Matrix Blog

Posts Tagged ‘Appraisal Management Companies’

[New Mortgage Program] Getting Paid To Sell Short

March 8, 2010 | 10:40 am | |

The Obama administration has come up with a radically aggressive plan to reduce foreclosure activity which has remained alarmingly high. The key ingredient is to encourage lenders/services to allow more short sales – selling the home for less than the amount of the mortgage without going after the debtor for the shortfall. Mortgage modification plans have not been successful to date.

The New York Times page 1 story today Program Will Pay Homeowners to Sell at a Loss does a masterful job in presenting the program and summarizing the problems of the issue to date, I just wish the title wasn’t so simplistic.

Perhaps I am missing the point, but I feel like this solution has focused on the wrong side of the mortgage default equation. Are servicers going to forgive $200,000 in principal to get $1,000? Are homeowners going to move forward because they get $1,500 (more than the servicer) in relocation fees?

The flood of short sale requests are already overloading many bank’s ability to handle the administration of this crisis – hard to see them able to manage the process any more efficiently.

However, the only way out of this crisis is a solution with principal foregiveness in the equation or people will simply walk away and perhaps the servicer/lender ends up being hurt more. No easy answer I suppose.

Real estate agents will determine property value

One mechanical aspect of this process which demonstrates the administration’s and government in general’s disconnect in the need for neutral analysis of value. Real estate agents, who are paid to sell property, determine the “reserve” price above which the lender/servicer must adhere to.

Under the new federal program, a lender will use real estate agents to determine the value of a home and thus the minimum to accept. This figure will not be shared with the owner, but if an offer comes in that is equal to or higher than this amount, the lender must take it.

Mr. Paul, the Phoenix agent, was skeptical. “In a perfect world, this would work,” he said. “But because estimates of value are inherently subjective, it won’t. The banks don’t want to sell at a discount.”

How about a neutral party in the process? A qualified appraiser? (not the yahoos doing AMC work in high volume). I would assume the agents selecting the number are not allowed to sell the property (huge assumption on my part) but why not have someone who can’t ever sell the property, whose full time job it is to estimate market value, be assigned that task?

The devil is in the details.


Tags: ,


[Surety Bonds] Some States Are Cracking Down On Appraisal Management Companies

February 21, 2010 | 5:30 pm | |

Since appraisal management companies are now responsible for the super majority of appraisals being ordered through lenders for mortgage purposes due to HVCC and AMCs are not a regulate institutions, the consumer is exposed more than ever to the potential for low quality appraisals, continuing to undermine the public trust in the appraisal profession. I suspect trend this has the potential to push errors and omissions insurance rates higher and provide more exposure to the mortgage lending system.

I firmly believe that 5-7 years from now we will be looking back to today’s AMC trend and will be saying: “if we only did something about it.”

Admittedly I know very little about surety bonds and this is no sales pitch or a solution to the AMC problem. I am more interested in understanding ways to protect the consumer against negligence and instill confidence in the appraisal process. To require AMCs to pay for surety bonds in order to operate in a state sounds like it provides an easier way for consumers to go after AMCs for negligence. Feedback or suggestions welcome.

According to Wikipedia, a surety bond is a contract among at least three parties:

  • The obligee – the party who is the recipient of an obligation,
  • The principal – the primary party who will be performing the contractual obligation,
  • The surety – who assures the obligee that the principal can perform the task

I was contacted by Jay Buerck of SuretyBonds.com who wrote provided the following post on surety bonds and appraisal management companies. He indicated that 6 states brought about new AMC legislation last year and it is expected to grow in the coming years. His article is simply trying to make everyone aware of this fact.

States nationwide are introducing tougher oversight and regulation of appraisal management companies. The push is part of a growing effort to bring more consumer protection and transparency to the home-purchasing process.

In all, six states: Arkansas, California, Nevada, Louisiana, Utah and New Mexico ó ushered in new AMC legislation in 2009. Industry officials expect another 15 to 20 states to consider adopting similar measures this year.

Appraisal management companies are becoming increasingly important because of sweeping changes to regulations for home valuations nationwide. The stricter regulations are geared toward boosting consumer safety and stabilizing the housing market.

“There is a significant belief out there that mortgage fraud played a significant role in the meltdown in the housing market, and any unregulated entity that is out there presents the possibility for mortgage fraud to creep back into the system,” Scott DiBiasio, manager of state and industry affairs for the Washington, D.C.-based Appraisal Institute, a global association of real estate appraisers, told Insurance Journal this winter. “I think legislators recognized that this was a gaping loophole that needed to be corrected.”

Taking consumer protection a step further, Arkansas became the first state to add a surety bond requirement to its appraisal management statutes. The new legislation requires that AMCs post a $20,000 surety bond with the stateís real estate appraiser board.

Surety bonds are essentially three-party agreements that ensure businesses or people follow all applicable laws and contracts. A surety bond also provides consumers and tax payers who are harmed by the business with an avenue of financial recourse.

Most of the new AMC legislation requires companies to make sure their appraisals are in line with the Uniform Standards of Professional Appraisal Practice. Theyíre also responsible for ensuring they use certified and licensed appraisers only.

There are also some financial disclosure and transparency requirements in some states.

