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Outsourcing Codeword: AMC

August 22, 2005 | 11:41 pm |

Ever notice how the only people who seem to be espousing outsourcing are those who gain financially? appraisal management companies themselves

As a self-proclaimed technology maven, I wonder if technology is the answer to all our problems within the appraisal process? In many ways, it can dumb it down, causing the process to drift away from its original intention. The AMC process seems to be an automated paper handling compliance machine.

Another AMC took outsourcing abroad to perform appraisal reviews.

How is it humanly possible to perform a review appraisal from another country unless the report is nothing but a compliance document and not a basis of risk analysis?

AMC’s are here to stay. Where is there middle ground between form-filling compliance automation and hand done reviews?



[Webmaster Note: This post has the highest number of “?” in any posts in this blog ;-)]


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Some Financial Institutions Care About The Safety Of Appraisers, While Most Do Not

March 18, 2020 | 10:08 pm | Investigative |


[Johns Hopkins University]

As co-owner of an appraisal firm for 34 years, while based in Manhattan, we generally don’t drive to appraisal inspections. Our staff relies on public transportation to get around including buses, subways, and commuter rail. I’d been following the coronavirus in the news since early this year, and became quite alarmed by mid-February and soon suggested my staff work remotely. By the time the first Fed rate cut was made in response to the coronavirus on March 3, we adopted a screening process for appraisal inspections. When our team made an appointment for the inspection, we inquired about the health of the occupant, and then on the day of the inspection, the appraiser called again to confirm that conditions had not changed.

Soon after we learned that we could be carriers of the virus without knowing and infect someone vulnerable, we stop performing interior inspections.

My appraiser colleagues around the country have become very concerned, if not plain scared.

Here are two scenarios shared by appraiser colleagues in another part of the country. Imagine if the appraiser was a carrier?

Scenario 1 Conversation
Sounds good 10 am is better
Kids are home
With no school
If your sic with a cold or similar please reset appointment

Scenario 2 Recap
Borrower is elderly and on a respirator
Says the appraiser can walk through the house by himself
And reminds the appraiser to keep their distance

Appraisers should not be placed in harm’s way or be in a position to be forced to unintentionally harm another.

So let’s look at some industry actions of the past few days:

HEROES

These lenders have shown how much they respect the appraiser’s role in the mortgage process and their concern for the appraiser’s health and welfare as well as the borrower.

First Republic Bank
I submitted a temporary driveby appraisal solution to First Republic Bank, a large CA/NYC+ lender we have worked with since 1999. I feared for the safety of our appraisal staff and didn’t want to risk infecting others. Plus we were starting to get pushback from homeowners who are getting uncomfortable. They embedded this solution within days. I challenge any appraiser to name any other bank that is more professional, more appraiser-centric than they are. Here is the note they sent out to their panel.


Citibank
We’ve been working for Citibank since 1986 and have enjoyed a great relationship. This policy treats appraisers as human beings. I’m not sure how closely this policy will be observed by the AMCs they engage to manage their appraisals orders (read-on).


ZEROES (AMCS, etc.)


To combat the COVID-19 outbreak in the appraisal industry, Appraisal Management Companies (third-party institutional middlemen that account for as much as 90% of residential assignments) have essentially provided a lethal magnanimous gesture by simply telling appraisers to wash their hands often and stay away from people that are sick and that they must go inside the property. While I anticipate that many AMCs would defend their position of placing appraisers in harm’s way because their bank clients require it, I say that indicates selective morality or incredible ignorance. They could push back and make a strong case for public safety.

We are in the early stages of a global pandemic that may infect 100 million Americans (1 out of 3, conservatively) with a 3% death rate (that’s 1 million people if you do the math). The appraiser population has an average age in the high-50s, and we have been told that the older populous is the most vulnerable.

In reality, these AMC policies show disdain not only to appraisers but to their own (bank client’s) borrowers by letting a fee appraiser, who is paid only for the assignments they accept, determine whether or not the appraisers themselves are carriers of this pandemic and whether they can assess the safety of the property they inspect. Here’s a key point.

NO ONE CAN TELL IF SOMEONE IS A CARRIER IF THEY HAVE NO SYMPTOMS.

The following AMCs opted to treat appraisers as a widget instead of a human being requiring them to physically inspect a property when they now know that it is not safe to do so. Today I was told that one federal agency lost 20% of their appraisers because they have refused to continue doing interior inspections. Different cities and states have different rates of infection. Because we don’t have full testing in place as a country, the number of infections might be significantly higher than we might anticipate. My particular location in Manhattan is highly problematic because of the reliance on public transportation – buses, subways, commuter rail, and just walking down a crowded street – no social-distancing here. And based on the comments the NYC Mayor made yesterday, it is possible that tomorrow could see NYC restricted to “shelter in place” like San Francisco.

If you’ll note in this pattern of negligent behavior, great efforts were made to plan for the safety of order staff, but no regard for the safety of the appraiser, who is providing the service – telling appraisers to wash their hands and practice social-distancing when they know that it is not enough. When you get right down to it, these companies sent similar silly instructions so they can check off a box to be compliant. Yet they must know that appraisers could be carriers, and occupants in the property could be carriers. This is not business as usual.

When we pushed back the appointment on a few of our AMC clients for safety concerns, they simply took away the assignment and rescheduled with another appraiser. No human contact to assess the risk. In good conscience, even if the new appraiser doesn’t have symptoms or doesn;t think the occupant does, that AMC or lender is placing the public at risk, going directly against CDC guidelines. This is what robots would do.


Here is a sampling of AMCs that provided COVID-19 instructions in the past few days shared by my appraisal colleagues – this is clear evidence that they see appraisers as widgets instead of human beings. To save you the trouble of reading all of these INSTRUCTIONS, here’s the translation: WASH YOUR HANDS A LOT

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The Apple Peeled – Ask the Experts: Market Dynamics with Jonathan Miller

February 12, 2019 | 11:54 am | | Articles |

Over the years, I have bantered with the Espinal Adler Team (Marie Espinal and Jeff Adler) at Douglas Elliman Real Estate about the market which has been invaluable for on the ground intel. And we’ve become friends. When Jeff and Marie asked me to be formally interviewed for their blog “The Apple Peeled” I was happy to do so, especially because I could veer off the road into issues about the current mortgage and appraisal process. This “The Apple Peeled” blog post: Ask the Experts: Market Dynamics with Jonathan Miller was distilled from the 90-minute conversation (I could have gone on for 5 hours) I had with their team.

I hope you find that this apple was fully peeled:


Jonathan Miller’s Market Outlook

The number of units sold in Manhattan in 2018 was down by more than 14 percent compared to the previous year. The brokerage industry tends to be very linear in its perception of the market, so many believe when the market is rising, it will rise forever. And, in-turn, when the market falls, it will fall forever. That approach can lead to overreaction.

The 10-year Challenge (2009 vs. 2019)

Some analysts are even comparing the current cycle to the last downturn and the housing bubble in 2009, but Miller outlined quite a few differences between then and now.

