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[Sounding Bored] Missing (And Surfing For) The Point: It’s Not About Getting The Story Right

September 3, 2008 | 11:42 am | Columns |

Sounding Bored is my semi-regular column on the state of the appraisal profession. We are a complex cast of characters. Even the media doesn’t understand us…

Last week I was mentioned in a new New York celebrity type site called Cityfile. For gossip sites, it’s design and content is very good. They get a little creepy on some of the profiles – one of my friend’s past dating history was chronicled (incorrectly).

I traded a flurry of emails with the founder/editor Remy Stern after this post was published. Remy was responsive and tweaked the extracurricular stuff, save one. He finally cut me off after the last batch of emails despite promising to reconsider, likely because he was sick of me.

Here’s an excerpt from the post in question:

A reporter wants to know how much an apartment in so-and-so building in such-and-such neighborhood will fetch on the current market? Real estate appraiser Jonathan Miller can guesstimate the price of any residential or commercial Manhattan property based on public property info, as long as you squeeze his name and firm (Miller Samuel) in the paper.

I sent him this response (cut down to spare the drama):

I do not give reporters prices of apartments or someone who calls me. EVER!…You are clearly saying I am telling someone how much a specific apartment is worth and that is against my state certification indicating I break the law to people in my appraisal circles. It takes one crackpot to file a complaint…

He responded with a subtle rub using a recent quote of mine in FT:

Thanks, Jonathan. I actually do understand. That’s why is says “guesstimate” and not “will give you a number you can take to the bank.” You’re taking it a bit too literally. Just like I won’t assume that you’ve conducted extensive, quantifiable research on the future value of having Orlando Bloom as a neighbor when you give quotes like this to the FT.

Anyone who reads this post will realize that it’s intended to be humorous and is not intended to be a precise analysis of what you do day-in and day-out. If someone doesn’t understand, that’s their issue. Again, thanks for your email.

He’s a smart guy but didn’t get my point.

A reporter I know called me about their post, saying it came up on their google search. She said the original post was pretty mean (pre-tweak) but given the source, actually thought it was complimentary to be recognized.

Bottom line is Cityfile sees values and numbers as one big fuzzy picture.

I don’t give reporters market values of specific properties. Never have, never will…that would violate my license. While I am protective of my name (after all, Miller is the seventh most popular last name in the US) where does one draw the line with writing like this?

Friends of mine who run other sites are presented with cease and desists on a regular basis. I opted to take a pass since the source determines the damage. Besides, I like the site.

A few years ago, while surfing I came across a generic appraisal directory that listed me as “Member Appraisal Institute” or something along those lines that would give the impression I was an “MAI.” I don’t know where they got this information. My business partner in our commercial valuation company is an MAI. I am not an MAI (not smart enough) and don’t list that information anywhere. In fact, since I am a residential appraiser, I do not see that as an advantage if I had an ethical lapse. Some of the worst individual condo or co-op appraisals I have ever seen in litigation cases I have been on were completed by MAI’s who should have stuck to the commercial valuation assignments that they complete competently on a regular basis.

I digress

It was simply a mistake on the appraisal directory web site’s part. I sent repeated requests to the site to take it down or change the text but got no response. Then some anonymous (wacko) submitted a complaint to the Appraisal Institute (had to be an appraiser) and I got a terse form letter from the chair of “Ethics Administration.”

Gotta love our profession – like field reviews – many of us are dying to stick it to our colleagues. In other words, I was assumed “guilty until proven innocent.” I called AI and they were actually pretty nice about it. I had to send them a letter explaining my situation and all was fine again.

“I’ve just found the Internet!”


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Miller Cicero Turns Six

August 19, 2008 | 4:38 pm |

Six years ago we (me, my wife and sister) formed a commercial valuation firm Miller Cicero with long time industry veteran John Cicero, MAI.

People have always told me “the only good partner is a dead partner” but John proved them wrong…lucky for John. 😉

He’s a great appraiser, smart, fun to be around and best of all, he’s got integrity (and if you have kept up with this blog, you’ll know thats in short supply in the mortgage business).