“We need to have and the public deserves to know who owns, operates and manages these appraisal management companies,” DiBiasio said. “I think the $20,000 surety bond is really there to provide some minimal protection to consumers.”


Tags: , , ,


Appraisers and Foreclosure Sales Bring Havoc to Housing Markets

January 29, 2010 | 12:30 am | | Articles |

I authored the following article for RealtyTrac which appeared on the cover of their November 2009 subscriber newsletter called Foreclosure News Report. It features a column for guest experts called “My Take.”

When Rick Sharga invited to write the article, he provided the previous issue which featured a great article by Karl Case of the Case Shiller Index and I was sold.

I hope you enjoy it.



Appraisers and Foreclosure Sales Bring Havoc to Housing Markets
By Jonathan Miller
President/CEO of Miller Samuel Inc.
11-2009

In many ways, the quality of appraisals has fallen as precipitously as many US housing markets over the past year. Just as the need for reliable asset valuation for mortgage lending and disposition has become critical (fewer data points and more distressed assets) the appraisal profession seems less equipped to handle it and users of their services seem more disconnected than ever.

The appraisal watershed moment was May 1, 2009, when the controversial agreement between Fannie Mae and New York State Attorney General Andrew Cuomo, known as the Home Valuation Code of Conduct, became effective and the long neglected and misunderstood appraisal profession finally moved to the front burner. Adopted by federal housing agencies, HVCC, or lovingly referred to by the appraiserati as “Havoc” and has created just that.

During the 2003 to 2007 credit boom, a measure of the disconnect between risk and reward became evident by the proliferation of mortgage brokers in the residential lending process. Wholesale lending boomed over this period, becoming two thirds of the source of loan business for residential mortgage origination. Mortgage brokers were able to select the appraisers for the mortgages that they sent to banks.

Despite the fact that there are reputable mortgage brokers, this relationship is a fundamental flaw in the lending process since the mortgage broker is only paid when and if the loan closes. The same lack of separation existed and still exists between rating agencies and investment banks that aggressively sought out AAA ratings for their mortgage securitization products. Rating agencies acceded to their client’s wishes in the name of generating more revenue.

As evidence of the systemic defect, appraisers who were magically able to appraise a property high enough to make the deal work despite the market value of that locale, thrived in this environment. Lenders were in “don’t ask, don’t tell” mode and they could package and sell off those mortgages to investors who didn’t seem to care about the value of the mortgage collateral either. Banks closed their appraisal review departments nationwide which had served to buffer appraisers from the bank sales functions because appraisal departments were viewed as cost centers.

The residential appraisal profession evolved into an army of “form-fillers” and “deal-enablers” as the insular protection of appraisal professionals was removed. Appraisers were subjected to enormous direct and indirect pressure from bank loan officers and mortgage brokers for results. “No play, no pay” became the silent engine driving large volumes of business to the newly empowered valuation force. The modern residential appraiser became known as the “ten-percenter” because many appraisals reported values of ten percent more than the sales price or borrower’s estimated value. They did this to give the lender more flexibility and were rewarded with more business.

HVCC now prevents mortgage brokers from ordering appraisals for mortgages where the lender plans on selling them to Fannie Mae or Freddie Mac which is a decidedly positive move towards protecting the neutrality of the appraiser. Most benefits of removing the mortgage broker from the appraisal process are lost because HVCC has enabled an unregulated institution known as appraisal management companies to push large volumes of appraisals on those who bid the lowest and turn around the reports the quickest. Stories about of out of market appraisers doing 10-12 assignments in 24 hours are increasingly common. How much market analysis is physical possible with that sort of volume?

After severing relationships with local appraisers by closing in-house appraisal departments and becoming dependent on mortgage brokers for the appraisal, banks have turned to AMC’s for the majority of their appraisal order volume for mortgage lending.

Appraisal management companies are the middlemen in the process, collecting the same or higher fee for an appraisal assignment and finding appraisers who will work for wages as low as half the prevailing market rate who need to complete assignments in one-fifth the typical turnaround time. You can see how this leads to the reduction in reliability.

The appraisal profession therefore remains an important component in the systemic breakdown of the mortgage lending process and is part of the reason why we are seeing 300,000 foreclosures per month.

The National Association of Realtors and The National Association of Home Builders were among the first organizations to notice the growing problem of “low appraisals”. The dramatic deterioration in appraisal quality swung the valuation bias from high to low. The low valuation bias does not refer to declining housing market conditions. Despite mortgage lending being an important part of their business, many banks aren’t thrilled to provide mortgages in declining housing markets with rising unemployment and looming losses in commercial real estate, auto loans, credit cards and others. Low valuations have essentially been encouraged by rewarding those very appraisers with more assignments. Think of the low bias in valuation as informal risk management. The caliber and condition of the appraisal environment had deteriorated so rapidly to the point where it may now be slowing the recovery of the housing market.

One of the criticisms of appraisers today is that they are using comparable sales commonly referred to as “comps” that include foreclosure sales. Are these sales an arm’s length transaction between a fully informed buyer and seller is problematic at best. While this is a valid concern, the problem often pertains to the actual or perceived condition of the foreclosure sales and their respective marketing times.

