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Posts Tagged ‘Jonathan Miller’

[Sounding Bored] Deja Vu: How Licensing Killed The Appraisal Industry As We Know It

December 29, 2007 | 7:08 pm | Columns |

Sounding Bored is my semi-regular column on the state of the appraisal profession. This week I take license with our law.

Ok, admittedly that post title is a bit dramatic and I am not against appraisal licensing at all. However, I do not believe that licensing alone protects the public from bad appraisers. The same concept applies to appraisal designations. Licensing only one tool for the protection of the consumer, investors and financial institutions.

Take a look at this New York Times article of 1990 called Reappraising the Appraisal Industry.

”THE party is over,” said Eugene Albert, a real estate appraiser. ”The binging of the 1980’s is finished.” Mr. Albert was discussing the excesses that characterized the 1980’s real estate market and led to a recent law requiring state certification of real estate appraisers.

”Many of the bad loans made by the banks in the S.&L. disaster were sanctioned by unscrupulous or untrained appraisers,” he said. ”Even some bank lending officers here in the county, in their frenzy to make loans, would call my office and say, ‘I want an X dollar value of this property, can you give it to me?’ Our firm lost business because we wouldn’t cooperate, but there were appraisers that did. And that’s why state certification is important. It will prevent shoddy appraisal practices.

Does this summary sound familiar? Its nearly the same situation as we have today. Appraiser clients pressure appraisers to achieve the needed result.

The real estate correction of the late 1980’s led to appraisal licensing in 1991 which was supposed to fix the problem of inflated appraisals. Yet mandated appraisal licensing made the quality of appraisals worse. Why?

  • A larger unethical element entered the profession because the barrier to entry was actually lowered by licensing. Approved classes, often placeholders for time, and took on the feel of diploma mills making it easy to get qualified.
  • Licensing cut membership in appraisal organizations severely (and I mean severely), which weakened an already weak lobbying presence in Washington DC (compared to NAR, NAHB, MBA and other real estate related trade groups).
  • The growth of mortgage brokers as a source of origination allowed them to select “good appraisers” who were also licensed.
  • Appraisal firms were able to skirt around the spirit of the law by hiring armies of trainees to crank out reports.
  • There was a sense of “job done” by government officials when the law passed that appraisal quality would be better from implementation of the laws.
  • Licensing made it easier to sue competent appraisers falsely, driving up malpractice insurance, placing greater financial pressure on appraisers.

The inability of the profession to communicate the problems with pressure while it was happening was very frustrating to those who recognized it as a serious problem. Very few understood the problem until the subprime mortgage mess became part of the national vocabulary.

What now?

If appraisers are not insulated from pressure, all the laws in the world will not allow them to be honest. Place a hungry person in a grocery store and see how long it takes for them to steal food.

Appraiser licensing alone is not the solution. Licensing is merely a tool to aid government in regulating the profession, primarily as a source of revenue. It doesn’t solve the problem of protecting the public and the financial system from inflated values. Does the public want an appraisal regulator mandate how big of an adjustment should be made for a view?

Now that many housing markets are seeing declining prices, its even more important that appraisers are able to perform their duties free from pressure.

Here are some thoughts in formulating a solution to the problem.

  • Clearly define what appraisal pressure is in legal terms and make it criminal to pressure an appraiser.
  • State appraisal license fees collected should be fully directed to appraisal regulatory departments so they can be fully funded and staffed.
  • Install a Federal regulatory wall between underwriting and sales functions in lending institutions, including mortgage brokers. Anything less than this should be disclosed as a potentially biased collateral valuation. This would affect pricing of mortgage pools.
  • Lending institutions should be required to maintain formal appraisal panels that are reviewed annually for quality by underwriting personnel, not sales personnel.
  • Allow appraisers to file anonymous formal complaints to their state agencies when pressure is applied without fear of retribution (ie whistleblower laws). Those whistleblowers are held to a high standard for proof in order to avoid nuisance actions.

For goodness sakes, let the appraiser be a professional and appraise the property. If the lending industry does not care what the value of the collateral is, then lets do away with the profession or call us something else, like “form-fillers.”

