage investors Fannie Mae and Freddie Mac for allegedly failing to ensure that appraisers were shielded from pressure to inflate their estimates. Appraisers have long maintained that many loan officers or brokers, whose pay depends on how many loans they complete, pressure them to come up with value estimates high enough to ensure approval of the loans.

In March, Fannie and Freddie, eager to avoid a legal battle, agreed with Mr. Cuomo on an appraisal code of conduct. That plan drew fire from mortgage-industry groups and some federal regulators. Among other things, they said the code could raise costs for consumers and cause unnecessary disruption in the appraisal business.

One of the key issues facing appraisers was the pressure we were placed under to “hit the number” during the recent mortgage/housing boom. 20 years ago our clients were stodgy financial institutions with a separate appraisal departments surrounded by a firewall to keep loan officers away from the appraiser. Just before the onset of the credit crunch, the mortgage system originated something like 3/4 of its volume via mortgage brokers, who are paid when the loan closes. They select the appraiser {red flag} to perform the appraisal for the mortgage. If the appraiser comes in low, eventually, maybe not initially, the mortgage broker would find someone “better” {wink}. I can tell you, 75% of the appraisals completed for mortgage purposes are not worth the paper they are written on.

New York State Attorney General Cuomo opted to start with the appraiser and follow the mortgage. He ended up striking a deal with then GSEs Fannie and Freddie to curtail some past practices called Home Valuation Code of Conduct or HVCC. Some appraisers lovingly call the agreement “Havoc” because of the chaos it created. It enabled appraisal management companies.

One of the main changes was removing the ability of mortgage brokers to order mortgage appraisals directly if the mortgage was to be sold to Fannie and Freddie. If a mortgage application has an appraisal order through the mortgage broker, then Fannie Mae and Freddie Mac won’t buy it from the bank. This is a significant incentive for a lender because many banks need to sell their loans rather than retain them in portfolio in order to recapitalize and lend more.

I thought this was a terrific idea because stopped this tainted relationship structure between the person setting values and the person being paid on a commission if the value was high enough. But with this solution, a problem was created and that new problem outweighs the former problem.

Because of the way the HVCC is being implemented, most lenders are effectively incentivized to order appraisals through appraisal management companies. The best way I can describe much of this cottage industry is

a centralized appraisal ordering and management organization run by 19 year old kids without any real estate experience who focus nearly exclusively on turn time and half market rate appraisal fees.

Kenneth Harney, of the nationally syndicated column, The Nation’s Housing in the Washington Post writes in his article: An Appraisal Upheaval

When you apply for a mortgage to buy or refinance a house, should you be concerned that your appraiser is being paid much less than the $300 to $600 you’re charged, perhaps half?

Should you know who pockets the rest, or that cut-rate fees are too low to attract the most experienced appraisers?

Should you care that the appraiser might be pushed to come up with a number so quickly — almost overnight in some cases — that he or she doesn’t have the time to do a proper inspection and accurate evaluation of comparable properties, pending sales contracts and local market trends?

Without realizing it, Cuomo has moved the problem from “values biased high” to “values unreliable”

But some prominent appraisers are scathing in their criticism of management firms. “Their quality is terrible — all they want you to do is crank it out at the lowest cost,” said Jonathan Miller, president and chief executive of Miller Samuel, one of the largest appraisal companies in the New York City area. Only “the least experienced people” are willing to do the work, he said, “and the product is unreliable.”

In recent issue of American Banker, Kate Berry wrote an article Re-Appraisal: How Revision is Recasting Expectations

“You’re creating a situation where a lender is going to have to order a lot of appraisals from an AMC,” said Jonathan Miller, the president and chief executive officer of the New York appraisal firm Miller Samuel Inc.

Mr. Miller said, “Appraisal-management companies are subject to the same pressure as mortgage brokers; only there’s actually more at stake. They’re almost more vulnerable” because most of the companies depend heavily on a few lender clients.

Do you remember the AMC known as eAppraise-it?

Cuomo sued them for all the reasons this agreement shouldn’t be implemented without modification.

Tags: Fannie Mae, Appraisal Management Companies, HVCC, GSE, AMC, Freddie Mac

4 Comments

I’ve discussed the curse of stadium naming. The new Citi Field stadium name is in danger of going Enron on us. After all, the naming rights are only a paltry $400M and the Sunday’s Citi bailout was $326B.

For the past few years (for security reasons?) appraisers have been required to provide private financial information to Citi in order to consider whether the appraiser was solvent enough to work for them. Appraisers I know fought tooth and nail against this. In our case, we had been working for them for more than 20 years and now they want to know how much money we make? In other words, they wouldn’t want an appraiser to go under during the middle of a $400 appraisal assignment. It would be (apply sarcastic tone here) devastating to the entire financial system I would think.

The irony here is amazing given Citi’s need for a bailout.

Don’t get me wrong, we work for other areas of Citi which are sophisticated and professional. I am simply fed up with the “efficiency” theory of banking as it applies to backroom operations of large retail banks. They have lost their way. Incidentally, nothing has changed in this regard since the credit crunch began in the summer of 2007.

A few months ago, Citigroup’s retail banking appraisal group based in Missouri put my appraisal firm out to pasture (demoted to backup) in favor of appraisal management companies (those big national companies known for high speed, low costs and virtually zero quality (aka “army of form fillers”) aka AMCs and high volume appraisal shops/factories.

