Can It Be A Bubble If Many Recognize It As Such?

August 2, 2005 | 9:16 am |

An article by By Mark Hulbert of MarketWatch titled Can it be a bubble if many recognize it as such? wrote a great article titled “Are bubbles only seen in retrospect?” based on research by

Professor Robert Schiller, the author of Irrational Exuberance which predicted the NASDAQ market correction and his recent book Irrational Exuberance: Second Edition which discusses the housing boom.

Professor Robert Schiller, who I admire greatly for his insight on the housing market and for whom I got to meet in the green room at the taping of CNBC Town Hall: The Real Estate Boom [Note: WM Clip] basically says that we are not protected from a housing bubble simply because people are worried we are in one.

He defines a bubble as “a market situation in which news of price increases spurs investor enthusiasm which spreads by psychological contagion from person to person, bringing in a larger and larger class of investors, who, despite doubts about fundamental value, are drawn to the investment partly through envy of others’ successes and partly through a gambler’s excitement.”


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Liability of Appraisers Who Help Understate Tax Liability

August 2, 2005 | 8:24 am | |

On the Tax and Legal update section on ERC’s web site, there is reference to an IRS memorandum that discusses applying penalties to appraisers who knowingly manipulate appraisals to help an individual pay less tax. Examples of appraisals done for tax purposes include estate tax, gift tax, facade easements and charitable contributions.

the IRS Office of Chief Counsel [note: pdf] discussed the possible application of section 6701 of the Internal Revenue Code to appraisers. Section 6701 imposes a penalty on anyone who aids or participates in the preparation of any return or document and has reason to believe it will result in the understatement of someone else’s tax liability.

What’s wrong with being held accountable for the value estimate? Nothing, except…

…and here’s the caveat, the person requesting the appraisal should be on the hook as well. The tax attorney or accountant is often the person trying to influence the appraiser. My problem with this IRS memo, is that the appraiser is left twisting in the wind.

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The Real Deal – The Real Deal Weekly Interview

August 1, 2005 | 10:09 pm | | Podcasts |

The Real Deal – The Real Deal Weekly Interview

I suggested to Amir Korangy of the Real Deal that he begin Podcasting since his publication would be a perfect candidate for it. The Real Deal has access to many interesting people and their content is always changing.

Not only did he look into this technology right away, but he asked me to be the guninea pig…errr…the first interviewee. 😉

From The Real Deal’s Web Site…

Jonathan Miller at The Real Deal Magazine’s first Podcast on July 15, 2005

In The Real Deal’s inaugural interview in its new weekly audiocast series, we sat down with appraiser Jonathan Miller, president of Miller Samuel Real Estate Appraisers and Consultants. Miller’s reports on the Manhattan apartment market are the most widely cited in the industry, and he has been featured in The New York Times, the New York Post and countless other publications including The Real Deal.

With reports showing apartment prices hitting new peaks each quarter but often differing significantly in their findings we asked Miller how he collects his data, and his thoughts on the existence of a real estate bubble. To listen to the entire interview, click one of the links below.

MP3 Version

Podcast (RSS) Version

excerpt…

THE REAL DEAL: Is there a housing bubble in New York?

MILLER: It’s interesting about the whole bubble psychology the boom and bust orientation in the real estate discussions that have been going on for the last three or four months. Especially because Manhattan is closely tied with the financial markets.

A lot of us remember what happened in ’87 with the stock market crash and subsequent real estate correction that we saw from about the end of ’89 to early ’95. So it is something that is fresh in everybody’s minds, and everybody is trying to relate that to the current experience that we are having now.

When I look at what happened then versus now, it’s apples and oranges, a very different experience. Back then we had a tax incentive-based supply-creation syndrome I made that up, but the idea is that housing came on in large quantities in the mid ’80s because of tax incentives. The 421a abatements gave the incentives to developers to throw foundations in the ground without even plans for what they were going to build just to get the tax credits.

Then all of a sudden in ’86 we had the change in the federal tax laws that eliminated the whole incentive for investors to buy individual units that created a lot of supply. And then we had the co-op conversion frenzy, in which seemingly every rental building that could have been converted was converted. I think the conversion pace today not including 2005, but up through the end of 2004 is something like 10 percent of what it was back then, but that’s largely inclusive of, say, lofts being gut renovated to condo as opposed to existing rental buildings.

