Commercial Grade is a weekly post by John Cicero, MAI who provides commentary on issues affecting real estate appraisers, with specific focus on commercial valuation. This week, John is crushed by the lack of a firewall in the commercial world of valuation.
Disclosure: John is a partner of mine in our commercial real estate valuation concern Miller Cicero, LLC and he is,
on Thursdays on Fridays, one of the smartest guys I know. …Jonathan Miller
I am thrilled that appraiser pressure is now in the spotlight. Articles are everywhere. The Real Deal writes Appraiser pressure at pandemic proportions and Inflated Appraisals feed mortgage meltdown and the New York Times and Bloomberg News have been reporting about the recent subpoenas issued to residential appraisal firm MMJ, appraisal management company eAppraiseIt, as well as mortgage broker Manhattan Mortgage.
In keeping with my Commercial Grade mantel, I wanted to give one commercial appraiser’s perspective. As professional appraisers, we essentially sell our opinions for a living. We don’t sell paper reports, or comps, but our expert opinion of market value. It may be an educated opinion, but it is an opinion nonetheless. And, just as in politics, sports and restaurants, there will always be some people that don’t agree with your opinion. You can have a spirited intellectual debate. That’s fine. When a client disagrees with my opinion I am open to discussion, provided that it centers around the valuation issues. If, for example, the client is able to give additional insight into the property and/or market that we may not have fully considered, then I may upon further consideration make a modification to my report. That is not appraisal pressure.
Appraisal pressure is every bit as real and sleazy as the articles make it out to be. And as my esteemed partner, Jonathan Miller said in his recent Matrix post it is a business and ethical decision whether you will work for those people. In the world of commercial lending, however, the sources of appraisal pressure are not necessarily the same as the residential appraisers. Yes, we have mortgage brokers who are clearly motivated to have the appraisal reflect a certain value, but we are not as impacted by the appraisal management companies. Actually, I think that the main source of appraisal pressure in the commercial appraisal world are the investment banks.
If I am not mistaken, the investment banks are the largest source of commercial loan origination in the country. They pool their loans and securitize then. The rating agencies rate the securities and then sell the various tranches to investors. No loans are held on the investment banks’ books.
There is no firewall between origination and appraisal at an investment bank, as required in commercial banks by FIRREA (which has proved to be ineffective, but that’s a topic for a different post!). To indulge in a stereotype, the appraisal is usually hired by a 22-year old MBA who has never seen a down cycle in real estate and needs to make the loan in order to make his 6-figure annual bonus. They are aggressive and they push hard.
I never really understood why it the investment banks need such optimistic appraisals. Nor do I understand why the rating agencies don’t see right through them when they review the appraisals that come with the loan documents. And since the investment banks require the appraisers to include reliance language in the appraisal saying that any investor of the security can rely on the appraisal, I don’t understand why so many appraisal firms are willing to be so ethically flexible.
Maybe once these securities start to default Andrew Cuomo will take a look here as well.