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Posts Tagged ‘AMC’

[REALTOR Mag] The Trouble With the HVCC

August 24, 2009 | 11:53 pm |

I often disagree with NAR and have frequently pointed out their missed opportunity to earn the public trust despite their interests as a trade organization, but hey – they are coming from a different vantage point. However this time I agree with their view on the Home Valuation Code of Conduct (the position itself rather than how they get to it.)

There’s a good article on HVCC which tells the story from the appraiser’s perspective called: “The Trouble With the HVCC: How new rules meant to ensure the integrity of the appraisal process have infuriated appraisers and stymied sales from coast to coast.

I am quoted in the opening of the piece.

“You can’t make this up,” New York appraiser Jonathan Miller riffed in his entertaining blog, Matrix, back in June.

Miller was recounting the frustration of a real estate salesperson who was trying to refinance her own New York apartment with her current lender. According to Miller’s telling, the out-of-town appraiser walked into the apartment, threw his hands in the air, and asked “How am I supposed to appraise this thing?”

My always insightful appraisal colleague Francois (Frank) K. Gregoire, IFA, RAA, with Gregoire & Gregoire Inc., of St. Petersburg, Florida has one of the best quotes in the piece:

The HVCC sets up AMCs as the guardians of appraiser independence, and isn’t it ironic that the investigation that prompted the rules centered on an AMC allegedly manipulating the system to please its customer?

He is referring to New York State Attorney General Cuomo’s lawsuit against eAppraisIT and it’s relationship with WaMu.


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[BankThink] Then Don’t Call It An Appraisal

August 24, 2009 | 11:24 pm | | Columns |

I stumbled on a really great blog on the American Banker site called BankThink and it’s worth checking back on a regular basis.

Webmaster/Journalist Emily Flitter asked me to contribute a guest column on the current state of appraising. I named it:

Then Don’t Call It An Appraisal.

I hope you enjoy it.

Here’s a local copy of the article:

The trillions in adverse financial exposure and lost economic opportunity were supposed to teach us, especially those of us connected with the banking system, something about risk. But a look at the latest trend in home appraisal practices shows that although the relationship between mortgage lenders and appraisers may look different on the surface, its nature remains troubled.

As a rule, appraisers are generally ignored until we make a mistake. We’re the back-of-the-house worker bees. During the housing boom (actually a credit boom with a housing boom as a symptom), an appraisal was relegated to a commodity status like a flood certification. Without much political clout or public awareness, we weren’t used to being in the spotlight. We’re finding it not at all flattering.

Mortgage brokers’ business swelled during the boom years and many participated in compromising as much as two thirds of the residential mortgage lending business at peak – they only got paid if they could close the deal. That took an appraisal. Guess what type of appraiser was hired en masse? The ones who provided the “right” value.

How did things work in the banking industry? During the boom, in-house appraisal review departments were closed in most US Banks because they were “cost” centers. Mergers and consolidation caused lenders to lose local relationships with appraisers.

After the September financial system tipping point, it seemed like we appraisers might get an opportunity to redeem ourselves. After all, we were part of the problem along with regulators, investment banks, commercial banks, ratings agencies, real estate brokers, mortgage brokers, mortgage bankers and consumers. One big happy party.

Regulators have set out new guidelines on appraisals for lenders. The Home Valuation Code of Conduct, pronounced “Havoc” is an agreement between New York State Attorney General Andrew Cuomo and Fannie Mae that was intended to change everything.

Comp Checks, inquiries in which an appraiser was often asked to assure a floor value for a property without actually performing an appraisal, are over. Mortgage brokers can’t order appraisals anymore – otherwise the bank can’t sell the paper to Fannie Mae.

But not much else has changed. Lenders now call appraisal management companies who pay the appraiser half their wage (fees for AMCs are lower than appraisal fees paid 20 years ago) and require 24 – 48 hour turn times without exception.

The National Association of Realtors wants appraisers to use “good” comps and ignore foreclosure activity because we are “killing the recovery.”

Many of the ethical “appraisers” have been forced to seek new types of work or switch careers, as they have been replaced by an army of “form-fillers.”

After all of the financial system turmoil, not much has changed in the mortgage process as it relates to appraisers. A conversation with a loan consultant we had last week perhaps best exemplifies how detached from reality many in the lending community really are.

One of my staff appraisers recapped to me a direct conversation with a loan consultant at a large national bank. The consultant had contacted the appraiser to complain about the appraised value not being high enough on several occasions, even bringing the borrower in without advanced notice to the appraiser on one of the calls. This is a frequent conversation and it’s getting old.

