Matrix Blog

Posts Tagged ‘RESPA’

Taking Orders, Separating Mortgage Functions

January 30, 2006 | 11:37 am |

William Apgar, the former head of FHA said it is time to change the way appraisals are ordered in the article Unraveling th Pyramid [BrokerUniverse].

This article addresses the fundamental issue with appraisals today – the independence of the appraisal function. To paraphrase: Its so important that on Oct. 27, 2003 the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, and the National Credit Union Administration, issued a Joint Statement that requires the separation between loan production, appraisal ordering, and the appraisal review function. In May 2005, the regulators again issued guidelines and warned that financial institutions may not understand the risk of aggressive lending standards.

To say that our mortgage system is unique would be an understatement. The American Dream of home ownership has become a reality for more people than anywhere on the globe. Lending money based on the securitization of loans backed by real estate has been the rock on which this phenomena has been built. Fundamental to this system is the fair, objective and unbiased valuation of the real estate that secures these loans and provides the confidence Americans have in the value of their home. For this reason the industry has created and depended upon a profession that has been central to our mortgage economy – the independent fee appraiser. This profession is wholly based on its separation from all others within the mortgage system. It cannot be tainted by self-interest or the desire of others to profit from a mortgage transaction. It is the cornerstone upon which the value of real estate is dependent. In fact, one of the key features of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 was to make certain that trained and certified licensed professionals completed the valuation process.


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[Commercial Grade] The Best And The Brightest

January 26, 2006 | 5:15 pm |

Webmaster’s Note: This is the first in a series of weekly posts by John Cicero, MAI who will provide commentary on issues affecting real estate appraisers, with specific focus on commercial valuation.

Disclosure: John is a partner of mine in our commercial real estate valuation concern Miller Cicero, LLC and he is one of the smartest guys I know.

We commercial guys like to think that we are sophisticated financial analystswe analyze real estate as an investment vehicle, similar to an equities or bond analyst would. We spend our days cash flow modeling wirh Argus and Dyna. Our training includes advanced capitalization theory, in order to understand the relationship between cap rates and yield rates, and we need to understand theories that, frankly, we’ll never use again (remember the J-factor and the Hoskold premise?). We analyze assets worth hundreds of millions of dollars, and advise clients on managing their real estate risk.

That’s why it’s particularly disheartening that, in these days of appraiser licensing, the state doesn’t quite know what to do with us. I recently went onto the New York State Department of Licensing web site and found the other “professions” that are similarly licensed:

Don’t get me wrong. I have the utmost respect for notary publics, cosmetologists and telemarketers, all of whom work hard to make an honest living. But if this is the public perception of the commercial real estate appraiser, I suspect that attracting bright and talented people to this field will continue to be a struggle.


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Unraveling The Pyramid Of Bad Practices

December 19, 2005 | 1:08 pm |

A friend of mine passed along an article by William Apgar called Unraveling the Pyramid. Mr. Apgar is the former Federal Housing Administration commissioner and senior scholar at Harvard University’s Joint Center for Housing Studies and lecturer in Public Policy at Harvard’s Kennedy School of Government.

I found it to be a great article because someone with the gravitas of Mr. Apgar addresses the primary reason that the appraisal profession is in deep trouble and why I started Soapbox to begin with:

The appraiser has not been allowed to remain independent.

The Article

“It cannot be tainted by self-interest or the desire of others to profit from a mortgage transaction. In fact, one of the key features of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 was to make certain that trained and certified licensed professionals completed the valuation process. Ever since FIRREA, legislators, bank regulators and consumers groups alike have weighed in on the issue of ensuring sound residential real estate valuations. On Oct. 27, 2003 the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, and the National Credit Union Administration, issued a Joint Statement that requires the separation between loan production, appraisal ordering, and the appraisal review function.

The reason for this independence is obvious; everyone, except the appraiser and borrower, benefits monetarily in fees and performance bonuses from a higher-priced home. As it is not uncommon today for a lender to be on both sides of the equation, making the loan and picking the appraiser, the federal regulations seek to separate the appraisers’ work from other aspects of the transaction. That is the idea, anyway, but not always the practice. In practice there are lenders that hire staff appraisers who are picked by and report to the lender’s loan officers. Certain lenders and title companies own or are part owners in appraisal companies.

There are agents and brokers that refer appraisers to lenders who are referred to borrowers by the same agents and brokers. This is all perfectly legal under RESPA, but gets in the way of independence. In May 2005, following the Joint Statement, the regulators again issued guidelines, warning that financial institutions “may not fully be recognizing the risk inherent in their aggressive lending standards.” In June, on the heels of this “shot over the bow” The National Community Reinvestment Coalition, a nationally recognized consumer group, released a report entitled Predatory Appraisals: Stealing the American Dream. [Soapbox] As they determined in their study “problematic appraisal practices exist as a serious impediment to responsible lending, impede fair housing and equal access to credit, and place the American Dream of homeownership and the safety and soundness of the mortgage marketplace at risk.” Today, no one can accurately assess how many homes are overvalued in the U.S. housing market and for how much. There are those who argue that there is no such thing as appraisal inflation and therefore, no problem exists; if a buyer is willing to pay an asking price, then the price isn’t inflated. True enough. But, when appraisal inflation becomes systemic to the loan process and when almost half of appraisers say they are pressured to inflate appraisals by others involved in the loan closing, then maybe it is time to change the way appraisals are ordered. The increased use of creative mortgage products and slowly rising interest rates, combined with predictions of falling prices in the hot real estate markets, concerned Julie Williams, the then- acting Comptroller of the Currency.