Miller Cicero has been guided with the same business philosophy as Miller Samuel has for nearly 22 years: think long term – neutrality – no short cuts.

It’s refreshing to see that there are clients out there that actually want to have an unbiased value estimate performed on a property. That’ll be the forward trend.

Here’s what John thinks.

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[Commercial Grade] Happy Anniversary, Miller Cicero!

August 19, 2008 | 4:13 pm |


Commercial Grade is a post by John Cicero, MAI who provides commentary on issues affecting real estate appraisers, with specific focus on commercial valuation. John is a partner of mine in our commercial real estate valuation concern [Miller Cicero, LLC]( and he is, depending on what day of the week it is, one of the smartest guys I know.

…Jonathan Miller

Six years ago today Miller Cicero, LLC was born!

From the minute that I put out my shingle, it’s been a great ride. The synergy created between me and the Millers has been dynamic and from day one…my biggest problem has been getting all of our work done in time. (We always did, but it often took a lot of midnight-oil burning!!).

I’m fortunate to say I’ve got one of the best appraisal staffs in the profession and a terrific roster of clients as well. Though the market is clearly changing I am confident that we will be able to ride the roller coaster to come (I’ve got toI start paying my first college tuition bills for my daughter this fall!)

Sorry for getting sappy, but once a year on my anniversary I’m entitled to get a little maudlin, aren’t I?

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[Commercial Grade] Take Me Out To Of The Ball Game

August 18, 2008 | 2:48 pm |


Commercial Grade is a post by John Cicero, MAI who provides commentary on issues affecting real estate appraisers, with specific focus on commercial valuation. John is a partner of mine in our commercial real estate valuation concern [Miller Cicero, LLC]( and he is, depending on what day of the week it is, one of the smartest guys I know.

…Jonathan Miller

By definition appraisers are supposed to stand for independence and objectivity. However s recent article in the New York Times highlights yet another avenue where pressure is borne on appraisers..those providing litigation support and expert testimony. The appraiser’s role in the mortgage lending process has the focus of much attention over the past months, with the appraiser once again being held responsible for lack of spine and flexible ethics in the face of pressure from banks and mortgage brokers. In the article, In US, Expert Witnesses are Partisan, author Adam Liptak highlights the process of retaining “neutral” experts in US courts. He writes,

In most of the rest of the world, expert witnesses are selected by judges and are meant to be neutral and independent. Many foreign lawyers have long questioned the American practice of allowing the parties to present testimony from experts they have chosen and paid.

Hmm, this sounds familiara potential conflict of interest in providing an impartial opinion to the person paying your fee.?…where have I heard that before??

The American system becomes somewhat of a farce, or is at least perceived to be. Each side picks a “hired gun” to advocate its side and then the judge, after listening to hours, or days, of technical talk, ends up deciding something in the middle. The presumption is that both sides have already exaggerated their positions to an extreme and therefore the real answer lies somewhere in the middle.

Mr. Liptak continues in his article,

Juries often find it hard to evaluate expert testimony on complex scientific matters, many lawyers say, and they tend to make decisions based on the expert’s demeanor, credentials and ability to present difficult information without condescension. An appealingly folksy expert, lawyers say, can have an outsize effect in a jury trial.

The same is clearly true for judges as well as juries. Judges cannot differentiate a “good” appraisal from a “bad” one so it all comes down to how the expert comports himself/herself on the stand. Being a good witness is for the most part, a different skill set than being a good appraiser. Being a good appraiser and a good witness is rare and a winning combination.

I recently learned a new term that I think should become the law for all valuation related disputes, baseball arbitration. In baseball arbitration, the arbitrator or judge ultimately sides with one party or the other, no splitting the baby down the middle. This would be a powerful incentive to get it right and not conclude to anything too extreme.

In the meantime, for those appraisers who give testimony, don’t forget to speak clearly and make eye contact!

