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[Commercial Grade] Better Late Than Never

May 24, 2007 | 10:24 pm |

Commercial Grade is a weekly post by John Cicero, MAI who provides commentary on issues affecting real estate appraisers, with specific focus on commercial valuation. This week, John is crushed by the lack of a firewall in the commercial world of valuation.

Disclosure: John is a partner of mine in our commercial real estate valuation concern Miller Cicero, LLC and he is, on Thursdays on Fridays, one of the smartest guys I know. …Jonathan Miller



I am thrilled that appraiser pressure is now in the spotlight. Articles are everywhere. The Real Deal writes Appraiser pressure at pandemic proportions and Inflated Appraisals feed mortgage meltdown and the New York Times and Bloomberg News have been reporting about the recent subpoenas issued to residential appraisal firm MMJ, appraisal management company eAppraiseIt, as well as mortgage broker Manhattan Mortgage.

In keeping with my Commercial Grade mantel, I wanted to give one commercial appraiser’s perspective. As professional appraisers, we essentially sell our opinions for a living. We don’t sell paper reports, or comps, but our expert opinion of market value. It may be an educated opinion, but it is an opinion nonetheless. And, just as in politics, sports and restaurants, there will always be some people that don’t agree with your opinion. You can have a spirited intellectual debate. That’s fine. When a client disagrees with my opinion I am open to discussion, provided that it centers around the valuation issues. If, for example, the client is able to give additional insight into the property and/or market that we may not have fully considered, then I may upon further consideration make a modification to my report. That is not appraisal pressure.

Appraisal pressure is every bit as real and sleazy as the articles make it out to be. And as my esteemed partner, Jonathan Miller said in his recent Matrix post it is a business and ethical decision whether you will work for those people. In the world of commercial lending, however, the sources of appraisal pressure are not necessarily the same as the residential appraisers. Yes, we have mortgage brokers who are clearly motivated to have the appraisal reflect a certain value, but we are not as impacted by the appraisal management companies. Actually, I think that the main source of appraisal pressure in the commercial appraisal world are the investment banks.

If I am not mistaken, the investment banks are the largest source of commercial loan origination in the country. They pool their loans and securitize then. The rating agencies rate the securities and then sell the various tranches to investors. No loans are held on the investment banks’ books.

There is no firewall between origination and appraisal at an investment bank, as required in commercial banks by FIRREA (which has proved to be ineffective, but that’s a topic for a different post!). To indulge in a stereotype, the appraisal is usually hired by a 22-year old MBA who has never seen a down cycle in real estate and needs to make the loan in order to make his 6-figure annual bonus. They are aggressive and they push hard.

I never really understood why it the investment banks need such optimistic appraisals. Nor do I understand why the rating agencies don’t see right through them when they review the appraisals that come with the loan documents. And since the investment banks require the appraisers to include reliance language in the appraisal saying that any investor of the security can rely on the appraisal, I don’t understand why so many appraisal firms are willing to be so ethically flexible.

Maybe once these securities start to default Andrew Cuomo will take a look here as well.


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[Sounding Bored] Managing To Give The Industry The Eye

May 23, 2007 | 5:07 pm | Columns |

Sounding Bored is my semi-regular column on the state of the appraisal profession. This week, the subpoena issued to eAppraiseIT generates some general thoughts about appraisal management companies.

New York State AG Cuomo has now added eAppraiseIT to the list. I thought it was curious that the president of eAppraiseIT was quoted saying: It’s a very good thing, what the attorney general is doing,” Merlo said. Cuomo’s office was focused on “who’s exerting the pressure” on appraisers, he said.

As an appraisal company, we made a “business” decision not to work for appraisal management firms like eAppraiseIT because their appraisal fees were roughly half that of market levels and the turnaround requirements were 2-3 times faster than the norms. It was a “business decision” on our part. I don’t see how appraisers who work for the majority of appraisal management companies don’t need to cut all corners to make it cost effective.

When Washington Mutual closed their in-house review function last year (the last national lender to do so), they went with eAppraiseIT and Lenders Service to manage the appraisal process. Unfortunately, Washington Mutual did not refer their approved appraisers to these two AMC firms and basically cleaned house after torturing all of us that were loyal to them for five years with an appraisal ordering system that did not work (remember OPTIS?). I had heard that they were having quality problems and sure enough, some of the formal panel members got calls from both firms. We didn’t bite.

