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Posts Tagged ‘Mortgage Fraud’

[Sounding Bored] Fighting The High Value, Getting Fired Over The Right Value

July 16, 2008 | 12:15 am | Columns |

Sounding Bored is my semi-regular column on the state of the appraisal profession.

The following IndyMac story was forwarded to me by a Soapbox reader. It was originally posted by appraiser Vernon Martin on I don’t usually repost but the story detail is amazing – read here or on the – either way, it’s worth the read.

Written by Vernon Martin:

I worked at IndyMac as their chief commercial appraiser from October 2001 to the end of March 2002.

I first became acquainted with IndyMac through OTS appraisal examiner Darryl Washington, MAI. Darryl used to examine my appraisal department each year when at Home Savings of America, which was acquired by WAMU in 1998. During the summer of 2001, I had a chance encounter with him at a jazz concert. I asked him what he had been up to, and he told me that he had just completed the first examination of IndyMac Bank, which had just received its savings and loan charter only a year before. He said, “Vern, they could use a guy like you.”

Several weeks later I saw the chief commercial appraiser position for IndyMac Bank posted on I responded with a cover letter that started with “Darryl Washington of the OTS suggested that I contact you.” Apparently, that was the right way to start the letter. IMB’s chief credit officer called me soon, asking “do you know Darryl Washington?’ I said “Yes, he examined my department annually at Home Savings.” His next question was “Do you know how to deal with him?” I assured the chief credit officer that I was used to dealing with the OTS and Darryl and that I could get IMB into compliance with OTS appraisal regulations.

After 3 interviews, IMB wanted me to start right away, because the OTS was returning in November. I started on 10/15/01 and had a month to familiarize myself with their commercial lending practices until the OTS showed up.

At the end of my first week, there was an urgent need to field review an appraisal of a subdivision in the Sacramento area. I went up there on the weekend, but also took along some other recent appraisal reports from the Sacramento area. One of the other appraisal reports concerned me. A residential subdivision had been appraised as “80% complete”, but when I visited it, it had only been rough-graded, probably no more than 15% complete. When I returned to the office on Monday I asked who the construction inspector was for that region. I was told that there were two inspectors for the Sacramento area; one was CEO Mike Perry’s father and the other one was Mike Perry’s father-in-law. The loan officer on the deal was Mike Perry’s younger brother, Roger, who had recently been hired. His previous experience had been as a cop. Thereafter I heard of favoritism towards relatives of Mike Perry and “FOMs”, and the chief credit officer advised me to take special care of Mike Perry’s brother. (“FOM” was IndyMac jargon for “Friend of Mike”.)

I reported my Sacramento findings in a private memo to the chief credit officer, who then distributed it to the senior managers at the construction lending subsidiary known as the Construction Lending Corporation of America (CLCA). The senior credit officer from CLCA, the manager who most resembled Tony Soprano, was the one to call me. He asked “Are you sure you saw what you said you saw?” in a rather chilling manner. He said he had been on site with Roger Perry and had seen things differently. After that call, I asked the chief credit officer why CLCA’s senior credit officer would want me to recant my report. He told me that the senior credit officer received sales commissions for every loan made, which seemed to me like a blatant conflict of interest.

All appraisals were ordered by the loan officers from a list of approved appraisers maintained by LandAmerica. I was not allowed to order appraisals, but I recognized many names on the LandAmerica list as well known, reputable appraisers. What I began to observe, however, was that loan officers were learning which appraisers were more “flexible” than others. My areas of concern were extraordinary assumptions, lack of feasibility analysis, and false information given to appraisers.

As an example, I read an appraisal of a vacant, former Costco warehouse which had been purchased for $2 million several months before, but was appraised for $17 million based on a fabricated rent roll composed of tenants that had never signed a lease or a letter of intent. Only one tenant actually moved in. I told the loan officer that I could not accept the appraisal report, as it was hypothetical. He wanted me to approve it, any way, with the understanding that no funds would be disbursed until the prospective tenants could be verified. I told him that I wasn’t going to approve a hypothetical appraisal. The loan was funded, any way.

My only substantive encounter with CEO Mike Perry was in November 2001. I was summoned late to an impromptu meeting of senior executives in the board room. When I arrived, the meeting was already underway. The tone of the meeting was very different than senior executive meetings at other companies I had worked for. Mr. Perry, a man in his thirties, was spinning ideas and executives who were 10 or 20 years his senior were behaving like “yes men”, competing to agree with his ideas. There were lots of raised hands and enthusiastic participation. He seemed to be enjoying this, in an immature, megalomaniacal way.

