Matrix Blog

Law, Ethics & Fraud

“Kleptocracy Initiative” to Stop Money Laundering in Real Estate up for Renewal

January 23, 2017 | 9:03 am | Infographics |

Almost two years ago the real estate new development world was rocked by the New York Times epic page one story by Louise Story and Stephanie Saul about foreign investment in U.S. real estate. The vehicle for “Towers of Secrecy” purchases was the ubiquitous LLC shell corporation. While I’m no advocate of illegal activity for the sake of preserving the health of a real estate market, I was very skeptical and outspoken about the challenge of measuring the impact of this new rule. Especially since the new development market had already started to show signs of over supply by mid 2014 in both Manhattan above $3M and Miami above $1M. It also seemed to single out wealthy buyers who did not want to get a mortgage. How could the effectiveness of this six month rule be measured reliably enough to be extended or made permanent when the market was already falling?

Since these series of articles came out, I have learned a lot more about the scale of kleptocracy around the world and more appreciative of what the rule attempted to accomplish.

MHjmkleptocracycallout

Fast forward to 2017 and the super lux (≥$5M) new development condo market cooled sharply. The rule has been extended but is now up for renewal in a month. It is not clear whether the new administration will renew it. Nicholas Nehamas of the Miami Herald penned are great recap of the rule status. To make it even better, he included a YouTube video of bulldozers playing chicken in the piece.

I have to say I admire the messaging that came out of Homeland Security to justify the rule’s impact. Whether or not the following is an exageration, the mere existance of the rule is probably an effective deterent.

“We don’t come across [money laundering in real estate] once every 10 or 12 cases,” said John Tobon, U.S. Homeland Security Investigations Deputy Special Agent in Charge for South Florida. “We come across real estate being purchased with illicit funds once every other case.”

Here are the areas current covered by the Treasury rule.

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Using the parameters of the rule, the Miami Herald asked that I analyze sales in the five boroughs of NYC since enactment.  I stuck with condos and 1-3 families since co-ops tend not be a preferred property type of foreign buyers. I found that sales dropped 6% year over year for the aggregate of Manhattan sales over $3M and the outer borough sales of $1.5M. This included legacy contracts that closed during the rule enactment period but went to contract before it started. Those sales likely softened the actual decline in sales.

MHsalessinceFinGen

While it appears reasonable that the rule had some drag on demand, a possible repeal in February won’t likely have much of an impact on the oversupply that currently exists.

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Voice of Appraisal Podcast: E136 A Deep Dive into A.I. with Jonathan Miller!!!

January 19, 2017 | 7:12 am | Radio |

I had another great conversation on Voice of Appraisal with Phil Crawford. The conversation centered around AI National’s “taking” policy debacle, my repository for all the documents on this matter (realestateindustrialcomplex), the viral outrage that has overtaken the appraisal industry, released from my first of several Matrix posts on the topic: Sadly, The Appraisal Institute is now working against its local chapters.

We also spoke about RAC, an appraisal organization I’ve been a member of for two decades and recently became the president. RAC works for its members.

Aside from Phil’s dreamy radio voice, he shares a lot of great content each week for appraisers. Well worth a regular listen.

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Unbelievably, The Appraisal Institute Intimidates A Chapter

December 28, 2016 | 5:17 pm | Investigative |

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On December 20, 2016 AI President Scott Robinson and AI’s legal counsel called a chapter executive director’s superiors about two posts placed on my REIC website (realestateindustrialcomplex.com) – under the guise of being brand damaging to AI National.  This was interpreted as an intimidation tactic.  For the record, the posted documents were already widely shared across the industry and there was no personal commentary provided with the posts. In fact, this person was merely posting them on behalf of someone else.

One of the posted documents, the North Texas Chapter’s position paper on the “taking” was already on REIC…if they had taken the time to scroll through it. The second document was the Chicago Chapter’s response to the “taking.” When I heard about this AI National action from multiple sources, I called the chapter executive director and left a voicemail, inviting them to take down the documents if they wanted to because of the threat. After the posts were removed, I re-posted the Chicago chapter letter since the North Texas Chapter letter was already on the site (it was the first document I ever posted on REIC).