As far as today, the situation is we have record low mortgage rates, which are really fueling a lot of the demand and we have an improving but very tepid economy. And we now have supply that is gaining momentum. Your magazine did a great study on the condo inventory that is coming online [in July 2005 issue].

TRD: Thank you.

MILLER: And it’s gaining speed. But it’s still about 3,000 units, give or take, and we have a condo universe of somewhere in the neighborhood of 65,000 to 85,000, depending on who you talk to. So it’s still relatively small. In prior years we were talking about 1,500 units coming online. So the pace is increasing but it’s another 1,500 units a year.

I think the two variables on whether we are going to go into a bubble real estate environment is going to be supply or mortgage rates. There are a lot of other things to look at, but those are two main things. Mortgage rates have been forecasted to increase since the end of 2003, and, generally speaking, they’ve been falling. So, in the equation of supply and demand, it has become a constant.

TRD: Brooklyn has become such a great place for developers to go to because there are so many available lots.

MILLER: For those new developments to come in and be viable they are getting $700 a foot. In Manhattan now, the threshold seems to be you have to be at least at 1,000, and more likely on the new developments you’re talking $1,500.

TRD: If you saw a new development at $1,000 per square foot, would you jump on that and say, “Hey, that’s a bargain?”

MILLER: I guess it’s personal preference. You have to decide whether you like the neighborhood. I’ve always felt the reason why [a neighborhood is] cheaper than a Soho and Tribeca is because it’s not proven as yet for that price structure. So you are going to see more price volatility if you have some sort of market downturn meaning that there is a lot of upside and there’s potential downside.

However, the thing about housing which is very different than stocks, is that, for example, the FDIC defines a housing boom as three years and 30 percent appreciation, and a bust is five years and 15 percent depreciation.

TRD: And how does that compare to our market now?

MILLER: On the upside, we’re about double what their boom figure is. But it’s sort of that idea that on a down cycle, prices tend to be sticky on the downside, that it’s still an asset that’s useable. Real estate is a cyclical thing.

We’ve just seen a lot of the upside over the last five to seven years.

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“Appraising the appraisers” on National Public Radio

August 1, 2005 | 9:37 pm | Public |

A few years ago, I decided to be more outspoken about the predicament that appraisers are in. We really don’t have a collective voice over the issue of the flawed structure that currently exists in our profession. It is essentially this:

Those who are paid on commission in the origination of a mortgage, determine which appraiser(s) to use. The system of checks and balances no longer exist.

Bob Moon of the Marketplace show on American Public Media radio showed great interest in the story. He researched and put together a broadcast aired on National Public Radio on June 23, 2005.

At about 6 minutes, it was one of the longest stories they had done in the past year. That meant either I was a fascinating interviewee or the story was compelling. (I assume the latter but was secretly hoping it was the former).

American Public Media “Market Place” Radio Broadcast Appraising the appraisers

UPDATE This was my first post on Matrix. The earlier posts were part of my original Soapbox Blog that I began in early July 18, 2005 and eventually merged into Matrix.

The Marketplace audio file link is broken so I don’t hope they mind me placing the audio file of the June 23, 2005 segment on my blog. This was the moment I came out on the situation appraisers were facing in public. If you’ve been following our industry or are part of it, the solutions set by Dodd-Frank have made the reliability of an appraisal done for a bank even worse.

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Appraiser Identity Theft

July 29, 2005 | 11:15 pm |

The Illinois Coalition of Appraisal Professionals commissioned a study on identity theft and resulting article that has been widely posted on the internet on appraisal sites. Here is a copy [note: pdf]. The letter written by Brian Weaver, a practicing appraiser for over 25 years and worked as an investigator for the Office of Banks and Real Estate in Illinois. He is referring to a problem that is manifested by the state agencies that publish the license numbers of appraisers on the Internet and the appearance of license numbers on all appraisal reports.

This is an excerpt of a letter written by Chip Wagner, IFA, SCRP, ERC’s 2005 Appraisal Foundation Advisory Council Representative to the Worldwide Employee Relocation Council to bring attention to the RAC membership an issue that is affecting the Appraisal Community.

