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[Fee Simplistic] Investment Banking Culinary School: Typhoid Mary And The Spreading Sub-Prime Infection – An Allegory

March 16, 2008 | 4:29 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. In the first of a series, Marty looks at what’s cooking in sub-prime and observes that everyone is now washing their hands after the infection has spread. …Jonathan Miller

Sharing an elevator, a civilian neighbor of mine (“civilian”: neither in real estate, law, nor finance) reading the morning paper asked me if I could explain to him in non-technical terms what the sub-prime mess was all about and how it came to infect the entire economy. As this was a question that could not readily be answered by arrival in the lobby I told him that I would have to give it some thought but that I would definitely get back to him with an explanation.

I called him a few days later and asked him if he remembered the story of Typhoid Mary. He recalled that she was the cook who harbored the typhoid bacteria but did not outwardly manifest the disease back in the early 1900’s. He recalled how she cooked for a Long Island banker’s family and how several family members came down with typhoid and that it was quite a number of months before the illness was traced to her and how she was later isolated but continued cooking and spreading the disease among those with whom she came in contact.

“So where does Typhoid Mary come into this”, he asked? I told him to imagine that she was a gourmet cook that was able to concoct delicious meals that we’ll call “sub-prime” and which revolved around highly questionable combinations of ingredients that tasted great to the investment banking community on Wall Street. The bankers said that if it tasted this good they could sell it to the public and make billions notwithstanding the toxic ingredients that would create problems later on.

So the investment bankers set her up in business and she got rave reviews for her sub-prime meals which are so low in price that they not only kept coming back for more but word spread internationally and they opened franchise operations all over the world and everyone could not get enough of sub-prime. However, nobody paid attention to the fine print in the back of the menu stating that meal prices are going to rise but “not-to-worry” because the people who had already dined will gladly give up their place to those who have not sampled the cuisine and they will go on to newer sub-prime establishments being built by the investment bankers who are now launching a haute cuisine line of restaurants called “Derivatives”. “Derivatives” traced its origins back to Typhoid Mary’s ingredients but its higher order of culinary evolution took basic ingredients and strained, extracted and refined them further to the point where there was only a minute trace of the flavor that people thought they were savoring but had no idea of what they were eating and really did not care.

“Derivatives” was so popular in the investment banking community that they spun off boutiques for even higher haute cuisine dining called “SIV’s”, “CDO’s”, “ALT-A’s”, “Tranches”, “RMBS’s” and “CMBS’s”. Wall Streeters claimed they discovered the new El Dorado and doled out billions in bonuses to their exclusive fraternity, the Investment Bankers. Unbeknownst to the dining public, however, was the fact that all of these new culinary establishments had one thing in common, the cooking and recipes all traced back to Typhoid Mary and her dormant but lethal bacillus, “ILLIQUIDUS-ILLSOLVENTUS” from the Latin “to go broke”. Also, the scientific community was unaware of the fact that this particular bacterial strain acted in a cyclical manner and took several years to mature before striking its lethal blow.

One day, after several thousand “sub-primes” were operating around the world a 911 call went out from one that a customer was experiencing severe abdominal cramps and shooting pains. The diagnosis came back that it was nothing to worry about as the diner was merely experiencing an upset stomach but at the same time other diners at other restaurants were experiencing the same symptoms all over the globe. Frantic calls were sent to the Wall Street headquarters to find out how to treat the outbreak but word came back that each diner assumed their own risk and, besides, all the funds that would have been held in reserve for 911 emergencies were already disbursed in spent bonuses.

Calls for help to the Communicable Disease Center in Washington were met with skepticism by the Wall Streeters who said it would be better not to have government intervention as the body will build its own defenses against the outbreak. As of this writing several franchise operations have closed their doors due to the outbreak and there is some discussion of applying massive dosages of steroids and human greed hormone. The doctors however are uncertain as to whether the disease is indeed bacterial or viral and treatment is under discussion. “We have seen outbreaks like this before such as the S&L crisis, the high tech crisis and we will deal with it-and let’s not forget the tulip crisis too”, said a member of the Administration.

