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As a longtime reader of Housingwire, I always saw them as a great resource on the goings on in the mortgage industry. But lately, I grew concerned about the one-sided coverage as it related to my industry – residential appraisal.

HousingWire recently published an “appraiser shortage” blog screed that was tone-deaf to the problems facing appraisers. To their credit, Jacob Gaffney, the editor-in-chief, reached out to me for a rebuttal after reading all the negative appraiser feedback in the comments section. Rather than address specific failings of this piece, I opted to focus on current appraiser reality.

To start, the residential appraisal industry has a perception problem.

Read my full post on HousingWire.

Here is another thought on this appraisal shortage silliness. Not too long ago there was a webinar hosted by Housingwire that included some Powerpoint slides by one of the panelists, Matt Simmons. He is a Florida appraiser and former state regulator. He shared it with me and one of his slides is quite amazing. He matched mortgage origination volume with the federal registry of appraisers.

The finding?

The ratio of appraisers to mortgage volume has been higher since the housing bust than during the housing boom. While the chart only goes to 2015, both total origination and appraisers have changed little since then, so the ratio would remain stable, consistent with the post-financial crisis pattern. In other words, there are more appraisers now than there were during the Housing Bubble based on mortgage volume.

UPDATE Full Housingwire Blog Post with Comments [PDF]

Tags: Appraisal Management Companies, AMC, HousingWire, Jacob Gaffney, 50-percenters, appraiser shortage

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During the Super Bowl advertising blitz, the most controversial advertisement seemed to be (no, not Mountain Dew’s PuppyMonkeyBaby) Quicken Loans RocketMortgage Super Bowl Ad: What We Were Thinking

David Stevens, CEO of the Mortgage Bankers Association was annoyed at the public outrage.

Wow – this piling on @QuickenLoans is outrageous. They try to make a complex process easier for qualified buyers https://t.co/sR8ulREGyq

— David H. Stevens CMB (@DavidHStevens) February 9, 2016

Even the Urban Institute’s Laurie Goodman who is another voice of reason, writes a blog post on Why Rocket Mortgage won’t start another housing crisis.

I am one of those who were angry after seeing the QL commercials that aired before the Super Bowl and my disbelief continued after watching the Super Bowl ad. I lived the insanity and the QL commercial was completely tone deaf and gave me great concern about repeating mistakes in the past. In fact I was so concerned that I made the QL Super Bowl commercial the cornerstone of last week’s Housing Note: Rockets Engineered to Amaze Housing: What was Quicken Loans Thinking?

A week later my view on the ad hasn’t changed and in all due respect to Laurie and David, I think they missed the forest for the trees (there’s a digital v. paper pun somewhere). I’ll explain by going through their own points:

• Borrowers can give lenders easier access to bank information – this is one of those wiz bang promises we always see with new technology (assuming this product is new technology). But I don’t think anyone is arguing to keep the process arduous.
• Approvals might be less prone to human error. – Sure, that’s entirely possible although this argument is like saying if there was less air pollution we might all feel better. We would have to assume that borrower data entry is better and it matches up to official documents like tax returns and pay stubs – something that was not a lender concern in the last cycle.
• Automation may ease tight credit. That’s another one of those wiz bang assumptions that any technology gain – automation is better – remove humans and the process gets easier (again, we don’t understand what the details are of this wiz bang new technology). EZ Pass scanning technology on the highway is far better for toll collecting but it took a few decades to perfect. The mortgage lending process is full of judgments that need to be made and common sense has been removed from the mortgage underwriting process so it can be completed with checkboxes. I contend that automation will NOT ease credit any time soon because automation means a series of lending rules and it will take years to iron out. It may even delay credit normalization as lenders are reluctant to fully trust it. Plus lending continues to remain tight because of bad decisions made in the past and a weak outlook for the future (30 year fixed is below the level just before the December Fed rate hike), not because the process needs to be more efficient. Mortgage origination volume has fallen nearly every year since 2006 so I can’t see lack of automation as holding back the normalization of credit.
• Digital lending is here to stay. No one is really arguing against digital lending per se. The future across most industries is digital and that transition can be good and bad. The mortgage process is much more digitized than it was a decade ago so disagreeing with the Rocket Mortgage message doesn’t make someone anti-digital.
• Make a complex process easier for qualified buyers. Of course! If that is what is actually being delivered. It’s a black box and the consumer is getting their information from a commercial that conveys dated message. If David gave a speech in a 1970s era polyester suit with bellbottoms, would his current information leave the audience with a current market impression?