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[Straight From MacCrate] What Has Happened To Manhattan Apartment Property Values?

August 17, 2008 | 10:08 pm | |

Jim MacCrate, MAI, CRE, ASA has his own firm, MacCrate Associates, but has worn many hats as a Director at PricewaterhouseCoopers in New York City and Chief Appraiser at European American Bank. He is a prolific writer on valuation issues and teaches a number of the real estate appraisal classes through the Appraisal Institute and New York University. I have had the pleasure of taking a number of courses taught by Jim. His wife Judy is an SRA and is an accomplished appraiser in her own right, having managed an appraisal panel for a large lending institution throughout its various mergers for a number of years. I can only imagine the riveting conversations at dinnertime.

UPDATE: Mark your calendar, Jim has been invited by the Wisconsin Chapter of the Appraisal Institute to address distressed commercial real estate properties for professionals including real estate brokers, owners, and appraisers. The Appraisal Institute is inviting the FDIC to attend this critical and timely seminar on August 27th, 2008 in Milwaukee, Wisconsin.

Here’s how to sign up for the seminar.

…Jonathan Miller

Real estate appraisers have to be wondering what property values are doing in Manhattan and elsewhere. Clearly, the real estate market is being hit by numerous factors that are affecting property values. The following chart indicates how Manhattan apartment values have changed in comparison to changes in the nationwide apartment value index, CPI index and applying capitalization rates to the projected changes in income to develop indexes based on the average and median long term (20 plus years) capitalization rates. From 1998 through 2003, apartment value trends followed the CPI very closely.

The nationwide apartment value index followed a similar pattern to New York’s until 2003. If the long term average or median capitalization rate is applied to the projected net operating income, apartment values in Manhattan would not have kept pace with inflation in New York.

Impact of Financing

Other factors drove the increase in apartment values. The following chart indicates the path the apartment capitalization rates took for the last eight years or so. Optimism, lower interest rates, huge capital inflows (beginning in the latter part of 2003) and tax free exchanges drove apartment prices into a bubble that is waiting to collapse.

If it is true that over the long term real estate values keep pace with inflation and returns regress toward the mean, Manhattan apartment values are in for a rough ride. If rates of return do regress toward the mean as interest rates increase, a large drop in value is indicated or values will remain stable waiting for the CPI to catch up. During the 1970’s and early 1990’s, apartment values declined and, then, stabilized for several years.

But Wait.

Not only are interest rates and debt coverage ratios increasing, all operating costs are increasing quite rapidly in the New York area. The NYC RGB forecasted the following expected increases in operating expenses from April 2007 through April 2008 for all apartment projects as follows:

During the first six months of 2008, fuel costs have already reportedly increased 20% annually. Real estate taxes will have to be increased more than expected to cover the shortfall in city revenues from other sources. All other costs will probably follow the inflationary spiral that has begun. Increases in rental income generally lag expense increases.

What will hurt apartment values will be increasing capitalization rates, operating costs and switching from interest only loans to amortizing loans. It would not be surprising to see an increase in delinquencies within the next six months or so. Lenders will be forced to modify loans or foreclose.

In addition, the New York City Comptroller’s Office issued a report stating “the real estate sector accounted for nearly $200 billion of the New York metropolitan area’s gross product in 2005, showing a location quotient of 1.3, or 30 percent higher than the national average.” That sector is contracting along with the financial services sector which accounts for 13.6 percent of the regional economy. Job growth is slowing and unemployment is rising.

So, The Question Is Not If But When?

The following chart provides a summary of the estimated apartment capitalization rates over time.

With capitalization rates falling below 6.00% during the mid-2000, it is only a matter of time for the rates to regress back to the mean and let the air out of the balloon. The events unfolding were predictable and the general historical patterns are similar. Financial regulation and sound underwriting policies disappeared during this time period of “irrational exuberance.”

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Who We Are In The Eyes Of The Federal Government

July 30, 2008 | 12:33 am |

Here’s a surprisingly detailed and well written analysis of our appraisal profession by the US Department of Labor.