Of course, investors in the secondary markets would continue to be reluctant to buy mortgage paper because they don’t know what they are buying.

Instead of relying exclusively on licensing, lets figure out who, what and why we are appraising.

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[Sounding Bored] Appraising New Construction: What happens in Las Vegas…

October 21, 2007 | 1:59 pm | Columns |

Sounding Bored is my semi-regular column on the state of the appraisal profession. This week I wonder about bulk appraisal fees and their impact on appraisal independence. I also posted this commentary on Matrix.

I’m a realtor in Las Vegas and a regular reader of Matrix and Soapbox. Thank you for both.

I’m writing in hopes that you may be able to address a question I have long had concerning appraisals of new construction…or could direct me to where I could find an answer.

During the boom, a builder would typically have several phases offered…phase 1 might be priced at $160 per square foot, phase 2 would jump to $180 PSF, phase 3 at $210 and so on.

My question is: how was an appraiser able to justify the purchase price of the first buyer in phase 2, when every single comp in phase 1 was so much less expensive? And how did the first buyer in phase 3 get an appraisal for a price substantially higher than all the comps in phases 1 and 2? It never made sense to me and I felt then (and still feel now) that the ability of developers to get appraisals to justify any price allowed them to create sales pitches based on appreciation rather then the intrinsic value of home ownership.

The reason I’m bringing this up now is because it’s happening on the downside as well.

Two years ago, a friend of mine signed a pre-construction contract to purchase a Miami condo for $500,000. Construction is nearing completion.

My friend would love to get out of the deal without losing her entire $100,000 down payment. She was hoping that the condo wouldn’t appraise, but of course it has…for precisely the amount stipulated in the purchase contract and despite the Miami condo market having been in a tailspin since the time she entered into her contract.

For the life of me, I am unable to explain to her how this is possible, so I’m sure I must be missing something. Any insight (or direction to another source) regarding the unique relationship between appraisals and new construction would be most appreciated.

Thank you in advance for any reply you may be able to provide.

Best regards,
Eric Young

Eric brings up a significant issue in the valuation process: appraising in new developments. Here’s a magazine article I wrote about the topic three years ago that may provide some additional insight.

Valuation in a new development project is actually difficult because the sales are not a matter of public record, the contracts are provided by the seller (developer) and not independently verified and there may or may not be comparable sales in the immediate vicinity outside the complex.

In the scenario you provide, the appraisals performed in later phases would only work in a flat market when using early sales, so therefore external evidence must be considered to be able to justify the first sale in a new phase, or a contract when the market is falling.

External influences should include contracts in other competing developments (contract dates as of right now) to show trends, current contracts of re-sales in the same or competing developments to show trends, current listings of similar properties in the new development to show trends. In other words, in a third phase where a re-sale of a phase one listing is less than your contract should be enough to prove the purchase price is above market levels (assuming its comparable).

The problem with appraisals done in new developments can be more about independence of the appraiser than the use of comps. If the developer arranges financing, they are likely going to own, hire or or have a financial relationship with a mortgage broker or local lender. The appraiser may have been offered a package deal to appraise these properties in bulk or more efficiently for the lender or mortgage broker. The act of saving the applicant $25 on an appraisal fee may also serve to remove independence from the process since killing a sale could cancel 100 future appraisal assignments. duh!

At the end of the day, the appraisal is supposed to reflect market value as of the effective date of the report. If the market is falling, it has to be evidenced by market data so its probably worth reviewing the report that was completed on the property. I don’t know the laws in those markets, but I suspect copies can be obtained before closing. If contracts were used to substantiate the value, they are only valid if the contract date is recent. Otherwise, they reflect a different period in time and are equivalent to using old closed sales.

The appraisal needs to reflect market value in place as of the effective date of the report, otherwise its just another silly form to fill out.

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[Sounding Bored] Appraisal Fees Aren’t Inflated: Treading Lightly Instead Of Communicating Our Value

August 31, 2007 | 8:02 am | Columns |

Sounding Bored is my semi-regular column on the state of the appraisal profession. This week I create my longest (and most inflated) rant list ever on the state of the profession.

An appraiser from North Carolina wrote me looking for historical data on appraisal fees going back to the 1970’s (I graduated from high school in 1978 so I didn’t have a clue of what an appraiser actually was back then).