When trying to get an understanding of the collateral, does the banking industry want to know what the value is from a neutral source or not? If not, don’t call it an appraisal because its not.

Jonathan Miller is a real estate appraisal consultant in New York. He is the co-founder of the residential appraiser Miller Samuel, and a managing principal of the commercial appraiser Miller Cicero.


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[Vortex] Palumbo on USPAP: The Industry Reality And The Unenforceable (Truth) Law

July 28, 2009 | 12:16 am | |

palumbo-on-uspap

Guest Appraiser Columnist:
Joe Palumbo, SRA

Palumbo On USPAP is written by 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] and I am fortunate to have his contributions here. View his earlier handiwork on Soapbox and his published article in the Employee Relocation Council’s Mobility Magazine.
…Jonathan Miller

There are many debatable topics in the appraisal world and within USPAP. There is one that is not really a USPAP issue but an issue of law….though it does draw some parallels in that some “interpret” things differently. To me there is only one correct interpretation which boils down to common sense. This time around I thought I would step outside of USPAP issue and a practical specific relationship to a valuation assignment and talk about something that has been “bugging me” over the past several years. I was reminded of this issue after reviewing the Appraisal Standards Board Q and A for Feb 2009. I can also recall debating this issue with a former supervisor of mine, who while extremely intelligent and knowledgeable in appraisal and (other matters) seemed to take the find any crevice in order to disagree with me. It got me so hot that I got a friend of mine (now unfortunately and untimely deceased) on the NJ State RE Appraisal Board to write me an e-mail explaining how my “view” was correct in fact and law…which I sent to multiple parties who “disagreed” with my view and the topic was never discussed again. Here is the issue as taken from the Q and A:

Must a Review Appraiser be licensed or certified in the state jurisdiction where the subject property is located?

Question:

Does a review appraiser have to be licensed or certified in the state where the subject property is located?

Response:

Appraiser credentialing requirements are not covered by USPAP. However, since this question is often asked, we have provided the following response from the Appraisal Subcommittee (ASC):

“Included in ASC Policy Statement 5 is the ASC’s position on when an out-of-state review appraiser must obtain a credential for purposes of performing a technical review. The ASC has concluded that for federally related transactions, so long as the review appraiser does not perform the technical review in the state within which the property is located, and so long as the review appraiser is certified or licensed by another state, that appraiser need not be registered for temporary practice or otherwise credentialed by the state agency where the subject property is located. With that said, state law may be more restrictive than federal law and may require a temporary practice permit or other credential. It is therefore imperative to consult with the state where the property is located.”

(ASC Policy Statements may be downloaded)

It is important to point out here that the “problem” I have is with a technical review that INCLUDES as part of the scope an alternate value conclusion (= APPRAISAL) even concurrence and NOT the Standard 3 Qualitative Review.

I’ll use the info from my friend at the NJ State Board to elaborate on this using NJ as an example. NJ is mandatory state which also requires a temporary practice permit should anyone with an out of state who wants to “appraise” a property. Simply put you need a NJ APPRAISAL LICENSE OR TEMPORARY PERMIT to appraise a property here. If you are a realtor, asset manager, outsource company, AMC, and you are “reconciling VALUES” between appraisals on NJ properties YOU NEED the specific permission granted under NJ LAW. If you want to do the qualitative Standard 3 review WITHOUT a value conclusion as stated above, that is acceptable. This restriction on “appraisals” would logically extend in any states that require practice permits. I fail to see how this can be interpreted any other way yet it does all the time. Ask yourself why the states would go through the legal process of protecting consumers and then allow someone that is (legally) unqualified to value a property? It flies in the face of why licensing came about. As an example, If a Pennsylvania appraiser without a temporary practice permit does a review with an alternate value conclusion on a NJ property and the valuation is flawed loans are made based on the valuation and things fall apart; whose economy is affected? Certainly this burdens NJ more than PA? What is the difference between getting in a car driving across a state line inspecting, measuring, photographing, conducting a quality and condition survey and rendering a value opinion OR rendering a value opinion from the desk after reviewing someone else’s report? Other than a difference in scope THERE IS NO DIFFERENCE, both are appraisals. And just to be clear I am not saying that you cannot be geographically competent because you can be….. but there is a technicality in that in the license MAY be required first. The problem is that this scenario presents a very difficult enforcement task from a timing perspective. Even further, this situation is taking place all over the country with major lending institutions who see the mandated use of a state-asset-specific appraiser to be a (costly) inconvenience. Hence we are left with the truth about how unenforceable the “e-review” is from a realistic perspective. The last thing any state board has is the resources to police cross-border electronic appraisals. ( the state would have to issue the cease and desist). The only real policing is for those in the industry to recognize the issues here and do a bit of self policing and refuse the review or for the banks to set up staffing and appraiser panels to comply. I worked at a large bank that did just that and I will not deny that it was very challenging economically and from a staff efficiency point of view. It was however the right thing to do for consumer the bank and the licensed staff. Current economics have made that more difficult but not IMPOSSIBLE.