Often foreclosure properties are inferior in condition to non-foreclosure properties because of the financial distress of the prior owner. The property was likely in disrepair leading up to foreclosure and may contain hidden defects. Banks are managing the properties that they hold but only as a minimum by keeping them from deteriorating in condition.

In many cases, foreclosure sales are marketed more quickly than competing sales. The lender is not interested in being a landlord and wants to recoup the mortgage amount as soon as possible. Often referred to as quicksale value, foreclosure listings can be priced to sell faster than normal marketing times, typically in 60 to 90 days.

The idea that foreclosure sales are priced lower than non-foreclosure properties is usually confused with the disparity in condition and marketing times and those reasons therefore are thought to invalidate them for use as comps by appraisers.

Foreclosure sales can be used as comps but the issue is really more about how those comps are adjusted for their differing amenities.

If two listings in the same neighborhood are essentially identical in physical characteristics like square footage, style, number of bedrooms, and one is a foreclosure property, then the foreclosure listing price will often set the market for that type of property. In many cases, the lower price that foreclosure sales establish are a function of difference in condition or the fact that the bank wishes to sell faster than market conditions will normally allow.

A foreclosure listing competes with non-foreclosure sales and can impact the values of surrounding homes. This becomes a powerful factor in influencing housing trends. If large portion of a neighborhood is comprised of recent closed foreclosure sales and active foreclosure listings, then guess what? That’s the market.

Throw in a form-filler mentality enabled by HVCC and differences such as condition, marketing time, market concentration and trends are often not considered in the appraisal, resulting in inaccurate valuations. As a market phenomenon, the lower caliber of appraisers has unfairly restricted the flow of sales activity, impeding the housing recovery nationwide.

In response to the HVCC backlash, the House Financial Services Committee added an amendment to the Consumer Financial Protection Agency Act HR 3126 on October 21st which among other things, wants all federal agencies to start accepting appraisals ordered through mortgage brokers in order to save the consumer money.

If this amendment is adopted by the US House of Representatives and US Senate and becomes law, its deja vu all over again. The Appraisal Institute, in their rightful obsession with getting rid of HVCC, has erred in viewing such an amendment as a victory for consumers. One of the reasons HVCC was established was in response to the problems created by the relationship between appraisers and mortgage brokers. Unfortunately, by solving one problem, it created other problems and returning to the ways of old is a giant step backwards.

We are in the midst of the greatest credit crunch since the Great Depression and yet few seem to understand the importance of neutral valuation of collateral so banks can make informed lending decisions. Appraisers need to be competent enough to make informed decisions about whether foreclosures sales are properly used comps. For the time being, many are not.


Tags: , , , , , ,


[HVCC Watch] Amendment to CFPA of 2009 Snuck In – Return To Old Days?

October 27, 2009 | 4:10 pm |

Oops! Wrong HVCC (not Huron Valley Corvette Club).

We’re talking Home Valuation Code of Conduct and its quickly running its own course (sorry).

Last week, an amendment was added to the Consumer Financial Protection Act of 2009 that would effectively “Sunset” the Home Valuation Code of Conduct or “HVCC” (pronounced “Havoc”).

From Valuation Review magazine:

An amendment was added late Wednesday Oct. 21 to the Consumer Financial Protection Act of 2009 that would sunset the HVCC, allow appraisals to be ordered by mortgage brokers again and would make a new Negotiated Rulemaking Committee responsible for creating one set of appraisal independence requirements across all the federal agencies.

This amendment was championed by the National Association of Mortgage Brokers (NAMB) who were dead set against HVCC for very different reasons than the best appraisers in the industry are. Regardless, HVCC is a systemic accident waiting to happen.

Setting aside the weak production quality, this video is a great source of clarification about the misunderstands surrounding HVCC.

Mortgage brokers were targeted by HVCC as providing undue pressure on appraisers for overvaluation. Systemically, thats absolutely true – of course there are always exceptions. But you can’t rely on the honor system for a financial system structure – thats what where we just came from.

Mortgage brokers get paid when the transaction closes. Guess what kind of appraiser thrived in this kind of environment? Form-fillers.

However, removing mortgage brokers from the process enabled AMC’s which are even more problematic, providing low biased appraisals. Simplistic assessments of the removal of HVCC as a good thing for appraisers is short sighted.

How about the public getting a lending system that has a neutral appraisal environment so the parties getting paid don’t game the system? That means that appraisers shouldn’t be getting assignments from individuals whose commission depends on the outcome. If HVCC is removed and we revert to the prior way of doing business, its a missed opportunity to give consumers fair valuations.

To demonstrate how detached from reality Freddie Mac is, they seem to think HVCC has improved appraisal quality?

This is an opportunity to break free of the past and break free of HVCC and replace it with a better way.


Tags: , , , ,


[Case Shiller 20 City Index] July 2009 Down 13.3% Y-O-Y, Up 1.2% M-O-M

September 29, 2009 | 12:03 pm | |


[click to expand]

Here’s the summary:

The S&P/Case-Shiller 20-city home-price index, a closely watched gauge of U.S. home prices, rose 1.6% in July from June in the third straight monthly increase, but prices remain below year-earlier levels.

For the sixteenth straight month, no area in the 20-city index posted a year-over-year price gain. That put nationwide prices at levels seen in 2003.

