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Good Appraisers, If Speed Is Only What You Need

May 23, 2007 | 8:20 pm | |

Here’s something you might have heard at some point:

“That appraisal firm is really good.”

Ok, that compliment means different things to different people. I am going to try to rank them by what I perceive to be the majority thinking on it. Although my rankings may be biased or completely wrong, the concepts are not:

  1. Speed — This is the number one priority of many consumers of appraisal services. The appraisal is often the last item to be completed on a mortgage approval. It can make or break the deal if it is done too slowly. The proliferation of appraisal management companies, who essentially are only able to rate appraisers by their turnaround time, have created a legion of form-fillers, who can’t afford, nor do they have time, to do a credible job.

  2. Cost – Keeping appraisal costs low, is perceived as a way to make the lender or mortgage broker more competitive. Of course, the assessment of collateral of a $1M mortgage can be decided by a $100 difference in fee and a world of difference in quality. Actual payment of fees to the appraiser are often used as leverage for making the number. If the fees are require in advance, less leverage is available. In the current environment, the appraiser has been relegated to a form-filler and the process is really seen as a “have to do” with little relevance to the overall objective, hence downward pressure on fees continues.

  3. Service – Overlaps speed and cost. Making appointments with sensitivity, handling the applicants professionally, client has easy access to appropriate appraisal staff to get the report turned around in a reasonable period of time. Moral flexibility (aka having business savvy) is very important. Being able to reach out to the appraiser or their superior to negotiate the value is key.

  4. Miscellaneous. Anything can be inserted here. You name it.

  5. Miscellaneous. Anything can be inserted here. You name it.

  6. Miscellaneous. Anything can be inserted here. You name it.

  7. Miscellaneous. Anything can be inserted here. You name it.

  8. Miscellaneous. Anything can be inserted here. You name it.

  9. Miscellaneous. Anything can be inserted here. You name it.

  10. Competence in a specific market – This is a distant placement in the rankings because the person who typically orders an appraisal for mortgage purposes has a financial incentive to get a desired result in a predetermined time frame. Clients rarely ask an appraiser what their experience is in a specific market because the perception is that the process is formulaic and its simply a matter of gathering data, inserting it into a form and the result is automatically determined.

A wise appraiser I know once told me:

Everyone in a sales transaction knows the value before the appraiser does. The buyer, seller, listing agent, selling agent, seller’s attorney, buyers attorney, bank, bank’s attorney, mortgage broker, and title company already know the value. The appraiser is simply late to the party.

Here’s a sample of appraisal firms who market themselves as fast. No real discussion of quality/competance other than brochure-speak.

  • Note the frequent mention of religious background for added proof of integrity. I am not questioning a religious conviction here, but does this make up for the loss of quality that a guaranteed appraisal turn time “or your money back” could result in? I don’t see how. The clients are nearly all real estate brokers and mortgage brokers. I wonder how many have received a “low” appraisal? Its also a very large coverage area.

  • 48 Hour Appraisal More of the same but less personal and more brochure-speak. Large coverage area.

  • Next Day Appraisal Covering all of Rhode Island and parts of Massachusetts. Discounts to loan officers (why would they be speaking with them directly?) Same day service on request.

  • Aggressive Appraisals Offers 24 hour turn time. Covers most of the New York region. I have linked to them before on Matrix. I still can’t believe they use that name…Aggressive = High. So you get the best of both worlds, a high, fast appraisal.

Good grief.

Confusing A Housing Bubble For A Lending Bubble

August 29, 2006 | 10:32 am |

Much of the housing boom can be attributed to the current lending environment. Housing prices are an indicator of where things are going. But its tough to analyze lending since the stats are few and far between.

In other words: the cart before the horse.

I have long vented about the perils of weak underwriting standards and the pressures placed on appraisers by the structure of the lending system, namely collateral valuation (appraisals). A double hat tip to Barry Riholz for articulating this point so clearly in his post Is a Housing Crisis Approaching? [Big Picture] via the very good Roger Nusbaum post in SeekingAlpha.

Barry’s post is based on a seminal piece in Barrons about loosening underwriting standards by Lon Witter [subsc]. Roger adds another related link with great info [RGE Monitor] as well.

the U.S. has is a lending bubble. His evidence is how loose the lending standards have become, and why not? The banks ultimately just flip the loans to the Fannie Mae (Federal National Mortgage Association, on the NYSE: FNM), where foreclosures and defaults become the headache of buyers looking for greater risk and return.

(And if that doesn’t make you squeamish, simply look at the recent accounting scandals at Fannie Mae.)

Traditionally, Mortgages have been low risk lending, as the loan is securitized by the underlying property. When banks were lending less than the value of the property (LTV), to people with good credit, who also were invested in the property (substantial down payments) you had the makings of a very good business: low risk, moderate, predictable returns, minimal defaults.

