Joe Palumbo, SRA
Palumbo On USPAP is a column written by a long time appraisal colleague and friend who is currently the Director of Valuation at Weichert Relocation Resources and a user of appraisal services. He spent seven years at Washington Mutual Bank where he was a First Vice President. Mr. Palumbo holds an SRA designation, is AQB certified and he is a State Certified residential appraiser licensed in New Jersey. Joe is well-versed on the ever changing landscape of the Uniform Standards of Professional Appraisal Practice [USPAP] and I am fortunate to have his contributions. View his earlier handiwork on Soapbox and his interview on The Housing Helix.
The Fool’s Gold of AMC Licensing
Since I landed in the world of Relocation some three and a half years ago, I really did not pay much attention to what was happening in the trenches of the lending world. That changed when the concept of licensing appraisal management companies came about. My interest became more of an occupational study since these laws are so “broad-brush” and vague. As the manager an in-house appraisal arm of Relocation Management Company I was shocked and disappointed that that these laws cast a net on just about anyone who manages selects and retains appraisers for third party use. Clearly this type of legislation was created out of a knee-jerk reaction to one of the many “crisis-type” issues that came AT the appraisal community in 2008 and 2009. I am specifically referring to the attention to the “appraisal process” brought about by the ill-informed attorney general Mr. Cuomo of NY and the infamous HVCC. I agree with the basic the tenets of the HVCC and the AMC laws I just do not think there will be a net tangible positive affect and that the “real issues” are being conquered. AMC laws and HVCC are not the PANECEA. I WISH THERE WERE a panacea because some calm is needed. Being the realist and institutionally tenured manager of the appraisal process I just know reality of what happens VS what is supposed to happen.
For starters let me say that the relocation world has no direct OTS-like government oversight or appraisal requirements for the appraisals which are NOT intended for lending. The relocation industry is self- policing and we rely on what is set up by state licensing and our own quality control. Let me also say that while my department may perform some of the same functions that an AMC does, we do not TAKE ANY of the appraisers fee. We do select maintain, review AND USE appraisers as well as arbitrate valuation disputes. Also for the record I am not anti-appraisal management company.
Here is the issue: As pointed out by the OTS, last year FIRREA laws of 1989 already contain much of the language that the AMC Laws cite. States have also set up Appraisal Boards who are supposed to monitor fraud egregious issues and such. The problem with FIRREA and the State Boards is simple: money, resources and time. So along come laws that state it is unlawful to coerce an appraiser, unlawful not to pay them, unlawful to tell them which appraiser to use, unlawful to have people who select and review who are not “trained in real estate”, and so forth and so on. So the new laws are just restating the same of what we already had but we still lack an efficient mechanism to enforce. If the AMC laws are governed and enforced by the state boards who are short on cash and time then what makes AMC laws different? Currently 18 states have such laws on their books.
On top of the AMC laws many states are requiring AMC’s to be “registered”. This process is costly and requires plenty of paperwork. KUDOS to the Governor of Virginia, who signed his states law basically making it illegal to engage in the “appraisal nonsense” described above, but NOT requiring a registration process or fee. Also noted as being proactive is Arizona, which requires licensing and registration for AMC’s but which has a single line exemption for the relocation industry simply because: “we are not the problem” (the law reads the exemption for appraisals prepared for the purpose of employee relocation) .
Recently I was contacted by a state board attorney whose state passed AMC legislation in 2009; she stated “this law was not intended for your business model….because you use the appraisal with the client, whereas an AMC does not use…. it they get it…Q C it and pass it on”. It is great to see some realistic thinking for a change. The AMC- appraiser relationship is much like the HMO doctor relationship: mutual need mandated by external forces peppered with some mistrust. Don’t get me wrong there is a lot of merit to the underlying premise of HVCC and such I just do not think it is going to result in a changed world for the appraisal community. What the appraisers do not like about the AMC’s are the request for fast appraisals, some at a lower fee than they have seen in years, requests coming with numerous assignment conditions many of which are not realistic and unacceptable (3 comps within 3 months and 1 mile) the occasional “can you hit the number request” before the analysis gets done (comps checks)…among many others.