“These figures continue to support an indication of stabilization in national real estate values,” said David M. Blitzer, chairman of the index committee at Standard & Poor’s. “But we do need to be cautious in coming months to assess whether the housing market will weather the expiration of the Federal First-Time Buyer’s Tax Credit in November, anticipated higher unemployment rates and a possible increase in foreclosures.”

Whether or not we see a renewal in tax credits, its hard to imagine a housing market recovery with another year of increasing foreclosures. Perhaps the worst is over, but I would think the best we can hope for in the near term is stability.


Tags: , ,


[NY Times Real Estate Cover Story] New York Appraisals Get Shortchanged

September 26, 2009 | 3:24 pm | | Articles |

It is nice to see the appraisal process move front and center after being on the back burner for the past 7 years during the credit bubble. The appraisal process in mortgage lending is like politics and making sausage – its not pretty when you look at it up close (except for my photo, of course).

Vivian Toy pens a great article which talks about the disconnect between the ideals of the appraisal profession and what is being forced on the profession by the lending community and regulators in this weekend’s real estate section cover story called New York Appraisals Get Shortchanged.

And without a stockpile of comparable sales for reference, Mr. Miller said, “you have to really know the local market, so you can go beyond the raw sales data and use all the subjective factors you can to really tell the story about a property.”

Here’s a key issue affecting all mortgage lending nationwide: APPRAISAL MANAGEMENT COMPANIES (all caps for emphasis beyond using bold).

The potential pitfalls are not exclusive to New York. “The least qualified and least experienced people are doing appraisals across the country,” said Jim Amorin, the president of the Appraisal Institute, a national trade group that represents 26,000 appraisers. He estimated that appraisal management companies now handle about 90 percent of the appraisal market, up from about 30 percent before May 1.

Mr. Amorin said he had heard of appraisers in California who travel 150 to 200 miles to do an appraisal.

It’s hard to believe that they could still be in their geographically competent area, he said. And in Manhattan it would be even harder if you have someone coming in from the suburbs, since things can be vastly different from one side of the street to another.

When you commoditize the appraisal profession as appraisal management companies do, you really get poor quality at a higher cost. The costs are measured in risk exposure, lost revenue from killing transactions that shouldn’t be, and AMC fees are often higher (remember the appraiser only gets about half of the total appraisal fee).

The irony here is that many of the appraisers who were the source of overvaluation during the boom times – cranking out a high volume of reports, mainly for mortgage brokers – are now getting most of the work through appraisal management companies. They are undervaluing because they are unfamiliar with the markets they appraise in and think the lenders want them to be low (they probably do). Remember that in either the high or low scenario, its all about making their clients happy – in other words – insanity continues to be pervasive in mortgage lending…but now it is costing the consumer directly.

The New York Times ran an A1 (page one) story back in August called “In Appraisal Shift, Lenders Gain Power and Critics.” Which talked about how good appraisers are being forced out of business because of the Home Valuation Code of Conduct agreement between NY AG Andrew Cuomo and Fannie Mae. Banks have all the power now and they are showing that they don’t understand the problem at hand.


Tags: , , , , ,


[REALTOR Mag] The Trouble With the HVCC

August 24, 2009 | 11:53 pm |

I often disagree with NAR and have frequently pointed out their missed opportunity to earn the public trust despite their interests as a trade organization, but hey – they are coming from a different vantage point. However this time I agree with their view on the Home Valuation Code of Conduct (the position itself rather than how they get to it.)

There’s a good article on HVCC which tells the story from the appraiser’s perspective called: “The Trouble With the HVCC: How new rules meant to ensure the integrity of the appraisal process have infuriated appraisers and stymied sales from coast to coast.

I am quoted in the opening of the piece.

“You can’t make this up,” New York appraiser Jonathan Miller riffed in his entertaining blog, Matrix, back in June.

Miller was recounting the frustration of a real estate salesperson who was trying to refinance her own New York apartment with her current lender. According to Miller’s telling, the out-of-town appraiser walked into the apartment, threw his hands in the air, and asked “How am I supposed to appraise this thing?”

My always insightful appraisal colleague Francois (Frank) K. Gregoire, IFA, RAA, with Gregoire & Gregoire Inc., of St. Petersburg, Florida has one of the best quotes in the piece:

The HVCC sets up AMCs as the guardians of appraiser independence, and isn’t it ironic that the investigation that prompted the rules centered on an AMC allegedly manipulating the system to please its customer?

He is referring to New York State Attorney General Cuomo’s lawsuit against eAppraisIT and it’s relationship with WaMu.


Tags: , , , ,


[BankThink] Then Don’t Call It An Appraisal

August 24, 2009 | 11:24 pm | | Columns |

I stumbled on a really great blog on the American Banker site called BankThink and it’s worth checking back on a regular basis.

Webmaster/Journalist Emily Flitter asked me to contribute a guest column on the current state of appraising. I named it:

Then Don’t Call It An Appraisal.

I hope you enjoy it.

Here’s a local copy of the article:

The trillions in adverse financial exposure and lost economic opportunity were supposed to teach us, especially those of us connected with the banking system, something about risk. But a look at the latest trend in home appraisal practices shows that although the relationship between mortgage lenders and appraisers may look different on the surface, its nature remains troubled.