Of course, Citigroup gets a bailout.

Here’s a sampling of our former clients who are national banks that went with appraisal management company factories and ended up getting into financial trouble.

• Citigroup – went with AMCs
• Washington Mutual – Residential mortgage lending gone – went with AMCs – NY AG tried to sue them for collusion with eAppraisIT to pressure appraisers (an AMC)
• Countrywide – absorbed by Bank of America – lots of litigation in the future
• US Trust Company – went with AMCs – such a disaster they actually came back to their appraisers only to be purchased by Bank of America and then we were dumped again
• Bank of America – went with AMCs – rumors that it was such a bad experience, returning to appraisers
• Wachovia – created their own AMC, Bought by PNC.

Coincidence?

Not really. Like the stadium naming deal, the shift to an AMC symbolizes the point when a mortgage lender goes too far and loses touch with it’s understanding of risk. The corporate culture loses the ability to understand the importance of assessing the value of the collateral to which they are lending. Common sense evaporates.

For the most part, the individual review appraisers that worked at these lenders were professional and competent and could see the issue at hand, but they just didn’t have the political weight, so to speak.

Hopefully those institutional politics will be crushed by the time we reach seventh inning stretch (at US Treasury Field).

This just in: Tiger Woods now needs to rustle up lunch money.

Tags: Appraisal Management Companies, Bailout, AMC, Bailout Nation

2 Comments

Back in September 2007, US Senator Dodd from my home state of Connecticut submitted what appears to be hastily conceived legislation to solve the mortgage crisis in response to the prior month’s credit market meltdown. I believe it was created to address subprime lending, but because it was so loosely presented, it casts a wide blanket over the lending process to little effect and likely causes more problems because it embraces conventional wisdom rather than actual practices. As far as appraisals go, it clearly doesn’t recognize the fundamental problems that New York AG Cuomo has already recognized.

The appraisal related language in the bill is sloppy and contains slang, suggesting that someone with little experience drafted it or the the bill was not understood by the Senator. I am very disappointed. It found co-sponsors because it contains buzzwords like “appraiser”, “mortgage” and “meltdown”.

In fact, the language of the bill was so vague and misdirected (the appraisal part) that most appraisers never took it seriously, instead focusing on efforts by Senator Frank and NY AG Cuomo. However, it still has life and is being taken seriously.

The bill is now in the Banking, Housing and Urban Affairs Committee.

I think Senator Dodd’s introduction of the concept of bonding was to incentivize the appraiser to do good by having “skin in the game” but it does nothing to solve the current lending problem. Is this the best that can be done by Congress? It’s damaging to the lending industry and poorly written and thought out, and in my opinion, it allows Congress to say this takes care of the problem, when in fact, it makes it worse.

Here is the appraisal-related content summary provided by Senator Dodd’s web site.

V. Require good faith and fair dealing in appraisals.
– Prohibit pressure from being brought to bear on appraisers.
– Hold lenders liable for appraisals to avoid the appraisal problems created in the current climate.

Here’s the actual language of the appraisal related portion of the bill:

Title IV Good Faith and Fair Dealing In Appraisals

Requirements for Appraisers

• Appraisers owe a duty of good faith and fair dealing to borrowers.

My comment: Generic boilerplate that probably needs to be said. On that note I propose legislation that government officials never abuse their power, the public shouldn’t commit crimes and all school kids show do their homework. In other words, its an ideal, but it has nothing to do with addressing the core systemic problem – remove the possibility of collusion from the process.

• No lender may encourage or influence an appraiser to “hit” a certain value in connection with making a home loan. In addition, a lender may not seek to influence an appraisers work, nor select an appraiser on the basis of an expectation that he or she will appraise a property at a high enough value to facilitate a home loan.

My comment: They actually use the word “hit” in the legislation. Who wrote this? How is a lender prevented from attempting to “seek to influence an appraisers work.” These are just words.

• A crucial cause of the current mortgage meltdown has been inflated appraisals. Many ethical appraisers complain that lenders will only use appraisers who consistently value properties at the levels necessary to allow the loan to close. Appraisers who do not cooperate simply do not get hired. This is particularly detrimental to the homeowner because it leads the homeowner to believe he or she has equity where little or none may exist.

Comment: “A crucial cause” implies appraisers initiated the problem. Wrong. They were the enabler of the lenders and the bad ones were rewarded for unethical practice. They actually use the word “meltdown” in this bill? This paragraph also infers that good appraisals are always low. You can say stuff like this all day long but that doesn’t stop it from happening.

• Appraisers must obtain bonds equal to one percent of the value of the homes appraised.

Comment: “How do the costs of the bonding enter into this? I am not familiar with getting bonded I assume that means appraisers would file for a bond with a predetermined amount so we get enough coverage. That violates federal licensing law (USPAP). This does nothing to fix systemic fraud and burdens the appraisers that do the right thing with additional costs. How does it keep a bad appraiser from doing bad work? They charge the bond costs to their unwitting (or not) clients and it’s no skin off their back. Good grief.

• Remedies available to borrowers

— Lenders must adjust outstanding mortgages where appraisals exceeded true market value by 10 percent or more.