Stay tuned for further developments.

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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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[Chip Shots] Looks Right and Priced Right

March 3, 2008 | 11:28 pm |

Alvin “Chip” Wagner III, SRA, IFA, SCRP is third generation appraiser from Chicagoland who is a public figure and well respected within the appraisal industry. He runs the firm A.L. Wagner Appraisal Group., which has been providing appraisal, consulting and research services throughout the Chicagoland market for more than 35 years. I met Chip through RAC (Relocation Appraisers & Consultants) and have learned a lot from him. Like me, he has an enthusiasm for market analysis. Its great to have him share his insight on Soapbox.

Chip breaks down active inventory into two categories: Tastes Great or Less Filling
…Jonathan Miller

The oversupply of inventory makes it very difficult for homeowners to sell their home. Many agents are telling me there are more buyers active right now as we are enter our Spring market, yet it remains a challenge. The buyers have many properties to look at. Homes are still selling but unfortunately the types of homes appear to fall into two major categories: Looks Right and Priced Right, everything else in between is sitting unsold.

The houses that Look Right are those that stand out above the competition. They have positive attributes that their competitors cannot match. This may include Location/Site features such as a cul-de-sac lot with reduced front yard traffic, or a view of the park or Forest Preserve. It could also include homes that have been remodeled that stand out above its competition; e.g., adding trendy features such as granite countertops and stainless steel appliances to the kitchen. Or it could be about the impeccable condition of the property with brand new carpeting, recently refinished flooring and a fresh coat of neutral paint. Good interior staging is going a long way to make the home show the best that it possibly can. The homes that look right are being purchased, those that have a couple of faults here and there, major or minor, are being overlooked and sitting on the market unsold. This is exactly what happens when there is an oversupply and it is a Buyers Market.

The houses that are Priced Right are also getting a lot of attention. These are the homes that are sometimes called ‘short sales,’ or ‘quick sales.’ They might be properties where a seller has to sell because of a job transfer or a job loss. They could be properties in pre-foreclosure where the owner is distressed to get out of the property before they must turn the keys over to the bank. It could be a corporate-owned home, either by a bank, or a corporation who moved their transferee. These are some of the most motivated sellers on the block. Or, it could be the builder who is willing to ‘wheel and deal’ and give away the spec home at an unbelievably low price, just to keep their sub’s paid, and able to work on that next home.

I recently met an owner being transferred who could not sell his home which was priced under the market at $325,000 when all of the comparable homes would support a value of over $350,000. He told me the feedback received was that people are choosing new construction of more expensive homes of homes originally priced $400,000 to $450,000 that builders were selling for $350,000 with the discounts and concessions. It remains a difficult resale market in areas where sellers are competing with builders.

With residential mortgage rates at favorable rates, most lenders have tightened their lending practices, making it more difficult for even the most qualified buyers to purchase a home. It appears to be more difficult to get a loan right now than in the recent past.

Many of the “fence-sitters” continue to sit back and wait for the market to hit rock-bottom, or wait for that home that either Looks Right or is Priced Right.

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Appraiser Clearinghouse Concept Is Not A Clear Picture

March 2, 2008 | 4:35 pm |

In a recent post on Matrix, [Talking Points] The National Appraisal Clearinghouse I published the memo text in full for the first time in public domain (that I am aware of). I got a lot of calls and emails from appraisers, organizations as well as links from other sites with a slew of commentary.

The focus of the feedback seems to be on the “clearinghouse” concept in the talking points memo by Fannie Mae. The clearinghouse has the potential to be a huge morass of bureaucracy because it is presented as vague in purpose.

