Sounding Bored is my semi-regular column on the state of the appraisal profession. Valuation Review gets me to spill the beans on the Brave New World our profession has entered. Believe it or not, I am optimistic.

Here’s my interview with Matt Smith, managing director of Valuation Review, one of the best real estate appraisal publications out there, IMHO:

As Valuation Review has reported, lenders have grown much more conservative in underwriting, and appraisers are feeling it in the form of growing demands for more in-depth market analysis and the inclusion of more recent comps in reports (see “Conditions, stips reach fever pitch for appraisers“).

“I hope it continues forever. It should never have gone away,” said Jonathan Miller, president and CEO of appraisal firm Miller Samuel. “The appraisal profession from 2004 to 2006 which was when the bar for underwriting dropped to the floor became an army of form fillers. The people who were competent either did not fare well during the housing boom or were effectively shut out of their trade. It’s a shame. That will take a while to rebuild.”

He estimated that the appraisal industry has fallen from “80 percent competent to just the opposite.” Miller recently shared his thoughts on how the GSE conservatorship and Wall St. crisis might mean for appraisers.

The most important factor, he said, is the housing market won’t get better until credit is fixed.

“The GSE takeover, in the long run, is a good thing for two reasons. One is they no longer serve two masters — the taxpayer and the shareholder. So they may be able to work out some of the foreclosure volume,” Miller said. “There may be more empathy.”

Also, no one knew how much of their balance sheet contained overstated assets.

“Until all the dirty laundry comes out, you’re not going to see much of a resolution of credit,” Miller said. “There’s no trust in the market whatsoever.”

What’s it all mean?

As the industry purges itself of unscrupulous practices and “professionals,” mortgage lenders might place a new premium on skilled, experienced appraisers at least temporarily.

“I’m skeptical that lending institutions are going to find the new religion tasteful for an extended period of time because it means lower revenue,” Miller said.

In addition, many of the executives and leaders who pushed for reckless behavior are still in place. There’s also another wildcard appraisers must face: The Home Valuation Code of Conduct.

Miller offered no guesses at a possible outcome for the HVCC, but said, “The biggest concern I have in all this and I can tell because I’m being heavily marketed to by them is the proliferation of appraisal management companies.”

Representatives from the mortgage broker industry have reported that with new rules preventing them from ordering an appraisal directly, 60 percent of their members will go under, according to Miller.

“Yes, because that is part of the systemic problem with valuations,” he said. “Lenders have essentially severed their relationships with local appraisers. They’ve gone national (with AMCs). You’re moving from an appraisal product that is biased to make the deal to one of incompetence. Generally, the appraisers willing to work for appraisal management companies are those willing to work for half or less than the market rate and therefore cut corners and turn the product around in 24 hours. The reviews I’ve done for banks suggest those reports generally aren’t worth the paper they’re written on. So how are we better?”

There has been no great solution for making sure appraisers are protected but viable, he said. Real improvements to the system would have to incentivize quality and trust.

“That won’t be accomplished by just making a new laws or regulations saying you can’t pressure appraisers. That’s been the tact in the past, and that really does nothing,” Miller said.

Rather, there has to be incentive on the demand side so that loan products aren’t purchased and securitized until they meet rigorous new standards. The larger trend in the appraisal community is that the intellectual knowledge base is leaving mortgage business for other types of valuation work.

“At some point, you decide whether you’re going to sell your soul or not. I don’t want to sound too cynical, but once you make the business decision to say, ‘I’m going to push the number,’ it’s over. You’re going to be doing that the rest of your career, because that’s what your reputation will be,” Miller said.

His own business has evolved in recent years from 50 percent mortgage-based to just 20 percent or work coming from mortgage companies.

“People that take the long-term view will probably leave the mortgage business as an appraiser and certainly are doing little work with mortgage brokers,” he added.