Comment: Can you imagine the litigation costs that would result if this passes? Who determines whether the value is off by more than 10%? Another appraiser who is hired by the homeowner? An AMC? A real estate broker? Zillow? A lender using an Automated Valuation Model? What is “True” market value? Is this a new definition of market value and all other forms like “Fair” used by GAAP are “False”? I find it hard not to say the word “true” in this application without sounding sarcastic.

— When an appraisal exceeds market value by 10 percent (plus or minus 2 percent) or more, a borrower has a cause of action against the lender. A consumer who is awarded remedies under this section shall collect from the appraiser’s bond.

Comment: Can you imagine the the costs that will be endured by the consumer? I understand that bonding costs for the typical appraiser would be $10,000 to $40,000 per year (per appraiser). For what? Appraising is already a razor thin margin business. Two things are going to happen: appraisal services are going to probably double, and many good appraisers will be forced out of business.

— Actual and statutory damages up to $5,000.

Comment:The further destabilization of the lending industry is worth $5k?

Here are the Senators who think this is a good idea:

Sponsored by Christopher Dodd(D-Ct), with co-sponsors: Sen. Daniel Akaka [D-HI]
Sen. Barbara Boxer [D-CA]
Sen. Sherrod Brown [D-OH]
Sen. Robert Casey [D-PA]
Sen. Hillary Clinton [D-NY]
Sen. Richard Durbin [D-IL]
Sen. Dianne Feinstein [D-CA]
Sen. Thomas Harkin [D-IA]
Sen. Edward Kennedy [D-MA]
Sen. John Kerry [D-MA]
Sen. Amy Klobuchar [D-MN]
Sen. Frank Lautenberg [D-NJ]
Sen. Claire McCaskill [D-MO]
Sen. Robert Menéndez [D-NJ]
Sen. Barbara Mikulski [D-MD]
Sen. Barack Obama [D-IL]
Sen. John Reed [D-RI]
Sen. Charles Schumer [D-NY]
Sen. Sheldon Whitehouse [D-RI]

I’ll bet if the situation was explained to the Senators with clarity, they would have issues with the bill as written. Time is of the essence, but the solution needs to solve the problem. The problem is about self-dealing and allaying investor’s concerns with the products they are purchasing.

Tags: FHA, Zillow, Appraisal Management Companies, AMC, Sub-Prime

1 Comment

Did a lot of painting inside my house this weekend so I apologize if some of the paint ended up on this post.

The comment period has ended but the debate rages on within the appraisal profession: the new mortgage process that does not allow appraisals to be ordered by mortgage brokers will have the effect of enabling appraisal management companies and end up with an unreliable appraisal product. Two different paths taken to the same end: crummy collateral asset quality.

I am guessing the OCC is going to get busy, gaining back the limelight on the mortgage lending process from the NY AG’s office.

James Hagarty wrote a nice piece in the Wall Street Journal called Who Should Profit From Home Appraisals? about the political storm that has only just begun. What I find disappointing is how self-serving the players have become. Nothing wrong with advocating for your constituents, that is their job. The part that rubs me wrong is that it has become so predictable. The trade groups seem to be saying the old system worked just fine. Of course that is a complete disconnect from reality.

How does one explain how we got here? And are we going in the right direction?

• Appraisal Management Companies (Title/Appraisal Vendor Management Association) – banks pay them about the same fee as the appraiser would get but they keep 30% to 60% of the fee and work hard to find appraiser (form-fillers) who will work at fees that don”t allow them to do research in the appraisal process. It’s laughable that the trade group contends they pay market rate to appraisers. Market rate for AMCs, I think is what he means. The AMC model doesn’t work paying market rates. It has been my experience that most appraisals I have seen done for AMCs are usually not worth the paper they are written on. The lower caliber appraisers they are forced to use experienced a flood of business during the housing boom. It is going to be interesting to see how that caliber of appraiser fares in a tighter underwriting environment.

The AMCs keep a big share of the fees consumers pay, typically at least 30% and sometimes more than half, appraisers and AMC executives say. The AMCs say they provide a valuable service by maintaining networks of local appraisers and controlling quality. “The AMCs pay market rate” to local appraisers, says Jeff Schurman, executive director of the Title/Appraisal Vendor Management Association, a trade group.

• Mortgage Brokers (National Association of Mortgage Brokers) – they want the appraisal industry to self-police and get rid of appraisers who turned in falsified work. Yes that has worked so well already (sarcastic emphasis). While we are at it, let’s tell mortgage brokers not to press appraisers for a higher value than they know is right or withhold payment from an appraiser for not making the number. Unbelievable. This mortgage brokerage group should be ashamed of themselves for taking the scare tactic approach that consumers will be forced to pay much higher fees. How much has the current mess already cost consumers?

• Appraisers (Appraisal Institute) – Appraisers have flip-flopped on this issue. Initially they applauded the Cuomo agreement but were disconnected from what the industry wanted. The industry has been roiling for the past month over the empowerment of AMCs. I think this trade group, which is inherently commercial appraiser centric rather than focused on the plight of residential appraisers, is so worried about AMCs that they are willing to accept the lesser evil of allowing mortgage brokers to control the appraisal (bingo!). Loss of competent appraisers versus standing up to intense pressure to play ball. Not much of a choice.

