Matrix Blog


Neutral Is A Place I’d Rather Be

September 7, 2005 | 11:12 pm |

Its late, I’m tired, and I’m thinking, what type of appraisal work do I enjoy most?

A neutral appraisal in a divorce case. Really?

In divorce matters, appraisers have the opportunity to build a business that is less dependent on interest rates.

Thats my mantra – focus on business opportunities that will keep the volatility down and most importantly, find a client base that appreciates your expertise.

Mortgage related business is generally very easy to get. However, the margins are low, turn times are fast and the client generally wants a form filled out.

In the New York , the courts refer to an appraiser who is court appointed as a “neutral.” I do a lot of this type of work. I appreciate it because I am paid fairly for my services, I get paid in advance, I usually have several weeks to complete the assignment, and I generally find that attorneys are easy and professional to deal with.

What is a neutral appraiser? Here are some thoughts and guidelines.

  • An appraiser who is hired by both parties, usually ordered by the court, to appraise a property.
  • Neutral means that no bias in any way can be shown to either party, whether actual or perceived. All communication should be with both attorneys only and on a conference call or by email with every cc’d.
  • Neutral means the property should be inspected with either both parties in attendance or neither party in attendance.
  • Do not accept phone calls from a specific party.
  • The fee should be paid in advance so no leverage can be placed over you.
  • The reports should be delivered to both parties simultaneously.
  • The results should only be discussed with both parties at the same time.
  • Remember the goal is to be fair and go right down the middle in every aspect of the case you are involved in.
  • Don’t be afraid to testify, although its rare in neutral matters. I love to. You don’t want the attorneys to be stuck with an expert that won’t go to court. If you have reservations about it, give it a chance. Its not that bad.

How do you develop this business?

Over the years, I have always recommended it to the lawyers or individuals that call me to represent them. Its a compelling argument because it saves each party from hiring their own appraiser. I’d estimate that 90% of the time I make the suggestions, I am proposed as an expert to the other side.

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Mortgage Fraud: Selecting Appraiser’s Right Name For The Report [part 3 of a series]

September 7, 2005 | 7:27 am |

Today our appraisal firm had a typical request from a client who happened to be a mortgage broker. We had submitted an appraisal that was performed by a licensed assistant in our firm. The report was reviewed carefully and the lender that received the report said it was fine except for one thing, they didn’t accept a licensed assistant as the signer. As it turns out, the mortgage broker had submitted our report to a different lender than we had been told, at the last minute. In the competitive world of interest rates, this is a common occurrence.

The call goes like this [names withheld to protect the guilty?]:

Mortgage Broker: The appraiser that signed your report is not approved by the lender we are submitting the report to. [because he was a licensed assistant]. The report looks fine but we need the appraiser’s name changed.

Appraiser: What do you mean?

Mortgage Broker: Just have another appraiser sign the report.

Appraiser: Do you mean, claim that they inspected the property and performed the analysis?

Mortgage Broker: Yes, all of the other appraisers we use do this.

Appraiser: No, we can’t do that. We did complete the report in compliance with the lender you indicated you were sending it to. However, we can send a certified appraiser to the property again quickly and do the report over at a discounted fee since the research has been done. The appraiser needs to verify the research and may or may not agree with the original result.

Mortgage Broker: Oh, ok. That’s fine. But please hurry.

Note: This client is one of the good ones – they will try to ask for this sort of thing but accept our logic and keep using us, indicating there is hope for humanity, or at least wholesale lending.

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White Lies: Study Shows Occupancy Fraud in 53% of Claims

September 6, 2005 | 9:08 pm |

The Prieston Group, who provide fraud insurance and other related services, released a study today analyzing mortgage fraud. Granted this is a press release and does not disclose the number of claims in the study, it does show some interesting results.