Good stuff.

Apparently employment opportunities are high.


[Fee Simplistic] Reinventing The Appraisal: Should Appraisals Be Subject To Side Effect Regulations As In FDA Prescription Drugs?

July 22, 2008 | 1:38 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.

…Jonathan Miller

Anyone who read the Monday (July 21st) Wall Street Journal could not escape the front page article on Superior Bank and their disastrous subprime lending which eventually ended up in an FDIC takeover. The FDIC operation was even more egregious as they continued the subprime lending while operating the bank until they could find a buyer. During the FDIC operation Superior funded more than 6,700 subprimes with a face amount of over $550 million and then sold most of the loans to another bank. The loan pool was a classic example of the subprime/credit implosion pandemic still spreading globally: lending to unqualified borrowers, lack of or poorly documented income verification and-last but not least-inflated appraisals.

Underpinning the inflated appraisal factor was the brief story of a retired high school teacher in rural Georgia near Athens who fixed up and added to a ramshackle house with a tin roof located next to a trailer park and who refinanced it with Superior in 2001 with a $120,700-20 year mortgage at 10.75% compared to a 7% rate for those with good credit. The bank’s appraisal valued the house at $142,000 and relied on 3 comps that were in “well attended” condition. The comps were located many miles away in neighboring counties and two were located close to the center of Athens where locational factors generated higher property values. Although not a true indication of market value, county records indicated fair market value for assessment purposes at $84,000 with the bank selling it at auction in 2005 after foreclosure for $76,000.

So where does the FDA’s side effects warning listed for all prescription drugs come in for application to appraisals?

  • First: All appraisals should have an EXPIRATION DATE: WARNING: Do not use this appraisal more than __ months after (list valuation date) as market conditions will likely have changed. See your bank or CDO or MBS trustee or contact SOAPBOX.
  • Second: Similar to drug interactions, the location of the comps used to arrive at market value should be highlighted so that their effectiveness can be measured as in: APPRAISAL COMPS INTERACTION: WARNING: The comparables used in this appraisal were located: within walking distance; within the defined neighborhood; within the outlying county; within the SMSA; outside the SMSA;-(choose one of the above). U.S. Government advisories indicate that there is an inverse relationship to the effectiveness of the listed comps and the distance from the subject.
  • Third: PREVIOUS CONTAMINANT INDICATIONS: WARNING: This appraisal was undertaken under TOTAL ANTISEPTIC & CONTAMINANT-FREE conditions. The value indicated has been arrived at independent of any outside contact or interference from a mortgage broker, lender, investment bank, underwriter, rating agency, or other influencing factor. This may or may not apply to the fee or future assignments.

Moral of the Story: Keep Diogenes on the job looking for honest appraisers.

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[Palumbo On USPAP] Common Sense Not Perfection: Can You Block Tackle And Pass?

July 21, 2008 | 1:25 pm |


Palumbo On USPAP is written by Joe Palumbo, SRA, a long time appraisal colleague and friend who is also an Appraisal Qualifications Board (AQB) certified instructor and a user of appraisal services. Joe is well-versed on the ever changing landscape of the Uniform Standards of Professional Appraisal Practice [USPAP].

…Jonathan Miller

Appraisal is far from a perfect science. My favorite line in USPAP is one I wish more appraisers and users of appraisal services would take note of. The comment to Standard 1-1 (c) reads:

Perfection is impossible to attain and competence does not require perfection.

Over the past 12-18 months I have heard the current real estate climate described many different ways: depression-like, recession-like, anemic, soft and turbulent just to name a few. Suffice it to say that the national market is generally much less favorable than it was several years ago when the fraternity party atmosphere prevailed. Credit flowed like wine and all involved were happily attending the party. Buyers stuffed as much home as the could into “creative financing”, sellers cashed out or traded up and investors risk was mitigated by the rapid appreciation that even in a short time period paid dividends and made just about every deal worthwhile. The “you can’t go wrong in real estate” cliché’ became the staple notion.