• OFHEO (HUD) – They seem to be detached from this whole situation yet they are the oversight agency for the GSEs. Amazing.

• FDIC – No comments submitted (yet they insure lenders and provide bank oversight).

• Federal Reserve – No comments submitted (yet they manage the health of the banking system).

• Congress – proposing lots of ideas but most of them of no real help or will provide a benefit after it is too late. Hard to parse out grandstanding from heartfelt concern. I’d like to think they are really trying to fix it.

• OCC (Treasury Department) – No comments submitted and boy are they pissed off. Their turf has been stepped on. Actually, it has been stomped on. I’d expect a lot more statements from the OCC in the near future.

Bottom line: If we want the lending system to have the collateral value estimate free from corruption and influence, then appraisal management companies, bank loan officers and mortgage brokers have no business whatsoever, ordering appraisals directly because they have a vested in their outcome. I believe it is called commingling interests.

Comments or no comments, I find it hard to believe that OCC will allow this to happen without making their own agreement. Otherwise, they will become as non-existent as OFHEO was during the housing boom.

Also check out: The Housing Crisis & The Plague of Potomac Fever

Tags: Appraisal Management Companies, FDIC, GSE, OFHEO, Appraisal Institute, AMC

Comments Off on [Capital Reflection] GSE/NY AG Comment Period Over, Political Maneuvering Remains

Well, the Matrix Zeppelin needed repairs, but the turmoil in the credit markets made it difficult to get a loan to make the repairs. But with the stimulus plan rebate check on its way, I decided to put the repairs on my credit card. Here’s a selection of recent comments on Matrix, whose readers cut to the chase:

• Eliminate AMC’s and their high pressure tactics. They muck up the works mostly, get the instructions wrong, order 1004’s for condo units, forget to give you a unit number, or sales contract, contact phone numbers, etc etc.

• Who has been a lender for 15 years is just a straight out liar. Terry comments that he or she has not yet to find an appraiser who will fix value. That means that he or she has tried, therefore the problem does exist. I believe Terry is just mad because now he or she will not be able to control a appraiser or appraisal value on a property. I have had on numerous occasions mortgage people call to see if I would push value. I never did and never will.

• I’ve been a table funding correspondent lender for 15 years and I’ve yet to find an appraiser who will “fix” value for me. Your premise that mortgage brokers are pushing appraisers to set value, in my opinion, means the appraiser is the one to blame, not the mortgage broker. Certainly, there are “crooks” in every aspect of every business. Maybe you should get rid of them and not penalize those that have never had an issue following the lending guidelines.

• Unless there is a minimum appraisal fee then I see more problems coming from this then good. How is the government going to order an appraisal? What would be different from whats going on with AMC’s now? They are the worst of the worst in terms of pressure and poor training. Somebody better clarify this quick because there is no such thing as a disinterested business

• When we start to see lots of job listings for asset managers and work-out professionals on monster.com et al we’ll know this thing is getting understood and we’re there. Until then we hang in

• There’s been a paradigm shift in cliches…

• the banks lent 100%+ on the appraised value of the home without looking at ANY supporting documentation. The model is flawed because it does not account for greed and dishonesty.

• As a buyer, I’d rather deal with higher interest rates and less innovative financial products along with a lower house price. My property taxes will be lower, and I can always refinance if interest rates drop in the future.

• What’s the point if they’re just going to default a few years later due to ARM resets? Note that I’m not even talking about the abuse from liar loans. If the conforming limits varied by region years ago, I would not have a problem with that. However, introducing this right now (and temporarily at that) will have the effect of prolonging the housing crisis more than necessary.

• Jon Stewart summed up the “too little too late” observation on the Daily Show last night with the following (paraphrased) quip: “Look, we know your house is in foreclosure … and you lost your job … and you don’t have health coverage. But listen, here’s $400. Take your family out to dinner at a nice restaurant and try to forget we destroyed your economy.”

• This video makes it seem like all the people who got mortgages needed to refinance or had rate adjustments. While in fact most people never needed to refinance nor did they have rate adjustments. Additionally, of those people that needed to get out of their sub-prime mortgages, a large portion were able to sell their property, which appreciated enough to yield them a hefty profit.
  

Tags: Appraisal Management Companies, AMC, Sub-Prime

Comments Off on [Matrix Zeppelin] a hefty profit, take your family out to dinner, Prolonging, rather deal with higher interest rates, greed and dishonesty, cliches, They are the worst, “fix” value, staight out liar, muck up the works

One of the problems with lack of transparency, is that people…errr…don’t know what you are thinking. Just like the fact that I have been weak in my quantity of postings as of late. I can’t explain it, because, well, I got tired of being, uhhhh…transparent. Needless to say, I am again transparent, and even more superficial.

One of the rumors floating around the appraisal/mortgage world for the past few weeks, covers the topic of Fannie Mae’s restriction on loans in markets they designate as declining. It was even suggested that a restriction in one market versus another, suggests redlining. However, I don’t see that correlation.

but i digress…

In a market that is declining, Fannie Mae will have a 5% higher loan to value ratio so instead of requiring 20% down, it might be 25% if the local market is declining. So markets with average mortgage amounts below the $417,000 conforming limit, this could have quite an impact.

