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.
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.
Tags: Soapbox Blog, Martin Tessler, Fee Simplistic
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. This is what bothers me. We blame the borrowers but the banks are partially to blame.
There are many honest appraisers in this country, most of who comply witht USPAP (Uniform Standards of Professional Appraisal Practice) insisted on by licensing states. The only problem is the honest appraisers do not participate in appraisals for mortgage lending. Primary reason: these appraisers stubbornly adhere to the purpose of the appraisal, ie., “Market Value”. This is not acceptable to lenders or, the scourge of the lending business, the mortgage broker. Unless the appraiser is willing to put ethics aside, way aside, there is no place for him/her in the appraisals required for mortgage lending. They are deemed “uncooperative” and other negative names by lenders, mortgage lenders and mortgage brokers if a value comes in at a dollar amount less than the purchase price or if the appraisal lists items of physical deterioration. Regardless of what the government, Fanny or Freddie or any regulator does, this practice will continue!
Can we please make a case to bring back the FHA rotational panel again?
It’s a start and will help put us honest appraisers back into the mortgage mix.