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6 Responses to “[Sounding Bored] Valuation Review Interview: “Tightened Appraisal Guidelines””

  1. Edd Gillespie says:

    The problem for appraising is in doing mortgage work, almost any kind of mortgage work. You have nailed the problem. If we are to be professional we must develope relationships founded on mutual trust with our clients and mortgage work is anathematic to that since the emphasis in mortgage work is primarily on cheap and speedy appraisals rather than on the character and ability of the appraiser and the depth of his/her analysis. Underwriters creating new stips and conditions is hardly a cure. That is frenzy produced by people who basically don’t know an appraisal from a 1040EZ. The cure is in paying more to obtain qualified and ethical appraisers and permitting enough time to complete the work required and just maybe trashing the Fannie forms forever.

    There are certainly exceptions to my conclusion, but they are found only in ethical and respectful clients who refuse to do the appraiser’s job and believe appraisers should be fairly compensated. My experience is that very few clients involved in mortgage work can muster up those attributes, residential or commercial.

    “You’re moving from an appraisal product that is biased to make the deal to one of incompetence. Generally, the appraisers willing to work for appraisal management companies are those willing to work for half or less than the market rate and therefore cut corners and turn the product around in 24 hours.”

    I know much is made of appraisers hitting the number, but that is symptomatic of a profession that has few knowledgeable professionals. If they knew what they were doing the number hitting would never have become a topic of conversation. We have designated teachers who instruct to pass the exam. If they don’t, the students go elswhere. It is truly difficult to find pride in this endeavor, anywhere.

    But that having been said, let me hasten to include that the quality of “bitchin” on this and related blogs is excellent. It contains information which is something appraisers need.

  2. Jonathan J. Miller says:

    thanks, that compliment was totally bitchin’ ;-). I must still possess a lot of anger about all of this because I don’t seem to tire of talking about it. Maybe that’s theraputic?

  3. John Martin says:

    There is no doubt that the mortgage brokers and their henchman (loan officers) need to lose their job description as appraisal pimps. In response to the HVCC, I have enlisted with numerous management companies in the past few weeks and have been inundated with comp requests. When I called them back to see if they were serious, the tone on the other side sounded very familiar. Hopefully the final version of the HVCC will require standards, cerification, and recourse for the updated version of the appraisal pimp.

  4. Jonathan J. Miller says:

    John – Exactly!!! Nothing has changed other than lower volume. AMCs will continue to do what they did before until they are incentivized not to. I repeat: nothing has changed.

  5. Edd Gillespie says:

    According to my knowledge AMCs go back to LSI. Remember in 2003 when they all (other than LSI who was already long in the tooth) were courting appraisers with $500 cookie cutter SFR assignments and building a stable of reliable and “competent” appraisers?

    That lasted all of six months, then we learned the primer $$ ran out and they needed part of the appraisal fee to survive—and we learned the lenders or title companies owned the AMCs (eappraisIt and WAMU, RELS and Wells, Transunion, LandAmerica). I pointed out the disparity to an appraiser who was recruiting for RELS and he actually said that the benefit to appraisers who joined RELS was that they didn’t get paid much, but they did get paid fast.

    You guys who do mortgage work and maintain your ethics are truly going to be knighted in heaven. Not me. I went nuts trying to balance it, so now I’m ethically nuts and broke.

    Which part of the $700B do appraisers get, or is the plan to trickle down on appraisers yet again?

    The only way to de-incentivize the AMC is to refuse to work for them. When there is absolutely nothing of quality left in their appraisals they will flop. Maybe some appraiser will think up a ZAIO to fill the gap.

  6. We are a small two-man firm located in a, until recently anyway, fast growing outer suburb of Washington, DC. The pressure to hit numbers was high during the boom. We won’t accept orders requiring us to hit numbers and we resist working with AMCs that pay low fees and micromanage us–the same reasons you have noted.

    I suspect that if enough of us refuse to work for wage-slave level fees and become glorified clerks, that the poorer quality appraisers among us who have been accepting these orders will eventually have to leave the business through their lack of good business judgment.

    Appraisers probably need to become unionized like airline pilots. I have been approached by some parties interested in promoting that idea, but haven’t responded to planning meetings. Any thoughts about this?