>Current home price trends indicate that home values continue to decline in many markets across the country. As a result, and based on our continued monitoring of loan performance, Fannie Mae is reinstating a policy to restrict the maximum loan-to-value (LTV) ratio and combined loan-to-value (CLTV) ratio for properties located within a declining market to five percentage points less than the maximum permitted for the selected mortgage product.

Notice the use of the word reinstating. This is a recurring theme in mortgage lending these days. Its not the introduction of new lending guidelines, its simply the enforcement of existing guidelines.

In theory, the appraiser gets to lead the way in determining declining markets (in sarcastic tone: shocking!, amazing!, incredible!)

>Fannie Mae strongly encourages lenders to use supplemental sources and tools to independently assess current housing trends, unless the appraisal indicates that the subject property is located within a declining market. When the appraisal notes that the subject property is in a declining market, the maximum financing policy must be applied. When the appraisal does not indicate that the subject property is located within a declining market, Fannie Mae strongly urges lenders to implement processes and apply supplemental sources and tools to validate current housing trends and not rely solely on the information reflected in the appraisal.

But the appraisal industry has been neutered so severely by the mortgage brokerage and mortgage lending industry with pressure to “play ball” that I am not confident the appraisal industry is able to have this responsibility in the first place until proper regulatory restrictions protecting appraisers are in place. No more than a small percentage (you know who you are) of appraisers would be brave enough to show a negative time adjustment for fear of losing a client. I hope recent enforcement actions by the NY Attorney General and the SEC will make a difference.

Still, its a prudent and thoughtful first step for Fannie Mae to take. One of the things that drove me crazy in prior periods of market decline, lenders would send out policy notices saying they would not allow negative time adjustments. We would argue back, saying that this was an underwriting issue and it was simply a matter of adjusting the loan to value ratio, not to mandate rose colored glasses and ear plugs for the eyes and ears of the lenders. We either dropped them as a client or they changed their mind.

The byproduct of this action in declining markets will likely be even lower sales volume via stricter credit, placing more price stress in already distressed markets.

I can’t help but see the irony here: the reduction of Fannie Mae’s loan to value criteria in declining markets could actually lead to more foreclosure volume and more exposure for lender’s collateral. But in the long run, its a prudent action.

This restriction in declining markets should never have been lifted in the first place. It is better for the stability of the lending system by re-introducing the concept of risk awareness to lending decisions.

Now thats a concept I think we can risk having.

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Tags: Conforming Mortgage, Fannie Mae, Appraisal Management Companies, AMC

Comments Off on [5% Holiday Update] Declining Markets Get Smaller Mortgages

August should be a slow month for real estate commentary as people take time off to relax, assuming they are not melting as the sun seems to be crashing to earth. Matrix readers however, have been cranking up their air condtioners and reflecting on housing related economic changes.

Throwing caution to the electric power grid, here’s a few notable comments from the Matrix Zeppelin:

• When housing prices were going through the roof, the FED kept interest rates low, based on the fact that “inflation,” which uses rents as the basis of housing costs, was low. Greenspan and then Bernanke made the case that the FED should focus on inflation, not asset prices (like the price of owner-occupied housing). How that housing prices are softening, but rents are rising, it appears the measure of inflation is shifting to the former. Bottom line: policy is inflationary. Governments, households, and (if you include pension liabilities) businesses are deep in more debt than they can service. Those debts cannot be paid in today’s dollars. The options are a reduction in the value of the dollar, which is to say inflation, or mass default. The hope appears to be that inflation will bring nominal income up to the level required to support today’s housing prices and credit card debts. The problem: lots of the debt is variable rate. But someone seems willing to lend for 30 years for no more than the return on cash. Amazing.

• …allowing for inflation and a weakening dollar just to rescue those who got into real estate over their heads. I’m not certain why anyone should feel responsible for their behavior anymore, if the government is just going to come in and clean up their messes for them.

• I wonder if any meaningful proportion of the residential listings currently on the market are sellers who are not serious and/or are “trolling” for a crazy price. I know several people personally who have their apartments listed but whose selling is strictly optional (meaning, they don’t have to relocate, don’t need a larger space for more kids, etc.), and their pricing reflects their flexibility. They offer what they consider to be a “score” price, meaning if they sold it at that they’d be very happy with their returns. That might be one of several contributing explanations to the reduction in sales volume without a related reduction in prices, a phenomenon you’ve mentioned several times and [this article [CNN/Money]](http://money.cnn.com/2006/08/07/realestate/vulturebuyersinvademarket/) reminded me of again.

• One could hypothesize that there is currently a greater proportion of such listings in the total, due to the widespread perception over the past year that the “bubble” was peaking. That might account for a bit of “phantom” inventory in comparison to previous eras. One could then extrapolate that the inventory growth or level was somewhat exaggerated.

• The WSJ journal incorrectly states that the boom began in 1991. However, prices in many places were in decline for several years after that. Their chart shows that the decline in sales activity stopped getting worse in 1991, but remained below the long term trend until 1998. I would pick that point as the start of the “boom.” Until then it was merely a weak recovery.

• Your use of the term “stagflation”, two days in a row make me want to go out and find a used AMC Pacer to buy.

• I believe between 2002-2004 we were all playing in a market that never really existed. With the correction of compliance over appraisals we are now starting to see who we can start pointing fingers at.