My thoughts

  • This call was a sign that AI National is panicking after creating a massive membership-wide backlash relating to what I call the “taking” policy.  This already implemented policy has been discussed in previous blog posts.
  • The two documents posted by the chapter executive director were already in the public domain after being widely circulated by an outraged AI membership across the country.
  • The heavy-handedness to make such a phone call shows the bully pulpit culture taken against those who speak out.
  • Most members I know are afraid to speak out against AI National for fear of retaliation. This recent call substantiates that fear and that is very sad even though their actions are based on nothing (sorry AI legal counsel) and brand damaging seems to be something that AI National has been good at. AI National has largely ignored their SRA designation to the point where it carries little weight with clients anymore. They have not successfully addressed declining membership, plus explain their singular emphasis on commercial, the international membership spending boondoggle and much more. Perhaps membership should be the one intimidating AI National leadership instead of the other way around?
  • There isn’t any reasonable basis for a lawsuit with what I understand.  Here is some rationale.
    — The two documents are not AI National’s documents.
    — The two documents are being circulated everywhere by AI members and non-members alike.
    — One document was the first document I had ever posted on my REIC website before it was posted by the executive director.
    — This aggressive action by AI National can only be interpreted as an attempt to perpetuate a culture that intimidates members and chapter administrations to allow them to continue on their current path.

Action

I have seen high volume on my REIC site since launch as well as on this Matrix blog and my Housing Notes. However, I have had fewer register on REIC than anticipated based on the traffic. After learning about the phone call and my intention to be transparent on the website with “who said what,” I realized I had not considered how badly damaged the current culture was at AI National and the animosity they show towards its chapters and members.  If that’s not an accurate interpretation, I invite Scott to call me and clarify what was said so we can get both sides of this situation and I can share it with our readers. I am only interested in getting the story right.

Therefore I have asked my web developer to remove all registration requirements on REIC to allow anonymous posts (soon – he’s on vacation) – look for the announcement.

In the meantime, you can email me directly and I will post your content myself on REIC.

Although I am no longer associated with AI specifically because of similar AI National behavior during the exit of TAF, their actions and (mainly) inactions have continued to hurt the appraisal industry.  Let’s stop an insulated AI National leadership from causing any further damage to the AI brand as well as the appraisal industry.

Two more thoughts.

  • It’s a free country and appraisers have the right to provide opinions and share widely circulated letters already in the public domain to whomever they wish.
  • There have been thousands of readers of my analysis of their stealth policy “taking” debacle and additional related content is making the email rounds in a frenzy – so I want to know this: Does AI National plan to threaten their entire membership?

 

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Real Estate Industrial Complex versus The Appraisal Institute’s Stealth Culture

December 18, 2016 | 8:48 pm | Favorites |

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Over the past couple of weeks there has been extreme outrage expressed by the chapters and membership of the Appraisal Institute towards “National” leadership and their stealth policy culture. The last straw was “The Taking” policy of nearly all chapter funds and then charging the chapters to manage them. This major AI policy initiative was passed without vetting of the chapters or the membership. I have written about this in two recent blog posts that went viral.

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

Incredibly, The Appraisal Institute is taking chapter “excess cash” and charging them for the privilege

Emails, letters and documents are flying everywhere.

On Thursday it was suggested I set up a central repository for all this information since not everyone in the chapters and membership are seeing all the same information.

So we set one up and it is ready to go. This new web site is a forum that allows users to either lurk or register. If you register you can add content and comments. If you’d rather lurk, that’s ok too since the goal here is to create transparency. I preloaded REIC with some of the information I have. I’m happy to upload information for those of you that are less tech savvy…just use my email address below.

But for now, the best thing you can do is SEND THIS URL TO EVERYONE YOU KNOW and start UPLOADING AND SHARING INFORMATION RIGHT NOW!!!

https://realestateindustrialcomplex.com

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Voice of Appraisal Podcast: E123 “Solving Problems with Jonathan Miller!”