The ASC does imply some driver’s license logic above; one must have a driver’s license to drive and that simple qualification extends the license to do so in any other state without additional requirements. That is where an appraisal license and a drivers license differ: An appraiser MAY have to have a specific license rather than just “any license” whereby automatic temporary practice is granted for driving from here to California. While some states do grant reciprocity most require the application and (fee of course) so there may be a state or two with “automatic driver’s license” reciprocity but based on my research they are a very small minority.

I have also heard the argument that the law only applies to those who ARE licensed and that the layperson can do anything….because the laws and subsequent restrictions only apply to those licensed. This was a statement made to me by the President of a AMC who was trying to justify the use of “non-licensed specialists” to reconcile appraisals via review with alternate conclusions. This is the most ridiculous thing I have ever heard which brings me back to the driver’s license analogy: Do the laws apply just to the licensed drivers? No unlicensed drivers can cited as well.

Defending your position based on what you have to gain is nothing new for business. At least in the case of major lenders using out of state appraisers they have “a” license. I guess they believe in half truths or bending laws unlike those who practice valuation with indifference altogether. They probably have their share of motor vehicle moving violations The amount of hypocrisy in this industry never ceases to amaze me.


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[NAHB] 26% Of Appraisals Faulty While AMC’s Talk Parrots

July 14, 2009 | 12:53 am |

NAHB regroup on the HVCC/Appraisal issue from after a very silly press release a few weeks ago to a more coherent message in the to the current press release [FAULTY APPRAISAL PROCESS HARMING HOUSING AND THE ECONOMY} which has more stats.

Twenty-six percent of builders are seeing signed sales contracts fall through the cracks because appraisals on their homes are coming in below the contract sales price, according to a nationwide survey conducted by the National Association of Home Builders (NAHB).

“Home builders are increasingly concerned that inappropriate appraisal practices are needlessly driving down home values. This, in turn, is slowing new home sales, causing more workers to lose their jobs and putting a drag on the economic recovery,” said NAHB Chairman Joe Robson, a home builder from Tulsa, Okla.

Ok, I can relate to this but the 26% figure is much higher than I would have thought, and I see myself as an appraisal pessimist these days. NAHB essentially defines faulty as “killing the deal” which is a very thin standard, but still their argument has merit.

This press release comes on the heels of the NAR press release in the form of research that said that 37% of all realtors have had 1 or more deals blow up because of the appraiser.

Lost sales were reported by 37 percent of Realtors® attempting to complete home sales, with 17 percent reporting one lost sale and 20 percent reporting more than one lost sale.

Approximately 85 percent of NAR Appraiser members reported a perceived reduction in appraisal quality.

Although these are trade groups and are known for spinning on behalf of their members, in this case, I do believe they are right. Appraisal quality has fallen sharply and the fact that Appraisal Management Companies (AMC) being enabled by HVCC has a lot to do with that.

Here’s how the AMC trade group responds to appraisal criticism from real estate agent and mortgage broker trade groups.

Realtors and mortgage brokers say the new procedures tend to produce below-market valuations that can delay or kill pending deals. Consumers are paying for the changes in higher fees and subsequent appraisals when the property doesn’t price right initially, they claim.

Such complaints are a “gross mischaracterization” that merely parrot talking points circulated by industry trade groups, said Jeff Schurman, executive director of the Title Appraisal Vendor Management Association, itself a professional organization representing AMCs.

“The way they tell the story, it sounds like we’re a bunch of cowboys who have come on the scene to take advantage of the situation,” he said. “We’ve been around since the 1960s.”

Yes that’s true Jeff, but it became an issue on May 1 when HVCC was implemented. The 1960’s cowboy analogy is like saying the Internet has been around since the 1960s.

Technically a true statement but a wildly misleading reference (much like many AMC appraisals).


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AMC Appraiser: How Am I Supposed to Appraise This Thing?

June 30, 2009 | 10:41 am |

I was recently speaking to a real estate agent who was quite upset and was asking me for advice on on a particular situation.

You can’t make this up.

I never saw the appraisal report and don’t know if it was right or wrong. It’s the process that amazes me. The agent told me:

I’m refinancing with a bank where I already have a mortgage – [Large US Bank Who Took TARP Money].