Many of the pressures ON AMC’s…yes I said ON AMC’S, are a result of what has transpired in the world: Increased competition, web-based valuation tools, fingertip internet real estate research, fraud, secondary market issues, and MISUNDERSTANDING of the appraisal process in general. I wonder what planet the “investors” live on that have guidelines they will not purchase loans in declining markets? I also believe that a lender than asks an appraiser to “remove a negative time adjustments” should be reported to the LVCC hot line” . Oh… that’s right there is none? Call your department of banking they say. Good luck. I had an appraiser the other day who did not read or adhere to the engagement letter I sent tell me “we have an AMC law here and you have to pay me regardless or you are breaking the law”. I stated, “great, I will take my chances since you signed the engagement letter but yet failed to meet the (simple) requirements stated in the letter, which is why I have called you three times ”. We’re not talking about value here we are talking about basic development and reporting issues that were not clear to me as user and client. Is this what the AMC laws are for?
Does anyone really think that the requirement of an AMC to fill out an application, pay a fee and require a few staff to take a 15-hour USPAP will stop the madness? Actually if the fees are an issue it could increase the cost of operating for the very folks that are presumable not paying a “fair rate”. Since the BIG 3 lenders (all using profitable AMC’s) have 60% of the market now via servicing or closing every US loan, I don’t see things changing until we see a UNIFIED industry, an industry that will unilaterally agree to push back on any conditions that are deemed to be unreasonable. It is very difficult to push back on three financial giants, but without a push, it will not happen. The other day a friend told me of a lender (his client) who is seeking to create a special list outside the AMC they use; their claim is poor service and product….betcha licensing that AMC would fix that! I also heard of a request coming from a AMC in a state that requires they be licensed and registered. The “caller” asked the appraiser if he could “hit the number”. He asked “isn’t that a violation of the HVCC and the AMC laws?”. The caller laughed…who is enforcing this stuff anyway..we do it all the time and we just send a text message to our appraisers telling them what they need”. There are approximately 97,000 appraisers in the US handling over 1 trillion dollars in mortgage money. Over 75% of the states require licensed appraisers for federally related transactions and 45% require for all appraisals. Imagine if ALL 97,000 decided to make change by just saying “no” on unreasonable compensation or assignment conditions. If we did not have state licensing there would be a clamor to get it. Remember what was stated twenty years ago? “State licensing will change everything” .
Maybe it didn’t because we didn’t MAKE it matter.
What we had already in FIRREA and state law is part of the mechanism to get us to the next level. The missing ingredient is unity. It does not mean abolishing the AMC’s or AMC laws either. Let’s look within and stop trying to reinvent the wheel with both the products and the process. We are miners of fool’s gold until we make real change happen from within, which while not easy is the only way for true meaningful change.
Please note: eAppraisIT’s tagline is “redefining value.”
“The attorney general claims that defendants engaged in fraudulent, deceptive and illegal business practices by allegedly permitting eAppraiseIT residential real estate appraisers to be influenced by nonparty Washington Mutual,” presiding justice Luis Gonzalez wrote in today’s unanimous decision. “We conclude that neither federal statutes, nor the regulations and guidelines implemented by the OTS, preclude the Attorney General of the State of New York from pursuing litigation.”
The institutions in my 2007 post have seen change:
New York can proceed with a lawsuit accusing title insurer First American Corp of colluding with Washington Mutual Inc. to fraudulently inflate home values, a state appeals court unanimously ruled on Tuesday.
Attorney General Andrew Cuomo had accused First American and its eAppraiseIT unit in a November 2007 lawsuit of having “caved” to pressure from Washington Mutual to use a list of pre-approved appraisers who provided inflated appraisals, in an effort to win more business.