In 2009, the average discount from listing was 10.2%. In 2018 the discount was 5.2%. In ’09, Miller said sellers were anchored to the “pre-Lehman, pre-financial crisis asking prices” and had to travel farther on price to meet a buyer. (Miller measures listing discount by the percent difference between the contract price and the price that the property was listed for sale at the time of contract – not when it was first listed). The most recent asking price is “really the moment the property entered the market,” he said.

Miller said there are more buyers today compared to 2009, but those buyers are “very jaded about what value is.” Meanwhile, sellers are anchored to another market completely, he said.

The change in tax laws in 2018 and a several-month stretch that saw mortgage rates rise before recently dropping close to previous levels had both buyers and sellers re-calibrating what value is. That process can take time.

“If a seller overprices a listing, it takes them up to 2 years to de-anchor from what their price was without thinking that they left money on the table,” Miller said. “The disconnect between buyers and sellers is measured by lower sales volume.”

Starter Segment vs. High-End Luxury

For the last two years, Miller has said that the NYC market is softer at the top and tighter as you move lower in price.

Overall inventory is up by about 17%, with a significant amount of supply coming from the studio and 1-bedroom market. Studio inventory is up 21% percent.

“The pace of the starter market is still the fastest of all segments,” Miller said. “It’s just not as detached as it was because now you have more supply.”

Interest Rates and Their Impact

Typically, rates rise when the economy is strong. The low rates we’re seeing today understate the strength of the current economy, according to Miller. “That’s the disconnect.” In the long run, interest rates do not impact price trends. Mortgage rates have trended lower for three decades, Miller said, but housing prices have fluctuated up and down during that same lengthy stretch.

Mortgage rates weren’t wildly different in ’09 compared to today. In a recent report, Miller stated that an adjustable rate mortgage rate averaged 4.38% in 2009 and was at 3.98% using the same metrics in 2018.

Miller said that real estate investors should stop trying to perfectly time the market (both with rate and supply vs. demand). Perfect timing is a concept that was born out of the housing bubble, he said, when investors viewed housing as a highly liquid stock, instead of in its proper context. “(Real estate) is more of a long-term asset.”

In-Depth Look at the State of Appraisals

“There was nothing learned from the bad behavior of a decade ago,” Miller said, reminding himself of a Mark Twain quote. “History doesn’t repeat itself, but sometimes it rhymes,” Jonathan Miller recited. Miller, President and CEO of real estate appraisal and consulting firm Miller Samuel Inc., said federal regulators are acting irresponsibly in their effort to reduce and perhaps even eliminate the need for an appraisal as part of an overall effort to erase “friction points” that slow-down the mortgage application process.

Miller said the regulators were more concerned with collecting fees than they were with protecting the American consumer. He likened the subtle de-regulation to the housing bubble of a decade ago, pointing out that regulators were getting paid by the failing investment banks they were rating back then. Now, he said, regulators and both Fannie Mae and Freddie Mac are getting paid whenever loan volume passes through those agencies. (Fannie Mae and Freddie Mac are Government sponsored enterprises that purchase mortgages from banks and mortgage companies in an effort to create liquidity so that lenders have the capacity to lend to more homebuyers).

The Office of the Comptroller of the Currency (OCC), The Board of Governors for the Federal Reserve System, and the Federal Deposit Insurance Corporation (FDIC) proposed a rule to amend the agencies regulations requiring appraisals for certain real estate related transactions. The proposed rule would increase the threshold level at, or below which appraisals would not be required for residential real estate-related transactions from $250,000 to $400,000.

In response to our request for comment, spokespeople for the FDIC, the OCC, and The Federal Reserve said they do not comment on proposed rules during the rulemaking process.

Mortgage volume has trended lower despite rates falling steadily since the housing bubble, because lenders don’t want to take on risk, Miller said. “They’re in the fetal position. Banks are afraid of their own shadow.”

The tremendous amount of regulation implemented since Dodd Frank has led to mortgage lenders filling Fannie and Freddie’s portfolios with low-risk “pristine” mortgage bundles. But with rates so low, margins are so compressed, regulators need to stimulate volume to make money, according to Miller. “I think (Fannie and Freddie) are emboldened to take more risk.”

The push for fewer mandatory appraisals isn’t the only thing that has hurt the appraisal industry since the Dodd Frank Act was passed in 2010. The evolution of the mortgage industry’s use of the Appraisal Management Company (AMC) has led to a collapse in quality of appraisals ordered by banks, Miller said. He described the AMC as an institutional middle man that takes more than 50 cents on the dollar away from the professional appraisers who do the actual work.

“It’s like a Hollywood actor paying their agent 60% instead of 10%,” Miller said. “The mortgage industry is trying to widgetize the appraiser.”

The AMC is supposed to act as a communication barrier between the appraiser and the loan officer or mortgage broker, to thwart undue pressure to bring appraised values in at specific numbers. But according to Miller, the AMCs are under the same types of pressure that an individual appraiser might face. Some AMCs receive hundreds of thousands of dollars every month by way of appraisal orders placed by big banks. At least at the sales level, the banks apply pressure to the AMC to not “kill deals,” said Miller, who has testified in several class action lawsuits against AMCs.

In many instances, Miller and his firm were hired to do sample reviews of appraisals that came through AMCs. Often, the AMC would utilize appraisers in the market that would always “hit the number,” Miller said. A lot of those appraisers were ignoring valid comps, sometimes from directly across the street that were virtually the same as the subject property. “The AMC encouraged it because they were getting the work,” he said.

Appraisers are pushing back and there are already signs that AMCs were beginning to crumble, Miller said. Quality appraisers are turning away bank work when they know the order is coming in through an AMC because they’re not happy working for less than they deserve and because they’ve been reduced to “form-fillers,” Miller said.


The Apple Peeled Blog, February 12, 2019

Espinal Adler Team at Douglas Elliman Real Estate

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Doubling Down On Appraisers as ‘Lone Wolves’ – Valuation Review

March 23, 2017 | 7:29 am | Articles |

Note: I have been a subscriber of Valuation Review and it’s predecessor for years. It provides a wide perspective on the appraisal industry and I’ve always got something out of it. Over the past few years, I’ve noticed that the voices in the magazine seemed to be skewing more and more towards national level AMC executives. I suspect the PR departments of these firms make their top executives readily accessible washing out the voices of individual appraisers. So I sent the editor a note offering another perspective with links to my content. He was immediately interested in getting another voice so he interviewed me.

From the Wednesday, March 22, 2017, Valuation Review Article:  CEO suggests appraisal industry comprised of ‘lone wolves’.

CEO suggests appraisal industry comprised of ‘lone wolves’

Reasonable compensation, lender and AMC issues are constantly on the mind of the appraiser. When things aren’t falling into place, the process of assigning blame kicks into high gear with appraisers continuing to look for guidance.

“That’s the problem in that there really isn’t any leadership for appraisers to follow. The false narrative of an appraisal shortage continues to be pushed by AMCs, unfairly tarnishing the image of individual appraisers,” Miller Samuel Inc. President and CEO Jonathan Miller told Valuation Review. “When an industry takes a 50 percent pay cut overnight, good people leave or struggle to hang on and weaker players are attracted-which equals problems. But is it the fault of the remaining individual appraisers?

“AMCs are at a seminal moment,” Miller added. “In what other industry does the company managing the talent get about the same compensation as the talent them? An agent representing a Hollywood actor isn’t going to get $1 million if their client is receiving that same amount for a movie role. It is a broken model.”