US Trust Company, who is being purchased by Bank of America was a great client of ours for years. Two years ago, UST senior management decided to dump all the appraisers they worked with to save money and hired AMCO, an appraisal management company. Many firms like us, who had been working for them for 15 years since they entered the mortgage business, were talked into working for AMCO, because our same fees and turn time requirements were mandated by UST. However, AMCO eventually ignored the mandate and stopped paying our outstanding invoices. Recently, with the previous senior managers gone, UST dumped AMCO and we were eventually able to recover nearly all our accounts receivable and were back to direct ordering from UST. AMCO seems to be out of business and someone is reportedly shopping their assets. We will see if Bank of America plans to go with credible appraisers in the markets they cover. I believe they too were burned by the appraisal management company process and reverted back to in-house ordering.

With all the focus on appraisal pressure these days, I can only hope that something is done to correct the flaws in the lending system and someone actually wants an unbiased collateral assessment. Thats the goal here and hopefully the regulatory agencies won’t lose sight of that.

Until then, I’ll have to manage.

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[Sounding Bored] AMCO Opts To Partially Pay Some Very Old Debts

February 14, 2007 | 11:25 pm | Columns |

Sounding Bored is my semi-regular column on the state of the appraisal profession. I am still hung up on this AMCO thing, but I think I am getting close to the end of the final chapter.

Two weeks ago after I posted my last discussion about AMCO, I started to get nervious about our non-payment of $15,000+ in outstanding appraisal fees, the majority of them are more than 6 months overdue.

I had been promised by AMCO that a check was written for $10,000, but no check ever arrived. Thinking that they were not likely to ever pay us, I decided to involve my former client in my efforts since I wasn’t really sure if they understood that most of their appraisers were cut off from work once they moved their business to AMCO. Since I wasn’t getting satisfaction of my debt, I felt I had nothing to lose.

I sent several emails to AMCO, copying my client, demanding payment of my debt. I explained the over six month thing, the lack of returned calles from accounts payable and the $10,000 check that never came.

Low and behold, I got an email from AMCO saying a check was being paid to us for $13,000 and they even provided a check number as proof. I was pretty skeptical until I got an email from my original client saying that they had interceded and forced the issue. They also informed me that they would be taking control of the appraisal process and we would start getting work again.

Wake me up: am I dreaming?

On the same day, we got an order from AMCO on behalf of this client. We had not received an order since November 14th. Coincidence?

We said we would only agree to do the appraisal if we were paid the $2,225 balanced owed, since all of it was over 90 days. They refused saying we were no different than other vendors but asked us if we would accept this new assignment if they sent us the payment for the new assignment via FedEx that night. We still declined the assignment since we had vowed not to work for them until we were paid in full. Even after that point, I don’t think its worth the risk.

The feedback this particular lender who interceded for us, indicated that several other national lenders have grown tired of the appraisal management company concept considering the poor quality of work being completed and the weakening real estate environment.

I hope its not too late, but I must admit, I am pretty happy about that new development.

AMCO Gets Credit Line Renewed, Appraisers Hope Checks Are In The Mail

Is AMCO In Financial Trouble Or Managing The Float?


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[Sounding Bored] Is AMCO In Financial Trouble Or Managing The Float?

January 17, 2007 | 9:09 am | Columns |

Sounding Bored is my semi-regular column on the state of the appraisal profession. This week I break out in a cold sweat as AMCO delays paying their bills.

As a matter of ethics, our firm avoids working for appraisal management companies, because as a rule, they encourage poor quality by demanding below market fees and unrealistic turn times. As a results, AMC’s in many markets can attract individuals who do no real research and serve only to make the number for their clients.

The one appraisal management company we had worked for on a regular basis is AMCO because one of our long time clients, US Trust Company, moved their appraisal ordering process to AMCO because upper management wanted to save internal administration costs and benefit from one stop shopping. They likely saw the appraisal as a commodity, like a flood certification. (Note: Be careful what you wish for.)

AMCO tout themselves as The Nation’s Leading Independent Valuation Management Solutions Company and their rep was that they pay a fair fee in a reasonable period of time.