• Low rates and exotic loans allowed people who could not purchase in the past the chance to buy a home. But eventually, prices (in certain areas) ran much higher than median incomes could afford. And now we have the market slow down and eventual correction. How the correction will play out… I really don’t know. I think many like to point to RISING mortgage rates (and will do so more and more) as the cause of the housing slow down, but I think it was the low rates (and exotic loans) that ACTUALLY caused it.

Tags: Appraisal Management Companies, AMC, Alan Greenspan, Ben Bernanke

1 Comment

The Wall Street Journal does a brief piece on what will likely prove to be a significant issue for many property owners down the road (getting big air): inflated appraisals. Its encouraging only because its on the front page so hopefully it will get attention from the regulators. The article [New Headache For Homeowners: Inflated Appraisals Rosy Valuations, Common In Boom, Now Haunt Sellers; It’s ‘Pay-the-Piper Time’ [WSJ]](http://online.wsj.com/article/SB115353434533614420.html) however, uses the same cast of characters in its coverage.

Here’s why the problem doesn’t get reported as extensively as it should: There is no smoking gun. 

Any new stories about inflated appraisals these days seem to originate from the National Community Reinvestment Coalition, a Washington-based nonprofit that supports low-income housing who last year came up with a novel solution to the appraisal problem. [I have covered the efforts of NCRC before [Soapbox]](http://soapbox.millersamuel.com/index.php?s=National+Community+Reinvestment+Coalition).

Why does the appraisal inflation issue get so little play in the media? Likely because most real estate mortgage industry people close to the issue downplay the problem since there has not been a quantifiable cost to be held accountable to. Here are samples of the typical mortgage industry response.

National Association of Mortgage Brokers, says brokers shouldn’t pressure appraisers to distort value estimates. But he advises appraisers to create and enforce their own ethical standards.

Their recommended solution of self-policing is a cop-out and rarely works in any profession. The appraisal industry is one of the most fragmented of all.

This don’t ask, don’t tell attitude has created the appraiser mantra -  Get work.  Hit number anyway you can.  Do it Fast.  Get more work. Talk a lot about servicing the clients needs. Repeat.  If the appraiser doesn’t take this path, then they need to find other types of clients.  A whole generation of experienced appraisers have been forced out of the business.  Its the era of the appraisal factory.  Inexperienced personnel cranking out the reports is the norm of today.  Some firms have appraisers that can generate 40-50 reports per week.  Think about the time spent coordinating the appointments, travel to and from the property, inspect, visit all comps, confirm data, write up report, review, deliver, follow up on client questions and concerns, field irate calls from clients or borrowers if the appraisal is too low to make the deal, re-work report, re-send new final version…times 40 in a week?

Lenders often play down the issue. Tim Doyle, an official of the Mortgage Bankers Association, says he sees no “broad” problem with inflated appraisals, outside of criminal rings engaged in fraudulent mortgage deals. Even though mortgage lenders typically sell loans to investors shortly after making them, the lenders have an incentive to ensure those loans are backed by property valued at least as much as the loan balance, Mr. Doyle says. Investors can force the lenders to buy back a loan if it goes into default and the appraisal was fraudulent, he says.

So the MBA is saying, if it becomes a problem, then leave the risk assessment to the buyers of the mortgages on the secondary market and then the lenders will reimburse them. However, if poor quality is so widespread, then how does this solve anything? The banking industry, at least at the upper levels, who tend to be detached from these sort of front line issues, like the way things are. [Lenders will only start to complain when poor quality begins to affect profits](http://www.rismedia.com/index.php/article/articleview/15282/1/1/) or there are other economic incentives or federal regulations for enforcement.

To summarize the players in the appraisal process who are happy or at least satisfied enough to stay with the status quo with the process:

• Banks/Mortgage Bankers – they want to keep costs down and as long as someone with an appraisal license says the value is ok, then there is nothing to worry about.
  
• Mortgage Brokers – they want to continue to retain control over the appraiser, after all, mortgage brokers are paid only if the transaction goes through and this is a way to ensure that continues to happen. They say that appraisers should self-police themselves.
  
• Appraisal Management Companies – The less quality concerns by banks there are, the more business they are able to generate, so of course they are happy with the status quo.
  
• Many Appraisers (Usually large firms aka ‘Appraisal Factories’) – High volume appraisal firms are happy with the way things are and have figured out that the secret to additional revenue is simply volume with no problems for their clients to deal with. Its easy to find those appraisers – just look and see if their client base is nearly 100% mortgage brokers.
  

The WSJ sights the seminal [October Research](http://www.octoberresearch.com/) study from 2003 which says that 55% of appraisers are pressured to change a value. Of course that is a wildly conservative number if reality is factored into the process. If an appraiser refuses to change the number or bend, they simply don’t get work anymore and therefore the occurrence of the pressure goes away (if their appraisal practice doesn’t go away first).

There is virtually no appraisal oversight of appraisers on a state level (which is responsible to administer the federal law) because there is limited funds available for it and to make matters worse, many states take a portion of the revenue from licensing fees and allocate it to other purposes.