The real reason for the pushback on this rocket thing is not because we are anti-digital, anti-efficiency, anti-credit easing, anti-automation or anti-polyester bellbottoms. The pushback comes from the messenger being the second largest mortgage lender in the U.S. who marketed their product seemingly devoid of any understanding of the housing bubble, which after all, was really a credit bubble.

And it becomes even more clear to me as an appraiser, looking at their complete reliance on appraisal management companies and how awfully unreliable that post-financial crisis industry really is at estimating collateral, that their judgment is flawed in the long run.

The same sort of promises and expectations were made during the run up of Countrywide Mortgage. We are nearly 9 years down the road from the 2007 implosion of American Home Mortgage and those 2 Bear Stearns mortgage hedge funds and yet economically, the world is still in the hangover stage.

I don’t really believe that QL’s Rocket Mortgage product will bring down the world’s economy as we saw with financial engineering in the last cycle. But it is a concern and unbelievable that this was the messaging they chose to go with. As Mark Twain said (paraphrased) “History doesn’t repeat itself but sometimes it rhymes.”

Please watch that commercial again.

Tags: Mortgage Bankers Association, HousingWire, Quicken Loans, David Stevens, Laurie Goodman, Urban Institute

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I saw an opinion piece written about appraisal management companies over at HousingWire that made me just about fall out of my chair – and my office chair is a sturdy Herman Miller Aeron so it was quite an unsettling piece. I’ve written about AMCs quite a bit since HVCC came into effect on May 1, 2009 and my last big piece: “Appraising for AMCs Can Be Like Delivering Pizza” prompted a senior executive at one of the largest US AMCs – who we don’t work for – to call me after he read it and say, “all of what you wrote is true – how do we change it?” He sounded very reasonable and earnest and got his Chief Appraiser to reach out to me to explore what to do. That person ended up providing me with robotic and defensive feedback before I even asked any questions – making it clear it was all about keeping his job, not improving the industry. Sad.

Make no mistake – I am not against the concept of AMCs and there are some reasonable ones to deal with – but the majority of them are poorly managed and therefore can only attract appraisers with the “form-filler” mentality.

This HousingWire editorial was called “It’s time to debunk the 3 biggest myths about your AMC” by the CEO of an appraisal management company. We don’t work with them and I don’t know of them or the author. It’s a corporate sounding piece so I’m guessing that it was pitched and written by their PR firm as a way to sell the virtues of a good appraisal management company.

What threw me for a loop was the omission of any discussion about the actual providers of valuation expertise. AMCs do not provide value opinions to banks. AMCs manage appraisers who provide value opinions to banks. My guess is they or the AMC industry in general are receiving more pressure from banks for the rising cost of the appraisal process – not because the appraisal fees are rising – but because the AMC appraisal quality is so poor that relative to the cost, the value-add of an AMC really isn’t really there.

We have started to observe national lenders push back against the poor quality of AMC appraisals and some lender personnel are now bypassing AMCs on complex or luxury properties because they don’t trust the expertise coming out of the AMC. Amazing.

Here are the 3 “myths” presented in this AMC PR piece. I restate each point being made to reflect the reality of the appraisal process:

From the Housingwire guest editorial:

THEIR Myth 1: Appraisal Management Companies add costs to the lender’s business.

So, yes, the costs of putting a solid value on a piece of real estate have gone up. But this is not due to the fact that an AMC has been added to the equation. It’s due to the fact that it costs more to do it right, to employ the technology, to manage the fee panels, to quality-check the results. Like most myths, this one has at its core the ugly truth that the price of an appraisal has gone up between $80 and $200, depending upon the circumstances.

MY Opinion of Myth 1: The rise in costs is NOT because appraisers are arbitrarily raising their fees. It is because the appraisal management industry takes half of the appraisers fee paid by the borrower at application to cover their costs and ended up driving most good appraisers out of retail bank appraisal work – now dominated by AMCs. The rising costs are being born by the AMCs who try to checklist away the poor quality. Here’s how: Imagine making a modest salary for a job well done and then one day (May 1, 2009) you get your pay cut in half. The middleman between the bank and the appraisers (the AMCs) got to keep the other half of the appraiser’s fee/salary. In reality, this 50% pay cut was the appraiser paying for bank compliance with HVCC by hiring the AMC. Would you quit your job if you got a 50% pay cut? Most would say yes. Who would replace you at 50% of an already modest wage? A lower caliber, lesser experienced person who was able to cut corners – like eliminate research – and essentially be willing to be a form filler rather than a valuation expert – quality evaporates not matter how much “review” is put in place. AMCs have been grappling with poor quality and probably have had to increase oversight as more banks push back against the poor quality. I think the additional compliance issues being touted throughout this opinion piece in this “Myth” are probably more of a scare or fogging tactic than a real reason for higher costs. The higher cost that is being represented by the AMC is more likely from the fact that AMCs are being forced to find better appraisers in certain markets and those appraisers are less willing to subsidize bank compliance with HVCC out of their own hide. We doing more and more AMC work now and we are paid a full fee and are given a fairly reasonable turnaround time. Why? Because that AMC’s panel quality was poor and their bank clients basically told the AMC to use firms like mine or the bank will go to another AMC who will use a higher caliber of appraiser.