From what I’ve been told by some older appraisers…many appraisers are charging about the same fee today that they were charging 15 years ago. I think all appraisers could benefit from a historical overview of the evolution of appraisal fees to where they are today.

This comment triggered some thoughts on how bad our profession is as a business. Here’s why.

  • We have little lobbying influence in Washington, DC to suggest legislation favorable to our profession (unlike NAR) so its easy to be blamed when things go sour. No one really understands what the problem is except those within our profession.
  • Appraiser licensing laws have little teeth to them and as a result, its tough for good appraisers to compete with “good” [wink] appraisers.
  • Our national appraisal organizations have lost membership by the thousands since licensing laws were enacted because a license is all that is needed to be qualified for many lenders (we take the state license test among dog groomers and pool cleaners applying for their industry licenses…whom are often more professional than we are).
  • There is no teeth to the enforcement of bad appraisers, because resources allocated to the problem aren’t adequate and lenders are reluctant to turn them in because of (the real) fear of litigation liability.
  • Good appraisers are being forced out of the business by high volume shops who employ trainees acting essentially as form-fillers rather than valuation experts.
  • We have let the mortgage industry remove the barriers between the quality and sales function subjecting us to obvious as well as subtle pressures to be results orientated. Most of us serve those who are on commission and thats a fundamental flaw in the integrity of the lending system.
  • Some of us work for Appraisal Management companies at half the going rate as our other clients with turn time expectations of 24 hours but provide slower more expensive service to loyal and sophisticated clients.
  • We act defensively when our values are questioned, even if the client concerns are legitimate.
  • Forget who our client is and speak to anyone about an appraisal who calls and asks. For example, a borrower who calls about a refi appraisal done for a bank client.
  • We often backstab our own colleagues when reviewing their work, not because the work was substandard, but because we see it as a way to get more business from the client or we assume thats what the client wants us to do.
  • The measure of our services (speed and “makin’ the number) was based on the desire for short term profits during the housing boom rather than long term gains. As a result, clients are moving to AVM’s and other alternatives because more and more we can’t be trusted as a profession. “What do you need the number to be?” With the credit crunch, do we really think the lender’s who need a real valuation are going to think we, as a profession, have changed our reliability overnight?
  • Government regulators and legislators do not understand what we do and how important it is for us to be free to independently assess collateral without pressure, which is now the exception not the rule.
  • Our industry guidelines such as USPAP and various associations are unwieldy, complicated and change frequently. Most importantly, theses guidelines and rules, although created with the best intentions, are disconnected from the real world making us appear less professional than the assumption of greater integrity. Less is more.
  • The consumer and the lending industry have lost the understanding as to why appraisers are here: to estimate the collateral, not make the deal.
  • We are afraid to charge the market rate for our services and instead let the client, rather than the market, dictate what the fee will be (not always the same) because we are not good at communicating the value of our services. We cave in to a lower fee at the first sign of rejection of work. There is always someone willing to charge less.

So back to the original topic of fees. These points are all negative but I don’t think I am too far off on most. If all of the above are true, what client in their right mind would want to pay us more than they did 15 years ago? What “value” does our profession of us bring to the table?

I suffer from fear and loathing of the appraisal industry’s future. For those of you (I suspect most who bother to read this blog) are doing a professional, credible job in your work. You believe there is some honor in the profession and its ok to do the right thing no matter what the personal or financial consequences.

For the rest of you, I hear there are openings as a dog groomer.

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[Sounding Bored] Outsourcing Competence Out

June 17, 2007 | 4:52 pm | Columns |

Sounding Bored is my semi-regular column on the state of the appraisal profession. This week I received an opportunity to spend $5 per report to have someone else fill out our reports.

Well, I am not considering outsourcing in our appraisal practice but the state of our profession has fallen to such a low, that the use of this service by some appraisers would not have an adverse impact on the quality provided (in other words, it can’t get any worse). The inference here, or at least the way I take it is, that appraising is simply picking 3 similar sales, and then sending them to India to insert them in the form.

Wouldn’t the appraiser have to insert the sales into the form anyway to understand how each sale compares to the subject?