As a rule, appraisers are generally ignored until we make a mistake. We’re the back-of-the-house worker bees. During the housing boom (actually a credit boom with a housing boom as a symptom), an appraisal was relegated to a commodity status like a flood certification. Without much political clout or public awareness, we weren’t used to being in the spotlight. We’re finding it not at all flattering.

Mortgage brokers’ business swelled during the boom years and many participated in compromising as much as two thirds of the residential mortgage lending business at peak – they only got paid if they could close the deal. That took an appraisal. Guess what type of appraiser was hired en masse? The ones who provided the “right” value.

How did things work in the banking industry? During the boom, in-house appraisal review departments were closed in most US Banks because they were “cost” centers. Mergers and consolidation caused lenders to lose local relationships with appraisers.

After the September financial system tipping point, it seemed like we appraisers might get an opportunity to redeem ourselves. After all, we were part of the problem along with regulators, investment banks, commercial banks, ratings agencies, real estate brokers, mortgage brokers, mortgage bankers and consumers. One big happy party.

Regulators have set out new guidelines on appraisals for lenders. The Home Valuation Code of Conduct, pronounced “Havoc” is an agreement between New York State Attorney General Andrew Cuomo and Fannie Mae that was intended to change everything.

Comp Checks, inquiries in which an appraiser was often asked to assure a floor value for a property without actually performing an appraisal, are over. Mortgage brokers can’t order appraisals anymore – otherwise the bank can’t sell the paper to Fannie Mae.

But not much else has changed. Lenders now call appraisal management companies who pay the appraiser half their wage (fees for AMCs are lower than appraisal fees paid 20 years ago) and require 24 – 48 hour turn times without exception.

The National Association of Realtors wants appraisers to use “good” comps and ignore foreclosure activity because we are “killing the recovery.”

Many of the ethical “appraisers” have been forced to seek new types of work or switch careers, as they have been replaced by an army of “form-fillers.”

After all of the financial system turmoil, not much has changed in the mortgage process as it relates to appraisers. A conversation with a loan consultant we had last week perhaps best exemplifies how detached from reality many in the lending community really are.

One of my staff appraisers recapped to me a direct conversation with a loan consultant at a large national bank. The consultant had contacted the appraiser to complain about the appraised value not being high enough on several occasions, even bringing the borrower in without advanced notice to the appraiser on one of the calls. This is a frequent conversation and it’s getting old.

When trying to get an understanding of the collateral, does the banking industry want to know what the value is from a neutral source or not? If not, don’t call it an appraisal because its not.

Jonathan Miller is a real estate appraisal consultant in New York. He is the co-founder of the residential appraiser Miller Samuel, and a managing principal of the commercial appraiser Miller Cicero.


Tags: , , , , , , , ,


[Vortex] Palumbo on USPAP: The Industry Reality And The Unenforceable (Truth) Law

July 28, 2009 | 12:16 am | |

palumbo-on-uspap

Guest Appraiser Columnist:
Joe Palumbo, SRA

Palumbo On USPAP is written by 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] and I am fortunate to have his contributions here. View his earlier handiwork on Soapbox and his published article in the Employee Relocation Council’s Mobility Magazine.
…Jonathan Miller

There are many debatable topics in the appraisal world and within USPAP. There is one that is not really a USPAP issue but an issue of law….though it does draw some parallels in that some “interpret” things differently. To me there is only one correct interpretation which boils down to common sense. This time around I thought I would step outside of USPAP issue and a practical specific relationship to a valuation assignment and talk about something that has been “bugging me” over the past several years. I was reminded of this issue after reviewing the Appraisal Standards Board Q and A for Feb 2009. I can also recall debating this issue with a former supervisor of mine, who while extremely intelligent and knowledgeable in appraisal and (other matters) seemed to take the find any crevice in order to disagree with me. It got me so hot that I got a friend of mine (now unfortunately and untimely deceased) on the NJ State RE Appraisal Board to write me an e-mail explaining how my “view” was correct in fact and law…which I sent to multiple parties who “disagreed” with my view and the topic was never discussed again. Here is the issue as taken from the Q and A:

Must a Review Appraiser be licensed or certified in the state jurisdiction where the subject property is located?

Question:

Does a review appraiser have to be licensed or certified in the state where the subject property is located?

Response:

Appraiser credentialing requirements are not covered by USPAP. However, since this question is often asked, we have provided the following response from the Appraisal Subcommittee (ASC):

“Included in ASC Policy Statement 5 is the ASC’s position on when an out-of-state review appraiser must obtain a credential for purposes of performing a technical review. The ASC has concluded that for federally related transactions, so long as the review appraiser does not perform the technical review in the state within which the property is located, and so long as the review appraiser is certified or licensed by another state, that appraiser need not be registered for temporary practice or otherwise credentialed by the state agency where the subject property is located. With that said, state law may be more restrictive than federal law and may require a temporary practice permit or other credential. It is therefore imperative to consult with the state where the property is located.”

(ASC Policy Statements may be downloaded)

It is important to point out here that the “problem” I have is with a technical review that INCLUDES as part of the scope an alternate value conclusion (= APPRAISAL) even concurrence and NOT the Standard 3 Qualitative Review.