AMCO was told by UST to use us for our market because we had a 16 year relationship. They did for a while but slowly moved the work to their army of form-fillers. We continued to work for them because they accepted our normal fee and turn time requirements. We were mainly hired for complex, high end assignments. We figured it was a matter of time befefore we would no longer receive work from them, so we kept at it until that day came.

A little over a year ago, we noticed they were becoming eratic in paying their bills. They would pay some, but not all of them. Payment times expanded. We have invoices we have been calling on regularly since June and July. We would be directed to their accounts payable department who NEVER returned our calls. I repeat: NEVER.

They owe us over $15,000.

Yesterday we got the following email from one of their reps:

I apologize for the delay in payment. AMCO was expecting to have the funds from a line of credit in December but did not receive them and so that pushed back our payment. We are now expecting to have the funds in the next 2 weeks.

All unpaid invoices thru October will be paid at the end of January. November invoices in February and December invoices in March.

Thank you again for your patience and understanding.

Of course, if the appraisal is a day late, we get yelled at by someone fresh out of high school who doesn’t understand what an appraisal is (ok, so I am exaggerating a little bit, but it makes me feel better).

Here’s an excerpt from my response yesterday:

…Taking 7-8 months to pay bills by a large national coporation is not reasonable and we are seriously concerned that you are having financial troubles or simply managing the float for a greater return. We would not have charged the same fees if it was going to take more than 6 months to get paid on a substantial amount of work.

Are payments prioritized by those who have the most outstanding or simply by their age? One of the advantages and reasons we agreed to work with your firm, as an AMC, was your sterling reputation for being fair about payment which now that seems to be an outdated characterization…

Is anyone else having this problem with AMCO? Do we have any recourse before I hire a lawyer?


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[Sounding Bored] Providing Clients Name, Rank and Serial Number

October 25, 2006 | 8:11 am |

Sounding Bored is my semi-regular column on the state of the appraisal profession. This week I get annoyed as a client gets personal.

Over the last several weeks, I have been having a polite argument with a client of mine, a large national lender whom I have worked with for more than 20 years. As part of our annual renewal in which we provide our updated insurance and license information for their files, I was asked to provide my P & L.

We have never provided this information to anyone but the IRS and a lender that I set up my revolving credit line with. Its nobody’s business.

We have had a 20+ relationship with this client and I like all the people we deal with and get modest appraisal volume from them.

I have no idea how my P & L impacts whether I can do business with them. There is limited exposure on their part. If I was a national appraisal management company doing thousands of transactions a month for them and was publicly traded, then yes, I could see the need to understand their exposure.

At first they gave me a waiver but a higher up rescinded it and attributed it to company policy. Aren’t I protected to the same level of privacy that a customer for a lender is under Gramm-Leach-Bliley?

Its a matter of principle, and I want to opt out.


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First American Buys Majority Share Of CASS To Spend More Time With Family

December 5, 2005 | 12:01 am |

In other words, having an inhouse AMC is probably not working out for Citi.

First American acquires majority share of Citigroup’s Chesapeake Appraisal and Settlement Services [Valuation Review] Reportedly the split is 51/49.

CASS is an appraisal management company and the purchase of this interest will help First American stay competitive with Fidelity. Speaking from personal experience, First American has the worst customer service of all of our vendors, probably because of their monopoly of services in our market.

Our appraisal firm has received many requests by CASS to join their appraisal panel with their callers basically apologizing for their unreasonably low fees (about half of market rate fees, in our experience) and 2-3 day turn times (3x faster than the norm). To get quality appraisers on their lists in certain markets, they say they will pay market rate fees and accept normal turn times. We have remained skeptical and have opted not to join the fray.

We have had the pleasure of reviewing many reports completed by their approved vendors and found the quality of the appraisal reports to be awful (The reasons could fill up another post). With low fee and fast turn time, the reports must be viewed by CASS as compliance documents rather than a tool to assess collateral. A factory, as you will. Remember, CASS is the firm that outsourced appraisal reviews to India to save money [SF Chronicle].

Actually, I have always wondered how an AMC owned by a lender can actually provided unbiased service to competing lenders.


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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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[Interview] Robert Dorsey, Chief Data and Analytics Officer, FNC Co-Founder

November 18, 2010 | 11:03 pm | Podcasts |

Read More

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[WAMU Irregularity] Placing Turf Wars Ahead of Common Sense

April 12, 2010 | 3:39 pm | |

Sewell Chan writes an excellent article in today’s NYT: “U.S. Faults Regulators Over a Bank” which illustrates the regulatory disfunction and conflict of interest that lead to the financial meltdown.