Here’s the email I got today:

Hello Mr. Miller,

How are you & how is appraisal business doing.

My name is Sandeep, from New Delhi, India.
I got your contact from Google search.

This is in regards to the data entry support in respect to following:-

1) Appraisal Report Data Entry -Filling out subject & comps data using your Field Inspection Data & MLS Listings pulled.
2) Entering your orders into systems as etrac & Xsite.
3) Helping you promoting your business by maintaining Lenders Database & emailing lenders on regular basis.
4) Any other specific data assistance.

You can contact at anytime for more information on above. I would love to answer any queries. Your time with this matter is much appreciated.

Looking forward to talk to you,
(The Support is available for an expense as low as $50 a month)

In other words, this type of service is really for “form-fillers” to boost efficiency and has nothing to do those few souls who actually perform an appraisal. The forms that are filled out must be so generic that they provide no useful information to base lending decisions on collateral. But then again, not many wholesale lenders have cared about the report content to date except for the “number” and how fast the report is turned around. What difference will outsourcing make to that caliber of client?

Hint: None.

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[Sounding Bored] Digitizing The Appraiser

June 5, 2007 | 3:29 am | Columns |

Sounding Bored is my semi-regular column on the state of the appraisal profession. This week, I touch on the FNC federal class-action lawsuit and the right of appraisers to their intellectual property.

In Kenneth R. Harney’s article in the Washington Post this weekend Reprisals on Appraisals he discusses the issue of reliability of appraisers and their digital alternative.

FNC is the subject of a federal class-action suit over the idea that the data collected by the appraiser can be leveraged for further use.

I do not take the view that all data in an appraisal is simply raw objective information that can be regurgitated for other purposes. As an appraiser, I have enhanced that data in my reports through my work and expertise. I made that effort for the preparation of the report. Of course some of the information is simply transposed from another source, but much of it is my intellectual property.

I have no problem with my data being used is if I am asked and decide not to opt out. However, I was never asked in advance to allow my data to be farmed for additional funds.

An appraiser’s expertise should be compensated if their work is used for an additional purpose not disclosed in the original appraisal request. That additional use would have been built into my fee from the outset.

Based on my experience and industry feedback with people who use them, the automated valuation models (AVM’s) are pretty much worthless as a reliable indicator of market value but they do appease the regulators as a document in the file and have potential in the distant future as a credible tool.

I am struck by the irony that the appraisers, who are supposedly a weak link in the mortgage chain, stimulating the need for AVM’s, are needed to provide reliable content to the very AVM’s that were built to replace them.

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[Sounding Bored] Managing To Give The Industry The Eye

May 23, 2007 | 5:07 pm | Columns |

Sounding Bored is my semi-regular column on the state of the appraisal profession. This week, the subpoena issued to eAppraiseIT generates some general thoughts about appraisal management companies.

New York State AG Cuomo has now added eAppraiseIT to the list. I thought it was curious that the president of eAppraiseIT was quoted saying: It’s a very good thing, what the attorney general is doing,” Merlo said. Cuomo’s office was focused on “who’s exerting the pressure” on appraisers, he said.

As an appraisal company, we made a “business” decision not to work for appraisal management firms like eAppraiseIT because their appraisal fees were roughly half that of market levels and the turnaround requirements were 2-3 times faster than the norms. It was a “business decision” on our part. I don’t see how appraisers who work for the majority of appraisal management companies don’t need to cut all corners to make it cost effective.

When Washington Mutual closed their in-house review function last year (the last national lender to do so), they went with eAppraiseIT and Lenders Service to manage the appraisal process. Unfortunately, Washington Mutual did not refer their approved appraisers to these two AMC firms and basically cleaned house after torturing all of us that were loyal to them for five years with an appraisal ordering system that did not work (remember OPTIS?). I had heard that they were having quality problems and sure enough, some of the formal panel members got calls from both firms. We didn’t bite.

