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.
7 Comments
Comments are closed.
I have not heard a lender anywhere express this, but my impression is that the lending community does not take well to an appraiser telling them what the value of a property is. If that is a correct assumption, I deduce that the attitude stems from two causes: 1. The banks do not view appraisers as any more expert than the bankers themselves, and 2. Appraisal has been imposed on the banks as a sort of tax. At any rate you are correct, there is not a healthy relationship between lending and appraising at a time when common sense would lead one to believe banks and appraisers are surely on the “same side.”
Turning to the article; Dean Feldman has an excellent proactive method of handling the situation. A broker most definitely should be “educating” the appraiser. I have often asked brokers, and particularly when a contract price is looking high, for information about the how the listing price was established. My experience has been that I get something less than what Mr. Feldman supplies to the appraisers he works with, but the broker is always a source of potential relevant information.
If I were to do mortgage appraising work, which I am not, I would recommend doing everything possible to circumvent the AMC, HVCC and whatever else gets in the way so you can work closely with the client. That relationship is indispensable and the key to de-commoditizing appraisal.
[…] The Art of Finding Good Comparables (Matrix […]
Unfortunately Mr. Gillespie and Mr. Feldman do not know what they are talking about. I am a mortgage broker in Colorado who deals with these issues on a daily basis.
The appraisers work for the AMC, not me, not the lender. They are not concerned with being educated by us. I am not allowed to contact the appraiser for any reason, even if I knew the identity of the appraiser, which I do not.
I can tell you first hand that the new HVCC regulations are resulting in higher costs with lower quality appraisals from less qualified appraisers who often “work out of their geographical area.” The AMCs are simply another layer of bureauracy that increases the costs and slows down to entire process. Lately the appraisals have been so poor my clients are being required to pay for second appraisals because the underwriters will not accept the first one. Another unintended consequence.
In addition, to imply that we should do everything possible to circumvent the AMCs and HVCC regulations is not only naive and unethical but clearly violates the regulations and laws we operate under.
One last note. The only entities who work in the residential lending (and realtor) market that is NOT licensed or regulated in Colorado is the AMC! How ironic.
Thanks Craig – you are absolutely right about quality and I think inherently, values are now biased low but were biased high when mortgage brokers could order directly. If you have a commission riding on the appraiser you select (not you personally, but your profession) then the appraiser who makes the deal gets the assignment and cream falls to the bottom so to speak. In response to that, your relationship was removed with the opposite effect. Now we are all searching for a neutral middle ground. My head is still spinning when I think about the unbelievably worthless appraisals your clients are being forced to by 2x for. What a mess.
[…] The Appraisal Process Moves Front and Center (Matrix) • Credit Report Card: A Truly Free Look at Your Credit Record (Credit […]
The low values are attributed as a back lash from the appraiser due to the fact the fees they are getting paid have been cut in half. Secondly, many of the appraisers should not even have the designation as they are not qualified to do appraisals in the first place. Many appraiser’s came into the field in the past 7 years as it become part of the easy money field in the boom times. Most of the appraiser’s today do not even utilize the proper techniques in formulating a market opinion of value. The appraiser thinks it is their opinion which should be the furthest thing from them adapting. I can go on and on. The appraisal industry is in the early stages of a shake out as the lenders through the management company’s are taking report cards on the appraiser’s and monitoring the quality of work. As the appraiser’s provides enough lower quality reports they will be suspended from doing work for the management company. Eventually these appraiser’s will be prevented from providing their low quality reports and forced from the industry. This will take 3-5 years to complete the shake out.
I have been appraising for over 23 years in the same area. Appraiser’s in the past new their area and knew appraising. The same can not be said for appraisers in today’s market. I hear complaints weekly from real estate agents about appraisers coming from hundreds of miles away to complete an appraisal and of course the appraiser had no idea what they were doing. There are also too many appraisers who failed to receive adequate training. Bad appraisers are training bad appraisers because the trainees can pump out the work and the co-signing appraiser can keep part of the fee. As long as the push from lenders and management companies is to finish appraisals as cheap and fast and possible, there will be appraisers willing to travel too many miles and appraisers with too little experience completing them. Lenders and management companies have NO incentive to remove bad appraisers from their lists as long as these appraisers do the work cheap and fast.