I’ll use the info from my friend at the NJ State Board to elaborate on this using NJ as an example. NJ is mandatory state which also requires a temporary practice permit should anyone with an out of state who wants to “appraise” a property. Simply put you need a NJ APPRAISAL LICENSE OR TEMPORARY PERMIT to appraise a property here. If you are a realtor, asset manager, outsource company, AMC, and you are “reconciling VALUES” between appraisals on NJ properties YOU NEED the specific permission granted under NJ LAW. If you want to do the qualitative Standard 3 review WITHOUT a value conclusion as stated above, that is acceptable. This restriction on “appraisals” would logically extend in any states that require practice permits. I fail to see how this can be interpreted any other way yet it does all the time. Ask yourself why the states would go through the legal process of protecting consumers and then allow someone that is (legally) unqualified to value a property? It flies in the face of why licensing came about. As an example, If a Pennsylvania appraiser without a temporary practice permit does a review with an alternate value conclusion on a NJ property and the valuation is flawed loans are made based on the valuation and things fall apart; whose economy is affected? Certainly this burdens NJ more than PA? What is the difference between getting in a car driving across a state line inspecting, measuring, photographing, conducting a quality and condition survey and rendering a value opinion OR rendering a value opinion from the desk after reviewing someone else’s report? Other than a difference in scope THERE IS NO DIFFERENCE, both are appraisals. And just to be clear I am not saying that you cannot be geographically competent because you can be….. but there is a technicality in that in the license MAY be required first. The problem is that this scenario presents a very difficult enforcement task from a timing perspective. Even further, this situation is taking place all over the country with major lending institutions who see the mandated use of a state-asset-specific appraiser to be a (costly) inconvenience. Hence we are left with the truth about how unenforceable the “e-review” is from a realistic perspective. The last thing any state board has is the resources to police cross-border electronic appraisals. ( the state would have to issue the cease and desist). The only real policing is for those in the industry to recognize the issues here and do a bit of self policing and refuse the review or for the banks to set up staffing and appraiser panels to comply. I worked at a large bank that did just that and I will not deny that it was very challenging economically and from a staff efficiency point of view. It was however the right thing to do for consumer the bank and the licensed staff. Current economics have made that more difficult but not IMPOSSIBLE.

The ASC does imply some driver’s license logic above; one must have a driver’s license to drive and that simple qualification extends the license to do so in any other state without additional requirements. That is where an appraisal license and a drivers license differ: An appraiser MAY have to have a specific license rather than just “any license” whereby automatic temporary practice is granted for driving from here to California. While some states do grant reciprocity most require the application and (fee of course) so there may be a state or two with “automatic driver’s license” reciprocity but based on my research they are a very small minority.

I have also heard the argument that the law only applies to those who ARE licensed and that the layperson can do anything….because the laws and subsequent restrictions only apply to those licensed. This was a statement made to me by the President of a AMC who was trying to justify the use of “non-licensed specialists” to reconcile appraisals via review with alternate conclusions. This is the most ridiculous thing I have ever heard which brings me back to the driver’s license analogy: Do the laws apply just to the licensed drivers? No unlicensed drivers can cited as well.

Defending your position based on what you have to gain is nothing new for business. At least in the case of major lenders using out of state appraisers they have “a” license. I guess they believe in half truths or bending laws unlike those who practice valuation with indifference altogether. They probably have their share of motor vehicle moving violations The amount of hypocrisy in this industry never ceases to amaze me.


Tags: , , , , ,


[NAHB] 26% Of Appraisals Faulty While AMC’s Talk Parrots

July 14, 2009 | 12:53 am |

NAHB regroup on the HVCC/Appraisal issue from after a very silly press release a few weeks ago to a more coherent message in the to the current press release [FAULTY APPRAISAL PROCESS HARMING HOUSING AND THE ECONOMY} which has more stats.

Twenty-six percent of builders are seeing signed sales contracts fall through the cracks because appraisals on their homes are coming in below the contract sales price, according to a nationwide survey conducted by the National Association of Home Builders (NAHB).

“Home builders are increasingly concerned that inappropriate appraisal practices are needlessly driving down home values. This, in turn, is slowing new home sales, causing more workers to lose their jobs and putting a drag on the economic recovery,” said NAHB Chairman Joe Robson, a home builder from Tulsa, Okla.

Ok, I can relate to this but the 26% figure is much higher than I would have thought, and I see myself as an appraisal pessimist these days. NAHB essentially defines faulty as “killing the deal” which is a very thin standard, but still their argument has merit.

This press release comes on the heels of the NAR press release in the form of research that said that 37% of all realtors have had 1 or more deals blow up because of the appraiser.

Lost sales were reported by 37 percent of Realtors® attempting to complete home sales, with 17 percent reporting one lost sale and 20 percent reporting more than one lost sale.

Approximately 85 percent of NAR Appraiser members reported a perceived reduction in appraisal quality.

Although these are trade groups and are known for spinning on behalf of their members, in this case, I do believe they are right. Appraisal quality has fallen sharply and the fact that Appraisal Management Companies (AMC) being enabled by HVCC has a lot to do with that.