One thing is for certain: today the market is clearly different.

For practitioners such as brokers agents and appraisers the normal market indicators are more important than ever. If these indicators are ignored or misread the likelihood of accuracy will fade. The good news is that what it takes to read and interpret the “good” market is also the same for the “bad” market: supply and demand, absorption, the principal of substitution and good old common sense. Unfortunately it seems as though some appraisers and realtors have forgotten about the basics. Existing supply of homes in relation to demand and in-turn local absorption rates are the foundation for existing market conditions. Coupled with price trending, absorption rates are the backbone of a good “micro analysis”, but it does not stop there. The principle of substitution is fundamental in determining what options exist for buyers in your market. Historical data (closed sales) is relevant to confirm trends and extract adjustments, but the recent and more current indicators of active and pending sale data is where the gold is.

It seems to me that this is not so much a real estate principle as it is common sense The reason is simple: why would a buyer pay your estimated ANTICIPATED SALE PRICE for the subject property when a less expensive alternative exists? Maybe you’re in a sub-market that does not yield a lot of very “truly” comparable listings, still if these are the only alternatives the market sees than it is all relative. Although ERC guidelines do not call for “adjustment” of competing properties, it can be a sound practice as a high benchmark “check” and some relocation companies have asked for such. The trend of requiring and adjusting listings is also becoming more common place in the lending environment.

Clearly the times have changed. As they say though, “the more things change the more they stay the same”.

At Weichert Relocation Resources Inc, we require that the competing listings be adjusted. For the most part our appraiser panel is diligent and understanding in that exercise. I have been personally involved in cases where it is evident that this very basic concept is misunderstood. On those few occasions when I have questioned appraisers whose final value is well above all adjusted listings, I have received responses that concern me very much. “They are just listings” I am told or “they have not sold so they mean nothing”.

They mean nothing? Actually, they mean something: that you, the appraisal professional do not clearly understand the principle of substitution.

Believe it or not football can be like real estate. No matter how complex the situation is winning a game can come down to the execution of the very basics: blocking tackling and passing.

I had a mentor who once told me “don’t be smarter than the market, let it tell you what is happening”. I have tremendous confidence in the appraisal profession. I see hundreds of appraisals via my current job responsibilities and speak with hundreds of students giving classes. Sometimes you have to offer something other than pearls of wisdom to make an impression so I will offer no such thing here. Just a plea to my fellow appraisal professionals: get back to the basics in real estate appraisal: the principle of substitution, your block tackle and pass concept.

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[Sounding Bored] Hiding Behind USPAP To Avoid Getting Sick

July 20, 2008 | 10:03 pm | Columns |

Sounding Bored is my semi-regular column on the state of the appraisal profession. Righteous USPAP indignation runs rampant in the appraisal profession and I worry it is leading to our demise as an industry.

Take the case of Mike Lefebvre, a Realtor in Massachusetts, who also happens to have an appraisal background.

There are many appraisers who were originally real estate agents and in fact, I believe there are still states that require appraisers to have a real estate sales person’s license in order to get their appraiser license.

Mike has an interesting approach to getting a listing. He performs an appraisal on a potential listing rather than a broker market analysis (BMA) because it is more detailed and helps him properly price the property. He uses that appraisal as part of his marketing effort. In many ways, he is being more professional as an agent by providing a more thorough analysis for his clients than a BMA affords.

Since pitching a listing is not a federally related transaction and he discloses (and it is apparent) that he has a vested interest in the eventual transaction by the fact he is an agent paid on commission, I don’t see this being a problem or a violation of USPAP.

Of course, I would love another perspective on this.

However, I often see more seasoned appraisers make a habit of needlessly scaring clients, banks and agents by using USPAP as a grey fogging tool…almost like the way a consumer feels reading an insurance policy…it is something so confusing that it is not meant to be understood, except by appraisers.