Lenders have encouraged people to use the appreciation in value of their houses as collateral for an unaffordable loan, an idea similar to the junk bonds being pushed in the late 1980s. The concept was to use the company you were taking over as collateral for the loan you needed to take over the company in the first place. The implosion of that idea caused the 1989 mini-crash.

The problem here is: what happens if the values of homes begin to decline as inventory builds and rates rise? What does the lender do? They had better decide to start caring about values as well as credit in order to make intelligent loans. Underwriting standards have to rise to avert a lending crisis.

WAMU is the posterboy for weak underwriting. They built their growth and aquisition engine around mortgage lending during the housing boom. As mortgage rates increased and the housing market started to cool in the way of lower transaction volume, what department did they cut to save money? You guess it: The appraisal department. Recently they pulled completely out of the valuation process [Soapbox] and have begun to rely on appraisal management companies [Soapbox] exclusively, which are notorious for attracting the worst element in valuation. The appraiser who work for them are usually form-fillers and provide no analytical service. [Disclaimer: My firm worked for WAMU from the first days of their expansion in New York and saw the problems first hand. They recently jettisoned every appraisal firm across the country (we were one) as part of their cost-cutting move.]

Barry’s post analyzes WAMU’s market position in his post.

Right now, many mortgage lenders are still hanging in there, any way they can. I yearn for the day they actually want to understand what their risk is. Unfortunately, only a select few actually get this point.


WAMU Thanks All Their Residential Appraisers For Doing Such A Great Job And Now Will Let Them Spend More Time With Their Families

July 14, 2006 | 9:50 am | | Milestones |

Well, the shockwaves have reverberated through the appraisal industry. This email was sent from management to all WAMU appraisal vendors. [Inman ran a story about the announcement as well referring to my post about the WAMU decision].

The email is polite and respectful, perfect pr speak, shows the disconnect between cost-cutting efforts of upper management in periods of declining mortgage volume and risk management by using [appraisal management companies].

This message is intended for all Fee Appraisers

July 13, 2006

Dear Valued Partner:

Washington Mutual is a dynamic, growing company focused on delivering optimum results to our customers and shareholders.

We’re contacting you today to let you know that after a thorough review of our current appraisal processes, we made the decision to outsource the management of appraisal services to national appraisal management companies.

We will begin transitioning our appraisal needs to two vendors exclusively, throughout the remainder of 2006.

With the formation of this new long-term relationship, we will be reducing the volume of new appraisal orders that we send to you during this transition. We ask that you continue to complete your current assignments following normal processes.

We thank you for your hard work and your continued support of Washington Mutual.

Please know that we have valued your work and contributions to Washington Mutual and we wish you great success in the future.

If you wish to contact LSI or First American, you may reach them at:
LSI – Rick Prosser
1-800-722-0300 ext 79084

First American (eAppraiseIT)

We thank you for your hard work and your continued support of Washington Mutual.

We wish you great success in the future.

Thank you,
Michelle White
Washington Mutual Residential Appraisal, Senior Manager
Greg Hoefer
Washington Mutual National Appraisal Production Manager

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Checking Insulation To Protect Appraiser From Production Staff

February 27, 2006 | 8:38 am |

John Taylor is the president and chief executive officer of the National Community Reinvestment Coalition in Washington who wrote How to Insulate Appraisers from Production Staff [American Banker]. He states that:

We believe that appraisal inflation is so pervasive that it requires this type of action. Over 8,000 appraisers have signed a petition circulated by the Appraisal Institute alerting the public to this pressure and warning them that their home may be overvalued. A recent survey of appraisers found that half had been pressured to increase appraisals by 10% or more.

His suggestions to reduce appraisal pressure is to:

  • Restructure internal operations so that loan officers do not select or interact at all with appraisers or approve them for rotating lists.
  • Isolate mortgage brokers from the appraisal process in the same manner.
  • Hire independent appraisers or appraisal management companies. Do not hire an appraisal company that is a subsidiary of the lender ordering the appraisal or of the title company supplying the title, because all stand to gain financially from a higher home price.
  • Never depend solely on automated valuation for an appraisal; each home must be seen by a qualified appraiser.
  • Sign a code of conduct developed by the Center for Responsible Appraisals and Valuations, agreeing to resolve differences between themselves and appraisers through the center’s arbitration pro-cess.

Federal regulators, such as the Office of the Comptroller of the Currency, have urged lenders to ensure the independence of appraisers from their loan production staff. Creating this independence, however, requires more than a few superficial steps that an aggressive loan production staff can easily dodge. Lenders must build a corporate structure that does more than simply hide the conflict of interest.

Currently, there is no promising solution for this problem. Associations that represent lenders and appraisers generally tout self-policing or the pending Responsible Lending Act (HR 1295) bill (which is currently stalled in Congress), but these issues amount to window dressing since the problems are inherent in the structure of the lending system and don’t address appraiser indepenedence.

A potential solution is not politically popular since few representatives want to go on record with a solution that will potentially increase loan application costs (near-term) and reduce turn around times.

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