US Trust Company, who is being purchased by Bank of America was a great client of ours for years. Two years ago, UST senior management decided to dump all the appraisers they worked with to save money and hired AMCO, an appraisal management company. Many firms like us, who had been working for them for 15 years since they entered the mortgage business, were talked into working for AMCO, because our same fees and turn time requirements were mandated by UST. However, AMCO eventually ignored the mandate and stopped paying our outstanding invoices. Recently, with the previous senior managers gone, UST dumped AMCO and we were eventually able to recover nearly all our accounts receivable and were back to direct ordering from UST. AMCO seems to be out of business and someone is reportedly shopping their assets. We will see if Bank of America plans to go with credible appraisers in the markets they cover. I believe they too were burned by the appraisal management company process and reverted back to in-house ordering.

With all the focus on appraisal pressure these days, I can only hope that something is done to correct the flaws in the lending system and someone actually wants an unbiased collateral assessment. Thats the goal here and hopefully the regulatory agencies won’t lose sight of that.

Until then, I’ll have to manage.

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[Sounding Bored] High Pressure = Appraiser Inflation, Systematic Inattention And False Markets

April 22, 2007 | 4:06 pm | Columns |

Sounding Bored is my semi-regular column on the state of the appraisal profession. This week I notice some are now finally paying attention to the inflated truth in the real estate market: its apparent that failure to protect an appraiser from influence, results in meaningless reports and financial misery to innocent people. (Thanks for the head’s up, Jose!)

There is a great article written by Kenneth R. Harney of the Washington Post in his syndicated Nation’s Housing column called Appraisal Inflation. Kenneth’s writings are always a must read.

Appraiser inflation results because there is no check or balance in the power relationship between lending institutions and the appraisers who work for them. Like panting dogs, the appraisers who crank out this work are wholly dependent on their master.

I had a strikingly similar experience in the mid-1980’s when were just launching our appraisal firm, Miller Samuel.

and it goes like this…

Back in the mid 1980’s when I get into this profession, there was a pattern of mortgage fraud abound, that I dubbed “creating a false market” that bears striking resemblance to the fraud that occurred in the subprime market (and just about every market) today.

A particular mortgage broker (who went on to become national and successful) specialized in marketing co-op apartments to recent college graduates. If the apartment was actually worth $100,000, they would sell it for $125,000 to the student who was unaware of the market but enticed by the no money down, no closing cost package. It was really +100% financing.

The mortgage broker approached appraisers in the market and promised them heavy volume, or asked them to simply hit the number. Surprisingly, it was more the former and the appraiser never shared in the fraud on a financial level. These apartments were typically in 10 unit walk-ups and the sponsor (landlord) was happy because they were getting high prices for their apartments. Once the first unit closed, it became easier to perpetuate the fraud. The appraiser was provided sales that closed and relied on them exclusively.

When we were approached to provide appraisals for one of these firms in particular, as far as I could tell, they had no idea that this was fraud. In other words, these students were saddled with apartments that were worth $100k but the mortgage was usually well above that and they were in effect, creating a false market based on misleading information.

We were provided “comps” that closed as a result of the faud, but we used our own sales and “killed” the first few deals we were sent, not because we knew what they were trying to do, but because the value wasn’t there. It wasn’t even close.

This firm then complained to a large national lender they were sending a lot of this work through, and we went through a series of meetings, phone calls and visits to some of the apartments we had appraised with senior bank officials. We had the spectre of losing one of our major clients hanging over us (aka assumed guilty and had the burden of proving our innocence), just as we were getting our company off the ground. It was stressful to say the least.

But to our lender’s credit and because the appraisal department was protected from sales function pressure, we were exonerated as being competant (pretty degrading, really). However, the mortgage broker was still allowed to provide work to this lender and were allowed to avoid using us. But it effectively killed the mortgage pipeline for this mortgage broker through this national lender since the lender was now aware of what was going on and scrutinized every deal.

Of course the mortgage broker simply found someone else to do their deals.

The subprime mess worked essentially the same way. Find an incompetant or morally flexible appraiser to channel the deals through, and the system takes care fo the rest. The current mortgage does not allow ethical appraisers to thrive. In fact it is just the opposite.

It would be great if the lending system could be incentivized to provide collateral assessment that actually meant something, instead of creating paperwork to throw in a file.