There is an alarming trend of the fraudulent use of appraiser’s license numbers and unscrupulous individuals stealing the name and license or certification number to use on fraudulent appraisal reports. As you can see from the [Brian Weaver] article, over $40 Million in forgery has been uncovered in Illinois, and it is expected that this might be only the tip of the iceberg.

Online appraisal directories, Department of State Web Sites, Appraisal Reports and printed appraiser directories all publish our license numbers. There is no need to disseminate this to the public. Posting categories would replace the need to post numbers since [honest] users of these directories only look to see the license number and often don’t know the classification.

  • Certified General
  • Certified Residential
  • Licensed
  • Trainee

When Chip brought this matter to my attention, my first reaction was “well the Department of State publishes our numbers online for all to see, and most states do the same thing.”

Chip’s response was:

Let me advise you, this is all changing based on the publicity that what is happening in my state is taking place. My state has access to this information password protected now. When I first saw this article on appraiser identity theft, I told my state appraisal board the same thing “this is available on the Appraisal SubCommittee’s website.”

I have been told by my state appraisal director and appraisers on the board that this will be changing because of what is happening in my state.

After thinking about this further, I realized this is a natural extension of identity theft from stolen credit cards and social security numbers. Today, the proliferation of Appraisal Management Companies have virtually eliminated the one on one relationships lenders had with their approved appraisers, in fact 10 years ago, a lender could tell when your signature was forged. Now its a non-issue, they have no idea what your signature looks like.


The first thing to do is remove your license numbers from your own web sites…

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Interagency Statements on Independent Appraisal and Evaluation Functions

July 29, 2005 | 9:51 pm |

The Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC), the Office of Thrift Supervision (OTS), and the National Credit Union Administration (NCUA) were concerned enough on several appraisal issues that they released a joint statements in 2003 and 2005.

The October 28, 2003 statement addressed concerns over the independence of appraisers. [note: pdf].

Highlights…

The agencies’ appraisal regulations address appraiser independence and require that an institution, or its agent, directly engage the appraiser. The only exception to this requirement is that an institution may use an appraisal prepared for another financial services institution, provided that the institution determines that the appraisal conforms to the agencies’ appraisal regulations and is otherwise acceptable. Independence is compromised when an institution uses an appraiser who is recommended by the borrower or allows the borrower to select the appraiser from the institution’s list of approved appraisers.

The March 22, 2005 statement addressed concerns over the transferring re-assigning appraisals [note: pdf].

Highlights (Q & A Format)…

  1. May an appraisal be routed from one lender to a regulated institution via the >borrower?

Answer: A regulated institution cannot accept an appraisal from the borrower unless the regulated institution can confirm that the appraisal was in fact ordered by another regulated institution or financial services institution. In accepting the appraisal, the regulated institution must also confirm that the appraiser is independent of the transaction and that the appraisal conforms to the agencies’ >appraisal regulations and is otherwise acceptable.

  1. Can a borrower pay the appraiser directly for an appraisal that is ordered by the lender?

Answer: Since the regulated institution has engaged the appraiser for its services, the regulated institution should be the party to remit payment to the appraiser. The regulated institution may seek reimbursement from the borrower for the cost of the appraisal. However, the borrower may not recommend an appraiser to the institution or select the appraiser.

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OFHEO Finalizes Regulation on Mortgage Fraud

July 29, 2005 | 1:47 pm |

From their press release: “The Office of Federal Housing Enterprise Oversight (OFHEO) has finalized for publication in the Federal Register a regulation requiring Fannie Mae and Freddie Mac (the “Enterprises”) to report mortgage fraud or possible mortgage fraud in a timely fashion.” OFHEO is the regulatory oversight agency for GSE’s (Government Sponsored Enterprises) like Fannie Mae and Freddie Mac.

Complete text of the final regulation can be found here. [note: pdf]

Appraisal fraud is now considered within the definition of mortgage fraud. This rightfully defines those who pressure appraisers to reach a specific value or they won’t receive future business as committing a fraudulent act.

Excerpt… § 1731.2 Definitions.