Then he turned to me with an idea. He asked me if I, as the chief commercial appraiser, had the regulatory authority to change the discounted cash flow models in each subdivision appraisal, which might have the effect of changing appraised values. I said that I could possibly do it, but why? He smiled and said “Don’t housing prices always go up?” (Was he really too young to remember the early 1990s?)

I told him that it wasn’t a good idea, because we were already hiring competent appraisers who had more local knowledge than I had. Unless I could show that their analysis was flawed, it would be inappropriate for me to change the appraisals. That answer seemed to anger him. At the end of the meeting, the chief credit officer tried to introduce me to him, but he turned his back on me.

I later learned that Mike Perry was hired as CEO of IndyMac at the age of 30 when it was spun off by Countrywide. He had been an accountant at Countrywide and a protégé of Countrywide founders David Loeb and Angelo Mozilo.

When the OTS arrived mid-November, my review duties were handed over to LandAmerica. I was to spend full time responding to findings from OTS examiner Darryl Washington. In the ensuing month it became increasingly obvious that the main reason I was there was to refute OTS findings and serve as window dressing for an institution that scoffed at or was wholly ignorant of federal regulations. Many, if not most, of the senior executives had come over from Countrywide, which was an unregulated mortgage bank.

One of the craziest violations of OTS regulations was underwriting loans based on appraised values well above purchase prices. For example, a prominent Sacramento developer purchased a piece of land for $18 million, a price most reasonably supported by the comps, but it was appraised and underwritten at a value above $30 million, the rationale being that this developer added value to the property just by buying it. This does not satisfy the USPAP and federally accepted definition of market value, however. The appraisal firm was the same one used for the supposedly 80% complete subdivision.

I was present at several confrontational meetings between the OTS and FDIC examiners and CLCA executives. It seemed that IMB was intent on refuting every finding and using me towards that end. I was criticized for not arguing enough with the examiners.

After the examination was over, there was an unsolicited appraisal report waiting for me on my desk. A piece of land next to an airport had recently been purchased for $24,375,000 and was almost immediately appraised for more than $65 million based on the owner’s plans to build an airport parking lot. This was three months after September 11th, 2001 and average parking lot occupancy at this airport had declined from 73% to about the low fifties. The appraisal lacked a sales comparison approach and its feasibility analysis was based on pre-September 11th data. The feasibility analysis was done by the same consultant who caused the city of Los Angeles to lose millions on the parking garage at Hollywood and Highland. The appraisal was done by an unapproved appraiser who had previously caused my previous employer, Home Savings, to set up a $17 million loan loss reserve on a hotel he appraised for $450 million and the loan defaulted within a year. The report was delivered less than a week after it was ordered by the IMB loan officer, leading me to suspect that it had already been completed for someone else, most likely the borrower. I told CLCA executives that I could not accept the report and that I considered it to be biased. I tried to get the appraiser to change the report, but he immediately called the chief lending officer, who must have then instructed him to ignore my request.

Despite my stated objections to the appraisal report, the chief lending officer told the Loan Committee that I had ordered and approved the appraisal, and they funded a $30 million loan. Thereafter, there was sustained pressure on me to approve the report. I responded that I would have to write my own report, since the original appraiser would not make changes. This bought me time. Meanwhile, the airport, who had previously owned 80% of the parking spaces in the area, was suing the developer and erected a fence to keep people from walking from the parking lot to the terminals.

The chief lending officer also pressured me to accept another unsolicited appraisal of a Sacramento-area subdivision. This report was based on an “extraordinary assumption” that a road led to the subject property. When I went up to Sacramento to see the property, there was no road.

In January I went to Sparks, Nevada, to review an appraisal of the last phase of a condominium project. The first phase, with condos on the golf course, was a success, but the last phase was on the opposite side from the golf course and actually sloped below grade. The appraiser made an $8000 downward adjustment for each unit, and I questioned whether $8000 was adjusting enough. That provoked warnings from several executives, including the chief credit officer. The developer was buying the land from David Loeb, IndyMac’s Chairman of the Board (and co-founder of Countrywide), and I was warned that challenging this deal could get me fired. Soon after, the chief credit officer came to my office with a representative from human resources to announce that my initial 90-day probation would be extended for another 90 days, as CLCA executives had complained about my lack of cooperation with them. The HR rep had a look of horror on her face the whole time he delivered this message.

