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[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.”


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[Appraisal Management Companies] An Accident Waiting To Happen

May 20, 2009 | 12:51 am | |

In other words, the institutional entities that are responsible for ordering, reviewing, approving and managing licensed appraisers, aren’t held to the same or similar standard – Appraisal Management Companies (AMCs).

One of the byproducts of New York State Attorney General Cuomo’s agreement with Fannie Mae (HVCC), was to prevent mortgage brokers from ordering appraisals for conforming mortgages that would be purchased by Fannie Mae. That’s a good idea in general. But by doing that, most national retail banks and many regional banks, are forced by necessity to manage the appraisal process directly. Few have the overhead to do this and therefore resort to appraisal management companies. Call an 800 number and order a report anywhere in the country.

Appraisal management companies are generally paid the same fee as an independent appraiser would be, so they have to find appraisers who will work for 1/3 to 1/2 the market rate (or 2/3 the rate as their trade group claims). To differentiate, they generally require 24 to 48 turn time per assignment, yet an appraisal is not a commodity like a flood certification – it’s a professional analysis by an expert.

Here’s a classic example of the new breed of unregulated appraisal oversight. It’s worth the read. Same problem as the mortgage boom days – pressure, sloppy work, crank it out – just a different type of institution doing the ordering.

And AMCs have a trade group called TAVMA (The NAR of AMCs), which does all it can to further their mission. Here’s their recent blog post saying their fees are 60% of the market rate rather than 50% as has been my experience as well as the appraisal organizations who testified in front of Congress.

Think about it – their argument is essentially this: Taking a 40% pay cut is a whole lot better than a 50% pay cut.

Whether it’s 40-20-10 [yet even more spin] or whatever percent the fee reflects what willing sellers (appraisers) and willing buyers (AMCs) in the local marketplace are willing to accept based upon their own self-interests. To try and draw a cause-effect relationship between fee and quality before congress is a little bit disingenuous, absent hard data.

Here’s the AMC fee logic in a nutshell:

If an employer posted a job listing with a starting salary 40% below the last hire’s salary – this will result in no measurable differences in the quality of job applications received? Forget the correlation/causation argument, what about common sense?

Good grief.

For once, I agree with NAR.

Appraisal management companies are not currently regulated at the federal level and regulation at the state level varies. Regulation would ensure that AMCs operate within the same basic guidelines and standards as independent appraisers. Further, this allows AMCs to be regulated within the existing appraisal regulatory structure, which avoids the need to create additional layers of government bureaucracy.

The Appraisal Institute announced the House version of bill 1728:

Furthermore, the bill requires separation and clear disclosure of fees paid to appraisers and fees paid for appraisal administration (i.e., fees paid to appraisal management companies); prohibits the use of broker price opinions in loan origination; and requires registration, and a regulatory framework, for Appraisal Management Companies, with mechanisms to prohibit infiltration by appraisers sanctioned by state regulatory agencies.

That specific wording “and a regulatory framework, for Appraisal Management Companies, with mechanisms to prohibit infiltration by appraisers sanctioned by state regulatory agencies” reflects the situation discussed in the St. Petersburg Times article.

Here’s usually the way the process works:

  • To be approved, the appraiser submits a state license and in some cases, submits a couple of sample reports.
  • The appraiser agrees to the half market rate fee structure and 24-48 hour turn time requirements (market rate is 5-7 days).
  • The appraiser is placed in a computerized queue and is given an assignment
  • The appraiser gets 1-2 calls by young kids out of high school making sure the appraiser will turn around the assignment in 24-48 hours
  • The appraiser has to be very pushy to be able to get into the property in order to turn the assignment around in time.
  • If there is a valuation problem or issue that needs interpretation by the AMC, the solution is often to just disclaim the problem in the addendum somewhere.
  • Little if any interaction available from qualified appraisal professionals on AMC staff
  • The appraiser gets more work if the jobs are turned around faster because the queue is set to have maximum amounts allowed by an appraiser at any one time.
  • Remember, the fees are half market rate. In higher cost housing markets, the fees can be as low as 1/3 the market rate because the AMC appraisal fees are often set at national rates. In other words, appraisers in Manhattan would be paid the same as North Dakota even though the cost of doing business is 4x higher in Manhattan.