The notion that appraisal management companies (AMC) create a ‘Chinese Wall’ so the bank does not control the appraisal process is incredibly misleading and disconnected from the realities of lending. AMC’s are usually only able to attract the bottom of the barrel (my apologies to the few exceptions). They are the worst element in the appraisal industry because of the low fee structure and unrealistic turnaround time requirements. They have nurtured an army of form-fillers. AMC’s are only able to competently rate this vast army of form-fillers by how quickly their turn around time is. In other words, since these appraisers generally can’t afford data services or don’t use what is available, the AMC appraisers often rely on data from the broker involved in the sale – a tainted data source in lending parlance – to generate a quick value to get more work. If they do get data from public record, they are unable or simply do not confirm details like condition, view, concessions, etc.

The person determining which appraiser gets the work, isn’t the one who has their collateral at risk – and aren’t those lending institutions the ones at risk, and aren’t they federally insured?  Licensing initiated in the early 1990’s after the S&L debacle has built an army of form-fillers who are simply rating on how fast they are.  Why? If you have a license, thats all you need to be in compliance. Speed, significant negligence and short cuts.  This system worked fine as long as the market was going up if you subscribe to the don’t ask, don’t tell theory.  Well, the market isn’t rising now, or at least not as dramatically.

_Conclusion_
The appraisal inflation problem is much more serious than reported yet it can’t be proven by stats since the market has kept rising, hiding the problems.  Most of the players connected to the process are generally happy.

The appraiser has no independence in the appraisal process, in any way shape or form. The entire structure of the mortgage appraisal system is seriously flawed. I find it absolutely amazing thats its been able to go on this long without some sort of regulatory concerns raised.

[Are We Damned If We Do Or Damned If We Don’t? Cause It Seems Like Deja Vu All Over Again[Soap Box]](http://soapbox.millersamuel.com/?p=227)

Tags: Appraisal Management Companies, AMC

7 Comments

Soapbox readers provided commentary about last week’s decision to close the in-house residential appraisal department at Wamu signified the end of an era. AMC’s won because when you get right down to it, its all about short-term costs in upper management, not about long-term exposure and risk. Soapbox would like to thank today’s B-Schools for this.

Soapbox readers write:

• I am saddened by the shift to AMC’s. It is nothing short of catastrophic that these “efficiency’ mills win because of greed and impatience. We will all pay for it in the long run.
  
• Optis was there homegrown loan Origination System that they completely blew up. I believe they dumped over $1B into this system that never worked. There appraisal management system is Optis Value, not Optis. This system functions fine and actually enabled WAMU to benefit from enormous increases in processing efficiencies and staff reductions on their operations side. This fact was reiterated by WAMU executive as recently as yesterday. There is nothing wrong with there Appraisal Management System, this was purely a senior management decision to move from an in house Appraisal Department to a VMC model.
  
• May its time the appraiser took a stance against the AMC’s. You know full good and well that the fees that have been paid will be cut in half or better. The AMC are acting more like an employer every day. Maybe they should be made to toe the line like an employer and the appraiser gets additional benifits. Looks like the ranch is looking better and better every day now.
  
• Yes, as an independent fee appraiser I have seen most potential review assignments go to the same low price fast turn-around incompetent form fillers who write the garbage reports that are up for review. They all must have been gone the week of the 4th, because I picked up a few review assignments, with my standard fee and turn times, and I can not believe the crap some appraisers are trying to get away with now days. All three sales from another county when there are three good comparables within a few blocks of the subject; 20% to 50% price inflation instead of the 5% to 10% that we are all used to seeing; and reports without ANY comments!
  

We even had someone who felt AMC’s were the only way to order a USPAP compliant appraisal because it eliminates the everyday pressures applied by mortgage brokers. You gotta think the reader’s heart was in the right place.

• AMC’S are the only entities that contract out for unbiased appraisals – in other words they are the only entities that order USPAP compliant appraisals. Our office has a swinging door for standard mortgage companies that order appraisals because they only order until the first one does not hit value, then they go somewhere else. In my review work, only about half reflects good work, the rest are just trying to keep their clients. I hate AMC’s, but it is the price I pay for being honest.
  
• You make an interesting point and I think your heart is in the right place but I disagree with the intentions of AMC’s. AMC’s don’t order appraisals based on making the deal like the mortgage brokers are often accused of. However, the fees are so low, that for the most part, and no offense, but their appraisal panels are the bottom of the barrel. Does the lender get a better understanding of the collateral? No. AMC appraisers quite often rely on all their comps from the broker involved in the sale who has a vested interest in the outcome. In other words, the order AMC process may be not as biased toward the outcome, but the mechanics of the appraisal certainly are and the outcome is the same.
  

Tags: Appraisal Management Companies, Soapbox Blog, WAMU, AMC, Appraisal Pressure

1 Comment

Source: NYT

Floyd Norris’ column asks: [Do big bank mergers lead to more crime? And is that a reason to toughen antitrust enforcement? [NYT]](http://select.nytimes.com/2006/03/17/business/17norris.html). His article is based on a study published in the Journal of Finance: [Bank Mergers and Crime: The Real and Social Effects of Credit Market Competition](http://www.afajof.org/journal/abstract.asp?ref=0022-1082&vid=61&iid=2&aid=847&s=-9999)

The study uses micro-evidence that:

Neighborhoods that experience more bank mergers are subject to higher interest rates, diminished local construction, lower prices, an influx of poorer households, and higher property crime in subsequent years.