I have to confess I’m not too neutral here on this issue – a few years ago, I decided not to renew one of our FirstAmerican subscription resources (floorplans) since we had access to more cost effective resources. Despite the cancellation at the end of the contract period, FirstAmerican continued to bill us every month for a year despite dozens of calls by me, then proceeded to threaten us with collection and then ultimately sent us to collection. This was because I opted not to renew my subscription. They couldn’t get us out of their billing system. Scary. On top of that, they never sent the product (they always send the product and then bill you).
I finally resorted to screaming and yelling until I finally got it resolved. I’ve never experienced anything like that before.
So its hard to believe an appraisal management company owned by FirstAmerican was above reproach but the courts will decide, not a disaffected (you should see the emails between Wamu and FirstAmerican presented in the Cuomo lawsuit. The link to the original lawsuit document is broken now but trust me, the emails were a doozy – here’s the Wamu 10k filing).
A False Premise and a Certain Irony
Here’s irony I can’t shake. Cuomo’s Home Valuation Code of Conduct agreement between Fannie Mae and his office change the landscape of bank appraisal work forever. What started out as good intentions to stop the conflict of interest between mortgage brokers and appraisers, ended up enabling the appraisal management company (AMC) institution which is what eAppraisIT is. The lawsuit shows that AMC are MORE exposed to bank pressure than individual appraisers are.
Floor pricing has been the stumbling block for credibility with automated valuation models (appraisal replacement tools) used by banks and for services like Zillow. StreetEasy gets it right, in the way they display information – grouped by building so the patterns are apparent.
Matthew Strozier over at The Real Deal Magazine asked me to crunch apartment prices to show some sort of floor level relationship to value. I took the down and dirty approach (because SPSS is way over my head) and looked at all closed co-op and condo sales in 2009. I broke those sales down by floor level and crunched the metrics for each floor. The results are seen in this very cool chart. Click on the graphic to the right that TRD created to open the big version.
In addition, the erratic price per square foot patterns on the higher floors reflect the differences in views. In our appraisals were make adjustments for floor level and view separately.
I ended the presentation at the 25th floor only because the data set gets so thin that it was more difficult to extract or infer a pattern.
Brownstoner, which is the go to resource on all things Brooklyn has a regular appraisal feature which I’ve meant to comment on. They feature an active property listing whether its a co-op, condo or brownstone and ask for readers to estimate the value of the property.
Most posts seem to garner 20-30 “appraisals” which is summarized in a chart.
Today the featured “Co-op of the Day” was 96 Schermerhorn Street, #7G
While they might consider changing their use of the word “appraisal” to something else like “opinion”. But frankly, with the crap being passed off as bank appraisals these days, I am pretty confident the reader won’t need to tell the difference.
The reader comments are both entertaining (hilarious) and informative at the same time. Whats intriguing about the chart itself is that it tells a good part of property valuation process appraisers go through. We have to deal with outliers, both high and low, that when relied on exclusively, don’t often reflect a reasonable value estimate.
The data is inherently different though – while this is a compilation of opinions on the property, the data points don’t represent sales transactions, each of which would have had a “meeting of the minds” and made it all the way to a closing usually via mortgage financing.
Of course, the results can also be skewed by the particular perspective of the participants for each property: renters, owners, brokers, etc. and someone could try to game the results, but the outliers tend to offset each other. The “appraisals” on the blog appear to be consistently averaging 10% to 20% below ask over the past month. This particular property was “appraised” at 12% below ask.
According to our market reports, the average listing discount for the past 2 years has averaged 4.9% so unscientifically, this “appraisal” method hits the properties 2-3 times harder than the actual discount might show.
However, as long as the “appraisal” discounts remain consistent, it might have some reliability, but more likely, it provides an nuggets of insight and a lot of entertainment.
I’d like to think actual appraising is this entertaining.
One of the more annoying things I see as standard business practice – (not just) in the appraisal profession – is listing client names in a report or brochure without permission as a point of credibility.