The appraiser who came to my apt [threw] his hands up in the air and said “how am I supposed to appraise this thing” and indeed he did not as the comps he used were completely not appropriate and he did not look at the info I sent to him PER HIS REQUEST.

To make a long story short, I have escalated this as much as I think I can at [Bank Name Redacted], but I see no results and Monday will be exactly 2 wks since this happened.

The agent just got back to me and told me the bank stood by the appraisal.

Of course, the bank has little to do with the review – that’s because national lenders are centralized, nearly all rely on Appraisal Management Companies and have little or have no local knowlege in housing markets or have relationships with someone who does. The AMC who hired the appraiser for the bank is likely the one who reviews the report. Remember, they are the same firm who felt it was appropriate to use an out of market appraiser, so how reliable will their review be?

The AMC position tends to be: if you are licensed in New York State, you should be qualified to appraise in all counties of the entire state.

A state appraisal license does not equal experience or competence. It’s a revenue opportunity for state governments and it is a very low bar to cross to get a typical state license. Basically a half dozen courses and 2 years experience.

In this case, the out of market appraiser based in Armonk, New York, and was hired by an AMC on behalf of a bank to appraise a duplex co-op penthouse in Manhattan. This is becoming a more common occurrence in appraisal function of the national retail banks, all of whom are using Appraisal Management Companies.

From the appraiser’s reaction in front of the bank customer/borrower reaction, I would guess he’s not familiar with this type of property, nor does he act as a professional while on the inspection. A low bar indeed.

Another large US bank I know uses nearly 300 appraisal firms in Manhattan with appraisers driving as much as 4-5 hours to bang out a bunch of co-op reports in one day. In my nearly 24 years as an appraiser in Manhattan, I am aware of only 4 firms that regularly do Manhattan work.

I don’t think the banks are stupid (I know, I know). I think they see the mortgage universe as short term profit and loss, rather than as long term preservation of capital. It’s a modern cultural thing I suppose.

If that’s not the case, then they don’t see what value appraisers bring to the table (no pun intended). It is going to be much harder for appraisers in the post-credit bubble universe to make a compelling argument for competent services if the market doesn’t seem to need them in the current structure and where most of the competent appraisers were put out to pasture.

Speaking of pastures…although I’m based in New York, I’m thinking of flying out to Montana and banging out a quick appraisal of a 100,000 acre cattle ranch for $175 in 24 hours.

How do I make money this way?

Volume, my friends.


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[NAHB] New Guidelines For Appraisers: Break Into Houses?

June 24, 2009 | 9:55 am |

Ok, so I’m kidding. But read further.

In my previous post, I address the swirl of interest in the appraisal part of the home sale process brought about by NAR’s Existing Home Sale press release yesterday where they blame appraisers for preventing the housing recovery.

On the same day, the National Association of Home Builders issue a press release specifically addressing the need for new appraisal guidelines. Betting money says the two organizations (NAHB & NAR) coordinated release to get more bang for the press buck, so to speak.

Did you ever think something was terribly wrong, but you didn’t understand why? If you haven’t, then you should definitely read NAHB’s press release.

I’ll lay it out here commenting on each paragraph. It you find it to be too much (most sane people), skip to the conclusion at the bottom.

Using foreclosed and distressed sales as comparables with appraisals on single-family homes without adequately reflecting the differences in the condition of the respective properties is needlessly driving down home values, according to the National Association of Home Builders (NAHB).

If foreclosures are competing with the open market sales in the neighborhood – guess what? That’s the market at that point in time. I strongly agree with their point that appraisers need to confirm condition of foreclosure sales if they use them as comps. It’s not that hard. AN APPRAISER SHOULD NEVER USE A COMP UNLESS THEY KNOW SOMETHING ABOUT IT. Otherwise, it can’t be comparable, by definition. Of course, the caliber of appraisers performing mortgage lending appraisals is falling rapidly with the proliferation of AMCs. That’s the real issue here.

“Any home buyer can recognize the difference between a well-kept home and a distressed property that is damaged or not properly maintained. So it only makes sense that an appraiser should be required to consider the overall condition of a property and the specific factors related to a foreclosure or distressed property sale when selecting and adjusting the value of comparables,” said NAHB Chairman Joe Robson, a home builder from Tulsa, Okla.

We already are required to verify the sales to be able to make adjustments but the Cuomo/Fannie Mae deal called Home Valuation Code of Conduct (HVCC) has enable a whole army of inexperienced or incompetent appraisers at the expense of competent experienced appraisers who can’t afford to work for half price and turn around assignments in 20% of the time without verifying the data.