And THAT, in my humble opinion, is one of the things that is killing the appraisal profession. USPAP was in place during the housing boom so it is apparent that this standard alone is not the panacea of the lending industry. Create so much confusion that you motivate the industry to find alternatives.

Others see it differently, and this email is the inspiration for this post.

Mike forwarded me an email sent by an appraiser. I am not familiar with him but he appears to be well-qualified as an appraiser in his market judging from his web site. I’ll even assume he is a good appraiser and a nice person.

The appraiser was “sickened by Mike’s performance of an appraisal on each of his listings to more accurately price the property and alludes to connecting him to bank fraud (the irony is that USPAP clearly forbids appraisers to mislead their readers, which this email is treading awfully close to that, no?):

From: [kept anonymous]
Date: June 6, 2008 10:07:42 PM EDT
To: mlefebvre
Subject: Re: Inquiry About 30 Jefferson Road, Franklin, MA – why would you bias yourself like this? Ever hear of USPAP?

You do understand that when you do an Appraisal you must adhere to USPAP including “I have no present or prospective interest in the property that is the subject of this report…..”

How can you do an Appraisal on a property you list, this is sickening to see.

Do you know what constitutes acceptable versus unacceptable business practices? This is required in all 50 States. Follow this link…

Giving a comp check without an Appraisal IS BANK FRAUD.

Ethics? Do you understand them? Follow this link to learn more about what an Appraiser is required to do and what not to do.

In addition to our Appraisal services we can also offer sessions for your office on how to be compliant with USPAP.

We “VALUE” your business! Specializing in honest and accurate results!

[deleted content to keep anonymous]

“Think about USPAP and how to follow it now, or you may get a long time to think about it in prison later.”

“People only think USPAP Requirements are stupid until they are caught and punished for not following them.”

I think having USPAP is a good thing, a necessary thing. The fact that the lending industry went to hell in a handbasket isn’t because every appraiser didn’t follow USPAP. The problem is much bigger than that.

We all need standards to live by and the public needs to have comfort that when they order an appraisal, they understand what they are being provided. If an appraiser has a potential conflict, it must be fully disclosed.

I also think this sort of threatening message is self-serving and shouldn’t be tolerated either. You don’t use USPAP as a weapon to create mass hysteria in the public domain as a way to generate business. That makes the profession look even worse than it already does.

Good grief.

Here’s Mike’s post on the subject.

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[The Hall Monitor] There’s Room For Improvement

July 20, 2008 | 6:05 pm |

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. In this post Todd structures the building argument for a change in terminology. …Jonathan Miller

Improve v 1. To raise to a more desirable or more excellent quality or condition; make better. 2. To increase the productivity or value of (land or property). 3. To put to good use; use profitably.

Improvement n 1a. The act or process of improving. b. The state of being improved. 2. A change or addition that improves.

These definitions are from the American Heritage College Dictionary, fourth edition, published in 2002. This same dictionary does not include an entry for “teardown”, as this is a relative “arriviste” in the lexicon of real estate. However, the term teardown has become ubiquitous among people living in the many places across the country where they are common. The New York Times, in an editorial on July 1, 2008 entitled Holding Back the Wrecking Ball, makes reference to a Westport, Conn. Web site featuring Teardown of the Day.

The Appraisal of Real Estate, thirteenth edition, has recently been issued (so says Jonathan Miller in Soapbox) but I’m still working from the twelfth edition and I have no plans to buy the new one. The index in my book does not include a reference to “teardown”. I am genuinely curious as to whether or not the thirteenth edition does. Consider this a plea to those of you who have the new book. Does the word teardown appear in the index, or doesn’t it? In my opinion it absolutely belongs there. What no longer belongs there is the word “improvement”, or any derivation thereof.

From this point forward, in appraisal parlance the word improvement should be replaced with the word structure. (or perhaps you have a better word) “As improved” should be “as structured”, “unimproved” becomes “unstructured”, you get the idea. The reason should be obvious. The very definition of the word improvement carries with it the implication that the “structure” always adds value to the land. And until fairly recently that was generally true but it is no longer necessarily so. An “improvement” that does not enhance the value of the land IS NOT AN IMPROVEMENT. If it were then “teardown” wouldn’t have become the commonly used word that everyone understands.