A First-Hand Appraisal Professional Testimonial

We can see this specifically within the appraisal profession. I have been talking about this for more than a decade. The wave of bank mergers has removed local oversight from the appraisal review function. In other words, appraisers that are morally flexible have been able to thrive because of this disconnect.

Large bank mergers generally result in a system of central controls and as a result, national vendors get appraisal contracts over locals. The irony here is that the national venders, known as appraisal management companies (AMC’s), track appraisers based on speed and whether they have a license, with a fee structure that is half the going rate.

Guess what happens? AMC appraisers can not afford to purchase reference materials and data. But it doesn’t really matter since they are only worried about turn times.

The pressure on reputable appraisal firms remains incredible.

If this is what happens in a fairly cut and dry scenario, I can only imagine what happens in more complex financial transactions.

Tags: Appraisal Management Companies, AMC

3 Comments

Ever since I was a kid, I remember seeing and reading about Christmas trees on top of buildings under construction but they were not quite finished. I also remember seeing an American flag and there was usually a ceremony of some kind that was covered in the newspapers.

There has been a tremendous amount of construction in recent years and I started thinking about [topping out](http://en.wikipedia.org/wiki/Topping_out) ceremonies:

What is this all about? Why a tree?, and Why was I looking up instead of watching where I was walking?

According to [Modern Steel Construction / December 2000 [pdf]](http://www.aisc.org/Content/ContentGroups/Modern_Steel_Construction3/December_2000/0012_05_christmas.pdf)

When or how it started, but the tradition of ‘Topping Out’ has become a cherished custom of Ironworkers whenever the skeleton of a bridge or building is completed. Topping Out is a signal that the uppermost steel member is going into place, that the structure has reached its height. As that final beam is hoisted, an evergreen tree or a flag or both are attached to it as it ascends.

This tradition of [ironworkers](http://www.ironworker.com/) is most closely associated with the [International Association of Bridge, Structural, and Ornamental Ironworkers](http://www.ironworkers.org/) union in Washington, DC.

[“Topping out” is the term used by ironworkers to indicate that the final piece of steel is being hoisted into place on a building, bridge, or other large structure.](http://www.findarticles.com/p/articles/mi_qa3732/is_200110/ai_n8986046)

The project is not completed, but it has reached its maximum height. To commemorate this first milestone the final piece of iron is usually hoisted into place with a small evergreen tree (called a Christmas tree in the trade) and an American flag attached. The piece is usually painted white and signed by the ironworkers and visiting dignitaries (figure 1). If the project is important enough (and the largesse of the contractor great enough) the ceremony may culminate in a celebration known as a “topping out party” in which the construction crews are treated to food and drink.

For those who are into Scandavian mythology here is the [History of the “Topping Out” Ceremony [Columbia University]](http://www.columbia.edu/cu/ssw/news/apr03/history.html) via [The Ironworker](http://www.ironworkers.org/ht/redisplay/1/printerfriendly/1) magazine.

Topping Out Bear Stearns NYC

[Mohawk Indians](http://www.indiancountrynews.com/fullstory.cfm?ID=94) are the most well-known ironworkers and are close associated with topping out buildings.

• [Booming Out: Mohawk Ironworkers Build New York [Smithsonian]](http://www.sites.si.edu/exhibitions/exhibits/booming/main.htm)
  
• [Mohawk Ironworkers Who Built the World Trade Center Profiled on Lost & Found Sound’s Sonic Memorial Project [NPR]](http://www.npr.org/about/press/020619.mohawk.html)
  
• [Mohawk Ironworkers to be Honored at WTC Ceremony [Canku Ota]](http://www.turtletrack.org/Issues02/Co04062002/CO_04062002_Ironworkers.htm)
  

Here’s a sampling of local coverage for a typical event:

[Topping Out at 7 World Trade Center](http://images.google.com/imgres?imgurl=http://www.lowermanhattan.info/images/news/113t_r_wtc7_bridge.jpg&imgrefurl=http://www.lowermanhattan.info/news/topping_out_22590.asp&h=105&w=140&sz=5&tbnid=GzaMC6PZ7BDb9M:&tbnh=66&tbnw=88&hl=en&start=30&prev=/images%3Fq%3Dtopping%2Bout%2Bsteel%26start%3D20%26svnum%3D10%26hl%3Den%26lr%3D%26c2coff%3D1%26sa%3DN)
[Topping Out At The Ukrainian Museum’s Top Project](http://www.ukrainianmuseum.org/news_021208toppingout.html)
[Topping Out the Blanton: That tree on the roof? Means the new museum is A-OK.](http://www.austinchronicle.com/issues/dispatch/2004-08-20/arts_feature2.html)
[Vought-Alenia plant to be topped out](http://www.charleston.net/stories/?newsID=67704&section=businessreview)

but its not limited to the US…

[New unit at Northwick Park Hospital finished [UK]](http://www.harrowtimes.co.uk/news/localnews/display.var.694667.0.new_unit_at_northwick_park_hospital_finished.php)
[New home to help juveniles re-integrate [HK]](http://www.news.gov.hk/en/category/healthandcommunity/060220/html/060220en05001.htm)
[TIOGA DOWNS PLANS MAY OPENING [NZ]](http://www.harnesslink.com/www/Article.cgi?ID=34207)

Tags: Appraisal Management Companies, AMC, Bear Stearns

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