I was told by a senior risk officer at a national lender that the bank uses several hundred appraisers in Manhattan. There are less than a half dozen long-time Manhattan-based firms here (with more than 1 employee). Where do all these companies come from? Out of state and up state New York. These appraisers will drive 3-4 hours to come to bang out a dozen reports in a day working for half the market rate.

Appraisers are often only required to conduct exterior inspections of properties that are being used as comparables because they are normally unable to enter these homes and examine their interiors. Too often, properties that have been subject to foreclosure or distressed sales have issues related to deferred maintenance or internal damage that an external inspection simply cannot reveal.

Think about what NAHB is saying here in the first sentence. We are not required to inspect the interior of the comps nor can we be made to. Do we have the right to go in all the comps? Simply walk up to the house across the street and say: “I am doing an appraisal of that house over there and the bank requires me to go inside your house and see what you have.” Good grief. A very poorly worded press release.

The actual point they are making here is that they want the appraisers to consider the condition of the houses being sold at foreclosure and adjust for their inferior condition. NAHB is absolutely correct.

However, the alternative bigger picture, between the lines, inference being delivered in the release is: ALL foreclosure sales are INFERIOR in condition to the house being appraised – that’s why they sell for less. That’s simply not true. Are they more likely to be inferior in condition than houses sold that are not foreclosures? Yes. The seller of a foreclosure is often a large institution not as close to the property as an owner occupant would be and may have a different objective/time frame than a typical seller might.

“While most appraisers do a fine job, there needs to be proper regulatory guidelines for those who use distressed or foreclosed properties as comparables when determining home values,” said Robson. “It is essential that appraisers have the proper experience and guidance to accurately assess values in distressed markets.”

You can’t mandate what comps to use, if they are “comps.” I don’t want the FDIC mandating what wattage of light bulbs I can use in my upstairs hallway either. However, I agree completely with the second point. NOTHING has changed to improve the quality of appraisals since the financial meltdown began. HVCC was intended to remove the high bias in valuation caused by the mortgage brokerage industry’s 60%+ market share of origination controlling and ordering the appraisals. That was removed with HVCC. The growth in mortgage broker market share of bringing business to the banks allowed lender relations with local appraisers and the existence of inhouse appraisal review departments to whither and die. The bank solution appears to be to use AMCs to order appraisals, a process which was enabled by HVCC, which is an accident waiting to happen. While mortgage broker ordered appraisals were biased high, AMC ordered appraisals are biased low.

What about a neutral middle ground? Good grief.

In neighborhoods where comps include a large number of short sales or foreclosures, appraisers should have the option of expanding the geographic area or extending the time frame for eligible sales to get a more representative basket of the value of homes sold in the area, Robson added.

They basically want appraisers to ignore all foreclosure sales because they are “low” and be allowed to expand search guidelines to find higher sales. Property values in a neighborhood that are hurt by rising foreclosure activity isn’t caused by appraisers. They are competition to the non-foreclosure homes (and should be properly adjusted for condition). If the appraiser is determining market value of a property, he/she can’t cherry-pick the high sales. Their logic is a fall-back to credit boom reasoning which was all about finding the highest sales to make the deal happen.

Currently, improper or insufficient adjustments to the comparable values of foreclosed and/or distressed homes often results in the undervaluation of new sales transactions.

The best message in this release and it is absolutely true. Condition of the comps should be discovered and adjusted for. Otherwise they aren’t comps – they are merely sales.

“This practice must be corrected because it contributes to the continuing downward spiral in home prices, forestalling the economic recovery,” said Robson.

Overstated but not entirely incorrect, due to the growing AMC issue. The legion of incompetent appraisers being enabled through HVCC and AMCs are resulting in less accurate valuations. This problem sticks like a sore thumb in a declining market with low sales activity, compromising the public trust.

Conclusion

Foreclosure comps are like the new breed of appraisal management appraisers proliferating in a down market. * The quality of appraisals should be much higher than it currently is, whether or not the housing market is rising falling or flat.
* Nothing has been done to address the poor quality of appraisals performed for lending institutions. * National retail banks have all gone the AMC route to get their appraisers.

If the user of an appraisal report (bank, Fannie/Freddie, secondary market investor) doesn’t care about the quality and reliability of the valuation process, then the use of AMCs are enabled and becomes the new market for appraisal services, damaging the livelihoods of competent and diligent appraisers.

The use of AMC appraisers is beginning to sound a lot like the way foreclosure comps are being used in an appraisal.


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[Snowball Pile] NAR Says Sales Higher, Blame Appraisers For Stalling Housing Recovery

June 24, 2009 | 12:38 am | |

The National Association of Realtors released their May Existing Home Sales Report today and reported:

The Realtors said that home sales rose 2.4 percent to a seasonally adjusted annual rate of 4.77 million last month, from a downwardly revised pace of 4.66 million in April. Prices, meanwhile, were 16.8 percent lower than a year ago.