I finally finished my own airport parking lot appraisal report in late March, the same week that the Bush Administration laid off most of the OTS examiners. I don’t know which event precipitated my termination. My appraisal of the airport parking lot estimated the stabilized value at $37 million in year 2003 and the value upon completion as $31 million in 2002. These appraised values were considered insufficient to support the $30 million loan.

IMB gave me two weeks’ notice of my impending termination and offered me $25,000 severance pay if I turned over all documents and signed a non-disclosure agreement. I told them that state law required me to keep records of all of my appraisals and reviews, and that $25,000 was not enough. After a few days of seeing that I was not cooperating, I was summoned to a final meeting with the chief legal officer and “chief people officer”. A written statement indicated that I was being terminated for having a “communication problem”. I asked for examples of my communication problem, but none were presented. (I later recounted, during a deposition, that I was left alone with the chief legal officer for a few minutes of awkward silence. I then asked him, “Doesn’t it bother you that I am being fired for a communication problem without any evidence against me?” He said, “Not at all.” This cracked up my attorney.) After the meeting, I was escorted back to my office by a large security guard to collect my personal belongings, and then I was escorted out of the building, with my toothbrush in my left hand and my toothpaste in my right hand.

During these last days I contacted OTS about the abuses going on at IMB and said I had documentary evidence. They flew in to Burbank to meet me and they debriefed me for a couple of hours. They were upfront about how the flow of information had to be one way, from me to them, and not vice versa. I had to call my friends at IMB to find out how OTS was responding. The OTS paid a special visit to IMB and called for an internal audit to investigate my allegations. The first audit was considered a whitewash, and the OTS called for a re-audit. Interestingly enough, there was even a document produced that supposedly indicated my approval of the appraisal of the “80% complete subdivision”.

The second audit corroborated most of my allegations and the OTS called for certain personnel changes. The president and senior credit officer of CLCA were ousted; the chief lending officer had his loan approval privileges removed. Chairman of the Board David Loeb suddenly and coincidentally retired at the same time. He died 5 months later.

Interestingly enough, at about this same time, I read in the press of IMB receiving a “corporate governance” award from some organization, for having an impartial and effective board of directors. Meanwhile, CLCA executives selected my replacement, someone who they had already wanted since even before I started at IMB.

I had an excellent attorney. Besides suing for wrongful termination, he showed me that I could actually sue for discrimination. Many states, including California, have laws that prevent discrimination against employees who are upholding public policy, which was the very reason that got me fired. Other bank appraisers should take note of this. USPAP and OTS appraisal regulations are public policy.

In interrogatories sent to IndyMac during the litigation, they were once again asked to demonstrate evidence of my “communication problem”. The only evidence provided was a memo from me about a borrower “trying to deceive us” and a memo from a loan officer complaining that I actually called Union Pacific Railroad concerning one of his deals, a subdivision being built close to a railroad right-of-way. I was told by the loan officer that the track was no longer used, but Union Pacific disclosed to me that it was still being used once a day during the evening hours.

Interestingly enough, in the six months of unemployment and underemployment which followed my termination, I rented many videos, one of which was “The Insider”, the real-life story of Dr. Jeffrey Wygand, who blew the whistle on the tobacco industry to Sixty Minutes and was also fired, coincidentally, for having a “communication problem.”

Most of this information is already publicly disclosed in my lawsuit, filed 7/15/02 in Los Angeles Superior Court, Case Number BC277619, for anyone wanting further details. As for the results of that lawsuit, the only thing I can legally say is that “the matter has been resolved to the mutual satisfaction of both parties”.

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[Sounding Bored] Appraiser Pressure Finally Reaches The National Stage

March 15, 2008 | 7:04 pm | Columns |

Sounding Bored is my semi-regular column on the state of the appraisal profession. This time it’s on video.

I caught this on the CBS Evening News last night – about appraisal and mortgage fraud…worth watching.

See the full post on Matrix: [Blackmail & Hot Potato] Appraiser Edition

I was quoted in an article by Emir Efrati of the Wall Street Journal, who has done a great job following the appraisal situation as it unfolds, saying:

“In my opinion, 70% to 80% of appraisals that were done during the housing boom are probably not worth the paper they’re written on because the appraiserswere rewarded with more volume,” said Jonathan J. Miller, a New York appraiser and longtime critic of industry practices. He estimates that home values are overvalued nationwide by at least 10% because of inflated appraisals.

Glenn Beck of CNN read the quote in the WSJ and invited me on the show.

Here’s the clip.

A booker at Fox Business News read my quote in the WSJ above and asked me to speak on the show.