Here’s how the AMC trade group responds to appraisal criticism from real estate agent and mortgage broker trade groups.

Realtors and mortgage brokers say the new procedures tend to produce below-market valuations that can delay or kill pending deals. Consumers are paying for the changes in higher fees and subsequent appraisals when the property doesn’t price right initially, they claim.

Such complaints are a “gross mischaracterization” that merely parrot talking points circulated by industry trade groups, said Jeff Schurman, executive director of the Title Appraisal Vendor Management Association, itself a professional organization representing AMCs.

“The way they tell the story, it sounds like we’re a bunch of cowboys who have come on the scene to take advantage of the situation,” he said. “We’ve been around since the 1960s.”

Yes that’s true Jeff, but it became an issue on May 1 when HVCC was implemented. The 1960’s cowboy analogy is like saying the Internet has been around since the 1960s.

Technically a true statement but a wildly misleading reference (much like many AMC appraisals).


Tags: , , , , , , ,


AMC Appraiser: How Am I Supposed to Appraise This Thing?

June 30, 2009 | 10:41 am |

I was recently speaking to a real estate agent who was quite upset and was asking me for advice on on a particular situation.

You can’t make this up.

I never saw the appraisal report and don’t know if it was right or wrong. It’s the process that amazes me. The agent told me:

I’m refinancing with a bank where I already have a mortgage – [Large US Bank Who Took TARP Money].

The appraiser who came to my apt [threw] his hands up in the air and said “how am I supposed to appraise this thing” and indeed he did not as the comps he used were completely not appropriate and he did not look at the info I sent to him PER HIS REQUEST.

To make a long story short, I have escalated this as much as I think I can at [Bank Name Redacted], but I see no results and Monday will be exactly 2 wks since this happened.

The agent just got back to me and told me the bank stood by the appraisal.

Of course, the bank has little to do with the review – that’s because national lenders are centralized, nearly all rely on Appraisal Management Companies and have little or have no local knowlege in housing markets or have relationships with someone who does. The AMC who hired the appraiser for the bank is likely the one who reviews the report. Remember, they are the same firm who felt it was appropriate to use an out of market appraiser, so how reliable will their review be?

The AMC position tends to be: if you are licensed in New York State, you should be qualified to appraise in all counties of the entire state.

A state appraisal license does not equal experience or competence. It’s a revenue opportunity for state governments and it is a very low bar to cross to get a typical state license. Basically a half dozen courses and 2 years experience.

In this case, the out of market appraiser based in Armonk, New York, and was hired by an AMC on behalf of a bank to appraise a duplex co-op penthouse in Manhattan. This is becoming a more common occurrence in appraisal function of the national retail banks, all of whom are using Appraisal Management Companies.

From the appraiser’s reaction in front of the bank customer/borrower reaction, I would guess he’s not familiar with this type of property, nor does he act as a professional while on the inspection. A low bar indeed.

Another large US bank I know uses nearly 300 appraisal firms in Manhattan with appraisers driving as much as 4-5 hours to bang out a bunch of co-op reports in one day. In my nearly 24 years as an appraiser in Manhattan, I am aware of only 4 firms that regularly do Manhattan work.

I don’t think the banks are stupid (I know, I know). I think they see the mortgage universe as short term profit and loss, rather than as long term preservation of capital. It’s a modern cultural thing I suppose.

If that’s not the case, then they don’t see what value appraisers bring to the table (no pun intended). It is going to be much harder for appraisers in the post-credit bubble universe to make a compelling argument for competent services if the market doesn’t seem to need them in the current structure and where most of the competent appraisers were put out to pasture.

Speaking of pastures…although I’m based in New York, I’m thinking of flying out to Montana and banging out a quick appraisal of a 100,000 acre cattle ranch for $175 in 24 hours.

How do I make money this way?

Volume, my friends.


Tags: ,


[NAHB] New Guidelines For Appraisers: Break Into Houses?

June 24, 2009 | 9:55 am |

Ok, so I’m kidding. But read further.

In my previous post, I address the swirl of interest in the appraisal part of the home sale process brought about by NAR’s Existing Home Sale press release yesterday where they blame appraisers for preventing the housing recovery.

On the same day, the National Association of Home Builders issue a press release specifically addressing the need for new appraisal guidelines. Betting money says the two organizations (NAHB & NAR) coordinated release to get more bang for the press buck, so to speak.

Did you ever think something was terribly wrong, but you didn’t understand why? If you haven’t, then you should definitely read NAHB’s press release.

I’ll lay it out here commenting on each paragraph. It you find it to be too much (most sane people), skip to the conclusion at the bottom.

Using foreclosed and distressed sales as comparables with appraisals on single-family homes without adequately reflecting the differences in the condition of the respective properties is needlessly driving down home values, according to the National Association of Home Builders (NAHB).

If foreclosures are competing with the open market sales in the neighborhood – guess what? That’s the market at that point in time. I strongly agree with their point that appraisers need to confirm condition of foreclosure sales if they use them as comps. It’s not that hard. AN APPRAISER SHOULD NEVER USE A COMP UNLESS THEY KNOW SOMETHING ABOUT IT. Otherwise, it can’t be comparable, by definition. Of course, the caliber of appraisers performing mortgage lending appraisals is falling rapidly with the proliferation of AMCs. That’s the real issue here.