Like many in the appraisal profession, Miller strongly believes that there is not a shortage of appraisers. In fact, he more than challenges one reason for such a shortage is that too many burdensome regulations are being placed upon appraisers.

“There is a shortage of appraisers willing to work for 50 cents on the dollar,” Miller said. “The AMC model has hit a wall. AMCs have run out of new people willing to work for 50 cents on the dollar. Sadly, consumers think appraisers are getting the appraisal fee stated in their mortgage documents. They aren’t and typically the appraiser receives as little as 50 percent of it.

“The Appraisal Institute says there is a shortage of appraisers and seem to be championing the AMC concept but appraisers don’t understand why,” Miller added. “I’m not against AMCs; rather, I’m against the execution of business by the AMCs. They treat appraisers as a commodity rather than a professional service.”

For the rest of the story, visit here.

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Banks Make Regulations Onerous By Over-Interpreting Them

March 8, 2017 | 11:52 am | Investigative |

Some people are their own worst enemy. And that old saying also applies to financial institutions.

With all the talk about revisiting, gutting or eliminating Dodd-Frank, a significant part of the problem with mortgage appraisal related lending actually exists within the bank risk management themselves. Their over-interpretation of what the regulations require gives outsiders the impression that appraiser related regulations or standards are more onerous than they actually are.

Fannie Mae Allows Trainee Inspections Without Their Supervisory Appraiser
One of the biggest issues today is the lack of mentoring by experienced appraisers because it is not financially feasible under current lending practice. Both banks and AMCs – who act as a bank’s agent – generally do not allow trainees to inspect a property without a licensed or certified appraiser alongside. So in an era where AMCs control as much as 90% of mortgage appraisal work, the lenders are requiring AMCs to require something the GSEs (the party buy their mortgage paper) do not require. This risk aversion is residual from housing bubble collapse. Mortgage lenders today, subjected to low rates and a very narrow rate spread, remain irrationally averse to risk.

However, their underwriting risk management is effectively destroying the future quality of appraisals that will be done on their collateral because the new wave of appraisers is essentially only book-smart without real world context (mentoring). Experienced appraisers can not afford to invest the time to inspect the property with the trainee (in addition to their own inspections) for the multi-year experience period before the appraiser is certified after already taking a 30% to 50% overnight pay cut from AMCs.

From the Fannie Mae Seller’s Guide Update – 2017-01 page 2.

Reporting “Material Failures” to State Boards
In reference to appraisal oversight, let’s consider how banks determine whether an appraiser is reported to their state licensing board.

Dodd-Frank says the following in 12 CFR 226.42(g)(1). Whereby a lender has to report an appraiser for…[bold, my emphasis]

(g) Mandatory reporting—(1) Reporting required. Any covered person that reasonably believes an appraiser has not complied with the Uniform Standards of Professional Appraisal Practice or ethical or professional requirements for appraisers under applicable state or federal statutes or regulations shall refer the matter to the appropriate state agency if the failure to comply is material. For purposes of this paragraph (g)(1), a failure to comply is material if it is likely to significantly affect the value assigned to the consumer’s principal dwelling.

When the CFPB was asked what they meant by a “material failure” – the following table shows the difference between material and non-material.  So how much is a material failure? A value off by 2%, 10% or 30%?

And by the way, the third option for reporting a material failure seems absurd although I suppose it has to be said – Who is dumb enough to admit that they accepted the assignment because they knew they would “make the deal” happen. The obvious lack of a definitive paper trail in such a situation makes this very hard to prove.

I’ve always had a problem with setting rigid rules in considering the concept of appraisal oversight. With valuation expertise, how does a state agency apply hard rules to value opinions, comp selection and adjustments, etc.? There needs to be a great deal of latitude for regulators and an “I’ll know it when I see it” approach should be allowed.

Separating gross negligence from negligence

Here is the rule.

“Performing an appraisal in a grossly negligent manner, in violation of a rule under USPAP.”

While subjective, it represents a very severe extreme to which an appraisal would be reported to a state board. The rule goes on to say…

“Accepting an appraisal assignment on the condition that the appraiser will report a value equal to or greater than the purchase price for the consumer’s principal dwelling, is in violation of a rule under USPAP.”

But big national mortgage companies today like Wells Fargo and others are reporting appraisals to state boards where the value is not supported. ie weak comps, unreasonable adjustments, etc. Reports with those issues may, in fact, be negligent but do not fall under the definition of gross negligence. Let’s not wreck an appraisers career because they missed some better comps. Once these reports are referred to the state, the state must investigate. It opens up the appraiser to more risk of unintended consequences. Think of a scenario where a cop pulls over a driver for a missing taillight and learns that the driver doesn’t have his wallet with him.

Gross negligence requires a much higher test than applying it to an appraiser who is just being stupid.

It is defined as:

Gross negligence is a conscious and voluntary disregard of the need to use reasonable care, which is likely to cause foreseeable grave injury or harm to persons, property, or both. It is conduct that is extreme when compared with ordinary Negligence, which is a mere failure to exercise reasonable care.

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Miller Samuel at 30, A Short Story

October 4, 2016 | 11:14 pm | Milestones |

matrixswimmingpools

It’s hard to believe that thirty years have passed since my family and I began our Miller Samuel appraiser journey. Here’s a little bit about the experience which reminds me of that old joke about marriage:

“We’ve been married for 30 years and it only seemed like five minutes…under water.” (boom)

It all began in 1986 when my parents, wife, sister, former brother-in-law and I got the idea to form an appraisal company after we had actually raised a substantial amount of money to launch a real estate brokerage firm. My wife and sister were already appraisers. A lawyer that I sold a condo to in 1985 (yes, I was a real estate agent in NYC for a brief stint) found a group of Japanese investors willing to back us. When it came down to it, we just couldn’t sign on the dotted line because we didn’t want to become real estate brokers. Our family’s collective real estate background was mixed, including brokerage, appraisal, management, development, rentals, sales, but most importantly, a lot of analytics and a fascination with technology. We seemed to be different from our competitors, creating our own software (there was no appraisal software), going with the Mac as a platform over PC and collecting any data we could re-use. I remember that we were the first New York appraisal firm to have two fax machines, with a hunt and search two line setup, allowing us to give out only one fax number (LOL). We cold called banks and hand delivered our appraisal reports to better connect with our clients (Who had heard of email?)

It’s a leap of faith to start a new business and in our first month, we received two bank appraisals for a total of $600. Even with the high cost of three couples living in Manhattan, those two appraisal orders felt like $1 billion – and they remain best feeling of validation I ever experienced in my professional career. Within a few months of our launch, our volume snowballed and a year later we nearly tripled in size to 17 employees and lots of personnel challenges.

The October 1987 stock market crash caused appraisal volume to implode. We laid off more than half of the firm shortly thereafter and stuck with an 8-employee line up for the ensuing decade. From this experience we learned a valuable lesson – we were far more profitable with a smaller nimble firm that focused on quality over volume. In addition we were able to do what we loved rather than be mired in personnel issues. Manhattan was our turf and we loved and walked every inch of it.