In fact one of the larger commercial appraisal companies is famous for including in its boiler plate “An appraisal company is measured by the clients they serve” followed by pages and pages of client names. It’s not illegal or frowned upon but I’ve always seen the practice as a weak argument for quality and perhaps a borderline breach of client confidence when its so excessive.
Yesterday I was sent a screenshot from a page on PropertyShark (a data service I absolutely love) that lists a bunch of appraisal firm logos as their customers. The presentation includes my firm and it is clearly presented as an endorsement.
I certainly do this myself as it pertains to a media outlet quote or by touting government agencies that rely on our analysis.
I guess I’m really thinking aloud here – wondering if there is a protocol that should be followed when using your client’s names as a form of marketing. Or am I just whining about working indoors when its so nice outside?
I need to hear from Joe, a marketing maven that would set me straight.
Hindsight is supposed to be 20/20, no?
We don’t seem to be laying adequate groundwork for placing a regulatory infrastructure in place that will reduce the odds of repeating another financial market meltdown. Congress had the spotlight turned away from them during the recent Greek/Euro crisis but continues to push the coherent decisions to future study.
Politically, it turns out, the Senate bill owes its surprisingly robust content to its ambiguous scope: 1,566 pages that don’t really address how the landscape of our financial system will look. To move the legislation through the various committees that came together to promulgate it, onto and off of the Senate floor (and ultimately, over the next several weeks, through conference committee to pair it off with an even less specific bill, H. 4173, passed by the House of Representatives in December), both the Senate and House effectively leave most of the heavy lifting to future study and regulation-writing by a host of new and existing regulatory bodies.
My own obsession with a financial reform resolution lies on the laps of the credit rating agencies, the enablers of the debacle that crushed the financial positions of millions of people by placing market share/greed ahead of objectivity/investor protection. Even as an outsider to Wall Street (I’m an appraiser) I could see the disconnect as early as 2004.
The Congressional hearings via C-Span on the role of credit ratings agencies were riveting but the agencies are still doing business nearly as usual and haven’t been hit hard legally, financially and structurally. How can you improve investor confidence when the same agencies with no real modifications, are still placing letters like AAA next to securities?
I draw a lot of parallels with my profession (appraisal) and mortgage brokers. The person ordering the service can’t pick an expert to value the collateral that others rely on if they are paid on the outcome of that advice. Its an insane concept.
For a housing market obsessed by real estate coverage, residents of New York City are like drug addicts being given heroin (or like an appraiser being giving perfect sales comps) by the sheer volume of real estate market coverage.
But that’s not the point I’m trying to make here. The appraisal profession has entered the media fray by name in major publications.
A few months ago the Wall Street Journal announced they were expanding their news coverage to include the New York metro area to compliment their national coverage. They expanded their staff and made a commitment to a new section called Greater New York and includes local real estate market coverage.
Within WSJ’s new Greater New York section is a page devoted to real estate. Among one of the daily features is a section called “The Assessor” which includes a graphic and some factual housing tidbits. One of the early names under consideration for the feature was “The Appraisal” but eventually became “The Assessor” (same diff).
The New York Times added a weekly column: “The Appraisal” by Christine Haughney, a former real estate reporter for the Sunday real estate section and a current New York (Metro) section reporter, she provides weekly buzzworthy real estate articles of substance.
While the appraisal profession remains a mystery to many (including me), the coverage of real estate certainly doesn’t.
Well, that’s my appraisal of the situation, anyway.
“Williams is a 15-year veteran of the IT industry, having served stints with Cisco Systems and PolyServe, a software startup acquired by HP. At one time he was co-owner of Carolina Appraisers, a real estate appraisal firm based in Raleigh.”
AIMS stands for “appraisal independence management system,” and “dashboard” is a software term meaning a control panel housing two or more applications.
His venture was enabled by introduction of the May 1, 2009 agreement between Fannie Mae and NY Attorney General Andrew Cuomo known as the Home Valuation Code of Conduct.