That’s all well and good, but there was a new wrinkle this month. Someone to new blame for continued weakness in the housing market.

You guessed it: The Appraiser.

“We have just been flooded with e-mails, telephone calls on the appraisal problems,” said Lawrence Yun, the Realtors’ chief economist.

“Poor appraisals are stalling transactions. Pending home sales indicated much stronger activity, but some contracts are falling through from faulty valuations that keep buyers from getting a loan.”

This unleashed a flood of appraisal coverage today.

The NYT’s Floyd Norris writes a great blog post on this topic called Realtors: Blame the Appraisers

ACRONYM Alert!!! AMC = Appraisal Management Company.

I was on Fox Business last night with Neil Cavuto. Don’t have the clip yet but the topic was..you guessed it…appraisers and whether we are killing the recovery.

Most of the good appraisers I know don’t work for Appraisal Management Companies nor are they getting much work from the national retail banks. Why? Because they don’t agree to work for half the market rate, crank out work in 24 hours that doesn’t allow enough time to research and cut corners because of their low fee structure.

But they likely got most of the appraisal volume during the spring mortgage boom with record low mortgage rates.

AMC’s are the unregulated byproduct of the Cuomo/Fannie Mae deal called HVCC or Home Valuation Code of Conduct. Generally, the lowest common appraisal denominator work for AMCs and you get what you pay for – usually garbage.

The likelihood of fragile deals blowing up because some out of area yahoo comes to bang out a dozen reports in one day and has no idea what is going on in the local market is likely to come in low on the value because they think that’s what the bank wants. And guess what? AMCs and the appraisers they use got most of the work during the spring.

NAR doesn’t seem to understand this – they seem to be inferring appraisers are singlehandedly stalling the housing market. Appraisers don’t all get together and say “Gee, lets all do a really bad job on our appraisals these days. It systemic. Banking wants to use AMCs. AMCs want to make a profit so they hire cut rate appraisers.

The NAHB press release today was even more silly. More on that in the next post. Like anything associated with appraisals, many know something is wrong, but they have no idea what it is.


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[Now Appraisals Are Obstacles?] Talking Out Of Both Sides Of Our Mouths

June 15, 2009 | 10:53 pm | |

The lending business has a love-hate relationship with appraisers – now appraisers seemed to be blamed for preventing the housing recovery. The following WSJ article from about a week ago has been making the rounds through the real estate world.

The orientation of those interviewed in this article come strictly from those heavily involved in the process of making deals during boom times. If someone prevents a deal from happening, they are an “obstacle.” Literally that is true, but there needs to be context applied.

Appraisals are becoming one of the biggest obstacles for Americans trying to sell their homes, refinance their mortgages or tap into home-equity credit lines.

During the housing boom, appraisers often complained of pressure from lenders to inflate home-value estimates to justify dubious mortgage lending. Now, some people in the mortgage business — and some borrowers — say the pendulum has swung too far the other way.

Hmmmm….the old on-off switch.

  • Neutral observer v. party to the transaction
  • Protector v. deal impeder
  • Watch dog v. cost center
  • Risk Management Tool v. Tool

Back in the day (I love that phrase, especially now because it is only 2 years ago), appraisers were marginalized because of our lack of organized political influence. We were treated as a commodity – like a flood certification rather than as a housing expert. Rubber stamping brought in a lot more business to those who played ball..

Valuation disputes are becoming more common now (translation: appraised value falls below purchase price).

Lenders are licking their wounds from billions in losses and the majority of appraisers, raised on a 7 year dose of housing boom, tend to more conservative about market value knowing they won’t be removed from a list because they won’t play ball. Most national retail banks are using AMCs. AMC appraisers are doing just what independent appraisers with integrity never stopped doing during the boom: estimate market value.

The problem is, many of the AMC “appraisers” (who are really form-fillers), are simply reading into the minds of their clients, and giving them what they think they want – low values. In other words, AMC appraisers are all over the map, depending on what their client wants and right now, lenders are not overwhelmingly excited about lending (measured by tightened underwriting) so these appraisers tend to be biased low – just the opposite of 2 years ago.

How about removing bias altogether and estimate market value?

The appraisal management company (AMC) phenomenon, which delivers some of the worst elements to the valuation process, enables legions of inept appraisers to thrive.

Kris Berg, a real estate agent in San Diego pens a perfect picture of the robotic nature of AMC appraisers and lack of competency when meeting them at the inspections for property sales. That’s because most lenders have found the AMC religion and appraisals are being ordered in conveyor-belt fashion, rather than matching up the appraiser with the assignment.