October 7, 2016 | 10:30 am |

Had a fun interview with Phil Crawford and his must listen weekly Voice of Appraisal talk show. I’ve set up a home button on my iPhone to grab each new interview. My only regret in life is not having Phil’s smooth silky radio voice. He provides a great service to the appraisal community.

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Multi-millionaire Motivational Speaker Dean Graziosi Shares His Appraisal Wisdom

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

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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.

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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.

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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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Good and Bad Super-Luxury Condo Buyers Love the LLC

February 9, 2015 | 9:46 am | | Favorites |

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One of the great ironies of modern residential real estate has been the expansion in transparency of information, along with greater secrecy of ownership. I think the latter coincides with the much greater wealth that is being put into hard assets like real estate. Privacy and security are indeed very important to many, including the wealthy and especially those near the top of the financial pyramid. There is nothing sinister or unseemly about the desire for privacy. The use of limited liability corporations (LLCs) has been a legal vehicle (and a gift) from lawmakers who created it that allows people to keep certain transactions hidden from view. However the LLC also provides an opportunity for bad actors to shelter their often ill-gotten assets too.

Louise Story and Stephanie Saul of The New York Times have explored this in “Towers of Secrecy: Stream of Foreign Wealth Flows to Elite New York Real Estate,” an epic data visualization along the lines of “Snow Fall: The Avalanche at Tunnel Creek” This article is a must read covering the hypersensitive subject of high end real estate and privacy.

The ongoing debate about the dying middle class versus the booming fortunes of the wealthy, the lack of affordable housing versus the super-luxury residential tower boom and municipal governments grappling to keep construction and development moving forward to keep tax revenue flows coming in, have made this effort long overdue.

Towers of Secrecy” is careful not to stereotype users of LLCs in high end real estate transactions as exclusively foreign buyers. Within the Manhattan market, foreign buyers are not the majority of overall high-end real estate purchasers. However they tend to be concentrated around the Midtown central business district (aka ‘Billionaires’ Row’) whereas domestic purchasers tend to favor markets found to the north and south of Midtown.

UPDATE There’s a great recap over on Curbed NY too:
Scandal-Plagued Foreigners Park Millions in Midtown Condos

Here are a few screenshots of the embedded videos within the “Towers of Secrecy” piece.

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My First Post: July 31, 2005 APM Marketplace Radio’s “Appraising the Appraiser”

June 18, 2014 | 10:21 am | Radio |

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It is hard to believe it has been nearly 9 years since I wrote my first blog post. Back then I was very frustrated with real estate world around me. The housing market was booming and my appraisal competitors were increasing their staff size by a multiple of 20 (they’re now essentially out of business). We weren’t part of the (fool’s) gold rush.

Apparently I had missed a key math and ethics class in school that would help me understand what was happening and why it was happening. Everyone seemingly was losing losing their minds – appraisers, consumers, banks, rating agencies, investment banks, investors – to a word – everyone. It didn’t help that national appraisal organizations, all of whose memberships had been dropping since appraisal licensing was introduced in 1991, did not understand or were not willing to speak out about the obvious problem. Appraisers were not allowed/not able to be a neutral valuation experts for lenders to make informed decisions on lending/risk of their collateral – lenders just didn’t care because they could off-load the risk to investors around the globe. The appraisal industry was converted nearly overnight to “deal enablers.”

I saw my career ending in 3 years if I didn’t do something. I did the only thing I could think of – start talking openly about the lack of independence the appraisal industry had at that time (amazingly, how little has changed in this regard). No appraisers I were aware of were speaking openly about the problem in 2004-2005 – our industry was living in constant fear of alienating their lender clients. Since I was losing lender clients to my rapidly growing competitors who were morally flexible, I really had nothing to lose.

My first blog post was a June 23, 2005 interview with Bob Moon at APM Marketplace in a segment called “Appraising the Appraisers” My industry was a symptom of a larger problem that eventually crushed the global economy – a credit crunch.

The original APM audio link is now broken but I have it here (I hope APM doesn’t mind).


It’s a time capsule and (I believe) worth a listen.

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AMC Structure Systematically Pushes Good Appraisers Out of Business

June 13, 2014 | 2:25 pm |

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Good appraisers are unable to compete with the fly-by-night form fillers that proliferate the AMC industry.