The common perception by most within the appraisal industry that I have spoken with or have provided commentary is that the clearinghouse will become:

  • a giant appraisal management company-like entity that will essentially prevent appraisers from establishing relationships with clients. The appraiser becomes a number in an automated system based on whether or not the appraiser holds a valid license and turns around the report in a required period of time (sounds like an appraisal management company).
  • appraisal management companies [AMC] would become enabled as a result of this talking points memo because lenders went to mortgage brokers and appraisal management companies to begin with to reduce overhead. By eliminating mortgage brokers from the appraisal ordering process, they would be forced to use appraisal management companies since they do not want to manage appraisal panels like they did before. They shifted mortgage origination to mortgage brokers to reduce overhead cost and risk and attempted to shift collateral risk to third parties in the process.

I’d say that both of these issues expressed by the appraisal industry are absolutely of significant concern if AMCs become enabled as a result of the implementation of this memo, it spells disaster for any sort of relevant solution to the problem of disconnect between the valuation of property and the mortgages that are lent against them.

Here’s the specific text from the memo on the clearinghouse and some thoughts on each point.

3. A CLEARINGHOUSE of appraiser information, conduct and activity will be established.

my comment: The purpose seems to either overlap or supersede the function outlined in FIRREA for the licensing of appraisers to be managed by each state. At the state level, budget constraints do not allow them to go much beyond managing license compliance. After all, it is not practical, fair or realistic for a state to tell an appraiser, “Gee, you overvalued this property by $12,000.” State agencies are not given adequate resources to be able to police all appraisers. It has been my experience, at least in New York, that the Department of State has been competent and fair, despite the lack of resources. The function for each state is to provide oversight to make sure appraisers are correctly licensed, their courses taken are approved and to answer complaints by consumers for shoddy appraisal practice. That means dealing with legitimate complaints as well as those from crackpots hoping to smear an appraiser because they were unhappy with a value conclusion. However, that does not address the quality problem with mortgage brokers and AMCs.

a. All lenders will be required to provide post-purchase copies of appraisal documents to the Clearinghouse.

my comment: Of course, with digital documents and scanning capabilities, this process is fairly simple (we’ll get to who pays for this later).

b. It will be an independent entity with an executive and board of directors (no Fannie Mae employee involved).

my comment: This point is important, and as an independent entity, it should include majority representation by appraisers and appraiser organizations as well as lender representation. No mortgage broker or appraisal management company representation since they are part of the reason for the need for this entity to begin with.

c. It will staff a hotline for industry and consumer complaints.

my comment: I see this as redundant to the state function and not able to serve much of a purpose that will prove effective in resolving problems. I think this should remain on the state level and the clearinghouse aggregates complaint data from the states as part of its reporting function. Remember that this organization is essentially one step removed from the state level and could really only refer complaints to each state to handle.

d. It will provide annual reporting publicly.

my comment: From the stand point of summarizing aggregate data, this is an effective tool to create awareness of progress with this serious problem with the mortgage industry. However, it should not be used to publish complaints about individual appraisers unless it can publish complaints about lending institutions, mortgage brokers and AMCs.


Appraisal management companies [AMC] should be pretty happy about their prospects if the talking points memo as presented, becomes standard practice, because they become essential to lenders if mortgage brokers are not allowed to order appraisals for lending purposes. The same quality problems with appraisals will remain, if not get worse.

In other words, the appraisal quality produced by AMC’s is just as bad as the work generated for mortgage brokers. I think it would be a disaster and a monumental waste of energy, given all the progress that New York State Cuomo has made in correctly identifying the real issues at hand if AMC’s become more relevant.

Ideas for consideration

  • If appraisal management companies [AMC] are contractually given incentives for handling a higher volume of appraisal orders by lenders, they are automatically ineligible to manage appraisals that are sold to Fannie Mae.
  • Cap the AMC participation to a nominal percentage (ie 10%) of mortgages accepted by Fannie Mae.
  • Create a national consortium of review appraisers who do not work for AMCs that would review AMC product. Perhaps this could be an offshoot Quality ratings could be established to determine whether the AMC product meets standards for Fannie Mae.

Other ideas or suggestions welcomed.

Aside: I would love to be officially part of the government clearinghouse effort because, as someone recently told me, “the devil is in the details” and I think it is important to have appraisers on the front line actively involved in fixing the disconnect problem.