Now imagine the quality and reliability of this product, which is not a commodity, but an expert opinion prepared by a professional. It’s hard imagine much professionalism squeezed in this process, isn’t it?

HR 1728 H.R. 1728: Mortgage Reform and Anti-Predatory Lending Act was just passed by the House and Senate and is ready to be signed by POTUS. Here’s the appraisal portion.

It looks as though AMCs will be licensed just like appraisers will:

‘(7) maintain a national registry of appraisal management companies that either are registered with and subject to supervision of a State appraiser certifying and licensing agency or are operating subsidiaries of a Federally regulated financial institution.’

However, this will be more of a revenue opportunity by the states – licensing doesn’t have much to do with competence. Plus, I don’t see how states will have the manpower to provide meaningful oversight other than clerical aspects.

Mark my words here – this is an accident waiting to happen.


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[Sounding Bored] Appraisal Management Companies are enabled but not required

January 22, 2009 | 1:44 am | Columns |

Sounding Bored is my semi-regular column on the state of the appraisal profession. There have been more changes made to the profession in the past several years than in the entire history of the profession, and most of the changes have not resulted in a more credible service. Still, I’d like to hope that the latest financial services sector turmoil will bring a clean slate approach to better regulatory oversight (devoid of insanity).


While appraisers face tough economic conditions in 2009, there is a lot of nervousness invading the insulated land of adjustments and contributory value. I can’t tell you how many people and several clients we have are under the impression that lenders are required to order appraisals through appraisal management companies effective May 1, 2009 under the new Cuomo/Fannie Mae Deal. Related news coverage makes the whole thing sound very scary.

Here’s the Fannie Mae Home Valuation Code of Conduct Frequently Asked Questions (FAQs) on Fannie Mae’s web site that answers many of the questions currently on appraiser’s minds. Here are the comments specific to AMCs:

Appraisal Management Companies
Q25. Is a lender required to use an appraisal management company for ordering appraisals?

No. A lender may order appraisals directly from an individual appraiser.

Q26. May an appraisal management company affiliated with, or that owns or is owned in whole or in part by the lender or a lender-affiliate, order appraisals?

Yes, an appraisal management company affiliated with, or that owns or is owned in whole or in part by the lender or a lender-affiliate, may order appraisals if the appraisal management company meets the criteria of Section IV.B. of the Code.

Q27. When a lender uses an appraisal management company, the appraisal management company is responsible for retaining and paying the appraiser. Is it likewise permissible for a mortgage broker to use an appraisal management company, since the mortgage broker does not technically retain or pay the appraiser?

No. The Code prohibits lenders from relying on an appraisal where the broker had a role in selecting, retaining, or compensating the appraiser.

Q28. May a mortgage broker provide the lender with an approved appraiser list for the lender to use when ordering appraisals for that particular broker?

No.

Please read the entire FAQ. There is a lot of useful information.

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Sadly, The Appraisal Institute is now working against its local chapters

December 6, 2016 | 6:38 pm | Investigative |

appraisalinstitutelogo

I have a lot of good friends and colleagues who frequently give at least a passing thought to quitting the Appraisal Institute, the largest real estate appraisal industry trade group. At the national level, the association has lost the ability to work for its members and has instead, shifted into a political failure spiral by enacting policies that are against their chapters’ and members’ best interests.

I get these types of comments from members at get togethers who say things like…

“I am only paying my dues to retain my designation.”

“The chapters are the only relevant thing AI provides to help me.”

“The self-dealing politics at National sickens me.”

Their announcement of the new administrative policy on November 30, 2016 continues the trend:

As you might have heard by now, the Appraisal Institute Board of Directors recently took a significant step to enhance your chapter’s ability to focus its attention on providing member services by reducing your current administrative burden. This is great news for chapters.

Here’s the letter that was sent to chapter leaders:

ai11-30-16

It reminds me of an old IRS joke: The IRS agent walks into your office with arms extended for a handshake and says:

“I’m from the IRS and I’m here to help you.”