We have done some work for the AMC of a global bank who provides mortgages in Manhattan when they are willing to pay the market rate for appraisal services. They send us requests to appraise a variety of co-op apartments in Manhattan. We recently received an appraisal request for a very large co-op apartment in a unique building (property probably worth well over $10M). The AMC offered a generic fee which is roughly 1/3 the local market rate for this type of property.

We sent them a request to be paid the market rate and was then asked to make an “exception request” and explain the reason for the higher fee so they can go back to the borrower to get approval. We are nearly always rejected.

Problem 1: Conflict of Interest Unbelievably the AMC is aligned with the borrower’s interest in cost savings without concern for quality. The AMC is in business to manage the appraisal process and therefore help protect the bank’s exposure to risk. When you get right down to it, the only value-add an AMC provides to a bank is cost containment (and they are not cheaper than banks doing it themselves) so why would an AMC be incentivized to allow the appraiser to collect a fair fee? It makes them look ineffective at cost containment.

Problem 2: Paying Lip Service to Quality The reason an appraiser is requesting a higher fee is the complexity of the assignment. What else would it be? Yet we have to write a specific request to this property which we haven’t inspected yet. In reality, the next appraiser on the conveyor belt will be selected and given a higher rating for being cooperative. This is a sham process – it is merely a way to document the appraisal process in case the regulators show up.

Here’s the standard BS response that this AMC gave to our request – this AMC is located in a rural location in the upper reaches of the northeastern US – they are concerned whether the borrower would feel comfortable paying a higher fee on a 50% cash co-op building on Park Avenue. The sender is a clerical (non-appraiser) individual who is giving the appraiser the following boilerplates response and doesn’t really understand what they are saying:

When you became an approved appraiser, you agreed to follow the processes and procedures required by [XXXXXX] by signing our Engagement Letter. We require all vendors to submit a fee exception form when they feel the work is outside of the norm. We need that information to justify your fee request to our borrowers. We are not looking to force an appraiser to complete work at low fees, we are looking to provide the best possible work at the best possible price for our borrowers. We expect that you are the expert in your market and we are looking for your expertise and explanation to make our borrowers understand why the fee may be warranted. However, we also expect the fee to accurately reflect the work involved and borrowers have the right to refuse to pay that fee and request that another appraiser be assigned. While, it may be frustrating for our appraisers, it is our current system and all of our vendors are required to follow the process.

No, it’s insanity.

Question How much do you think this clerical person understands about our specific submarket and whether they understand how much another appraiser who will work for a lowball fee does understand about our specific market?

Answer Nothing. This is merely canned comment process designed to blunt the impact of an investigation by a regulator in the future.

Here are a few other thoughts on this whole sham process:

Why Appraiser Robots Rule The World of AMCs
– In a market like Manhattan, especially for a substantial property, you could say that there is no such thing as a standard property and fees are based things like time spent on the assignment and the experience needed to handle the complexity….unless you see appraisers as robots and every assignment is the same.
– Beyond saying things like this is a unique property with limited data and would take a longer time to work on to provide a credible result aren’t enough to justify a higher fee to a borrower who wants to keep the fee low. Does the bank (AMCs client) even understand that this is happening?

So what would help an appraiser get a fee approval of any kind from this AMC? Here are a few reasons I might use next time when I have to substantiate a higher than generic appraisal fee:
-There are attack dogs in the building lobby that we have to run from and I am expecting them to tear at my clothes and force me to seek out significant medical attention.
-The flooring of the co-op apartment is believed to be covered with shards of glass and we therefore have to buy steel toed work boots to do the inspection.
-The occupant is known to carry a weapon, having assaulted visitors and did jail time as a result – so we need to buy a Kevlar vest

You get the idea. Good grief.

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Spectacular TED Talk on The US Financial Crisis: How it Happened + How to Prevent

May 31, 2014 | 4:59 pm | Favorites |

Wlliam Black, a former bank regulator, made a TED Talk last fall that I wish I had made (but I couldn’t be as eloquent although I have a cooler tie). It should be required viewing by anyone who is connected with the housing industry.