In fact, in our firm’s experience as an appraiser doing work for Washington Mutual during their run-up, you’d have to be blind not to see the conflicts and the loss of a sense of risk. The appraisal departments were the last bastion of neutrality in the organization to protect appraisers from pressure by loan officers and they were eventually closed as “cost centers.” Nearly two years to the day that WAMU closed their in house appraisal departments and went with Appraisal Management Companies, they became insolvent.

The two agencies that oversaw Washington Mutual, the investigation found, feuded so much that they could not even agree to deem the company “unsafe and unsound” until Sept. 18, 2008.

And one had an operational incentive:

With more than $300 billion in assets, WaMu was the largest institution regulated by the Office of Thrift Supervision and accounted for as much as 15 percent of its total revenue from assessments, the report found.

In 2004, while property values were rising at double-digit rates, I remember thinking that my firm would be “out of business” in 3 years if we continued to keep our majority of client base with large retail banks because most were pursuing high risk lending strategies. This meant high-ball appraisal values and little concern about borrowers ability to pay – firms like ours simply didn’t fit in. Frustrated with the insanity of all this, I eventually started up blogging in 2005 – the timing in this article as outlined in the treasury report framed the WAMU debacle perfectly.

The report found that Washington Mutual had failed primarily “because of management’s pursuit of a high-risk lending strategy that included liberal underwriting standards and inadequate risk controls.” The strategy accelerated in 2005 and came to a crashing end in 2007 with the drop in the housing market.

Here are a few simple takeaways that should be considered in all forms of financial regulation.

  • Regulators need clearly defined lines of authority – turf wars between all agencies were a distraction – politics not allowed.
  • Regulators can not be specifically dependent on income derived from the institutions they regulate – an amazingly large conflict.
  • Institutions can not select which agency they wish to be regulated by – wow, common sense.


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[Vortex] Fee Simplistic: Needed – Driving the Wooden Stake In the Bank/AMC Vampire

June 14, 2009 | 1:16 pm | |

Guest Appraiser Columnist:
Martin Tessler, CRE

Fee Simplistic is a regular post by Martin Tessler, CRE whom after 30 years of commercial fee appraiser-related experience, gets to the bottom of real issues by seeing both the trees and the forest. Marty has never been accused of being a man of few words and his commentary can’t be inspired on a specific day of the week.
…Jonathan Miller

The Wall Street Journal article of June 9th entitled, “Appraisals Roil Real Estate Deals” should be required reading for anyone who has opined to an opinion of home value. For those who missed it, the article details the swing of the pendulum from the high flying days of pre- 2007 when appraisers could not come in with values or, should I dare say, “numbers” high enough to justify a loan. In comparison, today’s lending world has swung 180 degrees to the low end of the pendulum where no value can presumably be low enough. The article goes on to portray the “usual suspects”- house values that have plummeted from the sky high years to todays’ nadir with some added color such as:

    • A Fairfield County CT appraisal that came in at $50,000 below the contract price necessitating either a new appraisal or renegotiation.
    • A JPMorgan Chase home equity line of credit predicated upon a 2,650 sq ft Manhattan duplex appraised at $1.475 MM in 2005 being reduced due to the bank’s estimate coming in at $600,000. The borrower then was able to produce a new appraisal that valued the property at $1.8MM. A spokesperson for the bank said that they use “an automated appraisal system on our portfolio” and that they encourage borrowers who feel that if their valuation is too low to order an outside appraisal and will reimburse them if it supports their claim.
    • Banks requiring appraisers to use sales comps that closed within the past 90 days with some asking for at least one sale within 30 days.
    • Agreement by the appraisal industry and Fannie/Freddie to adopt the Home Valuation Code of Conduct intended to prevent loan officers, mortgage brokers or real estate agents from selecting appraisers. This is to shield them from pressure on coming up with pre-ordered values, a major issue raised by NY State Attorney General Cuomo and on several postings in Matrix/Soapbox last year.

A significant issue not quelled by the Code is that it allows if not encourages lenders to outsource the selection to appraisal management companies or AMC’s who will charge the appraisal firm anywhere from 30%-40% of the fee for administration, overhead and, pardon the sarcasm, quality control. Exacerbating the problem is that lenders can own stakes in AMC’s. Thus, the conflict of interest is ever present.