It has been discouraging to watch the Appraisal Institute (National) erode into irrelevance while the appraisal industry is crying out for leadership at a seminal moment in our history. Dodd-Frank is about to be gutted and appraisal management companies have run out of appraisers willing to work for half pay. Instead they have morphed into a trade group that is unable to help its members. I challenge my readers to provide any evidence of such leadership since the financial crisis.

One of the only remaining redeeming features of the Appraisal Institute aside from their SRA and MAI designations has been the strength of local chapters. It’s where the rubber hits the road, where appraisers press the flesh at local meetings, take classes and listen and interact with guest speakers. The real value of AI membership remains at the chapter level.

At the Appraisal Institute headquarters in Chicago (National), they clearly recognize the power of the local chapters. For an organization that has been encumbered by procedural minutae, they developed the ability to enact policy without input or oversight. Here’s the current controversy over a non-vetted decree from National that involves money.

National has enacted a new policy that requires all money at the chapter level be administered by National. It’s a political power grab that will further alienate dues paying members. This is part of the growing pattern of AI’s lack of communication to their members.

The response

The very large New York Metro chapter responded in a letter from their board 2 days later – about being blind sided by the new policy. It’s an incredible read – a full-on indictment of the thinking of National. So many great appraisers in that chapter but how long will they put up with this? You can see how hard the local chapter is holding back it’s anger for such a policy. See link for pdf or the full text below. Bold emphasis provided by me.

AI Metropolitan New York Chapter Board Letter to AI National Board


December 2, 2016

Dear Members of the Appraisal Institute Board of Directors:

This letter is being submitted on behalf of the Board of the Metropolitan New York Chapter of the Appraisal Institute as a response to the National Board’s recent decision to implement a new Appraisal Institute Chapter Financial Management and Administration Policy. The Metro New York Board met this week and unanimously agreed to communicate our disapproval of the new policy and our astonishment that such a major change could be effectuated without any sort of prior notification or consultation with the Chapters and the Membership. Furthermore, to announce this decision as a fait accompli late on a Friday before a holiday week is alarming to our Chapter’s Directors.

The Metro New York Board finds it surprising and unacceptable that such a significant policy change in the governance of Chapter finances could be constructed without any transparency, input or dialogue with the Chapters and Membership. Simply being informed that national will take over our Chapter funds, albeit with assurances of our continued control of our finances, is outrageous paired with the admission that “Adjustments may have to be made to the policy as implementation progresses.” By creating this plan, effectively behind closed doors, you have not instilled any sort of confidence that the policy you are demanding we accept is acceptable to the Chapter. Given that the Appraisal Institute has a model for gaining feedback from the Membership – with the 45-day notice model provided for other significant actions impacting Members and Chapters – the Metro New York Board feels it is not at all appropriate for the national Board of Directors to unilaterally create this new policy in such an opaque manner. Given the potentially serious impacts of this new policy on the individual Chapters, we believe a more extended, perhaps 90-day notice would be minimally appropriate particularly given that this change was basically “sprung on” the Chapters on the advent of the holiday season that creates extra demands on all of us.

Beyond our uneasiness with the lack of transparency and how this new policy was implemented, the Metro New York Board finds the policy itself to be unacceptable. We believe that turning over our funds to national would limit and impact the autonomy of our Chapter and potentially diminish our stature in the local real estate community. The Metro New York Chapter is one of the most active Chapters and has been diligent in providing necessary education opportunities for our members and candidates, organizing enriching events for our members and the broader New York City real estate community, and fostering a supportive framework to help candidates work towards their designations. Importantly, this last goal contributes to the health of the organization nationally. Many of these programs are supported by our members through a historically successful Chapter sponsorship program. We believe our success in these endeavors illustrates that we are proficient in managing our own funds, maintaining reserves, and knowing how to do what needs to be done on a local basis. Certainly stripping the Chapter of its funds, particularly under terms that may be subject to change, will undermine the Chapter membership’s confidence that our efforts to maintain the economic health of the Chapter constitute time well spent. Furthermore, several Chapter sponsors who have consistently supported Chapter endeavors have expressed concern about this change in policy and that it may impact their willingness to continue such sponsorships in the future considering the substantial loss of Chapter autonomy as a result of the new policy changes.