THEIR Myth 2: AMCs deliver poor turnaround times that can’t compare to internal teams

Anyone who buys into this myth must live in a world without Service Level Agreements (SLAs) that spell out exactly what a vendor will provide to a lender. It sets the terms of the engagement and specifies penalties that the vendor will suffer should it fail to live up to the promises the document holds. Turnaround times are always part of the SLA between an AMC and a lender…Now, here’s the grain of truth at the center of this ridiculous myth: lenders are working to incorporate so many new compliance rules into their processes that the collateral valuation process is simply taking longer for many of them than it has in the past. Part of this comes from the fact that compliance checking takes time. Part of this comes from unnecessary processes within the lender’s shop that exist out of some executive’s fear of possible compliance problems. The appraisal process is taking longer in many cases, but it’s not due to the AMC. It’s just part of the new business environment we’re working in.

MY Opinion of Myth 2: This is simply a reframing of the conversation between lenders and AMCs. The biggest problem with most AMCs today is they demand an unreasonable turn around time – some require 48 hours (more with complex properties), about 1/3 the minimum average time needed to do a reasonably competent job. Because the AMC bank appraisal quality is generally poor, AMCs have to insert more and more checklists into the QC process to appease their lender clients. The lender clients require more service level agreements BECAUSE THEY DON’T TRUST THE QUALITY OF THE PRODUCT, NOT BECAUSE OF MORE FEDERAL COMPLIANCE ISSUES. In turn, the appraiser gets a gum chewing 19 year old who calls them every day to fill out a checklist. Banks were fine, pre-HVCC, with the turn times of their in-house and outside fee panel staff and it NEVER was as fast as the typical AMC requires today. Today, most AMCs have to differentiate themselves from other AMCs by cost and turn around standards. With the poor quality of the typical AMC bank appraisal, the AMC gets squeezed financially as banks and appraisers are beginning to push back with more requirements and costs. An appraisal is NOT a commodity – it is a professional service. If the AMC doesn’t respect the bank appraisal industry and pays them poorly, all the AMC can ever hope to receive in return is a poor quality product that can’t be check listed away.

THEIR Myth 3: The lender relinquishes control when they outsource to an AMC

The lender is in complete control at all times and federal regulators have made it crystal clear that the lender is the responsible party anytime they outsource to a third-party vendor. No lender will relinquish control to a third party when it knows the CFPB will come back to its front door in the event of a problem. There are some aspects of the collateral valuation process that the government has said must be removed from the control of the loan officers originating the loan and the managers who oversee them. Federal regulators do not want the lender to control the outcome of the appraisal process and so they have made it clear in the regulations that it must be moved away from the origination department. The uncomfortable truth is that the federal government wants the lending institution to lose a bit of control here, for the good of the consumer and the financial institution. But handing responsibility for a few aspects of one process to a third-party outsourcer is not the same thing as giving away control. No lender we know and no good AMC executive would equate these two.

MY Opinion of Myth 3: One of the biggest myths furthered by many AMCs is to fog lenders with the idea that HVCC requires banks to use them to be compliant. The statement “The uncomfortable truth is that the federal government wants the lending institution to lose a bit of control here” is very misleading. All the government wants is a separation between the sales function and the quality function of a bank – a firewall – which is an AMCs major selling point. The irony here is that large AMCs are just as susceptible to lender pressure as the individual appraisers, but on a much larger scale.

I am not anti-AMC. However I am against bank appraisers paying for a bank’s compliance with HVCC and being marginalized as a result. The appraiser is the expert developing the value opinion for the bank, not the AMC.

In my experience to date, the majority of AMC bank appraisals that I have seen are very poor. But it doesn’t have to be that way. If the lender paid the market rate for an appraisal and an additional fee for the AMC to administer the process, the quality would improve. Borrowers today generally don’t realize that the bank appraisers is paid a fraction of the “appraisal fee.” Today’s bank appraiser is paying for the bank’s compliance with HVCC and this has largely destroyed many of the quality firms in the appraisal industry. It doesn’t help that the residential appraisal industry has no real representation in Washington.

But I do like my chair.

Tags: Appraisal Management Companies, AMC, Aeron Chair, HousingWire

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