By 1989, appraisal licensing came on the scene after the S&L crisis. While I had already taken appraisal courses, continuing education became a mandatory requirement for the upcoming licensing law. On a whim, I remember flying on a Trump Air helicopter from Manhattan to Atlantic City for $75 to take an appraisal course for my license – who knew appraising was so exciting? As a self proclaimed cool geek, I felt very out of place standing on the heliport near the Javitz Convention Center waiting with the Atlantic City heavy hitters wearing white polyester blazers, gold chains and white patent leather loafers, ready for a weekend of gambling.

The subsequent years brought us through a recession where the New York region was hit far harder than the rest of the country and distressed real estate was the next wave. Remember the division of the FDIC known as The Resolution Trust Corporation (RTC)? By 1990, 50% of our practice involved co-op foreclosures, a byproduct of the high velocity rental to co-op conversions and a tremendous amount of investor activity that overheated the market – eventually the music stops in any housing boom. Renters were flipping their insider rights to outsiders for their retirement nest eggs.

Other appraisal firms arose in the early to mid-1990s that pushed out many of the “out of area” firms with token representation in Manhattan. Indirectly, these large new competitors ended up being helpful to us as they worked very closely with mortgage brokers and were hyper focused on high volume. We were focused on quality and low to moderate volume. From the beginning, we had worked hard to reduce our dependence on mortgage related work. Mortgage brokers, who were paid only when the loan closed, got to pick the appraisers. That conflict of interest was always mind boggling to me. The mortgage brokerage industry generally did not pay for appraisal reports until they reviewed the value to confirm whether it was adequate to make the deal work. By that point the appraiser had been officially converted from valuation professional to deal enabler. We weren’t very popular with mortgage brokers since we required payment before we would release the value.

By the late 1990s the Dot-com boom was in full force and the irrational exuberance we experienced in the 1980s returned, carrying all the way through the housing bubble. Our firm did not fair very well during the bubble from 2003-2008 because we weren’t morally flexible to work in this new world where risk was assumed to be managed away so reckless behavior was the standard – conflict of interest was the standard. We saw appraiser competitors’ volume explode to the point where they dwarfed us in size. Their commissioned staff were able to do as many as 40 appraisals per week, which included taking the order information, making the appointment for the inspection, getting information from the managing agent, searching for comps, calling agents to confirm condition and other comp information, writing up the report and fixing edits from the reviewer, following up with calls after the client received the report, etc. I should mention that Manhattan still doesn’t have a traditional MLS and sales were not public record until 2006, 20 years after we began. Our firm was based on salaried staff to control quality and maintain professionalism but maxed out at about 8 appraisals per appraiser per week. I never understood the math for the high volume process unless virtually all quality corners were cut. Our appraisal staff is still salaried with benefits today. Back then, those types of “crank it out” firms thrived at the expense of the dwindling pool of ethical appraisers. It was a frustrating period in our history because we could have tripled our volume overnight if we sold our souls. We just couldn’t.

By 2005 it became apparent that the end of the bubble was coming and I still needed an effective way to get the word out – that something was wrong with the mortgage process – not that anyone would listen since they were making too much money. U.S. banks began closing their in-house review appraisal groups as “cost centers,” and loan officers began to call and demand higher values or cut us off and mortgage brokers were dominating the market even more. So I started blogging about it. I figured I had nothing to lose by going public. And thankfully the feedback came quickly. My first blog post on Matrix (I had start writing on my appraisal blog Soapbox the previous month and later merged them) was in the summer of 2005 based on an APM Marketplace radio interview. Later, CNBC came to my office to talk about “real estate’s dirty little secret”…where I said on national television that “75% of bank appraisals weren’t worth the paper they were written on.”

I knew we would be out of business in three years (by 2008) if we didn’t change our business model. So we fired all our national bank clients (before they could fire us) as they went to the appraisal management company model that essentially removed all local market knowledge from inhouse. The onslaught of dumb questions from AMCs made the decision easier (i.e. sample AMC review question: “What does a doorman do in a co-op or condo building?”) We proceeded to focus on the underserved private and legal work – our ability to adequate serve these clients had been hampered from the mind numbing clerical tasks that appraisers were required to do. And it worked! Our new focus on clients that actually wanted to know what the value was and were willing to pay a fair fee for paid off.

When Lehman collapsed in September 2008 almost simultaneously with the bailout of the GSEs and AIG, mortgage appraisal work nearly came to a halt. Thankfully we had already inverted our business model away from retail bank appraisal work in the prior year, around the time that Bear Stearns had collapsed. Our new business model was very contrarian to the state of the market. The change to our business and new revenue streams were inspiring and liberating. Our firm has experienced record sales nearly every year since 2008 but only because we have stayed away from retail mortgage appraisal work. Aside from the very low fees, AMCs that issued appraisal orders for banks kept expanding clerical requests to justify getting half of the appraisal fee. Since the Lehman moment, most of my competitors have gone under and most of the principals either no longer have their licenses or have left the business. Unfortunately for mortgage lenders (even though they don’t realize it) is that most of the “best” appraisers in each housing market have either left the business or moved on to more lucrative market rate work.

The false appraisal shortage narrative being perpetuated by the AMC industry is disturbing since it is really about the shortage of people willing to work for up to half the market rate. There is no shortage of appraisers. Over thirty years of measuring housing markets and valuing property has taught my firm that appraisers, like housing markets, are subject to supply and demand. The current mortgage lending environment is stuck with a solution that ignores that basic fact, so good firms like us move on to greener pastures. As a result, Miller Samuel is not looking to return to generic retail mortgage appraisal work anytime soon. That is a shame because we have 30 years of market experience to share with those banks to help them make informed lending decisions on their collateral.

As the incoming president of RAC, a group comprised of the best residential appraisers in the U.S., I observed that many of our members moved out of the mortgage appraisal business as we did to land higher quality work. This mass exodus of the best appraisers in each market presents an incredible loss to the collective knowledgebase of the mortgage lending industry. Perhaps because of the federal backstop employed at the “Lehman” moment in 2008, the mortgage industry still thinks they have risk management under control. They don’t.

Hopefully at some point in the not too distant future, regulators, taxpayers, government employees and other assorted stakeholders will come to realize that it is for the greater financial good of the taxpayer/consumer to have a mortgage appraisal industry exist that is:

  • competent through education and mentoring
  • allowed to provide a neutral opinion of value without fear of retribution
  • adequately and fairly represented in the mortgage process

These elements do not currently exist. In order for the current disconnect between mortgage lending and collateral valuation to be fixed, it must be understood that:

  • a real estate appraisal is not a commodity, nor is the appraiser
  • real estate appraising is a professional service
  • real estate appraisers are the most essential element of understanding collateral values in order to make informed lending decisions
  • without adequate representation, appraisers will continue to be overrun with scope creep
  • appraisers are subject to the laws of supply and demand like any industry
  • cutting the pay of appraisers by half has an adverse impact on the reliability of the valuation result

It’s been quite a journey for our firm.

Miller Samuel is going to continue to do what it does best, provide neutral valuation opinions on collateral to enable our clients to make informed decisions.

And yes, these past thirty years have felt like holding our breath for five minutes underwater, but it was worth it.