While we look forward to hearing more details regarding the new policy from National on Tuesday’s call, the Metropolitan New York Chapter Board strongly urges the National Board to reconsider implementing this new policy.

Appraisal Institute, New York Metro Chapter
John A. Katinos, MAI, President
On behalf of the Metro New York Chapter Board of Directors


I heard a rumor that AI wants to do away with chapters and I’ve also been told that is not true – but with the opaqueness of National, I don’t know what to believe. And I keep hearing rumors about AI spending millions to expand their footprint across the globe but haven’t seen any measurable success let alone share the status of this effort with members. Is esoteric global expansion worth raising dues in a compensation compressed environment? Is the membership even aware of this effort and the millions supposedly lost?

Most of my peers nationwide have expressed frustration with an organization mired in self-serving politics. And it only seems to be getting worse.

My moment of zen was their self inflicted and childish exit of the Appraisal Foundation a few years ago. I eventually left AI and moved on to two other organizations that provide what appraisers are looking for. Remember that most of us are “lone wolves” and belong to organizations to get other perspectives. I can’t tell you how many SRAs and MAIs I know are talking about leaving the organization.

And did you ever wonder why there are so many statewide appraisal coalitions popping up? It’s largely because of inaction by National or their opposition to issues important to appraisers.

Incidentally, this new policy parallels the changes made by the Chinese government a while back. They moved the majority of the tax income stream from the provinces to the national government. This forced the provinces to go hat in hand to the national government to beg for an allotment of income each year. Sound familiar?

Lots of graft ensued for the provinces to get their “share” of revenue. In fact one of the reasons there are as many as 40 ghost cities in China right now is because the provinces were incentivized to generate GDP. What better way to do that then to build cities for several hundred thousand residents that would never come.

The moral of the story: central planning is never efficient. Through the loophole that National installed allowing them to modify this policy at anytime in the future is a recipe for disastrous self-dealing.

This is the appraisal industry’s moment to have some impact on our future. There are many challenges in front of us. The Appraisal Institute on a national level is now officially obsolete.

Enough with the self-dealing. We don’t make enough money collectively to fund their boondoggle. We need leadership, not politics.

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Multi-millionaire Motivational Speaker Dean Graziosi Shares His Appraisal Wisdom

October 4, 2015 | 4:40 pm | | Favorites |

Huffington_Post_Logo

Over the past few days I’ve been sent this blog post by a number of real estate appraisers who are upset with its derogatory reference to our profession. It was written by Dean Graziosi in the Huffington Post guest blogger section. I’ve never heard of him but perhaps that’s because I’m not a real estate agent. If you insert the word “scam” in your google search, there are a lot of additional insights that come up.

His Huffpost bio and web site indicates he is a NY Times Best Selling Author along with one of the top personal motivation and real estate trainers in the world. I also learned from his bio that he is a multi-millionaire, a guru in the personal motivation sector and cares deeply about his students. Translation: He basically teaches real estate agents how to sell.

watchgraz

Good. While it’s not my thing, I’m happy for Dean’s success (notice how his watch is strategically placed within his Facebook head shot as an indirect confirmation of his success) assuming no one was hurt. However as a public figure (as indicated on his Facebook page with 340K+ likes), Dean has a responsibility to convey information accurately to his students if he does indeed care.

While I doubt he wrote it it personally, his brand handlers managed to mischaracterize two key issues in a small blog post on HuffPost:

  1. Graziosi frames the current housing market as equal to the bubble’s peak but doesn’t accurately describe what that means.
  2. Graziosi frames the real estate appraiser as something other than a real estate professional while the real estate agent is a professional.

1. Housing Market

Graziosi cites the FHFA trend line as breaking even with the 2006 peak. Yes, based on FHFA methodology that’s certainly true and taken directly from the most recent FHFA report. I do feel the need to split hairs here since his “brushstroke style” of simplifying everything misaligns with reality. He says:

First, and most important, it requires repeat sales of homes, so if there aren’t huge numbers of sales, then we’re looking at a number derived from a small set of sales data. So, we’re not necessarily seeing an excited bunch of buyers flocking to the market. We are seeing a whole lot of homeowners who aren’t selling, waiting for rising values. So, we have a small inventory and competition for it.