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[Sounding Bored] Old AMCO Down The Drain, Appraisers Can’t Feel Flush Yet

April 10, 2007 | 10:36 pm | Columns |

Sounding Bored is my semi-regular column on the state of the appraisal profession. This week, I feel lucky to be flush.

Over the past 6 months, we have been pretty open about our long running issue with AMCO for their unreasonable delays in paying our bills. After a lot of ranting, and a flurry of emails and involvement by one of our clients, we were finally paid for all but one (as of today’s mail) of our appraisals (our A/R was as high as $30K at one point.) In the interim we have declined all new assignments from AMCO, even when they offered to pay us in advance. I guess we were just uncomfortable with them as a client.

Here’s our saga.

Last week, there was finally some insight into their financial problems and some discussion as to payment of overdue appraisal fees for members of their panel. As evidenced by feedback from Soapbox readers, the amount of arrears for some was pretty significant, which is unfortunate. We were lucky I guess.

Valuation Review posted a pretty thorough discussion of the AMCO announcement made last week that the Cleveland-based firm is going to be sold to a new investor on May 1st and all outstanding appraisal invoices will be paid at that time.

I am scratching my head at this whole thing. I find it really amazing, (and a miracle) for those still waiting to get paid, that AMCO would be able to locate someone to salvage them and then still make it a priority to pay what is owed. If they didn’t do that, their value as an organization would probably approach zero.

I’ve got to think that other appraisal management firms could follow AMCO down this slippery slope with the drop in purchase volume and issues with subprime lending, will probably make banks think twice before going this route as credit continues to tighten.

If AMCO can make good on their stated intentions, they are worth another look. However, until they make good on their debts to the appraisal community, I won’t be accepting work (not that they would offer us any).

As appraisers, I think our industry is very weak at account collections. We feel we have to beg to be paid what we are owed and we are worried about pissing off the clients that still owe us money.

Its a trap. Someone once told me:

Work like you don’t need the money.

I think it needs to be modified to:

Work for clients who respect you so you don’t need to worry about getting the money you earned.

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[Sounding Bored] New York Magazine Covers Dull And Boring

April 10, 2007 | 9:51 am | Columns |

Sounding Bored is my semi-regular column on the state of the appraisal profession. This week I get a little more exposure.

In Jhoanna Robledo’s article this week: This Man Knows What Your House Is Worth: An appraisal of Jonathan Miller, she does an excellent job covering a dull and boring topic: Me.

Admittedly, I was nervous, wondering how this article would turn out.

When they approached me, the piece was going to be more personal, including interviewing friends from my younger days including Bart Simpson (really! and he happens to be an appraiser) and Woody Wheeler, who was my group leader when I rode my bike across the US in ’76 (Wheeler, really!). A warm thanks to everyone who was quoted.

Fun stuff. But they neglected to include my banged up but beloved HP 12C as a tool, as well as my Mac 17″ Powerbook.

What’s In Jonathan Miller’s Pocket? [Curbed]

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[Sounding Bored] Appraiser Pressure, Or What Got Me Into This Blogging Gig

March 17, 2007 | 11:50 am | Columns |

Sounding Bored is my semi-regular column on the state of the appraisal profession. This week, all the pressure venting starts to get the word out.

For the past 5 years I have watched the appraisal profession go through a pretty dramatic change, most of it bad, accelerated by the housing boom. In 2005, I decided to beginning blogging about it to try to get the word out because going through normal channels (ie appraisal organizations and politics) didn’t seem to be effective enough, plus, I had no idea how to do any of that.

So I simply said what was on my mind in this blog, and later on, got others to join me. These include appraisers and former appraisers that I have met during my career including Chip Wagner from Chicago, my commercial appraisal business partner John Cicero, Marty Tessler from New York City, Butch Hicks from Virginia, John Mason from suburban New York and Todd Huttunen from suburban New York.

The subprime mortgage market woes expose the problems we have been discussing for years. Two articles were released this week that are starting to shed light on the situation. These authors got our attention through Soapbox and my other blog Matrix.

“Drive to make deals fuels mortgage woes” by Holden Lewis of who writes an excellent blog called “Mortgage Matters

“In the current real estate market, an accurate appraisal is more important than ever” by Carol Lloyd of the San Francisco Chronicle who writes a must-read weekly column “Surreal Real Estate

The subprime lending woes we are all reading about illustrated the problems all of us have been shouting about in this blog and on a personal level for the past several years if not more.

