We have outlined in great detail within Soapbox, that appraisal pressure is prevalent in the lending industry, encouraged by the structure of the lending process and the lack of political clout held by the appraisal industry.
A consumer activist group National Community Reinvestment Coalition has set up a trade group to arrange for the arbitration of business disputes over appraisals [American Banker]. “Members of the Center for Responsible Appraisals and Valuations would also agree to follow a “code of conduct.” They would include all parties to the process – lenders, appraisers, and various intermediaries.”
Here is the NCRC press release. [PDF]
One of the issues the lending industry has problems with, and rightly so, is that in a mortgage situation, the appraisals is being done for the lender, not the borrower. However, the problem with this structure, is that the lender is not incentivised to weed out appraisers that are there strictly to make the deal. Problems usually occur years down the road. Lack of focus on competency is clearly evidenced by the proliferation of appraisal factories (very large shops largely manned by trainees) and appraisal management companies who largely measure appraisal quality by turn around times.
Curently, lenders typically sue the appraiser’s E & O insurance company which is difficult because the insurers are in the business of litigation and its often difficult to extract claims.
I believe the objective here is to improve the reliability of appraisals. Since appraisal licensing came into effect in 1991 through FIRREA, the focus has been on licensing, required coursework and continuing education.
However, the reality is that licensing has been ineffecive because the states, who are charged with administering their interpretation of the federal law, have limited budgets and minimal staffing. Even if they did have adequate staffing, is a state agency really in the position to determine whether the appraiser used reasonable comps? I don’t believe so.
Erick Bergquist, the author of the American Banker article provides a quote from a lender:
[A National Lender’s] spokeswoman said Tuesday that appraisals are “something we already have some pretty stringent guidelines around and monitor on an ongoing basis.” As a result, “we really haven’t seen a big issue.”
This is the typical lender response to this issue which shows how, in rising markets, there are generally no problems since the deals usually get done. Stringent guidelines usually refer to more quantifiable requirements that generally do not impact quality. Its very difficult to measure quality and therefore most emphasis is placed on turn times. For a lender to say there is really no issue, really is the issue.
Perhaps the outcome of this effort will be to create additional awareness of the problem, but I doubt it will be universally accepted by the lending industry. It has to be for this to be universally accepted. However, I believe it is a step in the right direction.
Tags: Appraisal Management Companies, Soapbox Blog, Appraisal Pressure, Appraisal Process, Mortgage Fraud, Redlining and Predatory Lending
Unfortunately, we live in a society where we react (or even overreact) to crisis, rather than evaluate and modify existing systems through common knowledge and logic. Appraisers have cried “the fox is guarding the hen house” for years, but to no avail. When prices in the real estate market decline, as they eventually will through the normal course of up and down cycles, it will become all too obvious that the proper measures were not in place. And it will become most important to find someone to blame. For in blaming someone, it can then be said that the problem was fixed, by fixing “them”. The trouble is the resulting failure and even the “fix” itself, can often have such a harsh effect, the market can be shocked to the point where it takes years to recover. Is it possible that the highs might not be so high and the lows not so low, if we simply “tweaked” the systems gradually as we moved along? It’s like waiting for a car to die before we decide it’s time for a tune-up. And, as we sit on the side of the highway in “crisis” with cars whizzing by at 70 mph, the “logic” becomes so obvious, we feel like fools for waiting so long. But, if someone else can be blamed.