The problem here is that there are a lot of sales outside of FHFA data – and FHFA only tracks mortgages that go through Fannie and Freddie. Roughly 30% of home sales are cash and another 5-10% of them are jumbo loans, too large to be purchased by the former GSEs – so they don’t get included. FHFA also excludes new construction.

fhfajuly2015

The Case Shiller index is also a repeat sales index like FHFA but shows a different price point for the current market because it includes transactions outside of the GSE world.

CSJuly2015CR

If we look at the number of sales, which is the key point he makes, sales activity is low because we’re not necessarily seeing an excited bunch of buyers flocking to the market. But in reality, home sales are not low and they have been rising for 4 years. Of course sales are not at pre-crash highs because those highs were created largely by fraudulent lending practices including the unethical behavior of consumers caught up in the systemic breakdown that included nearly all particpants in the mortgage process.

EHSAug2015CR

Graziosi is right that inventory is low, but not because buyers aren’t flocking to the market – many buyers are being held back credit access has over-corrected. Many homeowners can’t qualify for the next purchase so there is no point of listing their home for sale.

EHSInvAug2015CR

Conclusion – we are not at the pre-Lehman market peak unless you only look through the eyes off FHFA, a distorted subset of the overall housing market. I would think that real estate gurus understand this.

2. Appraisal Industry

Let’s move on to the real reason I am writing this post.

I can ignore Graziosi’s “lite” market commentary but I can’t ignore his misunderstanding of the appraiser’s role in the purchase mortgage process (buyers applying for a mortgage to purchase a home.)

Don’t call an appraiser, as their approach to market value is different than that of a real estate professional. The real estate agent is trying to get you a sold price near to the top of the market, and their CMA, Comparative Market Analysis, is going to give you a pretty good idea of its value.

There is so much to talk about within these two sentences I’m not sure where to begin. It’s mindbogglingly simplistic, misleading and uninformed. Perhaps this is how he makes his students motivated?

Lets go for the big point first:

“Don’t call an appraiser, as their approach to market value is different than that of a real estate professional.” He must be thinking along the lines of the IRS definition, which is

To meet the IRS requirements, you need two things: spend the majority of your working time spent performing qualified real estate activities (regardless of what you do), and rack up at least 750 hours. Qualified activities include “develop, redevelop, construct, reconstruct, acquire, convert, rent, operate, manage, lease or sell” real estate.

Nary an appraisal-related definition within that list.

The problem with Graziosi’s communication skills as a best selling author and nationally renowned real estate guru who gives seminars for a living to communicate to his students (agents) how to succeed is – if we (appraisers) are not “real estate professionals” then it is a hop, skip and a jump to suggest we are “unprofessional” as if appraisers are something less than a real estate agent. Ask any consumer if they hold real estate agents in higher regard than real estate appraisers? In my view both industries don’t have sterling legacies but one isn’t more professional than another. Remember that he is used to speaking to his students who are real estate agents, the kind that sign up for this type of course. Promote BPOs and help agents get more listings – has got to be his recurring mantra.

The second issue with his quote concerning an appraiser’s value opinions – “their approach to market value is different” than a real estate agent. Providing an opinion of market value is likely the intention of both. Most real estate agents are hoping to get the listing and the appraiser is not incentivized by the home’s future sale. The agent may be the most knowledgeable person in the local market but there is an inherent potential conflict. Graziosi suggests that the broker will give you a price you want to hear. However I do like his idea of getting three broker opinions – that’s a very common practice – nothing new there. Ironically both an agent and an appraiser are looking at closed sales, contracts and listings but the appraiser doesn’t have an inherent conflict. They aren’t going to get the listing no matter how accurate their value opinion proves to be.

One problem with today’s appraiser stereotype as this column brings out indirectly, is that bank appraisers now generally work for appraisal management companies (probably about 90%) and the best appraisers tend to avoid or perform minimal AMC work because they can’t work for half the market rate. As a result, good appraisers aren’t necessarily known as well by the brokerage community as in years passed unless they get in front of the brokerage community in other ways, like giving seminars, public speaking, etc. Competent brokers within a market will know who the competent appraisers are.