They ranked mortgage fraud by type:

Some highlights of study:

  • Appraisal fraud: 9.7% of all claims.
  • Occupancy fraud: was by far the highest type at 52.9% of all claims – “borrowers — or someone acting on behalf of borrowers — misrepresents whether they plan to live at the property.”
  • Mortgage fraud: 48% of all claims in Georgia had some sort of fraud.
  • Average LTV in survey was 81.7%
  • Full doc loans were 55.5%

Remember, these are percentages of claims filed, not total numbers. I suspect the actual transaction numbers with some sort of fraud are much higher.

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Mortgage Fraud: Time Adjustments Can Underwrite Reality [part 2 of a series]

September 5, 2005 | 10:22 am |

Freddie Mac’s Weekly Primary Mortgage Market Survey for September 1st shows fixed rate mortgages dropping for the 3rd consecutive week. shows that this trend has continued since the first week of August and mortgage rates took a steep drop after Hurricane Katrina hit. The federal government OFHEO released 2nd quarter housing stats that showed a 13.4% increase in prices over the past year. Granted I have some issues with OFHEO stats, but they do show an important trend.

Then why do most appraisals we review show no time adjustments?

The answer is usually, “the underwriter wouldn’t accept the report with the adjustments included.” However, the sales price or refi estimated value was reached in the final report anyway. How? Other amenities were over or under adjusted to make the number, thats how.

A form of appraisal fraud and appraisal pressure

This a form of appraisal pressure or fraud that occurs so frequently that many underwriters and appraisers don’t even realize that this violates lending and licensing regulations. According to USPAP, the appraiser is not supposed to present a report that is “misleading” to the reader. Characterizing a rapidly rising real estate market as “flat” fills the definition of misleading.

Our firm receives this sort of pressure nearly every day.

The solution: do not remove your time adjustments if they are clearly supported by the market. Time adjustments are an underwriting issue, not a valuation issue. The appraiser is reporting an existing market condition. If the appraiser chooses to comply, then the appraisal must be made subject to a “hypothetical condition” per USPAP.

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Disaster Relief Aid: Hurricane Katrina

September 1, 2005 | 5:58 pm |

This has turned out to be a larger disaster than anyone imagined. Here are some ideas on how you can help in the relief effort.

Relief Organizations

[American Red Cross through Apple iTunes]

I used Apple iTunes (100% goes to the Red Cross) but all are great organizations.

[American Red Cross]

[Salvation Army]

[North American Mission Board Disaster Relief Fund]



In Texas, Privacy Was Not A Pretty Picture

August 31, 2005 | 10:07 pm |

When a number of the 254 Texas tax appraisal districts began to post photos of private homes on their web sites, thats when the trouble began. [Note: Reg.] The practice was designed to help appraisers and better inform homeowners when protesting their taxes. The photos were taken from the public street and were not of the homes interiors. Some districts posted floorplans as well. Effective September 1, 2005, all such content is to be removed.

After much turmoil, the Texas Legislature passed, and the Governor signed, the appraisal photo bill:

SB 541 amends the Texas Tax Code to protect the confidentiality of photographs and floor plans of homes or property. These photographs and floor plans will remain available for the official use of the appraisal district, the state, the comptroller, taxing units and political subdivisions, but will be exempt from Open Records Requests from the public.

This is fascinating because this law showed how far the window on privacy could be pushed. Many of the largest properties in the survey were not revealing because they simply showed the front gate or the trees that blocked the property. Advocates for the bill were concerned that floor plans and photos made it easier for stalkers and burglers.

New York City had done the same thing in the 1980’s but the photos were not in the public domain because the internet was not readily accessible to the public in its present form.

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Behind The Curve: The Appraisal Waiver

August 30, 2005 | 11:23 pm |

In many markets, a financing contingency is simply not accepted by sellers due to the limited supply of inventory [Arizona Republic].

In other markets, there is a modification of a contingency called an “appraisal contingency waiver,” “To get a house, buyers now often have to waive the appraisal contingency on their home contract. That means the buyer agrees to the sales price even if the appraisal comes up short. They no longer have the low appraisal as a way to back out of the contract without losing earnest money.”