  • Competent appraisers are being replaced by form-fillers and 10-percenters.
  • The lending industry structure has evolved into a flawed system where those on commission determine which appraiser gets the work.
  • The appraisal industry is being commoditized into the equivalent of a title search or flood zone certification rather than a professional analysis.
  • Appraisal licensing, while a good idea overall, has legitimized a legion of hacks and given the good ones a bad name.
  • The lack of political clout for the industry has made appraisers the poster child for all that is wrong with lending (aka mortgage fraud).
  • Lending institutions don’t understand the value of their collateral, affecting compliance with bank reserve requirements by federal regulators.
  • Mortgage portfolio pricing in many cases is grossly inaccurate, because the secondary mortgage market investors don’t realize nor have access to accurate collateral valuation.

Let’s hope there is more coverage of this specific issue in the future.

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[Sounding Bored] What About The Chinese Wall?

March 5, 2007 | 11:54 pm | Columns |

Sounding Bored is my semi-regular column on the state of the appraisal profession. This week I talk to a wall.

In Today’s Inman News, there was an article written by a pretty sharp real estate reporter named Marcie Geffner, called: Real estate appraisals are outmoded. (If the link is expired and you don’t have access, I have included the salient parts.)

At first I was in agreement with the article because it addressed the pressure appraisers are faced with every day. Its what I have been preaching for more than 20 years. Lenders, agents and appraisers are all to blame in the process because the appraiser, in their unique position in the transaction, is vulnerable (willingly or not) to outside influence. Quite often their only sources of business systematically apply pressure.

The fundamental problem is the conflict of interest among the lender who selects the appraiser, the borrower who pays for the appraisal and the investor who relies on the adequacy of the appraiser’s opinion.

Here’s where 90% of all consumers, lenders, agents, appraisers and the reporter for this article miss the boat.

The fundamental problem is the conflict of interest among the lender who selects the appraiser, the borrower who pays for the appraisal and the investor who relies on the adequacy of the appraiser’s opinion.

  • A mortgage appraisal has nothing to do with the borrower — The appraisal for a home purchase that is ordered by a lender or mortgage broker for a mortgage has nothing to do with the borrower. It is purely an assessment of the collateral (the asset) of which to lend against. It makes no difference what the buyer wants the value to be or to feel comfortable about the purchase. This issue needs to be reinforced with loan officers and underwriteres, as well as real estate agents.
  • An appraisal ordered by the buyer, by law, can not be used by the lender for the mortgage — If the buyer wants to feel more comfortable about the transaction, they can hire their own appraiser to get an estimate but they need to make sure the appraiser is getting their data from an independent source and has limited contact with the agents involved in the sale.
  • A client is not defined by who pays the appraiser — An appraiser’s client is determined by who engaged the appraiser for the assignment. Just because a borrower pays an appraisal fee for their mortgage application doesn’t mean they have any right to speak with the appraiser directly.

The author’s solution to the credibility problem is more about enforcement and an update of current laws. This is not likely to happen, nor will it effect change. Licensing actually made the quality of appraisal work decline because it lowered the bar on the entire profession. With a few classes and some simple training, anyone can get a license and all appraisers are on a even playing field.

Enforcement is virtually impossible unless the report is out and out fraud. Licensing departments in most states are understaffed and lack adequate resources despite best intentions. Plus, its tough to deal with subjectives. Boy, that value was a little too high – let’s get ’em on that.

Most of the substandard work that gives the profession a black eye is done by ten-percenters. Those are typically appraisers who always seem to be a little high on their values which coincioedntally gives their clients more flexibility. This practice was reinforced to me today as I reviewed an appraisal today done for a mortgage broker by a ten-percenter and the appraiser used no real logic but kept using the phrase…based on my vast experience… in his text.

The solution has to be regulatory needs to be resurrecting that Chinese Wall between the sales function and the underwriting function of a bank.

Until then, we might as well keep talking to a wall.