There are unprofessional professionals in every industry – doctors, lawyers, deepwater diving arc welders and farmers, so please don’t make sweeping pronouncements to the contrary – especially if you are in the business of communicating information to “real estate professionals”.

Conclusions

The real estate appraisal industry is not unprofessional
IRS definition aside, real estate appraisers are real estate professionals

As I’ve walked through this response, I realized that the silly advice blog post in the Huffington Post by an infomercial guy did what it intended, stir up conversations of any type to get his name out there when his actual content was devoid of useful information. There is a great post I stumbled on the industry of motivational speakers: Real Estate B.S. Artist Detection Checklist. Worth a read.

Looks like I’m never going to be a multi-millionaire wearing a huge watch strategically placed in my head shot. If you notice my own head shot in the righthand column, my watch is very small.

Sigh.


UPDATE From the I have no idea for whom the appraisal is being performed but I am a 20+ year real estate professional (see definition above) department: Here’s an article from the Santa Fe New Mexican “Be cautious of appraisals” that damns appraisers using a stunning lack of understanding of the appraiser’s role in the mortgage process given his experience. This piece was written by a mortgage broker who was also a former financial consultant and real estate agent. The author states:

Everyone in every business falls under some measure of accountability. Certainly appraisers must also be accountable to their customer. The customer is the homeowner, not the AMC.

No it isn’t.

The appraiser’s client in the mortgage appraisal situation you describe is not the homeowner. The AMC is acting as an agent for the lender in order to for the lender to make an informed decision on the collateral (of course that’s only a concept). The appraiser is working for the AMC (who works for the lender) and not for your homeowner. Your logic from the housing bubble still sits with you today.

Yes I agree that the quality of AMC appraisals for banks generally stinks, but blame the banks for that, not the appraisers. Quality issues don’t change who the appraiser is working for. AMCs do internal reviews and make ‘good’ appraiser’s lives a living hell for half the prevailing market rate loaded with silly review questions by 19 year olds chewing gum to justify their own institution’s reason for existence. No wonder you are frustrated with appraisers from AMCs. ‘Good’ appraisal firms like mine avoid working for AMCs whenever possible. Yes I would be frustrated as a mortgage broker today because your industry got used to using appraisers as “deal enablers” during the bubble and nothing more. I contend that the current mortgage process post-Dodd Frank is clearly terrible and AMCs are a big part of the problem.

ASIDE This new era of online journalism for print stalwarts like the “Santa Fe New Mexican” and new versions like the “HuffPost” rely on filler-like the above 2 articles discussed here. Very sad.

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[Appraisal Infographic] Common Myths About The Homebuying Process

March 15, 2014 | 1:07 pm |

The Appraisal Foundation published an appraisal infographic that attempts to clarify common misconceptions by the borrowers about the appraiser’s role in the home buying process. The content is amazingly simplistic, but that’s the point.

I continue to be amazed at how so few people don’t understand what the appraiser’s role is in the home buying process. Perhaps this is why the appraisal industry continues to be marginalized in the lending process (ie appraisal management companies, Appraiser Independence Requirements) and the exodus of competent appraisers into other disciplines outside of residential mortgages continues.

2014-03-06-BorrowersinfographicTAF

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The Low Appraisal “Hassle” is a Symptom of a Broken Mortgage Process

September 16, 2013 | 3:58 pm | |

Last week we saw a chorus of “appraisers are killing our deals” stories in some major publications:

  • When Appraisal Hassles Tank a Home Sale [WSJ]
  • When Appraisals Come in Low [NYT]
  • Appraisals Scuttle Home Sales Where Prices Rise Fast[IBD]

I’ve long been a critic of my own industry. Like any industry there are terrific appraisers, average appraisers and form-fillers. Post-Lehman there are a LOT more of the latter.

The scenario that prompted these articles and others like them occurs when a sale is properly vetted in the market place and an appraiser enters the transaction and subsequently appraises the property below the sales price. It supposedly is happening in greater frequency now, hence the rise in complaints.

My focus of criticism has largely been centered on appraisal management companies (AMC), who have tried to convert our industry to a commodity like a flood certification or title search rather than a professional service. AMCs serve as a middleman between the bank and an appraiser and they have thrived as a result of financial reform. Most only require an appraiser to be licensed, agree to work for 50 cents on the dollar and turn work around in one fifth the time required for reasonable due diligence. Appraisal quality of bank appraisals has plummeted in this credit crunch era and as a result has prompted growing outrage from all parties in a transaction.