It seems to me that a buyer could convince the lender to decline their loan for weak credit so they don’t lose their deposit or earnest money.

This reporter in this article also says something that bothered me: Appraisers take months to catch up to the market, waiting for closed sales from three to six months prior.

If that is the status quo, then those appraisers are not estimating market value, but instead, are just form filling. How can an appraiser not consider current contracts to adjust the dated closed sales to market value? Relying soley on closed sales is simply an incomplete analysis. For this type of contingency to be common place, then this appraisal practice must be widespread in this market.

On the flip side, appraisers are under tremendous pressure to “make the number” from buyers, sellers, brokers, mortgage brokers and lenders. So I am surprised that so many appraisers have no problem killing a sale with all the pressures they face. I suppose thats a good sign.

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Flipping In Secret

August 29, 2005 | 9:36 pm |

A survey of recent condo sales in Miami showed that nearly half the condo owners were LLC’s. It is believed that these are mainly speculators. Corporations and foreigners often create an LLC when purchasing real estate to protect themselves from liability. Speculative flipping appears to be on the rise in metropolitan areas around the country.

If you have been appraising for a while, remember the painful experience the FDIC’s bailouts starting with Vernon Savings and Loan in Vernon, Texas in the late 1980’s? This was often claimed as the straw that broke the camel’s (FDIC’s) back and a flood of bailouts soon followed. One of the reasons for the collapse was the high volume of property flipping, with the same property often transferring several times in the same day. While the stories are different today, flipping is still occuring.

Buyers and sellers are increasingly withholding information that as appraisers, we are bound to verify. According to USPAP, we are supposed to report all prior transfers within the past three years. Our licensing requires us to disclose what we were unable to verify that is needed for the valuation.

It is now even more important than ever to get a copy of the contract and review it. We are stumbling into undisclosed flips more than in prior years. Flipping appears to be one of the reasons Fannie Mae recently redesigned their appraisal forms.

How do we determine if there is a flip? Usually, an experienced appraiser will notice that the sales price, even considering an optimistic appreciation assumption, doesn’t make sense and match the names in the contract with the owner on record. For the appraisal firms that do high volume with trainees, I hope you have good E & O insurance. 😉

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PMI: Going Over Your Limit

August 28, 2005 | 1:00 am |

See previous post on Matrix: PMI Gets You In The House: Now Get Rid Of It.

The Homebuyers Protection Act was passed by Congress in 1998 requiring lenders to notify homeowners when the equity in their home reached a level where PMI was no longer required.

Here is the testimony of Richard J. Roll, Founder and President, American Homeowners Association (AHA) in front of the United States Senate Committee on Banking, Housing and Urban Affairs on February 25, 1997 on PMI. He was speaking about the abuse of PMI overcharges.

“Your home falls under this act if you purchased, constructed, or refinanced your single-family home after July 29, 1999, and your loan is not a government-insured FHA or VA loan. If you purchased your home before July 29, 1999, your lender is not required to cancel your PMI when you reach 20 or 22% equity, but many lenders will do so if you ask.

Here is an article on the costs associated with PMI insurance to homeowners.

There is significant incentive for a homeowner to get PMI removed from their loan payment. In order to do this you need the services of a certified real estate appraiser to provide a value estimate. If the home has appreciated enough to where the equity is at least 20% of the overall value, then the odds are relatively good that you can get the lender to remove the PMI.

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PMI Gets You In The House: Now Get Rid Of It

August 28, 2005 | 12:41 am |

percent Homeowners can save thousands by canceling private mortgage insurance [PMI]. PMI is an insurance on the top 20% of the loan so the lender is assured that they will get the full 80% or balance of the funds outstanding if the property goes into foreclosure.

The Homebuyers Protection Act was passed by Congress in 1998 requiring lenders to notify homeowners when the equity in their home reached a level where PMI was no longer required.