(c) Mortgage fraud means a material misstatement, misrepresentation, or omission relied upon by an Enterprise to fund or purchase — or >not to fund or purchase — a mortgage, including a mortgage associated with a mortgage-backed security or similar financial instrument >issued or guaranteed by an Enterprise. Such mortgage fraud includes, but is not limited to, a material misstatement, misrepresentation, >or omission in identification and employment documents, mortgagee or mortgagor identity, and appraisals that are fraudulent.

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The Responsible Lending Act (HR 1295)

July 27, 2005 | 10:12 pm |

The Responsible Lending act introduced in the house this spring addressed the issue of appraisal pressure. The section of the bill to refer to TITLE IV–APPRAISAL ACTIVITIES primarily addresses predatory lending in the sub prime market.

The appraisal portion of the bill has been covered in the media and here and here and here and here.

You get the point.

This was probably in response to a rash of appraisal fraud that has been happening in then the relaxed lending guideline environment, proliferation of sub prime lending, increased wholesale mortgage origination, specifically in markets like the Poconos, which was highly publicized.

The bill provides terminology that specifically equates appraiser pressure to a criminal act. Its a giant step in the right direction but at the end of the day, we believe nothing will change to prevent overall fraud in the industry within the bill’s current format.

With 72,000+ licensed appraisers nationwide, state enforcement is limited at best. The average enforcement department for each state is something in the order of a few staff members and limited funds.

The government is currently analyzing the appraisal industry and will produce a detailed analysis. Hopefully, it will show that the lack of separation between the sales function and the underwriting function promotes fraud. In other words, those individuals paid on commission, should not decide which appraisers get the assignment.

One of the best descriptions of the current problem can be found from the think tank DEMOS.

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Testimony Before the Subcommittee on Oversight

July 26, 2005 | 8:45 am | |

Committee on Ways & Means :: U.S. House of Representatives : Testimony

Someone from the research staff of the House Ways & Means committee actually called me on this issue as well and I volunteered to testify. I wanted to discuss the problem of the lack of independence of the appraiser but they wanted me to name names. They completely missed the point. Its not specific individuals, its the way the industry is set up. I got the distinct impression from my conversation that the committee already knew what they wanted to hear. They went wih an appraiser from Virginia, David Lennhoff, who didn’t name names either, but basically said that the 10% rule – of – thumb adjustment is not valid.

Most appraisers who do facade easement valuations are using 10% to 15% adjustments as a guideline which originates from the now infamous original Primoli Letter [pdf] , since replaced by a revised version from the IRS [pdf] that omits the 10% to 15% verbage. Since it could be interpreted that the IRS seems to be re-writing history, I suspect that is the motivation for the National Architectural Trust to document the changes in policy by the IRS on this matter [NAT].

The Problem: Most appraisers are simply performing a valuation and making this discount. The problem is that the disclosure of whether the seller has taken advantage of the deduction is not available to the public, in a practical manner. The inability to use empirical data (because it doesn’t exist) provides the classic catch-22. You need empirical evidence to appraise the first property in your market, but yet the IRS says you can’t appraise without using empirical data. However, there is no definition as to what constitues empirical evidence. Using court cases, sales data, equity stock trends, what conference wins the Superbowl (well, thats a stretch) might be interpreted as appropriate since they are all empirical evidence.

Our firm grew disaffected as homeowners caught on to the process and pressured appraisers to appraise the properties on the high side to get a bigger deduction. We refused to do that so we stopped getting this type of work. We were openly complaining that there was a problem, but from their perspective, they do not have the ability to police the appraisers.

Who is going to say the value is too high? No one. There is no review function or policing of these reports done for any facade easement organization. It falls in the lap of the IRS agent during an audit.

The loss in tax revenue due to inflated appraisals has got to be staggering to the Treasury. Many appraisals are inflated because there is no oversight and like the wholesale lending process (mortgage brokers), the benefactor picks the valuation expert. And once again, appraisers, including good appraisers who don’t play this game, will be blamed.

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The Real Deal – The Real Deal Weekly Interview

July 26, 2005 | 8:26 am |

The Real Deal – The Real Deal Weekly Interview

I suggested to Amir Korangy of the Real Deal that he begin Podcasting since his publication would be a perfect candidate for it. The Real Deal has access to many interesting people and their content is always changing.

