It is nice to see the appraisal process move front and center after being on the back burner for the past 7 years during the credit bubble. The appraisal process in mortgage lending is like politics and making sausage – its not pretty when you look at it up close (except for my photo, of course).
Vivian Toy pens a great article which talks about the disconnect between the ideals of the appraisal profession and what is being forced on the profession by the lending community and regulators in this weekend’s real estate section cover story called New York Appraisals Get Shortchanged.
And without a stockpile of comparable sales for reference, Mr. Miller said, “you have to really know the local market, so you can go beyond the raw sales data and use all the subjective factors you can to really tell the story about a property.”
Here’s a key issue affecting all mortgage lending nationwide: APPRAISAL MANAGEMENT COMPANIES (all caps for emphasis beyond using bold).
The potential pitfalls are not exclusive to New York. “The least qualified and least experienced people are doing appraisals across the country,” said Jim Amorin, the president of the Appraisal Institute, a national trade group that represents 26,000 appraisers. He estimated that appraisal management companies now handle about 90 percent of the appraisal market, up from about 30 percent before May 1.
Mr. Amorin said he had heard of appraisers in California who travel 150 to 200 miles to do an appraisal.
It’s hard to believe that they could still be in their geographically competent area, he said. And in Manhattan it would be even harder if you have someone coming in from the suburbs, since things can be vastly different from one side of the street to another.
When you commoditize the appraisal profession as appraisal management companies do, you really get poor quality at a higher cost. The costs are measured in risk exposure, lost revenue from killing transactions that shouldn’t be, and AMC fees are often higher (remember the appraiser only gets about half of the total appraisal fee).
The irony here is that many of the appraisers who were the source of overvaluation during the boom times – cranking out a high volume of reports, mainly for mortgage brokers – are now getting most of the work through appraisal management companies. They are undervaluing because they are unfamiliar with the markets they appraise in and think the lenders want them to be low (they probably do). Remember that in either the high or low scenario, its all about making their clients happy – in other words – insanity continues to be pervasive in mortgage lending…but now it is costing the consumer directly.
The New York Times ran an A1 (page one) story back in August called “In Appraisal Shift, Lenders Gain Power and Critics.” Which talked about how good appraisers are being forced out of business because of the Home Valuation Code of Conduct agreement between NY AG Andrew Cuomo and Fannie Mae. Banks have all the power now and they are showing that they don’t understand the problem at hand.