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Appraisers Are Front And Center

February 28, 2008 | 3:03 pm |

The appraisal profession has been front and center in the discussions between NYS Attorney General Cuomo and the GSE’s. Hopefully there will be some sort of resolution soon. Here are some recent posts about the latest developments:

There will be a lot more appraisal commentary on Matrix to come over the next few weeks as this situation unfolds. This is a seminal moment in our profession so it is a real shame that we do not have a meaningful way to show our collective voice.

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[The Hall Monitor] The Pendulum Swing From City to Suburb – is Swinging Back

February 28, 2008 | 12:01 am | Columns |

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 suggests we park our cars on the lawn because you can’t fight progress. …Jonathan Miller

With all its faults, you’ve just got to love the internet, Google in particular! I wanted to know how many cars there were in the United States in the early 20th century as opposed to how many there are now and to juxtapose this with the changes in population over the same time period. A Google search brought me to an article published in the New York Times entitled “How Many Can Buy Cars?

“Everybody who drives an automobile, or has tried to find a vacant space in which to park one, and every pedestrian who is daily obliged to dodge automobiles, or to wait on the endless stream of them to pass, so that he may cross a busy street every one of these persons, or nearly everybody must have asked himself at some time:

What is going to happen when there are several times as many automobiles as there are now? How many automobiles are there going to be in this country, anyhow? Where are we going to put them all?”

The article that posed these questions was published in The Times on August 28, 1921, and the somewhat less than prescient sub-heading to the story read “Country’s Limits in the Use of Automobiles Not Far Off, According to Expert”. “Indeed it appears doubtful if there will ever be even twice as many cars in use as there are today. The point of saturation is probably only a few years ahead.”

The Times may, or may not, ultimately be vindicated with regard to their recent story suggesting an “improper” relationship between John McCain and a female lobbyist. But as to the question of the future of the automobile, it seems clear they missed the boat on that one back in 1921.

According to the article, there were nine million (9,000,000) cars on the road for a population of one hundred and five million (105,000,000) in 1920 – one car for every twelve people. The population has nearly tripled, to 300,000,000 people in the United States, but the number of cars has multiplied by a factor of twenty-five to 228,000,000, according to The World Fact Book. This breaks down to one car for every 1.3 people.

What got me thinking about cars and people was an article in the on-line version of The Atlantic, written by Christopher B. Leinberger entitled The Next Slum? The writer argues that “The subprime crisis is just the tip of the iceberg. Fundamental changes in American life may turn today’s McMansions into tomorrow’s tenements.”

He notes, “In most metropolitan areas, only 5 to 10 percent of the housing stock is located in walkable urban places. Yet recent consumer research by Jonathan Levine of the University of Michigan and Lawrence Frank of the University of British Columbia suggests that roughly one in three homeowners would prefer to live in these types of places. In one study, for instance, Levine and his colleagues asked more than 1,600 mostly suburban residents of the Atlanta and Boston metro areas to hypothetically trade off typical suburban amenities (such as large living spaces) against typical urban ones (like living within walking distance of retail districts). All in all, they found that only about a third of the people surveyed solidly preferred traditional suburban lifestyles, featuring large houses and lots of driving. Another third, roughly, had mixed feelings. The final third wanted to live in mixed-use, walkable urban areas-but most had no way to do so at an affordable price. Over time, as urban and faux-urban building continues, that will change.”

The automobile industry was a necessary precursor to the creation of the post WWII suburban landscape. And although The New York Times was wrong its 1921 predictions, they did pose questions which are today more relevant than ever: “What is going to happen when there are several times as many automobiles as there are now? How many automobiles are there going to be in this country, anyhow? Where are we going to put them all?” It is perhaps ironic that the very industry whose growth played a pivotal role in the success of the suburbs, at the expense of cities, will now be a driving force in the ultimate demise of many of them.