“Your home falls under this act if you purchased, constructed, or refinanced your single-family home after July 29, 1999, and your loan is not a government-insured FHA or VA loan. If you purchased your home before July 29, 1999, your lender is not required to cancel your PMI when you reach 20 or 22% equity, but many lenders will do so if you ask.”

How to Cancel PMI Here’s a great article on removing PMI from your loan by Chip Wagner, an accomplished appraiser in the Chicagoland area. Most lenders require and approved and state certified appraiser to perform the evaluation.

Here’s how they do it in Minnesota. I suspect it is not much different than other states.

Note: Check with your lender for specific instructions.


Eminent Domain: Nice Home, I’ll Take It

August 27, 2005 | 8:56 pm |

Eminent Domain refers to “the power possessed by the state over all property within the state, specifically its power to appropriate property for a public use.”

The valuation principal behind this is the idea that the highest and best use for the property will benefit the public which supercedes the private property rights of the property owner. This has been unnerving to many because property ownership is perceived as a basic tenent of citizenship in this country.

Last week, the Supreme court announced that it would not re-visit [Note: Paid Subsc.] the controversial ruling made in the eminent domain case, KELO et al. v. CITY OF NEW LONDON et al.

In the original decision, the Supreme Court found that local governments have the right to take private property if it faciliates economic growth. The New London case was controversial because the area to be taken was comprised of residential homes that were not blighted or crime-ridden. Another sore point was the fact that developers are making a profit against the loss of private property.

Before the New London case, the Poletown case in Michigan 20 years ago was seen as a leading symbol of eminent domain abuse.

There is the potential for abuse by government authorities in these takings and the fear of a land grab by developers who have strong political connections with local governments. This ruling has begun to prompt states to examine when a government should take private land, what methodologies should be used for fair compensation as well as others

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Crackling and Buzzing: Power Lines/EMF Valuation

August 25, 2005 | 1:25 pm |

The National Association of Realtors has created a resource area called Field Guide to Power Lines. Part of the problem with this issue is that there has been a battle of competing health studies that of course, are on the opposite side of the sprectrum.

Position: Power lines don’t affect property values
This party claims that since there is no definitive proof of a health risk, no loss in value should occur to property owners. The key driver of this movement has been the powerline industry.
American Transmission Co.
American Trails From an operational perspective, EMF is not much of an issue for trail activities…
Colgate Univ Term Paper Just a term paper and not a scientific study but it concludes that there is more evidence that says there are limited health risks and on that basis, possibly not detrimental to value.

Position: Power lines affect property values
This party claims that since there is evidence that there is a health risk, a loss in value to property owners should be recognized. The key driver of this movement has been the environmental groups.
University of Missouri-Kansas School of Law A review of a case where “…that a tax assessor’s opinion that the proposed power line would not change the assessed value of the property for tax purposes was incompetent and prejudicial…”
Wave-Group An exerpt of the correspondence: “Late last year, New York’s highest court, the Court of Appeals, ruled that the owner of property adjacent to a utility’s high-power electrical transmission lines could seek damages for a decrease in the market value of the property caused by the fear that the power lines might cause cancer, even if such a fear was not medically or scientifically reasonable. That decision has already begun to change the outlook on electromagnetic field (EMF) litigation for utilities.”

Valuation Links
Power Lines and Property Values: The Good, the Bad, and the Ugly An incredibly detailed discussion on valuation approaches for powerline properties.
Realty Times Columns Concludes that homeowners would probably pay less for a property near a powerline just because of the uncertainty.

Common Sense Application for Appraisers
In a valuation matter, where an appraiser is asked to value the effect of power lines on property values, wouldn’t it come down to how the typical homebuyer in a market felt about the uncertainty of risk? In other words, if two properties are identical, but one is located under or near a powerline and one is not and the former sells for less, isn’t that indicative of the effect on value? Whether or not EMF causes cancer or not, if a buyer pays less, it would seem to me that the difference before and after is a quantifiable measure of effect.

What do you think?

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