In a speech given in March 2005 Ms. Williams raised price declines as part of her warning about the growing credit risks stemming from aggressive retail lending. She said, in an article titled Amid the Housing-Bubble Din, Something Different? [American Banker] that some of the increasingly popular hybrid mortgage products “are often predicated on continued healthy price appreciation for residential properties. No one knows how these loans will perform if housing prices stabilize or fall or, worst yet, if the value of homes fall below what the borrower owes.”

This is a time of transition for the mortgage marketplace. Economists agree that although there is no nationwide housing bubble there are “regionalized bubbles” where housing prices seem to have risen to unsustainable levels and price declines have been predicted over the next two years. The mismatch between income gains and higher real estate values in some cities is particularly striking. How can someone earning $70,000 a year afford a $500,000 home? They can’t over the long run. Regulators have taken steps in the past several months that could exert strong influence on lenders and all vendors providing services to lenders.

Due to the volume challenges of the past two-to-three years, for some time now lower price and fast turn time have been favored over accuracy concerns. It remains to be seen if the real estate market changes and increased delinquencies put lenders in a more cautious posture. The ascendancy of credit risk over production in overall lending management may actually be on the near horizon, where it should have been all along. I applaud NCRC’s report, their veracity on the subject of predatory lending and for asking the hard questions. This issue is systemic, as the entire process from regulators to lenders to the third party interactions of loan officers and the Realtors/builders is broken.

It certainly will take a collaborative effort from the entire industry to unravel the pyramid of bad practices that have occurred over the past ten years.”

Webmaster’s Note: Lets hope we start seeing some movement in the right direction soon. The American public is not served well by the current state of the profession.

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Welcome To The Club: IRS May Require Membership In Trade Groups

December 12, 2005 | 12:11 pm | irslogo |

The Senate recently approved S. 2020, the Tax Relief Act of 2005 that allows the IRS to define an appraiser as being a member of an appraisal trade group [Valuation review]

The measure, which got the Senate nod last month, requires appraisers performing valuations for tax purposes to be designated by the Appraisal Institute or another professional appraisal organization or meet comparable requirements to be determined by the IRS in forthcoming regulations.

“The appraisal reforms contained in S. 2020 are consistent with recommendations that have been made by the Appraisal Institute, American Society of Appraisers and the American Society of Farm Managers and Rural Appraisers,” said Bill Garber, director of Government Affairs for the Appraisal Institute. “The Senate-passed bill has effectively ‘raised the bar’ with regard to appraisals performed for tax purposes, which is a move that is welcomed by the professional appraisal community.”

Wrong.

These appraisal trade groups have worked very hard for passage of this bill since the passage of appraisal licensing in 1991 rendered them inconsequential to the appraisal process and their membership has been in decline ever since. Their argument is that membership or designation would improve quality of appraisals that the IRS sees. This seems hypocritical since licensing came into effect for the very same reason – these trade groups were ineffective at influencing quality, or if they did, it was so poor that it didn’t really matter. It also gives bad appraisers something to hide behind. In other words, I think these organizations are worthy and expand the base of information a professional appraiser has access to, however, it is not the panacea for quality appraisals.

In fact, it has been our experience that appraisal quality is not improved if the appraiser has a designation. The poorest reports we review for lenders appear to be equally represented by members of these organization and those that are not.

The real problem is not whether an appraiser is a member of a trade organization, it has more to do with the structure of the industry and the bad habits it creates so that appraisers can survive.. We need to install some sort of controls to protect appraisers from influence because a change in the structure of the industry is how quality will improve.


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Regulators Lip Service On Loan Standards Goes Unheeded: Now Its Hammer Time

November 15, 2005 | 9:40 am |

Federal regulators have been warning lenders for months about home mortgage underwriting standards but little has changed [American Banker] According to a survey by the Federal Reserve, only 5 in 60 banks have made changes. This seems out of step with the tone of the guidance on home equity lending, AGENCIES ISSUE CREDIT-RISK MANAGEMENT GUIDANCE FOR HOME-EQUITY LENDING [pdf pg. 7], which was issued by the Fed, the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the National Credit Union Administration.

By most accounts, fierce competition, coupled with banks’ general comfort with the practices, has kept the industry from changing its product offerings or lending criteria much.

“Regulators said in the guidance that, along with rising interest rates, there were several other issues that warrant extra caution: interest-only features; loosening documentation standards; weaker loan-to-value ratios, debt-to-income ratios, and credit scores; and the increased use of brokers and automated appraisals…Agency heads’ speeches have grown more ominous, and bank executives report a recent uptick in questions from examiners and written warnings of coming scrutiny.

However, regulators say they are making progress and are concerned about moving too quickly for fear of causing a credit crunch, but are concerned about unsafe lending practices.”

Web Master’s Note: As a matter of record, there is no real wall between the sales function and the underwriting function of many, if not most national lenders. In other words, the structure of lenders today is flawed related to matters of collateral assessment. Perhaps this movement by regulators is the proverbial “light at the end of the tunnel.” There is still hope that good appraisers will be able to continue working whether or not they “play ball.”

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