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Multi-millionaire Motivational Speaker Dean Graziosi Shares His Appraisal Wisdom

October 4, 2015 | 4:40 pm | | Favorites |

Huffington_Post_Logo

Over the past few days I’ve been sent this blog post by a number of real estate appraisers who are upset with its derogatory reference to our profession. It was written by Dean Graziosi in the Huffington Post guest blogger section. I’ve never heard of him but perhaps that’s because I’m not a real estate agent. If you insert the word “scam” in your google search, there are a lot of additional insights that come up.

His Huffpost bio and web site indicates he is a NY Times Best Selling Author along with one of the top personal motivation and real estate trainers in the world. I also learned from his bio that he is a multi-millionaire, a guru in the personal motivation sector and cares deeply about his students. Translation: He basically teaches real estate agents how to sell.

watchgraz

Good. While it’s not my thing, I’m happy for Dean’s success (notice how his watch is strategically placed within his Facebook head shot as an indirect confirmation of his success) assuming no one was hurt. However as a public figure (as indicated on his Facebook page with 340K+ likes), Dean has a responsibility to convey information accurately to his students if he does indeed care.

While I doubt he wrote it it personally, his brand handlers managed to mischaracterize two key issues in a small blog post on HuffPost:

  1. Graziosi frames the current housing market as equal to the bubble’s peak but doesn’t accurately describe what that means.
  2. Graziosi frames the real estate appraiser as something other than a real estate professional while the real estate agent is a professional.

1. Housing Market

Graziosi cites the FHFA trend line as breaking even with the 2006 peak. Yes, based on FHFA methodology that’s certainly true and taken directly from the most recent FHFA report. I do feel the need to split hairs here since his “brushstroke style” of simplifying everything misaligns with reality. He says:

First, and most important, it requires repeat sales of homes, so if there aren’t huge numbers of sales, then we’re looking at a number derived from a small set of sales data. So, we’re not necessarily seeing an excited bunch of buyers flocking to the market. We are seeing a whole lot of homeowners who aren’t selling, waiting for rising values. So, we have a small inventory and competition for it.

The problem here is that there are a lot of sales outside of FHFA data – and FHFA only tracks mortgages that go through Fannie and Freddie. Roughly 30% of home sales are cash and another 5-10% of them are jumbo loans, too large to be purchased by the former GSEs – so they don’t get included. FHFA also excludes new construction.

fhfajuly2015

The Case Shiller index is also a repeat sales index like FHFA but shows a different price point for the current market because it includes transactions outside of the GSE world.

CSJuly2015CR

If we look at the number of sales, which is the key point he makes, sales activity is low because we’re not necessarily seeing an excited bunch of buyers flocking to the market. But in reality, home sales are not low and they have been rising for 4 years. Of course sales are not at pre-crash highs because those highs were created largely by fraudulent lending practices including the unethical behavior of consumers caught up in the systemic breakdown that included nearly all particpants in the mortgage process.

EHSAug2015CR

Graziosi is right that inventory is low, but not because buyers aren’t flocking to the market – many buyers are being held back credit access has over-corrected. Many homeowners can’t qualify for the next purchase so there is no point of listing their home for sale.

EHSInvAug2015CR

Conclusion – we are not at the pre-Lehman market peak unless you only look through the eyes off FHFA, a distorted subset of the overall housing market. I would think that real estate gurus understand this.

2. Appraisal Industry

Let’s move on to the real reason I am writing this post.

I can ignore Graziosi’s “lite” market commentary but I can’t ignore his misunderstanding of the appraiser’s role in the purchase mortgage process (buyers applying for a mortgage to purchase a home.)

Don’t call an appraiser, as their approach to market value is different than that of a real estate professional. The real estate agent is trying to get you a sold price near to the top of the market, and their CMA, Comparative Market Analysis, is going to give you a pretty good idea of its value.

There is so much to talk about within these two sentences I’m not sure where to begin. It’s mindbogglingly simplistic, misleading and uninformed. Perhaps this is how he makes his students motivated?

Lets go for the big point first:

“Don’t call an appraiser, as their approach to market value is different than that of a real estate professional.” He must be thinking along the lines of the IRS definition, which is

To meet the IRS requirements, you need two things: spend the majority of your working time spent performing qualified real estate activities (regardless of what you do), and rack up at least 750 hours. Qualified activities include “develop, redevelop, construct, reconstruct, acquire, convert, rent, operate, manage, lease or sell” real estate.

Nary an appraisal-related definition within that list.

The problem with Graziosi’s communication skills as a best selling author and nationally renowned real estate guru who gives seminars for a living to communicate to his students (agents) how to succeed is – if we (appraisers) are not “real estate professionals” then it is a hop, skip and a jump to suggest we are “unprofessional” as if appraisers are something less than a real estate agent. Ask any consumer if they hold real estate agents in higher regard than real estate appraisers? In my view both industries don’t have sterling legacies but one isn’t more professional than another. Remember that he is used to speaking to his students who are real estate agents, the kind that sign up for this type of course. Promote BPOs and help agents get more listings – has got to be his recurring mantra.

The second issue with his quote concerning an appraiser’s value opinions – “their approach to market value is different” than a real estate agent. Providing an opinion of market value is likely the intention of both. Most real estate agents are hoping to get the listing and the appraiser is not incentivized by the home’s future sale. The agent may be the most knowledgeable person in the local market but there is an inherent potential conflict. Graziosi suggests that the broker will give you a price you want to hear. However I do like his idea of getting three broker opinions – that’s a very common practice – nothing new there. Ironically both an agent and an appraiser are looking at closed sales, contracts and listings but the appraiser doesn’t have an inherent conflict. They aren’t going to get the listing no matter how accurate their value opinion proves to be.

One problem with today’s appraiser stereotype as this column brings out indirectly, is that bank appraisers now generally work for appraisal management companies (probably about 90%) and the best appraisers tend to avoid or perform minimal AMC work because they can’t work for half the market rate. As a result, good appraisers aren’t necessarily known as well by the brokerage community as in years passed unless they get in front of the brokerage community in other ways, like giving seminars, public speaking, etc. Competent brokers within a market will know who the competent appraisers are.

There are unprofessional professionals in every industry – doctors, lawyers, deepwater diving arc welders and farmers, so please don’t make sweeping pronouncements to the contrary – especially if you are in the business of communicating information to “real estate professionals”.

Conclusions

The real estate appraisal industry is not unprofessional
IRS definition aside, real estate appraisers are real estate professionals

As I’ve walked through this response, I realized that the silly advice blog post in the Huffington Post by an infomercial guy did what it intended, stir up conversations of any type to get his name out there when his actual content was devoid of useful information. There is a great post I stumbled on the industry of motivational speakers: Real Estate B.S. Artist Detection Checklist. Worth a read.

Looks like I’m never going to be a multi-millionaire wearing a huge watch strategically placed in my head shot. If you notice my own head shot in the righthand column, my watch is very small.

Sigh.


UPDATE From the I have no idea for whom the appraisal is being performed but I am a 20+ year real estate professional (see definition above) department: Here’s an article from the Santa Fe New Mexican “Be cautious of appraisals” that damns appraisers using a stunning lack of understanding of the appraiser’s role in the mortgage process given his experience. This piece was written by a mortgage broker who was also a former financial consultant and real estate agent. The author states:

Everyone in every business falls under some measure of accountability. Certainly appraisers must also be accountable to their customer. The customer is the homeowner, not the AMC.