In the case of a teardown, not only does the structure not add value, it diminishes the value of the land, as unstructured. The word “structure”, which makes no premature judgment as to any contributory value of an existing building, allows for the critical question to be asked in a way that the word “improvement” does not. Does the existing structure enhance the value of the land, or does it diminish it? In places where teardowns are common the answer is clear the value of the land, as vacant, is greater than its value, as structured. It’s misleading, ridiculous even, to call these buildings “improvements”.

In real estate appraisal the word “improvement” is an archaic term reflective of an early 20th century truism land was cheap (dirt cheap) and most of the value (75% or more) was in the building. In the early 21st century, in many urban and suburban places this notion is demonstrably false. In these areas the land component may account for as much as 50% of total value and that’s with new construction! The best way to acknowledge this reality is to replace the heavily biased word “improvement” with the more neutral “structure”.

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“Near Zero Default” A Recent IndyMac Conversation About Speed

July 18, 2008 | 10:51 am |

also posted on Matrix

In my continuing obsession with appraisal/lending issues given the bank shakeouts that will occur over the next 12-18 months, here’s an email conversation with IndyMac on an appraisal assignment occurred in late May with my appraisal firm Miller Samuel.

The report was ordered with a specific inspection date needed. Up until then, our turn time was consistently 7-10 days, usually inspecting the property within a day or 2 after the order depending on the contact info accuracy and customer cooperation. Granted, 7-10 days is not stellar, but we are very busy, ours clients know this in advance and our competitors (that I would consider competent) have the same turn times as well.

You can see one of our employees frustrations toward the end because we had gone through great effort to accommodate the bank to inspect the property on the day they needed it done and they did not indicate early on that there was any “rush” plus they basically told us we were not needed, after a warm and fuzzy relationship that preceded this conversation. Very odd.

I guess what annoyed me in seeing this email later on, was the comment about their 0 default rate and yet the lender collapsed 2 1/2 months later. I am sure this person was responding to their own branch’s experience but its weird they brought up such a reference in the dialog, inferring (to me, anyway) that it was a big problem looming at the bank).

Incidentally, 300 banks are projected to fail in the next 3 years.

May 28, 2008 email dialog

IndyMac Please provide status on this report – thanks

Miller Samuel [address omitted] will be inspected tomorrow, May 28th.

IndyMac And how soon thereafter can we expect the completed report? Thanks

Miller Samuel All appraisal turnaround time is currently 7-10 business days starting from the time of inspection.

IndyMac We are going to have to cancel this order- sorry but your turn around time is just too long.

Miller Samuel [name omitted] we have worked an entire schedule around this appt. When do u need the hard copy and we will deliver it.

IndyMac We have appraisers that give us reports back within 2 days of the inspection. This is still not going to work. If you can get us the reports back in that time frame we will have a lot of business for you. I am sorry

Miller Samuel Yikes! That’s called bang it out, hit the number appraising. No that’s not something we participate in. That’s how subprime occurred and why the housing market continues to fall. Conditions for mortgage fraud remain in tact with many lenders because of a lack of concern for quality. 48 hr Speed = Bad appraisals and ultimately bad loans. We can do 5-7 business days. I really hope you guys don’t end up like countrywide and all the rest. But with 2 day turn time its inevitable.

IndyMac I understand your position and would never ask you to do something you are not comfortable doing. This branch does AAA business with typically low ltv’s, high credit, etc. Our default ratio is nearly 0 pct and we pride ourselves on efficiency and effectiveness. I think going forward we should help you gain access earlier in the transaction so you can adequately do your job. If there is something we can do on our end please let us know.

July 11, 2008

IndyMac collapses

July 17, 2008

FBI fraud inquiry after IndyMac collapse

IndyMac Collapse Fuels Fears About WaMu

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[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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