Of course, the market value of the property may not be worth it. But the real estate industry doesn’t trust the appraiser anymore so we point them finger at them automatically.

Yes, it’s a hassle. So let’s decide what the problem really is and fix it.

A long time appraisal colleague and friend of mine once told me before the housing bubble burst:

“Jonathan, you as the appraiser are the last one to walk into the sales transaction. Everyone involved in the sale is smarter than you. The selling agent (paid a commission), the buyers agent (paid a commission), the buyer (emotionally bias), the seller (emotionally bias), the selling attorney (paid a transaction fee), the buyer’s attorney (paid a transaction fee) and the loan officer or mortgage broker (paid a transaction fee) all know more than you do.”

The appraiser in this post-financial reform world doesn’t have a vested interest in the transaction like they did during the housing boom – some could argue they are too detached. The vested interest I speak of occurred during the bubble when mortgage brokers and most banks generally used appraisers who always “made the number.” Incidentally, many of those types of appraisal firms are out of business now.

Let’s clear something up. The interaction an appraiser has with a lender when appraising below the purchase price now is not that much different than during the boom. When an appraiser kills a sale, the appraiser is generally hit with a laundry list of data to review and comments to respond to questions from the AMC, bank or mortgage broker who use the “guilty until proven innocent” approach even though the bank likely won’t rescind the appraisal. The additional time spent by the appraiser is a significant motivator to push the value higher to avoid the hassle if the appraiser happens to be “morally flexible.”

And by the way, sales price does not equal market value.

The sources for most of these low appraisal stories I began this post with come from biased parties so it makes it clear that low appraisals are the problem. In reality, the low appraisal issue is merely the symptom of a broken mortgage lending process. The problem is real and becomes more apparent when a market changes rapidly as it is now. Decimate the quality of valuation experts and you generate results that are less consistent with actual market conditions and therefore more sales are killed than usual. Amazingly the US mortgage lending infrastructure today does not emphasize “local market knowledge” in the appraisers they hire no matter what corporate line you are being fed. This is even more amazing when you consider that most national lenders have only a handful of appraisal staff and tens of thousands of appraisals ordered ever month.

The cynical side of me thinks that rise in low value complaints reflects an over-heated housing market – that the parties are getting swept up in the froth and the neutral appraiser is the voice of reason. The experienced me realizes that financial reform has brought new appraisers into the profession that have no business being here (and pushed many of the good ones out) and that the rise in the frequency of low appraisals has only seen the light of day because housing markets are currently changing rapidly.

Here’s my problem with the mortgage lending industry today as it relates to appraisers:
• Most of the people running bank mortgage functions are the same as during the bubble, only see appraisal as a cost, not as eyes and ears.
• Banks love the current state of appraisals because the values are biased low (banks are risk averse) and they fully control the appraiser.
• Appraisal Management Companies themselves have no real oversight (some are very good, most are terrible).
• Banks no longer emphasize local market knowledge in their appraisers or they pay lip service to it.
• Short term cost savings trumps emphasis on quality and reliability.

Every now and then (like now) everyone seems surprised and feels hassled when appraisal values don’t match market conditions. However the bank appraisal process has largely morphed into an army of robots on an assembly line – either because we are unaware of the problem until it affects us directly or we just want it that way.

Let’s focus on fixing the mortgage lending process or stop complaining about your appraisal.

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Having Fits With Appraisal In Home Buying Process

January 13, 2013 | 9:27 pm | | Public |

The New York Times Real Estate goes gonzo this weekend with a nice write-up AND a large color artwork on perhaps the least understood part of the home buying process.

No not the radon test…

The appraisal. Can’t live with them, can’t live without them.