Here is one quote in the article that is absolutely ridiculous and speaks for the AMC phenomenon:

Jeff Schurman, executive director of the Title/Appraisal Vendor Management Association, said AMCs typically take about 40% of the fees and appraisers get the rest. Mr. Schurman said he has seen no evidence that AMCs’ practices lead to lower quality.

This trade group continues to claim the average fee is 40%. My experience and my colleagues rule of thumb is about a 50% discount in fees or more. Put that aside and consider this real world translation:

If you posted a job listing at a company for $100k over the past several years. Due to budget cuts, you offered the same position, when it became vacant at $60k. And hundreds of companies did this, do you think the experience and educational backgrounds of the majority of applicants would be exactly the same in either salary scenario?

Yet that’s the message being conveyed by Title/Appraisal Vendor Management Association. As Warren Buffet once said, “Never ask a barber if you need a haircut.”

Good grief.

Kris Berg and many good agents like her are seeing the adverse impact of AMC appraisers first hand. After all we have been through, the appraiser function as it relates to lending remains as it was, unreliable.


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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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[No OCC, OTS in T-E-A-M] Reducing Banking Regulatory Clutter

May 28, 2009 | 10:34 am | |

Empirical evidence says that the myriad of alphabet soup regulatory agencies didn’t work to prevent the systemic breakdown of the financial system on a global scale, stemming from CMBC activity. Of course, I’m not naive to think that they would have prevented it, but I do think the scale of the crisis was significantly larger as a result of the lack of logical oversight.

It’s not about lack of regulation, it’s about limited coordination, lack of responsibility and most importantly, departmental turf wars.

Hopefully this may change in a few weeks as the administration takes the wraps of an emerging plan to reorganize regulatory oversight.

Senior administration officials are considering the creation of a single agency to regulate the banking industry, replacing a patchwork of agencies that failed to prevent banks from falling into the worst financial crisis since the Great Depression, sources said.

Ideas include

  • Federal Reserve – becomes a powerful systemic risk regulator
  • Create a new agency to protect consumers of consumer products
  • Merge the SEC into CFTC to protect investors from fraud
  • OCC and OTS would go away and their responsibilities would be distributed to FDIC and the Federal

One of the key issues, which runs parallel to investment banks being able to select the most favorable ratings agency or mortgage brokers to pick their own appraiser, is the fact that banks can pick whichever regulator is most lenient: FDIC, OTS or OCC.

Seriously, a regulator that is competing with other agencies to get more banks to work with them to justify their existence is inherently flawed.

Of course the American Bankers Association is against this:

“As a practical matter, I think the idea is a nonstarter,” said Ed Yingling, president of the American Bankers Association. He said the administration should focus on the two ideas that command the broadest consensus: the creation of a system risk regulator and a resolution authority for collapsing companies. “That’s probably all Congress can handle,” he said. “They can propose a lot of things, but there’s a real risk in doing so that you just overload the system.”

Good grief. Use of the word “Risk” and “Overload” seems kind of quaint at this point, doesn’t it?

The proposal also urges creation of a new government agency to conduct “prudential regulation,” with supervision authority over state and federally chartered banks, bank holding companies and insurance firms, the source said.

Yes the Fed will have new powers, but seriously, why have any of these agencies if they aren’t very effective? In the current format, it all seems like a colossal waste of taxpayer dollars unless the system is streamlined and reorganized. However, the turf wars will move from the regulators to Congress as everyone tries to hold onto their power base.

The new bank regulatory agency could prove controversial because it would consolidate the Office of the Comptroller of the Currency and the Office of Thrift Supervision and strip supervisory powers from the Federal Reserve and the Federal Deposit Insurance Corp.

Ideally, it is in everyone’s benefit to reduce the regulatory clutter and create clean lines of responsibility and authority. My worry is that we don’t jettison enough of what didn’t work after the power struggle/compromise struggle shakes out.

Housing doesn’t stabilize until banking/credit stabilizes. Period.


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[Appraisal Management Companies] An Accident Waiting To Happen

May 20, 2009 | 12:51 am | |

In other words, the institutional entities that are responsible for ordering, reviewing, approving and managing licensed appraisers, aren’t held to the same or similar standard – Appraisal Management Companies (AMCs).

One of the byproducts of New York State Attorney General Cuomo’s agreement with Fannie Mae (HVCC), was to prevent mortgage brokers from ordering appraisals for conforming mortgages that would be purchased by Fannie Mae. That’s a good idea in general. But by doing that, most national retail banks and many regional banks, are forced by necessity to manage the appraisal process directly. Few have the overhead to do this and therefore resort to appraisal management companies. Call an 800 number and order a report anywhere in the country.