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[Sounding Bored] Appraisal Pressure, Blog Motivation, October Research

February 20, 2007 | 12:52 am | Columns |

Sounding Bored is my semi-regular column on the state of the appraisal profession. This week I revisit what got me into this blogging gig (hint: appraisal pressure).

Back in August of 2005, I was fed up with the pressure myself, my firm and my profession was under to make the number “or else.” So I launched Soapbox. It seemed that no one really cared about ethics or the risk placed on banking system. Appraisers were fast becoming the enablers to fraud and a whole lot of “gray areas” that I wanted no part of. Blogging became a way to vent my frustration with the industry which didn’t seem to have much political clout in Washington to change policies that placed us in between a rock and a hard place. At one point I was even contacted by the House Ways and Means Committee in Congress to testify about the problem with appraiser ethics on a specific issue, but they had already inferred what they wanted me to say.

The bottom line?

Those whose commissions depend on “hitting the number” have become the appraisal order givers and quality, as they say, Elvis, has left the building. Appraisal management companies gained favor with lenders who didn’t understand the disconnect between real collateral values and loan needs. AMC’s pushed fees below cost (without taking ethical shortcuts) and required completely impractical turn time requirements for even reasonable research time. Gradually, once were good banking clients, began to disappear from the good appraisers.

After a short while, I realized I could rant and rave all I wanted but it wouldn’t change a whole lot as quickly as I wanted it to. The change had to come from within (no, I didn’t sell my soul). I had to change my client base and perhaps someday the lending community would come around and feel true concern about the value of their collateral and the regulators would begin to see the problem.

In the meantime, I needed to reinvent my practice and basically stop placing so much emphasis on on retail bank appraisal work, a previous mainstay. Whats sad, is the lending industry has already lost a significant portion of its collective appraisal experience to rely on. In other words, many of the talented valuation experts have begun to focus on other clients. But hey, the lending industry has plenty of form-fillers that can bang out 10 reports in a day and make 24 hour turn time specs to make their customers happy.

October Research, publishers of a series of smart publications including Valuation Review, broke the news to the world with their definitive 2003 National Appraisal Survey. The survey has been updated in 2007 which showed that:

  • 90% of appraisers reported pressure to adjust property values, up from 64% in 2003.
  • 71% of appraiser clients, specifically mortgage brokers and real estate agents have provided pressure, up from 60% in 2003.

Note: If 90% are feeling pressure and 71% are from mortgage brokers, then wouldn’t it be logical that a significant portion of the remaining balance is from appraisal management companies and banks themselves?

As an appraiser, ask yourself this question regarding any type of mortgage appraisals: “Does the person ordering the appraisal have a direct financial incentive as to its outcome?

I would guess the answer is yes more than 90% of the time.

The National Association of Independent Fee Appraisers has used the results of this study to launch a legislative initiative to stop this silliness along with other appraisal organizations. On February 6, 2007, the results of the October Research Survey were presented to the Senate Banking and Housing Financial Services Committee:

This week, NAIFA, along with the Appraisal Institute, the American Society of Appraisers and the American Society of Farm Managers and Rural Appraisers delivered a letter to Congressional Committee on Financial Services about the pressures appraisers face. The action was based on the recent release of the study by October Research Corporation that found that 90% of appraisers are pressured by mortgage brokers, real estate agents and others to raise property valuation to assist in the consummation of deals. The study also noted that 75% of appraisers reported “negative ramifications,” if they did not cooperate, alter an appraisal and provide a higher valuation.

Sadly, the results of the survey mirror the concerns you as members have raised. To address these concerns and others, NAIFA is encouraging Congress to hold hearings on theses issues and approve legislation that protects home buyers and the real estate financing process. Reforms should also be considered to Title XI, which has several shortcomings that contribute to mortgage fraud.

There are several appraisal reform bills at the top of the 110th Congress’ agenda, specifically, bills offered by Rep. Paul Kanjorski (D-PA) related to Title IV of H.R. 1295 and Sen. Barack Obama (D-IL) on S. 2080. These pieces of legislation would provide federal and state appraiser regulators more resources to conduct enforcement, ban inappropriate coercion, and promote professionalism of real estate appraisers among other things.

Appraisal survey teaser
To order the survey

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