We discussed the agreement between Fannie Mae and New York State Attorney General Cuomo’s office covering appraisal pressure.

Here’s the clip.

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[Fee Simplistic] Move Over FIRREA-Make Way for FURREA: A Brief History of Real Estate Finance Follies

August 21, 2007 | 5:40 am |

Fee Simplistic is a semi-regular post by Martin Tessler, whom after more than 30 years of commercial fee appraiser-related experience, gets to the bottom of real issues by seeing the both the trees and the forest. He has never been accused of being a man of few words and his commentary can’t be inspired on a specific day of the week. In this post, he ads a new acronym to our tool box while giving us a lesson in how we got here. Great, great stuff.” …Jonathan Miller

One of the few advantages of being an “old fogey” with 30 years of real estate counseling experience notched on the belt is that if you hang around long enough you will see history repeating itself in cyclical aspects of real estate finance-roughly every 20 years. My career started back in the early 70’s when the REIT world imploded as the result of mostly borrowing short but investing long at a time that the economy underwent something the economists called “stagflation” following the first oil crisis. It was a time of double digit inflation, a stagnant economy and it also featured a phenomenon called “disintermediation”- a PhD word that denoted the massive withdrawal of deposits from fixed interest savings accounts that resulted in the devastation of real estate financing and many REIT’s. Somewhat similar to today’ subprime and hedge fund world of investing it was a time of money chasing deals.

Recovery from stagflation culminated in the mid-late 80’s when Wall Street and the real estate markets hit its stride with a booming stock market-think Gordon Gekko a/k/a Michael Douglas’s “greed is good” and the unscrupulous S&L bankers and their crooked appraiser cronies. As banks hemorrhaged loan write-downs from fraudulent appraisals Congress went after the appraisal profession (the bankers, for the most part, escaped punishment owing perhaps to the fact that the American Bankers Association is more generous to Congressional campaigns than the penurious appraisal world) and we got FIRREA in 1989. FIRREA, as we all know by now, was the Feds pointing the finger at the appraisers while telling the bankers to beware whom they sign up on their appraisal “dance card”.

Fast-forwarding to the late 90’s and the post millennium a new crop of miscreants surfaced, namely the underwriters and the rating agencies. The advent of the slice and dice tranche in the RMBS and CMBS world gave rise to the subprime and its not-quite illegitimate but certainly suspect “piggyback” loan. A recent article in the Wall Street Journal noted that in 2000 Standard & Poor concluded that “piggyback” loans were no more likely to default than those of standard mortgages. A new symbiosis evolved between the lenders eager to lend, the home buyers and speculator investors eager to borrow on easy credit, the Wall Street underwriters eager to sell their bonds and collect their up-front commissions and the bond rating agencies eager to capitalize on the lucrative and expanding rating business.

As with the appraisal world you had lenders shopping around for the “right” value from cooperating so too with the bond world you had underwriters shopping around for the right credit rating from the rating agencies. Moody’s had revenue of roughly $3 billion from 2002-2006 for rating securities from a variety of debt pools including mortgages and other types of loans. Standard & Poor did not change its mind on “piggybacks” calling them more likely to default until 2006 at which time the subprime mortgage market ballooned to $1.1 trillion.

Now that the chickens are coming home to roost and the appraisal world is, for the most part, guiltless will the Feds move to reign in the underwriter/credit rating agency cabal? Is it time for FURREA-the Financial Underwriting Reform and Recovery Enforcement Act? Perhaps New York Senator Chuck Schumer, who never saw some skullduggery that did not warrant a Congressional action should be asked, “How about this one Chuck”?

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[The Hall Monitor] The Eye In The Sky Doesn’t Lie

May 29, 2007 | 12:01 am |

Todd Huttunen began appraising more than 20 years ago with a few years off in between to pursue a career in cabinet making. He relegated that to hobby status and is currently an appraiser in an assessor’s office. His best friend dubbed him The Hall Monitor because of his rigidity and respect for rules. He offers Soapbox readers tongue-in-groove insight on appraisal issues. This week Todd takes a bird’s eye view which is straighter than the way a crow flies about enhancing reports with photos from sources like Google Earth as an alternative to boilerplate text. …Jonathan Miller

Appraisals that are deliberate attempts to mislead are generally effective not because of the information that is communicated in the report, but because of that which is not. The client may be in another part of the country and have no direct knowledge of the area in which the subject property is located. He is completely dependent on the appraiser in that he only “knows” what the appraiser tells him. An unscrupulous appraiser may state “the subject dwelling is part of an established residential neighborhood”, when in fact the subject is on the outside edge of the established residential neighborhood, just as it transitions to an industrial area. The client may want to know (then again, maybe not) that the subject is across the street from, say, a piggery.