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[Sounding Bored] Apparently Credit Cards Are Not As Good As Cash

February 27, 2008 | 11:45 pm | Columns |

Sounding Bored is my semi-regular column on the state of the appraisal profession. This week I charge at the latest credit problem.

Last fall, my appraisal firm was engaged for consulting services in a litigation by an attorney representing one of the parties in the action. A formal engagement letter with the terms was signed and returned to us. The retainer was paid by the client using their American Express card. Over the next few months, the services were rendered and there was constant dialog with the client. They provided access to the property as well as information and documentation.

We delivered the report and received feedback that our services were complete and the client was satisfied. We were then was asked to provide additional services by the client in the same matter and we submitted a new proposal.

About two weeks later we were contacted by American Express saying the cardholder questioned the initial charge from the past fall and the removed the amount (a substantial fee) from our AMEX account. Apparently credit card companies are only required to send via US Mail in order to provide an opportunity for the vendor to contest the complaint. A non-response indicates the vendor is not fighting the contested fee and the cardmember gets their money back.

We never got their mail notice, and therefore never responded (they are not required to send via certified or overnight mail) so our fee was removed from our AMEX account. We noticed the account debit when we got our monthly statement. The fee was significant and we had received no notice, so we called AMEX in a panic.

The AMEX people were very nice but my first contact gave me the clear impression that because the attorney had signed the engagement letter, and then asked his client to call in the fee using a credit card, so we were not protected.

I was taken aback because the client had interacted with us for months and had called in the card number to us. It smelled like fraud if we were to lose our compensation for our efforts this way.

In order to contest the action, I was told to send a letter to AMEX and they would decide whether the fee was reasonably taken from the cardmember. That sounded pretty ominous to me. It would take 2-3 weeks for us to get a decision.

About 2 weeks later we received a notice via US mail (glad we actually got it) that AMEX had returned our fee to the account. Game over, money returned.

This experience was pretty distasteful since 4 months had passed since we were originally engaged and paid.

Apparently credit cards are not as good as cash.


UPDATE: AMEX was contacted by the cardholder again who simply submitted the same documents and said they protest the charges. These were the same documents that we submitted already that prove that the cardholder was simply trying to get out of paying for services they had already authorized. AMEX called me and I explained again what the situation was. They agreed that this was unfair to us and indicated that the case was closed and we would retain our fee. What a nightmare.

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[Straight From MacCrate] It Will Get Worse The Housing Mess

January 27, 2008 | 6:27 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.

In this post, Jim and his accomplished colleague George McCarthy get gloomy.
…Jonathan Miller

The chart indicates the long term trends in Nassau County’s housing market based on proprietary data maintained by George McCarthy, MAI at Real Property Advisors and James R. MacCrate at MacCrate Associates, which indicates the long upward trend in prices came to an end in 2005-2006 and the long downward trend has just started.

Trends in Westchester and Suffolk Counties are quite similar with Manhattan to follow Staten Island, Brooklyn and Queens downward. This will create a major dilemma for politicians who have relied on the baby boomers, new construction, increasing home values and mortgage applications to provide the cushion to maintain real property tax rates. New construction is slowing, mortgage applications are down and real property values will continue to decline which will impact real property transfer taxes, recording fees, mortgage taxes, and all associated municipal income generated from the “bubble” created by the Federal Reserve and the lax government regulation for the last five or six years.

The preceding chart does not clearly show the extent of the downturn in the early 1990’s. It is interesting to note that home prices declined between 10% and 25% during the last downturn in the early 1990’s and more than 15% during the mid-1970’s. The current downturn has just started and will escalate as massive layoffs at Citigroup & Merrill and other financial institutions continues into the future. Industry-wide reduction in revenue and bonuses and repercussions in related industries will affect the demand for housing and commercial real estate.