Reports are prevalent that AMC’s shop around for the lowest appraisal fees that frequently end up on the desks of appraisers who are geographically distant from the subject property’s market, are not fully familiar with the local market and thus present sales that are not directly relevant.

It is obvious that AMC’s are clearly conflicted if owned either partially or fully by a lender. They are recipients of profits generated by a company that is not arm’s length from their fiduciary role where they require the borrower to buy the service. As for tools such as JPMorgan Chase’s “automated appraisal system” these are only rough guides to average or ranges of value from a large data bank of properties and extreme care must be taken in applying such macro data to a specific property or micro set. It is therefore not surprising that Chase allows for an independent appraisal although I’m not sure that it allows the borrower to select the appraiser as the article implies and, if so, it’s a violation of FIRREA if not the Code.

If no reforms of the Code are made to disallow AMC’s from ownership by lenders it is my opinion that history is doomed to repeat itself in the next frenzied lending cycle. Let’s get the stake ready now.


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[Market Report Pulse] Sales Contract Data Can Mean Nothing

January 16, 2009 | 2:44 am | |

One of the most sought after trending tools for housing markets is contract data. Not listing data, not closed data. Contract data.

Compile a lot of data across all regions, property types and price strata and you are golden. You are observing the market as close to the “meeting of the minds” as is humanly possible – you have its proverbial pulse.

I thought to write about the concept of reporting contract data after I got a call from The Real Deal about a new contract-based real estate market report. Their founder is a very creative, very smart and very successful marketer of real estate, first as an agent and then as a marketing expert for new developments. Visually, the report is beautifully done, consistent with the quality of their firm’s marketing materials and online presence. However, they might consider dropping the name of “real-time” from the report. It’s monthly. I understand the intention, but the use of the phrase “real-time” infers a live feed, which this report is not. Isn’t “monthly real-time” an oxymoron?

A quote from The Real Deal article:

It tracks contracts info. To me, that’s what reflects the marketplace and where we are currently, not closed information, which is actually a look back in history.

Another company attempted “real-time” a few years ago by treating real estate listings like the stock market and began publishing a “ticker” type interface. I have to give them credit for the innovation, but it never really got people’s attention.

But I digress

What is contract data exactly?

It’s a property sale with an executed (both parties signed) contract – It is usually 45-60 days ahead of a closing date if new development data is excluded. Actually this 45-60 day time frame is currently expanding as lenders become more difficult to deal with. New development data in the mix could lag the market by 1 to 2 years.

I sort of dealt with contract activity in the most recent market report numbers in my 4Q 2008 Manhattan Market Overview but not in the traditional sense of aggregating contract data and trending it.

Our appraisal firm began to see a pattern in late September 2008 where current contracts of properties we were appraising, were clearly lower than contracts signed in the summer of 2008. The range was roughly 15% to 20%. My 20% number has been widely referenced by the Fed, Goldman Sachs and others, and in fact, page one of AM New York published the number “20%” in red on the entire cover. But our conclusions were based on more of a case by case analysis, similar to a repeat sales analysis.

I don’t currently issue contract reports but I certainly aspire to, but only when I have credible results. Periodically I’ll see one of my appraisal competitors distribute a press release with their own contracts tabulated. I’ll see real estate brokers and marketing agents issue contract reports.

Readers oooh and ahhhh over the relevancy of contracts because the data is perceived to be fresh and current. In principle it is current, but in practice it is much more subject to skew than other data.

I also wonder why methodologies are never fully provided, especially those prepared by marketing groups or departments.

Here are the issues that make much market analysis of contract reports suspect, despite perhaps the best intentions of the authors.

  • Quantity of data — the key issue that makes much analysis unreliable – absent from the public domain.
  • Location of the data — contract data tends to be sourced from a few institutions or entities so its availability and the potential for skew is very serious.
  • Unit mix of the data — This is subject to skew depending on the source of the data – what type of business they have – who their customers are (low end, high end, studios, 3-bedrooms, etc.)
  • Source of the data — The four largest real estate brokerage firms probably account for 80% of all sales in Manhattan. I know each of the senior management teams so I am fairly confident they will not release contract data in bulk to anyone outside their company, especially to a competitor.