Not only did he look into this technology right away, but he asked me to be the guninea pig…errr…the first interviewee. 😉

From The Real Deal’s Web Site…

Jonathan Miller at The Real Deal Magazine’s first Podcast on July 15, 2005

In The Real Deal’s inaugural interview in its new weekly audiocast series, we sat down with appraiser Jonathan Miller, president of Miller Samuel Real Estate Appraisers and Consultants. Miller’s reports on the Manhattan apartment market are the most widely cited in the industry, and he has been featured in The New York Times, the New York Post and countless other publications including The Real Deal.

With reports showing apartment prices hitting new peaks each quarter but often differing significantly in their findings we asked Miller how he collects his data, and his thoughts on the existence of a real estate bubble. To listen to the entire interview, click one of the links below.

MP3 Version

Podcast (RSS) Version

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Form-Fillers Wanted

July 18, 2005 | 9:29 pm |

Appraisers have been relegated to form-fillers. The easiest source of new business is the mortgage broker (wholesale lending) pipeline. I don’t want to stereotype all mortgage brokers because there are a number of good ones out there. The appraisers who deal with this client base are in a catch-22. Its simply common sense that an appraiser who comes in “low” on a refinance valuation or “kills” a sale, won’t get repeat business from that mortgage broker. Afterall, the mortgage broker is paid on commission. Appraiser makes number, gets more business. I often chuckle when appraisers are described as a “good” appraiser. That usually means that you “hit the number.”

Here’s a recent letter to the editor on this subject as seen in the New York Times:

July 3, 2005

A Disservice to Clients

To the Editor:

I am writing in response to the article that appeared in the Real Estate section concerning appraisals that don’t match the sales price (“When the Numbers Don’t Match,” May 29.).

Mortgage brokers who order appraisals until they get one that works for them are doing a disservice to their client, not to mention the lender.

It would be interesting to know how many mortgage brokers engage in this practice without disclosing their actions to their clients. If the appraisal comes in low and the mortgage broker orders another appraisal that makes the number, the question has to be asked why one appraiser could make the deal and the other couldn’t.

Is it possibly because one appraiser has taken sales outside the subject’s market in a higher-priced market or may have misrepresented the size or condition of the comparables?

The appraiser’s job is to provide the lender with an opinion of value supported by the market. The appraiser gets paid whether or not he makes the deal. The mortgage broker gets paid only if he makes the deal.

The appraiser does not have any interest in killing the deal. After all, when the appraiser makes the deal, he or she doesn’t have to take irate calls from the buyer, the seller, the sales broker or the mortgage broker. Plus, he doesn’t make any enemies, stays on the mortgage broker’s list of approved appraisers and remains on good terms with the sales broker.

Scott H. Gallant

Park Slope, Brooklyn

The author is a real estate appraiser and consultant.

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The beginning of the end, or how this mess got started.

July 18, 2005 | 9:13 pm |

It amazes me how flawed the structure of the wholesale lending process is. Someday during an economic downturn or future lending crises, this will come out with the wash. Until then, its status quo.

How it began…

As banks floundered in the early 1990’s during the recession, the non-revenue departments were cut back, which included…you guessed it…appraisal departments. The order and review function, which requires administrative overhead, was shifted to mortgage brokers who would bear the staffing risk. Mortgage brokers are generally paid a commission of 1 point, or 1% of the mortgage. The appraisal fee, which generally starts at $300 to $500, is either paid in the borrower’s application fee or the absorbed by the mortgage broker.

In relatively short order, the wall between the sales function and underwriting essentially went away and so did the buffer between bank loan reps driven by a commission incentives and the appraiser, who is supposed to be assessing the collateral for the lending institution.

Large appraisal factories sprang up across the country hiring trainees who would simply fill out appraisal forms and make the deals. Without inhouse appraisal departments to review these reports, they were essentially accepted at face value. Many experienced firms either shut down or moved into other areas of valuation.

Why does this matter?

Lets count the ways.

  1. The borrower is under the assumption that the licensed or certified appraiser is independently assessing the value.
  2. Lending institutions have no idea what their collateral is really worth and the implicit risk to their portfolio.
  3. These lending institutions are government insured.
  4. Guess who pays the bill in the next banking crises?

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