If we are serious in our concern about minimizing the number of misleading, inflated and fraudulent appraisals then we should be taking greater advantage of existing technology, such as Google Earth which has the added benefit of improving the overall quality of appraisals done by reputable appraisers. Let’s face facts here and recognize that even if you don’t consider yourself a “form-filler” (as Jonathan Miller derisively refers to the lowest among us) you’ve got to admit that most of the narrative parts of any appraisal report consist of boilerplate (with only minimal deviation) starting with the Neighborhood description and going right on through to the Reconciliation, and finally – the always scintillating – Certification and Limiting Conditions. Most of the verbiage in a FANNIE MAE appraisal, even one which is well written, consists of the same insipid pabulum that few clients read even the first time they see it (and never again thereafter).

On the other hand, everybody likes to look at pictures! All Yankee fans (and a lot of other people) will recognize this one as the House that Ruth Built.

A picture is worth a thousand words. Most appraisals would benefit from fewer (meaningless) words and more (insightful) pictures. By utilizing the “layering” effects available in GIS based systems like Google Earth, the appraiser can replace his generic Neighborhood Description with a uniquely specific, Neighborhood Illustration.

Appraisals should include two aerial photographs of the subject, one from 1,000 and another from say, 10,000 feet – with the subject property displayed at the center. This is easily doable with Google Earth. By looking at these photos it’s very easy to see how the subject conforms, or doesn’t, with properties around it. There’s no better way to examine externalities, changes in land use, density, size of buildings, etc. than by looking down from above. Until recently, you had to be in an airplane on its final approach to see a neighborhood from this perspective. Thanks to Google Earth, the flyover is “virtual” and you are at the controls (I know what you’re thinking. These photos are not in “real” time and therefore not necessarily accurate representations of the landscape. True enough, but unless there’s been a recent tsunami or comparable disaster, they will be plenty accurate enough to do the job for which they are intended.)

The photo addendum should include the roof top view in addition to the usual front and rear of subject, street scene and interior rooms. The same is true for the comparable sales a view from the sky taken from the same “eye level” as is used for the subject.

The list of potential applications for GIS systems like Google Earth to the appraisal profession is nearly endless and if you’re not using it yet, you should be. Best of all, the basic version is free.

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[on Matrix] Good Appraisers, If Speed Is Only What You Need

May 23, 2007 | 8:30 pm |

Here is an appraisal-related post on our other blog Matrix: Good Appraisers, If Speed Is Only What You Need that ranks the items a growing number of mortgage clients emphasize from their appraisers.

Guess where quality ranks?

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[on Matrix] Molasses Primer: The Subtext on Subprime

May 18, 2007 | 9:21 am |

Here is an appraisal-related post on our other blog Matrix: Molasses Primer: The Subtext on Subprime that discusses Fed Chair Bernanke’s muted reaction to the subprime lending problem.

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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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[on Matrix] Appraisers: Band-aids Don’t Prevent Cuts

April 13, 2007 | 11:02 am |

Here is an appraisal-related post on our other blog Matrix: Appraisers: Band-aids Don’t Prevent Cuts that discusses the real issues related to appraiser’s access to sales contracts.

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[Commercial Grade] The Shin Bone’s Connected to the Knee Bone

April 12, 2007 | 6:42 am |

Commercial Grade is a weekly post by John Cicero, MAI who provides commentary on issues affecting real estate appraisers, with specific focus on commercial valuation. This week, after a winter slumber, John looks at client traffic patterns and explains why sharing information is not a one way street.

Disclosure: John is a partner of mine in our commercial advisory firm Miller Cicero, LLC and he is, on Wednesdays on Thursdays, one of the smartest guys I know. …Jonathan Miller

Being just an appraiser, I always appreciate someone who can take a complex subject like economics and explain it in a way that I understand. I was fortunate to have recently been at a joint seminar offered of the Appraisal Institute and the Royal Institute of Chartered Surveyors (RICS). The keynote luncheon speaker was an economist named James Grant, Founder and Editor of Grant’s Interest Rate Observer, who was speaking on the current state of affairs in the subprime lending market.