Appraisal management companies are generally paid the same fee as an independent appraiser would be, so they have to find appraisers who will work for 1/3 to 1/2 the market rate (or 2/3 the rate as their trade group claims). To differentiate, they generally require 24 to 48 turn time per assignment, yet an appraisal is not a commodity like a flood certification – it’s a professional analysis by an expert.

Here’s a classic example of the new breed of unregulated appraisal oversight. It’s worth the read. Same problem as the mortgage boom days – pressure, sloppy work, crank it out – just a different type of institution doing the ordering.

And AMCs have a trade group called TAVMA (The NAR of AMCs), which does all it can to further their mission. Here’s their recent blog post saying their fees are 60% of the market rate rather than 50% as has been my experience as well as the appraisal organizations who testified in front of Congress.

Think about it – their argument is essentially this: Taking a 40% pay cut is a whole lot better than a 50% pay cut.

Whether it’s 40-20-10 [yet even more spin] or whatever percent the fee reflects what willing sellers (appraisers) and willing buyers (AMCs) in the local marketplace are willing to accept based upon their own self-interests. To try and draw a cause-effect relationship between fee and quality before congress is a little bit disingenuous, absent hard data.

Here’s the AMC fee logic in a nutshell:

If an employer posted a job listing with a starting salary 40% below the last hire’s salary – this will result in no measurable differences in the quality of job applications received? Forget the correlation/causation argument, what about common sense?

Good grief.

For once, I agree with NAR.

Appraisal management companies are not currently regulated at the federal level and regulation at the state level varies. Regulation would ensure that AMCs operate within the same basic guidelines and standards as independent appraisers. Further, this allows AMCs to be regulated within the existing appraisal regulatory structure, which avoids the need to create additional layers of government bureaucracy.

The Appraisal Institute announced the House version of bill 1728:

Furthermore, the bill requires separation and clear disclosure of fees paid to appraisers and fees paid for appraisal administration (i.e., fees paid to appraisal management companies); prohibits the use of broker price opinions in loan origination; and requires registration, and a regulatory framework, for Appraisal Management Companies, with mechanisms to prohibit infiltration by appraisers sanctioned by state regulatory agencies.

That specific wording “and a regulatory framework, for Appraisal Management Companies, with mechanisms to prohibit infiltration by appraisers sanctioned by state regulatory agencies” reflects the situation discussed in the St. Petersburg Times article.

Here’s usually the way the process works:

  • To be approved, the appraiser submits a state license and in some cases, submits a couple of sample reports.
  • The appraiser agrees to the half market rate fee structure and 24-48 hour turn time requirements (market rate is 5-7 days).
  • The appraiser is placed in a computerized queue and is given an assignment
  • The appraiser gets 1-2 calls by young kids out of high school making sure the appraiser will turn around the assignment in 24-48 hours
  • The appraiser has to be very pushy to be able to get into the property in order to turn the assignment around in time.
  • If there is a valuation problem or issue that needs interpretation by the AMC, the solution is often to just disclaim the problem in the addendum somewhere.
  • Little if any interaction available from qualified appraisal professionals on AMC staff
  • The appraiser gets more work if the jobs are turned around faster because the queue is set to have maximum amounts allowed by an appraiser at any one time.
  • Remember, the fees are half market rate. In higher cost housing markets, the fees can be as low as 1/3 the market rate because the AMC appraisal fees are often set at national rates. In other words, appraisers in Manhattan would be paid the same as North Dakota even though the cost of doing business is 4x higher in Manhattan.

Now imagine the quality and reliability of this product, which is not a commodity, but an expert opinion prepared by a professional. It’s hard imagine much professionalism squeezed in this process, isn’t it?

HR 1728 H.R. 1728: Mortgage Reform and Anti-Predatory Lending Act was just passed by the House and Senate and is ready to be signed by POTUS. Here’s the appraisal portion.

It looks as though AMCs will be licensed just like appraisers will:

‘(7) maintain a national registry of appraisal management companies that either are registered with and subject to supervision of a State appraiser certifying and licensing agency or are operating subsidiaries of a Federally regulated financial institution.’

However, this will be more of a revenue opportunity by the states – licensing doesn’t have much to do with competence. Plus, I don’t see how states will have the manpower to provide meaningful oversight other than clerical aspects.

Mark my words here – this is an accident waiting to happen.


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Catch-22: Fannie Mae, AMCs and a $39 suit

March 22, 2009 | 12:00 am | Milestones |

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