I have never met a broker that will share contract data in bulk because it can jeopardize their company’s sales and commissions. We are able to get contract data periodically, but not in bulk. If producers of contract reports can win me over on these key issues, I am ready to jump in with two feet. NAR publishes a pending contract index and frankly, not many people I know believe the results.

In other words, contract data is the Holy Grail, but I am not convinced it’s yet achievable as a reporting tool.

Now give me a sales contract specific to the appraisal we are working on and I am happy ’cause that’s a whole ‘nother story.


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[Palumbo On USPAP] USPAP, No, You’re Misleading Me.

October 23, 2008 | 11:36 pm |

palumbo-on-uspap

Palumbo On USPAP is written by Joe Palumbo, SRA, a long time appraisal colleague and friend who is also an Appraisal Qualifications Board (AQB) certified instructor and a user of appraisal services. Joe is well-versed on the ever changing landscape of the Uniform Standards of Professional Appraisal Practice [USPAP].

…Jonathan Miller


Although I am supposed to be managing a process, it is quite often that I “get my hands dirty” and dive in.

Reviewing appraisals and conversing with appraisers keeps me close to the issues of the market as well as helping me get a handle on the realities and challenges of dealing with a nationwide professional vendor panel. Most of the time this is a pleasure and very reassuring: I get to observe new markets, some of which are NOT declining, yes that is correct, not a typo, and I also have discussions with highly skilled appraisers who enlighten me on their markets via articulate thorough (appraisal) analysis so my risk is mitigated as best it can be. To those TRUE business partners I say thanks and I look forward to the next challenge for us to work on TOGETHER.

Unfortunately, like always here are some bad apples. Those who accept appraisal assignments with a sense of entitlement, who also tend to fail miserably in communicating let alone solve the appraisal problem. And just so we are clear here we are NOT talking about questioning someone’s “value”. In the relocation business it is standard protocol to obtain two or three appraisals and then query each appraiser based on what was observed as it relates to facts about the subject, market conditions, trends, common comparables used etc. The summary of responses is recorded so that the “intended user”, an employing corporation, can (try) to make sense of this highly subjective process. A lot of the questions we (in-house staff) ask we already know the answers to and how they impact the analysis (if at all) but we ask anyway so the client and employee can gain some reassurances on some real estate related misconceptions and such. We are not a management company and we pay market fees and allow for ample completion time. All we ask in return is thorough credible appraisals in a timely manner and endurance of the back-end process.

The specifics of my “bad experience” involve my query of an appraiser’s room count as it related to what was reported by the two others. Seems this gentleman included both an above ground laundry and utility room as part of the “room count”, where HIS local peers did not. Item of note here is the both realtors did NOT exaggerate the room count via this method of counting. When I pointed that out and merely suggested that he “clarify, explain why, or possibly modify his room count”, I was met with a terse one line response “per USPAP to change the room that would be misleading”. The terse response to that one question was followed by a petulant response to the several other items noted in contrast to the other reports. Since this is not my first day on the job, nor the first such role I have had as a manager of the appraisal process, I promptly finalized the summary of my findings internally so as to “pull up the anchor” and move on. CLEARLY this is not even a USPAP issue.so I figured I would have some fun with this guy. This kind of response to this kind of issue makes me wonder what some people are thinking and why there is such a sense of entitlement. I wrote back: “thank you sir for your response, I appreciate it. No worries on the room count issue, but I just want to clarify one thing: Acting unprofessional and petulant and providing a response like this the worse USPAP crime going: YOU”RE MISLEADING ME into thinking you belong in the appraisal profession!! Maybe you have done the best appraisal I will ever read, and the valuation conclusion is rock-solid but that gets lost in dialogues like this”.

Don’t get me wrong, I know everyone has a bad day every now and then. Unfortunately unlike my last appraisal management gig where fee panels can cover 90% of the (pre-determined) lending area, I have no idea where the next “move” will be. We qualify and engage within a small window and trust tremendously in those we engage. 2008 has revealed this type of response and attitude more than one would like to see. I get it: is very tough out there right now. Just remember no matter what business you are in that angry and unprofessional does not work. Angry sends a message beyond what you think and begs the question of empathy VS apathy. Also. when you quote USPAP be carefulthere may be a hidden meaning to what you quote.


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