As a commercial appraiser, I’ve been reading about the rising default rates in subprime mortgages with one eyethat’s a problem for the residential guys! However, Mr. Grant explains that in the capital marketsthe shin bone’s connected to the knee bone, and the knee bone’s connected to the thigh bone! The light bulb went off (thanks, Jim)the fallout in residential subprime mortgages are just the tip of the iceberg and although they may be affecting our residential brethren first, it is inevitable that it is just a matter of time before tighter credit ripples through the capital markets to affect us commercial guys as well.

I can’t help but feel that this is the calm before the storm. The wheels have already been set in motion and credit is starting to tighten. While I have not personally seen the effects of this yet in my practice, the thigh bone is connected to..something( the hip bone?)

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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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[Fee Simplistic] Getting Primed On Sub-prime

March 13, 2007 | 10:00 pm |

Fee Simplistic is a regular post by Martin Tessler, whom after 30 years of commercial fee appraiser-related experience, gets to the bottom of real issues by seeing the both the trees and the forest. He has never been accused of being a man of few words and his commentary can’t be inspired on a specific day of the week. This week, Marty explains the smoke and mirror lending process.
…Jonathan Miller

My original commitment to authoring Fee Simplistic was that it would only be written when commentary would be warranted by current events in the real estate market. And so the imploding of the sub-prime mortgage world on investors and the fallout of lenders and borrowers going into default makes it seem that the mortgage market is caving in.

The term “sub-prime” connotes a loan that is related to prime when never the twain ever met or will meet. Reading the individual anecdotes of some of these sub-prime borrowers reflect histories of people who would score exceedingly low in credit ratings; were either fraudulent in reporting income or else their broker was fraudulent in reporting on the borrower’s income and assets; executed sales contracts that had excessive sales prices where the buyer would get a kickback and use the proceeds to pay his first few mortgage payments and/or split some with the seller or broker; and finally broker “sweet talk” lulling the borrower into refinancing where mortgage payments would eventually end up higher than what was previously paid. So what prevailed was a sub-prime lending world comprised of smoke and mirrors if not outright chicanery.

This time, instead of Uncle Sam having to step in with the establishment of an RTC to keep the banking system afloat it appears that the only ones being hurt are those investors who played the high risk game of buying the bonds of the sub-prime CDO’s that were issued by Wall Street. The “invisible hand” of the marketplace so aptly described by Adam Smith is at work in culling out the bad from the good and the risky investment from the prudent one. High risk and high yield vs. low risk and low yield have always governed the marketplace and now is no exception.

It is not a far stretch to remember the principles most of us were brought up on by our parents:

* Don’t play with the bad kids, you’ll get hurt
* Don’t skate on thin ice
* It may look good now but it may give you an upset stomach later
* If it looks too good to be true it probably isn’t
* What makes you think you can get away with it?

And for those who know their Latin
* Caveat Emptor

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[Sounding Bored] Behind The 8 Ball: Weaker Market Requiring Stronger Appraisals

January 22, 2007 | 12:01 am | Columns |

[Sounding Bored is my semi-regular column on the state of the appraisal profession. This week I get woozy from getting beat up so much.]

Last month I was speaking in front of the loan officers of a local mortgage brokerage firm that we do some work for. We are not considered a favorite choice because of our reputation is less about the playing ball then it is about estimating a reasonable market value. We get very light, but regular volume of work from them and they are pleasant enough to deal with, but they clearly favor a competitor by giving them heavy volume because their orientation towards better “service.”

I remember a specific question by one of the mortgage reps posed to me at the meeting that sort of threw me for its brashness. It went something like:

Jonathan, assuming that there is a range of gray in valuation, how high in the range would you be willing to go to make the deal for us?

Although this is probably always in the back of every mortgage broker’s mind when ordering an appraisal, the audacity of being so blunt and open, made the room go quiet.

I didn’t have an answer, other than:

I understand what you are saying, but we can only provide what we feel to be a reasonable estimate of market value, supported by facts.

I ran into this loan officer a few weeks later at a holiday party and he chuckled as he recapped the situation and replied that he knew I gave the only proper ethical answer I could and he enjoyed seeing me try to answer it.

Apparently he didn’t understand how the question made him look in front of his peers. At the end of the day, I don’t need (or want) more work from someone like that and I resent the fact that our profession is placed in this position every day …play ball or die.

The irony here is that the profession is even more important now for assessing collateral as the market weakens. Perhaps there is a remote possibility that lenders will start to have a more critical eye in their need to understand what the real value of a property is. They just need to ask why [appraisal reviews nearly always turn up inflated first appraisals [SCS]]( that were done for wholesale lenders (mortgage brokers).

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