AIMSdashboard is intended to help financial institutions take back control of the mortgage process through a software solution. Chris was very quick to point out that his company is a software company, NOT an appraisal management company.
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Tags: Fannie Mae
I have been coming across what I believe to be somewhat weird rear view looks at the credit/housing bubble we just went through from some well respected voices. I’m thinking there is perhaps an academia disconnect from the front lines.
Casey B. Mulligan is an economics professor at the University of Chicago writes “Was it really a bubble?“
According to the bubble theory, for a while the market was overcome with exuberance, meaning that people were paying much more for housing than changes in incomes, demographics, technology and other basic factors would suggest.
But why would the blue line need to be where it is? Housing prices are stickier on the downside and the slope should not form a bell curve as the drawing suggests. It should be a lesser slope and drawn out over several years, shouldn’t it? And wasn’t that the whole point of the stimulus plan in reference to the first time home buyers’ and existing homeowner’s tax credit? It stimulated sales activity and as a result, artificially pushed sales price levels sideways.
Take a look at my colleague at Westwood Capital, Dan Alpert’s chart showing the exuberance of housing prices. You can slice it and dice anyway you want but THAT’s a bubble.
And one of my favorite economist/writers Edward Glaeser writes “What Caused the Great Housing Maelstrom?“
If the easy credit hypothesis is correct, then we can take comfort in the thought that we understand the great housing convulsion, and we can start pointing fingers at those institutions, like the Federal Reserve System, that play a role in determining interest rates.
He and his colleagues through their research seem to be saying that low interest rates and high lending approval rates don’t explain enough of the rise in housing prices.
In all due respect, I don’t know exactly how they proved their points empirically but this research seems to be a bit disconnected to what most of us observed on the ground during the boom itself.
For example, a five percent increase in loan-to-value ratios is associated with a 2.5 percent increase in prices, and loan-to-value ratios rose by less than five percent during the boom.
That seems like a very low ratio to me. As appraisers we could clearly see the pressure we were under to hit the number for the mortgage approval and that most people were placing 5%-10% down. I contend that credit was easier than anytime in modern history and that combined with interest rates kept on the floor from late 2001 to mid 2004 caused a frenzy of demand or as Professor Robert Shiller characterizes it as “Irrational Exuberance.”
This was a credit bubble and that housing was merely a way to keep score. Perhaps I am not following their logic but having lived through it and saw the lending environment first hand, its hard to imagine this whirlwind of the past 7 years was not a bubble of some kind.
In today’s WSJ has an article that was on the front page of the online edition (not sure about the print version) called “How to Appraise Home Appraisers“
The core idea behind the article was that appraisers:
Ok, my response to all of this is [Doh!]
This article reflects conditions of more than a year ago. Today with the advent of HVCC, the quality of appraisers has fallen precipitously due to the popularity of appraisal management companies. For the most part working for national retail banks as an appraiser is an abomination of the profession.
None of these checklist items have much to do with today’s mortgage process that rewards lenders for hiring a middleman (AMC) who simply finds appraisers who are certified in a state and can turn work around in 24 hours and often are hours away from the property working for nominal fees.
Lenders are afraid to lend right now and the disconnect between upper management and the front lines is bigger than ever. Apparently there is great comfort by national lenders for a poor valuation product in exchange for homogenous nationwide conveyor belt style ordering with rapid turnaround and nearly non-existent oversight. The appraisal process within the mortgage process is a complete joke – it makes me want to scream.
Can we all be so blind and so dumb? Haven’t we learned anything over the past 18 months? [Nope. Not a thing.]
To the media – please spare everyone the misleading portrayal of our industry as professionals willing to use their eraser on occasion when the banks ask us to reconsider. Thats a mischaracterization – we have no choice and no real voice in the mortgage lending process. I’d estimate that 20% of our profession is terrific. The remainder are not.
Garbage in [AMC’s], garbage out [their appraisal quality].