Black’s presentation lays out the financial crisis in the proper context. He provides the recipe for disaster for all to see and it is NOT complicated to understand. Change the perverse incentives and a lot of this goes away. So many opportunities to avoid this crisis were missed.

And this is the first time I’ve heard someone talk about the unrelenting pressure that banks (and mortgage brokers) placed on appraisers, essentially forcing our industry to either make the number of get out of town. By 2007, 90% of appraisers said they were coerced by banks to make the number. That seems low to me. It had to be 100% or else those 10% of appraisers were living in a cave.

I’ll be returning to this video periodically for the foreseeable future as a reminder.

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Room 666: Providing court testimony as an expert witness makes you better

May 21, 2014 | 9:54 am |

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I took the photo of this door in NYS Supreme Court yesterday and it got me thinking about quality of “experts” as did this.

In a perfect world, any appraiser or analyst (in any profession) should be forced to provide expert witness testimony in court at least once – covering a paper they’ve written, research they have presented, an opinion they’ve formed, a sales pitch they’ve developed, heck even a blog post they’ve posted.

I actually like providing testimony and our firm does a fair amount of this work for our clients. Getting grilled for hours and even days by lawyers trying only to chip away at your credibility in front of others provides amazing clarity to the way you approach your analysis and profession (aside from being exhausting).

Many talking heads that opine on a housing market, a stock, a court case, etc. often aren’t tested to fully articulate their thoughts, assuming they are even thinking. Hence, BS reigns.

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Regulators Turn Focus on AMCs, Proposals Include Hiring “Competent” Appraisers

March 26, 2014 | 12:43 am | Milestones |

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The OCC and an alphabet soup of 5 additional regulators: FDIC, CFPB, FHFA, NCUA and the Federal Reserve issued a joint press release that if adopted, takes a small step forward in the regulation of appraisal management companies, who are largely responsible for the collapse of valuation quality since the credit crunch began.

To many, this action is long overdue. Appraisal management companies control the vast majority all mortgage appraisals in the US, having been legitimized by HVCC back in May 2009. I’ve burned a lot of calories over the past several years pointing out the problems with the AMC industry so admittedly it is nice to see them getting attention. The fact that these institutions are not licensed to do business at a statewide level but the appraisers who provide the valuation expertise they manage is inconsistent at best.

Still, the recognition of this regulatory glitch probably won’t have a significant impact on appraisal quality provided by AMCs. As my friend Joe Palumbo maintains, is like fool’s gold.

I think proposal is at least a starting point.

A couple of highlights – regulators would:

  • Require that appraisals comply with the Uniform Standards of Professional Appraisal Practice (today we had a clerical AMC staffer tell us that writing out the math calculations on the floor plan was a requirement of USPAP).
  • Ensure selection of a competent and independent appraiser. (It is unbelievable to think this is necessary but it does make the legal exposure a little larger for AMCs.)

Housingwire has a good recap of the proposed regulations and so does the Wall Street Journal provides a nice overview (I gave them background for the piece).

The proposal by the Office of the Comptroller of the Currency, Federal Reserve and other regulators mandates that appraisal-management companies hired by federally regulated banks use only state-licensed appraisers with “the requisite education, expertise, and experience necessary” to complete appraisals competently.

Moral hazard There is no significant financial incentive for lenders to stop accepting the generally poor quality appraisals the AMC industry presents them daily. The hope is that the additional regulatory largess the AMCs have to confront will force the issue with lenders simply because the AMCs will have to raise their fees. Without a real “value-add” to the banks other than cost control and fast turn times, the lack of quality for a large swath of AMCs may no longer be overlooked by banks. Yes I can dream.

Residential appraisers, mostly 1-2 person shops, have largely been left without a voice and the bigger financial institutions have lobbied financial reform overtop of us without the regulators truly understanding what our role should to be to protect the taxpayer from excessive risk.

Anumber of smart appraisers I know have created a petition whose sole purpose is the get the attention of the CSFB to address the issue of “customary and reasonable” fees. Our industry has no other way to reach the regulators or the ability to lobby our views in Washington. I hope they are listening.

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