“Any home buyer can recognize the difference between a well-kept home and a distressed property that is damaged or not properly maintained. So it only makes sense that an appraiser should be required to consider the overall condition of a property and the specific factors related to a foreclosure or distressed property sale when selecting and adjusting the value of comparables,” said NAHB Chairman Joe Robson, a home builder from Tulsa, Okla.

We already are required to verify the sales to be able to make adjustments but the Cuomo/Fannie Mae deal called Home Valuation Code of Conduct (HVCC) has enable a whole army of inexperienced or incompetent appraisers at the expense of competent experienced appraisers who can’t afford to work for half price and turn around assignments in 20% of the time without verifying the data.

I was told by a senior risk officer at a national lender that the bank uses several hundred appraisers in Manhattan. There are less than a half dozen long-time Manhattan-based firms here (with more than 1 employee). Where do all these companies come from? Out of state and up state New York. These appraisers will drive 3-4 hours to come to bang out a dozen reports in a day working for half the market rate.

Appraisers are often only required to conduct exterior inspections of properties that are being used as comparables because they are normally unable to enter these homes and examine their interiors. Too often, properties that have been subject to foreclosure or distressed sales have issues related to deferred maintenance or internal damage that an external inspection simply cannot reveal.

Think about what NAHB is saying here in the first sentence. We are not required to inspect the interior of the comps nor can we be made to. Do we have the right to go in all the comps? Simply walk up to the house across the street and say: “I am doing an appraisal of that house over there and the bank requires me to go inside your house and see what you have.” Good grief. A very poorly worded press release.

The actual point they are making here is that they want the appraisers to consider the condition of the houses being sold at foreclosure and adjust for their inferior condition. NAHB is absolutely correct.

However, the alternative bigger picture, between the lines, inference being delivered in the release is: ALL foreclosure sales are INFERIOR in condition to the house being appraised – that’s why they sell for less. That’s simply not true. Are they more likely to be inferior in condition than houses sold that are not foreclosures? Yes. The seller of a foreclosure is often a large institution not as close to the property as an owner occupant would be and may have a different objective/time frame than a typical seller might.

“While most appraisers do a fine job, there needs to be proper regulatory guidelines for those who use distressed or foreclosed properties as comparables when determining home values,” said Robson. “It is essential that appraisers have the proper experience and guidance to accurately assess values in distressed markets.”

You can’t mandate what comps to use, if they are “comps.” I don’t want the FDIC mandating what wattage of light bulbs I can use in my upstairs hallway either. However, I agree completely with the second point. NOTHING has changed to improve the quality of appraisals since the financial meltdown began. HVCC was intended to remove the high bias in valuation caused by the mortgage brokerage industry’s 60%+ market share of origination controlling and ordering the appraisals. That was removed with HVCC. The growth in mortgage broker market share of bringing business to the banks allowed lender relations with local appraisers and the existence of inhouse appraisal review departments to whither and die. The bank solution appears to be to use AMCs to order appraisals, a process which was enabled by HVCC, which is an accident waiting to happen. While mortgage broker ordered appraisals were biased high, AMC ordered appraisals are biased low.

What about a neutral middle ground? Good grief.

In neighborhoods where comps include a large number of short sales or foreclosures, appraisers should have the option of expanding the geographic area or extending the time frame for eligible sales to get a more representative basket of the value of homes sold in the area, Robson added.

They basically want appraisers to ignore all foreclosure sales because they are “low” and be allowed to expand search guidelines to find higher sales. Property values in a neighborhood that are hurt by rising foreclosure activity isn’t caused by appraisers. They are competition to the non-foreclosure homes (and should be properly adjusted for condition). If the appraiser is determining market value of a property, he/she can’t cherry-pick the high sales. Their logic is a fall-back to credit boom reasoning which was all about finding the highest sales to make the deal happen.

Currently, improper or insufficient adjustments to the comparable values of foreclosed and/or distressed homes often results in the undervaluation of new sales transactions.

The best message in this release and it is absolutely true. Condition of the comps should be discovered and adjusted for. Otherwise they aren’t comps – they are merely sales.

“This practice must be corrected because it contributes to the continuing downward spiral in home prices, forestalling the economic recovery,” said Robson.

Overstated but not entirely incorrect, due to the growing AMC issue. The legion of incompetent appraisers being enabled through HVCC and AMCs are resulting in less accurate valuations. This problem sticks like a sore thumb in a declining market with low sales activity, compromising the public trust.

Conclusion

Foreclosure comps are like the new breed of appraisal management appraisers proliferating in a down market. * The quality of appraisals should be much higher than it currently is, whether or not the housing market is rising falling or flat.
* Nothing has been done to address the poor quality of appraisals performed for lending institutions. * National retail banks have all gone the AMC route to get their appraisers.

If the user of an appraisal report (bank, Fannie/Freddie, secondary market investor) doesn’t care about the quality and reliability of the valuation process, then the use of AMCs are enabled and becomes the new market for appraisal services, damaging the livelihoods of competent and diligent appraisers.

The use of AMC appraisers is beginning to sound a lot like the way foreclosure comps are being used in an appraisal.


Tags: , , , ,