No it isn’t.

The appraiser’s client in the mortgage appraisal situation you describe is not the homeowner. The AMC is acting as an agent for the lender in order to for the lender to make an informed decision on the collateral (of course that’s only a concept). The appraiser is working for the AMC (who works for the lender) and not for your homeowner. Your logic from the housing bubble still sits with you today.

Yes I agree that the quality of AMC appraisals for banks generally stinks, but blame the banks for that, not the appraisers. Quality issues don’t change who the appraiser is working for. AMCs do internal reviews and make ‘good’ appraiser’s lives a living hell for half the prevailing market rate loaded with silly review questions by 19 year olds chewing gum to justify their own institution’s reason for existence. No wonder you are frustrated with appraisers from AMCs. ‘Good’ appraisal firms like mine avoid working for AMCs whenever possible. Yes I would be frustrated as a mortgage broker today because your industry got used to using appraisers as “deal enablers” during the bubble and nothing more. I contend that the current mortgage process post-Dodd Frank is clearly terrible and AMCs are a big part of the problem.

ASIDE This new era of online journalism for print stalwarts like the “Santa Fe New Mexican” and new versions like the “HuffPost” rely on filler-like the above 2 articles discussed here. Very sad.

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Getting excited about the “Top Appraiser” making $25K last year!

January 28, 2015 | 10:25 pm |

25kperyear

I’ve received a couple of these appraisal spam messages recently and I was struck by the audacity of the messaging.   Of course this firm could be inferring through the use of poor grammar that this is a good way to get additional work for your appraisal practice.

Still, the “top appraiser” made $25K last year!

In the email marketing piece and the web site  there is no mention of competence, experience or quality.  The messaging is all about how this firm automates the sign-up process with all the AMC’s that the lucky appraiser gets to work with as well as providing plenty of inspirational discussion about fees, turn times and how quickly the appraiser gets the check.

Still, the “top appraiser” made $25K last year!  Yay!

Good grief.

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Lone Wolves: Appraisers Fighting Everyone, Including Appraisers

September 27, 2014 | 2:20 pm | Milestones |

appraisalreviewcartoon

A few days ago I published a critical piece on the appraisal industry for Bloomberg View called Guess What’s Holding Back Housing.

There are many great people, incredible talents and solid organizations within the appraisal profession. But in my opinion only 20% of the industry are truly competent professionals and the remainder are merely varying degrees of form fillers.

I have been an appraiser for 28 years and it is apparent that the industry is dying a death of a thousand knives. One of the key reasons for this slow death is the lack of national leadership and the extreme fragmentation since most appraisal shops are comprised of a single or just a handful of professionals. I’d also like to offer that the majority of our profession seem very willing to make unsupported negative inferences on reviews of a colleague’s work such as appraisal field reviews or troll columns like mine.

Like I said, 80% of the profession are really not professional. Many of these appraisers have not looked up from their clipboards in quite a while and take an objective look at the world around them.

I have found appraisers throughout my career to be hyper defensive about the quality of their own work (I am definitely one of them on occasion). Just ask any bank review appraiser what it was like to call an appraiser out on an unsupported analysis. And just ask any appraiser what it is like to get meaningless criticisms from a bank appraisal reviewer over nothing germane to the value opinion.

A few week’s ago a colleague sent me a link to the first empirical study on the impact of HVCC on the appraisal profession by the Federal Reserve Bank of Philadelphia. The thrust of the study was the analysis of “low appraisals.”

When I used the term “low appraisals” in my piece combined with their editors choice of post titles: Guess What’s Holding Back Housing all bets were off.

It was “game on”, yet I’m in the appraisal trenches with all of them. The most amazing thing about the adverse reaction was that most of the appraisers who trolled the comment section or sent me scathing emails never read the Fed’s working paper on the analysis which was the basis of the post. The core of the working paper is only about 10 pages double spaced in length yet they were more willing to troll a colleague than undertake a professional debate.

I could chalk this unprofessional reaction to the battering our industry has taken over the past decade – I certainly feel that way – but it doesn’t explain everything. Because our industry has no real voice in related public policy, we continue to be marginalized by robotic institutional processes such as AMCs, AVMs and upper management that still sees our services as merely a cost center.

When I received the first email troll comment, I queried his email address and called him up right away. He was surprised that I found his phone number but we had a pleasant discussion. He was concerned that I would out him.

I exchanged emails with several of the email ranters and the replies were much more civil. I also did this with a few of the commenters on the post.

Although the majority of these responses are rambling rants, they shed some light on the state of the appraisal profession.

Take a look at a sample (I redacted their last names, firm names and contact info):

Hello Jonathan- I’ve heard good things about your firm and its work, so I am doubly shocked by the headline in your article “Guess What’s Holding Back Housing,” and the implication that somehow appraisers are to blame for the sluggish pace of the housing recovery. There’s no question mark at the end of the “Housing.” It’s not a question, but more of an accusation. You do know we’ve been through a severe recession, don’t you? That in spite of the increase in employment that has taken place we have created a lot of part-time jobs and done away with a lot of high-paying full-time jobs. Labor force participation is way down. You do know that lending standards have tightened? Are you aware of these facts? I ask that because your article conveys ZERO understanding of any of these fundamentals. The term “Low Appraisals” manages to be erroneous and stigmatizing at the same time. That an appraisal is “low” tells me nothing about the quality of the appraisal. It may be a great appraisal. It may be a terrible appraisal. It says nothing about whether the appraisal conforms to regulatory guidelines and industry standards and is a credible opinion of market value. I NEVER use that term when referring to an appraisal. I have dealt with many irate customers throughout the years and I always take the time to explain to people what an appraiser is supposed to do – which the general public frequently does not understand. The term “low appraisals” is also stigmatizing. If “low” appraisals are “holding back housing,” well that is not a good thing, is it? As a leader in an industry which is poorly understood by the general public, I am saddened that you would take the space granted to you to further the misconceptions people have about appraisers and what we do. It is NOT our job to “make” or “hit” a number. When we make that the job is when the problems start happening. You could have explained to Bloomberg’s readers that appraisers have to weigh an offer for a property in light of market evidence. If the evidence to support the sale price is not there, an appraiser is doing his or her job in NOT “hitting the number.” Your use of the “low appraisal” term suggests that the appraisal is somehow flawed. If the appraisal is flawed, it is not because it is “low” but because it does not incorporate appropriate data and/or analysis. In all my time in the appraisal industry I have always offered irate clients a change to point to specific, substantive errors or omissions in any appraisal when they do not agree with its findings. The overwhelming majority of the time the client, or broker, or other interested party has nothing to say. They are angry because the number is “too low.” They don’t know or care if the appraisal is well done or poorly done. All they care about is that it is “low.” I hope you will use your prominent position in the industry and your access to publications such as Bloomberg to speak the truth about what appraisers are do, not further misconceptions. Sincerely William

I called William directly and we spoke at length.