To compound the problem, sales tax revenue will fall as consumers feel the pain and lack the resources to live beyond their means. The baby boomers retiring will begin to flood the market with their homes and move out of high tax states and municipalities, such as New York, Nassau and Suffolk Counties to lower tax areas in the country that favor retirees. It’s usually the oldest & youngest who get pushed out when companies reduce staff, via early retirement and layoffs. There are insufficient high-income wage earners coming into the New York Metropolitan area to acquire the homes the baby boomers want to leave behind. The statistics tend to indicate that it will take many years for the housing market to recover from the scandalous activities of the financial industries, from the local bankers to Wall Street executives who knew quite will what they were doing and are getting off scot free with bonuses when they get fired or their firms collapse, while the little guy who has worked so hard sees their equity evaporate. Where were our political leaders in the State and Washington, D.C? These institutions are not done yet! Bond insurance anyone?

It would also be interesting to see what the Feds, state, city and surrounding counties have been spending their increased revenues on over the last seven years. Have they been necessary services, or beautification, gentrification and pilot projects? Do these projects support long term growth or short term gains for the local politicians? Based on what I see, we have had fraud and waste at all levels because no one was watching the “piggy bank”.

The leaders in our democracy better wake up, because the long term picture for real estate is not rosy to say the least! Only, Mayor Bloomberg has sounded the warning. Who is really going to hurt? Are politicians really going to raise property taxes or reduce police forces to maintain revenue on non-necessary services? In an election year? O and by the way, the recent lowering of interest rates will not help the housing industry in the short run.

Regulations existed to protect the innocent and punish the individuals that were responsible for this mess. But, they all but disappeared beginning in the 1970’s and 1980’s. We will all pay the price, I’m sorry to say. This will not end next year or the next…..we remember the five good years, forget the five bad years; and, now we will have at least four or five bad years for other reasons.

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[Sounding Bored] Form-Fillers Anonymous: The Power Not To Check A Box

January 20, 2008 | 11:54 pm | Columns |

Sounding Bored is my semi-regular column on the state of the appraisal profession. This week get doubly annoyed and also post this on Matrix.

Near the top of all the various appraisal forms designed by Fannie Mae, considered the standard by the residential mortgage industry, is the “neighborhood” section. It contains a series of check boxes that appraiser uses to identify the overall trend of the neighborhood where the subject property is located.

An appraiser in California is suing Washington Mutual Bank, the embattled mortgage lender who is under regulatory investigation by the Office of Thrift Supervision after the New York State Attorney General initiated a law suit against one of their primary appraisal vendors. The appraiser was supposedly blacklisted by WaMu for checking the “declining” box on her appraisal forms, because she observed price declines in the market she was covering.

The action is surprising to me since appraisers are usually the recipients of punishment. The appraiser is hired to render an opinion about the local housing market. Based on the lawsuit, this appraiser was not allowed to present her opinion without retribution. Kudos to her. The typical new type of appraiser born out of the housing boom, would not have checked that box and that makes me angry.

This was my comment to the Wall Street Journal about this last week.

Jonathan Miller, a New York appraiser, said pressure on appraisers not to check the “declining” box in their reports is widespread and that many appraisers submit to such demands. But “if you do that,” he says, “you’re not doing an appraisal anymore — you’re a form-filler.”

I always viewed these check boxes as an “on/off switch” and ethical appraisers that would check these boxes were placed at high risk to lose their retail banking clients because those clients had to sell the mortgage paper to investors. There was generally less concern about banking clients that held the reports in portfolio.

Fannie Mae released policy guidance last year that would cut back the allowed mortgage by 5% if this check box was selected. It is logical for Fannie Mae to implement this policy since it is an underwriting decision whether or not to lend or how much to lend in a market. The appraiser is merely the observer and the valuation expert, and the appraiser has nothing to do whatsoever with making underwriting decisions for the lender.

On the other end of the spectrum, I remember getting calls about not checking the “Increasing” box when the market began to rise in the late 1990s so as to be more conservative. Of course we would decline the instruction explain how we could not implement the request without a full disclosure and disclaimer. We found that most of the other appraisers on the approved panel of that same bank, would readily agree to the lender instructions without resistance.

Where was our profession’s backbone? Good grief.