Here’s my stream of consciousness on the topics brought up in the article:

  • “Sale and “Comparable” are not interchangeable terms. Really.
  • There is no ratings category for (like totally) “super excellent.” The checkboxes provide good average fair poor with “good” at top end (but fear not, “super excellent” is marked “good” and like total adjusted for).
  • Not all amenity nuances that are important to you as a seller (ie chrome plated doorknobs), are important to the buyer.
  • Not all amenity nuances that are important to you as a seller, are measurable in the market given the limited precision that may exist.
  • Not all appraisers have actually been anywhere near your market before they were asked to appraise your home, so technically they shouldn’t be called appraisers. Since their clients don’t seem too concerned about this, something like “form-filler” seems more appropriate.
  • Most appraisers who work for appraisal management companies are not very good, but some actually are.
  • When an appraiser makes a time-adjustment for a rising market, understanding whether a bank will accept that adjustment or not is (should be) completely irrelevant and quite ridiculous (unless they are “form-fillers” and not actual appraisers). I have always believed that the appraiser’s role is to provide an opinion of the value and that occurs in either flat, rising or falling markets.
  • HVCC was a created with best intentions by former NY AG Cuomo by attempting to protect the appraiser from lender pressure, but it has literally destroyed the credibility of the appraisal profession by enabling the AMC Industry.
  • The 12% deal kill average of an AMC an arm’s length sale properly exposed to the market is absolutely an unacceptably high amount and a major red flag for appraiser cluelessness about local markets.
  • I’ve never heard of a major bank since the credit crunch began who would throw out the original appraisal found to have glaring errors that would severely impact the result. My quote on this nailed that sentiment with brutal precision, if I do say so:
“You have a better chance of winning Powerball than getting a lender to abandon the first appraisal.”



Understanding the Home Appraisal Process [NY Times]

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[WSJ Appraisal] Professional Appraiser Stereotypes Proliferate

May 9, 2010 | 11:02 pm | |

In today’s WSJ has an article that was on the front page of the online edition (not sure about the print version) called “How to Appraise Home Appraisers

The core idea behind the article was that appraisers:

  • had little data to work with these days
  • make mistakes
  • are in an environment where a low appraisal is more likely to kill a deal
  • banks are seeing people appeal the value
  • lenders may appeal value with the appraiser
  • appraisers may have used foreclosure or short sales as comps
  • appraisers may not be from the area so request a local expert

Ok, my response to all of this is [Doh!]

  • had little data to work with these days [not true with robust sales activity in past 6 months]
  • make mistakes [moi?]
  • are in an environment where a low appraisal is more likely to kill a deal [why should that be any different now – should appraisers be more flexible now – seriously?]
  • banks are seeing people appeal the value [didn’t need to during the boom because values were higher through mortgage brokers]
  • lenders may appeal value with the appraiser [that’s rare – lenders aren’t interesting in pushing values higher now as they did during boom]
  • appraisers may have used foreclosure or short sales as comps [yes and why shouldn’t they, especially in a market where they are common? as long as condition and terms are adjusted for.]
  • appraisers may not be from the area so request a local expert [lenders are predominantly using appraisal management companies and national firms who DO NOT CARE about local expertise, only the fee and turn time.

This article reflects conditions of more than a year ago. Today with the advent of HVCC, the quality of appraisers has fallen precipitously due to the popularity of appraisal management companies. For the most part working for national retail banks as an appraiser is an abomination of the profession.

None of these checklist items have much to do with today’s mortgage process that rewards lenders for hiring a middleman (AMC) who simply finds appraisers who are certified in a state and can turn work around in 24 hours and often are hours away from the property working for nominal fees.

Lenders are afraid to lend right now and the disconnect between upper management and the front lines is bigger than ever. Apparently there is great comfort by national lenders for a poor valuation product in exchange for homogenous nationwide conveyor belt style ordering with rapid turnaround and nearly non-existent oversight. The appraisal process within the mortgage process is a complete joke – it makes me want to scream.

Can we all be so blind and so dumb? Haven’t we learned anything over the past 18 months? [Nope. Not a thing.]

Good grief.

To the media – please spare everyone the misleading portrayal of our industry as professionals willing to use their eraser on occasion when the banks ask us to reconsider. Thats a mischaracterization – we have no choice and no real voice in the mortgage lending process. I’d estimate that 20% of our profession is terrific. The remainder are not.

Garbage in [AMC’s], garbage out [their appraisal quality].


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[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.


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[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.


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[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).


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