How can you, a highly recognized real estate appraiser, write an article for Bloomberg suggesting that appraisers are partially responsible for the weak housing market when the quality of the appraisal reports was not analyzed? How can anyone, or an agency make such a suggestion if the reports weren’t analyzed? I am a retired general real estate appraiser who reviewed many reports and to do so required a knowledge of the real estate market in which the report was prepared. In my own opinion, again without an analysis of any reports, it is more likely that the appraisers are better now and are NOT trying to hit the target as was the case prior to the 2006, 2007 blowup because they are under so much scrutiny from the lenders. For example, no more calling an average property “above average with no repairs necessary” when, in fact, the property has a few problems. The local appraiser group has shrunk as the worst ones are no longer in business, as is the case of many of the unscrupulous lenders who employed them.

My response to the above:

Hi Thomas,

Thanks for sending the note.

It’s actually quite easy to write about it. I disagree with your observations about today’s quality. It is very poor.

I have reviewed thousands of residential appraisals, been an expert in a number of national litigation cases and the quality right now is just as bad as it was during the boom, but different. The Fed study I referred to in the piece inferred a quality problem as a result of the metrics presented. Talented professionals like I’m sure you were are no longer entering the industry.

Yes the mortgage broker-orientated appraisers are largely gone now but the new generation of appraisers working for AMCs are just as bad, but in the opposite direction. Now we have an industry working for half the market rate who need to cut corners to be able to complete the report. With AMC’s it is much more common for the appraiser to be missing local market knowledge and to drive much farther to their assignment.

Mortgage appraisers today who work for AMCs tend to be biased low because they don’t know their market area cold which is just as bad as being biased high back during the boom.

I want our industry to provide a neutral well research product. The problem is the the clients don’t care and see us as a commodity rather than a profession.

Again, thanks for sharing your thoughts.

Thomas did not respond.

Jonathan, Summarized: Appraisers were responsible for the housing bust AND now for holding back progress in the housing market. Funny how that is……..that so many cover the above as truth and that few actually write about the actual purpose of the appraisal process. I suppose it would be harder to headline an article like that and draw readers in. I enjoyed this part in particular; “The quality of appraisal reports wasn’t analyzed, but the paper suggests that it may have declined.” I look forward to reading more. Sincerely, Adam

My response to Adam:

Hi Adam

Summarized: you need to drop the righteous indignation lathered in sarcasm approach. It’s not productive unless you are merely a troll.

Otherwise I assume you are an accomplished appraiser. Would you like to discuss this tomorrow? I’d really appreciate dissecting the disconnect.

Let me know.

Adam did not respond. The more sarcastic the commentary, the more afraid appraisers like Adam are to engage in reasonable discussion.

I don’t think you have all the correct information. For only a $400 to $500 fee an appraiser will make sure I don’t pay too much for a house. Nor pay the real estate agent a 7% commission which on a $500,000 home would be $35,000. Nor pay $300,000 in interest to a mortgage company. So are “low ball” appraisals really the problem? Or were “inflated values” the problem? Or is it that appraisers keep the other guy honest? Sorry sir, but I want to not get ripped off! Bobby

My reply:

Bobby

Thanks for the reply. On a bank appraisal, the appraiser’s client is the bank, not the borrower – a common misunderstanding.

We had a continuing dialogue.

I just read the article on Bloomberg View and I have to say, as a certified real estate appraiser, I am a little offended. I know the graphs and the statistics show that there has been an increase of real estate sales and refinances that are killed by the appraisal. I also agree that the HVCC and later the Dodd-Frank Act has increased the number of what are called “low appraisals”. I think the problem myself and many other appraisers have is even the often incorrect use of the phrase “low appraisal” itself. As in all professions there are always going to be the few that don’t do the job correctly or even those who falsely skew the results. The other 98% of the appraisers out there are just giving the honest truth, as we are required to by our ethics and the law. Most appraisers including myself have a great respect for the fact that we are there to protect the borrower and the lender, or the seller and the buyer in the case of a sale. I have read many articles in realtor or mortgage professional trade magazines and online blogs about these “low appraisals” and the bad “low ball appraisers”. The story often goes like this; A realtor Jane Doe describes how “bad, low appraisals” have killed 4 of her last 10 sales. She says the problem has gotten worse and she has been a realtor for 20 years and appraisal quality is at an all time low. The truth is that most agents, like appraisers are honest professionals who are doing a good job. The issue is their job is to get a buyer and seller to agree on a price… so that they get what they want and money can be made. They are advocates for “brokering” the deal and work on commission. There are few checks and balances in that system, it is self regulated by the free market, which is great… most of the time. What sometimes happens is this: The house for sale is a nice 2,000 sf, 3 bed 2 bath ranch home in Niceville Subdivision, the seller feels his house is worth at least $250,000 and the buyer loves the house and they feel that $240,000 is the highest they can pay. The house goes under contract for $240,000 and 2 agents and 2 clients are happy… for now. Then when the appraisal comes back at $225,000 everyone thinks it is a low appraisal, 2 agents, 2 clients, 1 loan officer, etc. all want the house to be worth the agreed upon $240,000. The problem is the appraiser is doing his job and found that out of 30 total sales in Niceville S/D, 8 of them are similar ranch style homes that are in “average” to “very good” condition selling between $190,000 and $220,000. Most of the ones that best match the size, condition, # of garages, amenities, etc. have sold for about $215,000 after + & – adjustments are made for differences. That is what is known as “The MOST PROBABLE PRICE a property will bring in a competitive and open market”, not the highest price “if you get lucky”, or the price you can get “if the buyers are from out of town and don’t know the local market”. The scope of work we agree to is just that, the most probable price. Lenders want to know that if the loan stops performing that they actually own something that is worth what they lent on it. If 90% of homes like the one in this case sell for $215,000 and I value it for $240,000 I have not done my job correctly. If the loan defaults 6 months later when the buyer losses his job and the bank loses money because they can’t find that rare buyer willing to pay too much, I have harmed them. If the buyer of that house gets relocated in 6 months and cannot sell it or has to take a loss when he realizes he can only get the usual $215,000, I have harmed him. The agents and loan officers that made the high commissions 6 months ago have nothing to fear, they did their job and got the deal done. The appraiser will be the one that will be getting the call from the attorneys. That is something that needs to be remembered. We are NOT paid on commission and our work is scrutinized by underwriters to test us constantly. It is in our best interest to do the right thing and value a property fairly, not too high or too low…. And that is what we do…. and get pressure in one direction or the other if values are going up or going down. That is why the average age appraiser is over 55 years old and few are joining the profession. Being a punching bag for doing the right thing gets old as fees go down gobbled up by the AMC’s that Cuomo forced on the industry as the cost of living, gas, business expenses, insurance, etc. goes up. P.S. Look at Cuomo’s involvement and gain, in creating a forced middleman in the modern appraisal industry. Regards, John

Thanks for your thoughtful reply John.

The phrase “low appraisal” was the metric selected by the Fed and the basis of the study. It strikes a nerve in appraisers and rightful so. They used it in a mechanical way versus the way NAR might complain that appraisers are killing their deals. Still, the appraisal quality of the industry is worse today compared to 10-20 years ago. Are there good appraisers out there? Of course. I am. You sound like you are. But the industry is dying and part of the reason, but not the entire reason, is us. We have no leadership and are simply being marginalized – the outcome in my opinion is a lower quality product that reduces the reliance on our industry.