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[Sounding Bored] Bless You: Ten Percenters Needed To Make Toxic Loans Work

January 20, 2008 | 11:51 pm | Columns |

Sounding Bored is my semi-regular column on the state of the appraisal profession. This week get doubly annoyed and also post this on Matrix.

In Bloomberg News Appraisal Problem Opus by Sharon Lynch and Bob Ivry called Appraiser Exposes Toxic Debt Tie to Inflated Values

The article quotes Susan Wachter from Wharton Business School who states that mortgage appraisals are inflated by as much as 10%.

…exaggerate U.S. mortgage values by as much as 10 percent, or $135 billion, in 2006, according to Susan Wachter, a real estate professor at the University of Pennsylvania’s Wharton School in Philadelphia. Such appraisals artificially inflated the value of collateral supporting mortgage-backed securities and are contributing to record foreclosures because borrowers end up owing more than their houses are worth.

The most important concept here is:

There has to be an appraiser who basically blesses the loan,” she said. “There are lenders who are deciding what terms to extend and then there are appraisers indicating it is appropriate or isn’t appropriate.”

When my appraisal firm reviewed appraisals done by other firms in my region of the years, I found +10% to be a reliable number and most often these appraisals done for mortgage brokers or appraisal management companies. The 10% factor was so consistent that we would refer to this caliber of appraisers as “Ten Percenters.”

We could see how easily appraisal reports could be tweaked by comp selection and adjustments made to result in the value needed to make the deal. The reports looked fine to people not familiar with the market. So now remove the local expertise from appraisal review process (which is what has been the ten year trend) and its a recipe for disaster.

Here’s what I said about the topic to Bloomberg.

Lenders and mortgage brokers routinely pressured appraisers to boost values, said Jonathan Miller, a New York property appraiser for more than two decades who writes a blog about the problem [Soapbox]. Protections established by the Washington-based Appraisal Foundation, a non-profit that sets industry qualifications and standards, came under attack in the 1990s as banks cut their appraisal departments to save money, Miller said. The system was further corrupted when lenders began moving mortgage applications to third-party brokers who only got paid if a loan closed, he said.

Market Mentality
“There just became less and less emphasis on quality,” Miller said. “You started to see more and more loan products that would keep payments low, and I see that as correlating with appraisal pressure because those products only work in a rising market.”

As the underwriting pendulum swings to the more conservative end of the spectrum, “done deals” are on the decline. Most housing markets are not rising and appraisals are under more scrutiny by lenders [picture a video of a light bulb turning on] than seen in prior years, which is making deals harder to put together.

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Outstanding On Our Soapbox: Taking License With Appraisals

December 29, 2007 | 11:04 pm |

There has been a lot of great content presented by my guest columnists (and, on my other blog Soapbox as of late. Its a pleasure to have their contributions. Admittedly its appraiser-centric content, but isn’t that a big part of the credit crunch? Lack of understanding of mortgage risk and one way its measured is via value of the collateral.

Sounding Bored – My recent post outlines the problems with licensing the appraisal profession (hint: because it doesn’t go far enough) in Deja Vu: How Licensing Killed The Appraisal Industry As We Know It.

The Hall Monitor – Todd uses a tongue in cheek analysis of current appraisal practice and comes up with new rules for us to live by in Let’s Get The PAP Out Of USPAP!.

Fee Simplistic – Marty dissects the credit crunch for us via Tin Pan Alley music in The Paper Moon in the Cardboard Sky; Bewitched, Bothered & Bewildered; Don’t Know Why There’s No Sun Up in the Sky-Stormy Weather: How Tin Pan Alley Can Better Explain the Credit Crunch Than Alan Greenspan

Palumbo on USPAP – Joe speaks to the labyrinth of appraisal guidelines that exist and the problems with loosening the reigns in USPAP 2008: Be Careful What You Wish For.

There will be a quiz on Tuesday…

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

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

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

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

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

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

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

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

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

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

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

What now?

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

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

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

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

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

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

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

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

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