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[Sounding Bored] Appraisal Pressure, Blog Motivation, October Research

Sounding Bored is my semi-regular column on the state of the appraisal profession. This week I revisit what got me into this blogging gig (hint: appraisal pressure).

Back in August of 2005, I was fed up with the pressure myself, my firm and my profession was under to make the number “or else.” So I launched Soapbox. It seemed that no one really cared about ethics or the risk placed on banking system. Appraisers were fast becoming the enablers [1] to fraud and a whole lot of “gray areas” that I wanted no part of. Blogging became a way to vent my frustration with the industry which didn’t seem to have much political clout in Washington to change policies that placed us in between a rock and a hard place. At one point I was even contacted by the House Ways and Means Committee in Congress to testify about the problem with appraiser ethics on a specific issue, but they had already inferred what they wanted me to say.

The bottom line?

Those whose commissions depend on “hitting the number” have become the appraisal order givers and quality, as they say, Elvis, has left the building. Appraisal management companies gained favor with lenders who didn’t understand the disconnect between real collateral values and loan needs. AMC’s pushed fees below cost (without taking ethical shortcuts) and required completely impractical turn time requirements for even reasonable research time. Gradually, once were good banking clients, began to disappear from the good appraisers.

After a short while, I realized I could rant and rave all I wanted but it wouldn’t change a whole lot as quickly as I wanted it to. The change had to come from within (no, I didn’t sell my soul). I had to change my client base and perhaps someday the lending community would come around and feel true concern about the value of their collateral and the regulators would begin to see the problem.

In the meantime, I needed to reinvent my practice and basically stop placing so much emphasis on on retail bank appraisal work, a previous mainstay. Whats sad, is the lending industry has already lost a significant portion of its collective appraisal experience to rely on. In other words, many of the talented valuation experts have begun to focus on other clients. But hey, the lending industry has plenty of form-fillers that can bang out 10 reports in a day and make 24 hour turn time specs to make their customers happy.

October Research [2], publishers of a series of smart publications including Valuation Review [3], broke the news to the world with their definitive 2003 National Appraisal Survey. The survey has been updated in 2007 which showed that:

Note: If 90% are feeling pressure and 71% are from mortgage brokers, then wouldn’t it be logical that a significant portion of the remaining balance is from appraisal management companies and banks themselves?

As an appraiser, ask yourself this question regarding any type of mortgage appraisals: “Does the person ordering the appraisal have a direct financial incentive as to its outcome?

I would guess the answer is yes more than 90% of the time.

The National Association of Independent Fee Appraisers [4] has used the results of this study to launch a legislative initiative to stop this silliness along with other appraisal organizations. On February 6, 2007, the results of the October Research Survey were presented to the Senate Banking and Housing Financial Services Committee:

This week, NAIFA, along with the Appraisal Institute [5], the American Society of Appraisers and the American Society of Farm Managers and Rural Appraisers delivered a letter to Congressional Committee on Financial Services about the pressures appraisers face. The action was based on the recent release of the study by October Research Corporation that found that 90% of appraisers are pressured by mortgage brokers, real estate agents and others to raise property valuation to assist in the consummation of deals. The study also noted that 75% of appraisers reported “negative ramifications,” if they did not cooperate, alter an appraisal and provide a higher valuation.

Sadly, the results of the survey mirror the concerns you as members have raised. To address these concerns and others, NAIFA is encouraging Congress to hold hearings on theses issues and approve legislation that protects home buyers and the real estate financing process. Reforms should also be considered to Title XI, which has several shortcomings that contribute to mortgage fraud.

There are several appraisal reform bills at the top of the 110th Congress’ agenda, specifically, bills offered by Rep. Paul Kanjorski (D-PA) related to Title IV of H.R. 1295 and Sen. Barack Obama (D-IL) on S. 2080. These pieces of legislation would provide federal and state appraiser regulators more resources to conduct enforcement, ban inappropriate coercion, and promote professionalism of real estate appraisers among other things.

Appraisal survey teaser [6]
To order the survey [7]