Thanks again for sharing your thoughts.

John replied again with a very well articulated description of the state of the appraisal industry.

I agree that we need to do more. In Louisiana we are pretty good about regulating AMC’s and there is a requirement for them to pay C&R fees but many still don’t. I am sorry if I sounded rude in my first e-mail but as you know the low appraisal thing strikes a nerve with most of us. I would love to see a large powerful national organization that truly advocates for appraisers the way NAR does for realtors. That would be the real answer. Getting most of us in one organization I agree is the problem since we are lone wolves in many ways.

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Floored: Can/Should A Governing Body Set Minimum Sales Prices?

May 6, 2014 | 2:47 pm |

woodfloored

The concept of “setting a price floor” applies to gated communities, homeowner associations, planned unit developments – in fact any situation where a central governing body has direct influence over the sales price and/or buyer of your property. I believe the idea of “setting price floors” is surprisingly common in the outer boroughs of NYC, especially Queens.

Let me back up a second to provide context.

As the Manhattan market peaked in 2007/2008, we began to observe some co-op boards setting floors to prices in their buildings to “maintain value” for their shareholders. While a fiduciary responsibility, it is steeped in contradictions to free market principles. There was a great New York Times summary piece about this practice back in June 2007: “Should Co-op Boards Set ‘Floor Prices’?

About 15 months after the NYT article was written Lehman Brothers had collapsed and AIG, Fannie Mae and Freddie Mac were all bailed out. Manhattan sales prices had fallen about 30% from 2008 to 2009. During this period I observed an increase in the practice of setting price floors. A hypothetical scenario (the type I often observed first hand) for – let’s call it – “Apartment XXX” and the timeline might go something like this:

  • Sold in 8/2007 for $1,000,000
  • Listed in 8/2008 for $1,100,000
  • Zero activity until 1/2009, offered $700,000. Offer rejected by shareholder.
  • Offer made by new buyer in 2/2009, offered $705,000. Offer rejected by shareholder.
  • Offer made by new buyer in 3/2009, offered $700,000. Offer accepted by shareholder.
  • Board turndown – “price too low.”
  • Offer made by new buyer in 4/2009, offered $695,000. Offer rejected by shareholder.
  • Offer made by new buyer in 5/2009, offered $710,000. Offer accepted by shareholder.
  • Board turndown – “price too low.”
  • Taken off market by shareholder.

A co-op board CAN’T dictate sales prices
It is clear from the steady stream of new offers in my hypothetical that the market had reset to a significantly lower level during the year. If that was the case (it was), then the board was actually doing a disservice to their shareholders by making their apartments essentially unsaleable. A buyer isn’t going to pay what the seller or the board wants the price to be. Econ 101. Housing market prices change over time, hopefully rising more than falling in the long run. The brokerage community also has a fiduciary responsibility to get the highest price for their seller under market conditions at that time. Although the board is trying to protect their shareholders (and themselves as shareholders), they have in effect, temporarily nullified the market in their building. The brokerage community is less likely to bring offers to sellers because they assume the board will reject the price even though the property had been properly exposed and vetted in the marketplace.

A co-op board CAN protect their shareholder against price outliers
One of the misnomers of the “setting a price floor” discussion is the fact that appraisal quality for lenders has been decimated since the financial crisis as banks now fully rely on appraisal management company ie “AMC” appraisers and most have no “local market knowledge.” An out of market appraiser will likely be more influenced by outliers than a local appraiser because the out of market appraiser is data starved and has no experience in the nuances of that market. It is clearly prudent for a board to be vigilant about outliers as reflected in the video. I’ve consulted on transactions for boards that don’t represent market value – ie the heir or executor lives on the other side of the country, doesn’t care about the market value and simply wants to dump the unit, make some money and move on. The out of market appraiser will probably use that sale as a “comp.”

“Protecting against outliers” is very different than “controlling prices” in a market.

In the outer boroughs especially in Queens, I believe the practice of setting a price floor has remained a widespread practice for years. Here’s a co-op attorney who is providing tips on how to “maintain values” on Habitat Magazine‘s web site. Concepts like setting up “sliding scales” to sell at 95% of the average of past sales may work in a stable market but worry me because the co-op won’t be able to respond to downturns and is in danger of choking off the market, potentially depressing prices even more.

This video also talks about apartments being different in condition and boards need to consider this because real estate appraisers don’t take into consideration whether or not an apartment was renovated.

No! This is absolutely an incorrect or the appraiser is not being asked to provide an opinion of market value – appraisers are supposed to take condition into consideration if they are being requested to provide an opinion of market value.

As I mentioned earlier, with the proliferation of AMCs, appraisers working for retail banks are generally being paid 50% of the market rate and can’t or won’t confirm condition of their comps. Higher up banking executives don’t yet equate appraisal fees with appraisal quality.

“Maintaining Value” in a co-op (or multi-unit housing entity with a governing body) Here are a few (non-legal) valuation thoughts on “maintaining” values in a co-op. I’ve personally always taken this to mean that the corporation is run efficiently for the benefit of the shareholders and when that happens, property values are “maintained” relative to the market. I also believe their values will ebb and flow with the world that surrounds the building – ie supply, demand, credit, interest rates, economy, employment, etc. These are outside factors tend to be things that the board has no control over. If the board takes actions to control “market forces” they can potentially damage shareholder value and they are potentially not fulfilling their fiduciary responsibilities.

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Online Petition To Get “Customary & Reasonable Fees” Issue In Front of CFPB

March 19, 2014 | 3:16 pm |

CFPBlogo

Within the current mortgage industry, predatory appraisal fees are driving experienced appraisers out of the field only to be replaced by an army of “form-fillers.” The appraiser today is being asked to pay for a bank’s compliance with financial reform directly out of their appraisal fee or go out of business. The practice is misleading to the consumer, exposes the taxpayer and the financial system to unnecessary risk and drives invaluable expertise out of the appraisal profession.

The folks over at AppraisalBuzz ask me to provide input into the petition. It is an essential read for all appraisers regarding the practice of predatory fees by AMCs: The Online Petition Every Appraiser Should Know About or you can go directly to the petition and signup if you agree – it takes about 30 seconds.

My hope is that this petition creates a public awareness of how serious and untenable this problem is and how much the reliability of the appraisal of collateral for mortgage lending purposes has deteriorated since the financial crisis began.

Appraisal Buzz post: The Online Petition Every Appraiser Should Know About

Sign the petition.

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[Appraisal Infographic] Common Myths About The Homebuying Process

March 15, 2014 | 1:07 pm |

The Appraisal Foundation published an appraisal infographic that attempts to clarify common misconceptions by the borrowers about the appraiser’s role in the home buying process. The content is amazingly simplistic, but that’s the point.

I continue to be amazed at how so few people don’t understand what the appraiser’s role is in the home buying process. Perhaps this is why the appraisal industry continues to be marginalized in the lending process (ie appraisal management companies, Appraiser Independence Requirements) and the exodus of competent appraisers into other disciplines outside of residential mortgages continues.

2014-03-06-BorrowersinfographicTAF

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