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Posts Tagged ‘Appraisal Pressure’

[Commercial Grade] Greed Is Not So Good

March 18, 2008 | 5:50 pm |

Commercial Grade is a post by John Cicero, MAI who provides commentary on issues affecting real estate appraisers, with focus on commercial valuation. John is a partner of mine in our commercial real estate valuation concern Miller Cicero, LLC and he is, depending on what day of the week it is, one of the smartest guys I know. Since I ended my Radar Logic gig, John has promised to bring more of his insight to Soapbox [wink] …Jonathan Miller

Greed is not-so-good after all.

If the movie Wall Street were made today, they would give Michael Douglas an HP-12c and make him a real estate investment banker.

I don’t think that I fully realized just how bad things had gotten until I learned that powerhouse Bear Stearns was being bought for $2/share. (For $2/share, even I could have bought itI always wanted to own an investment bank!). While this 90-year old institution, crippled by its losses in mortgages, was being rescued by JP Morgan Chase and the Fed, I was on a conference call with a couple of investment bankers (a Bear Stearns competitor) who were adamantly trying to convince me that my appraisal of a proposed apartment building was too low. There are clearly still some Masters of the Universe out there that apparently don’t read the papers and are still underwriting business as usual.

Appraiser guru Jonathan Miller (my business partner) recently did a series of interviews about appraiser pressure where he opined that as many as 80% of all residential appraisals were inflated during the housing boom. That is an astonishing number and when I challenged him on it, he stuck to his number and explained that not coincidentally as many as 80% of all home mortgages were originated by mortgage brokers. I have no idea how many commercial mortgages were underwritten by investment banks and securitized during the recent boom, but that’s probably a good indication of the number of commercial appraisals that were likely inflated.

Though the attention to date has been on residential mortgage brokers and the pressure that they exert on residential appraisers, inflated appraisals have also been greasing the wheels of the CMBS market. Unlike a commercial bank, where FIRREA requires separation of the appraisal and underwriting, no such distinction exists in the investment banks (unless it happens to be the investment banking arm of a commercial bank). Therefore, the same 24 year old underwriting the CMBS loan, and who stands to realize a six-figure bonus at year end depending on how much money he pushes out the door, is also responsible for ordering the appraisal.

Just like 1987 all over again!

And the rating agencies, supposedly the watchdogs of the process, failed to see the abuses, or since they are also hired directly by the investment banks turned a blind eye.

With all of the recent high-level attention given to real estate lending practices, we seem to be at a turning point in the appraisal profession. However, without fundamentally changing the way commercial CMBS loans are underwritten, this problem will not go away.

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[Sounding Bored] Appraiser Pressure Finally Reaches The National Stage

March 15, 2008 | 7:04 pm | Columns |

Sounding Bored is my semi-regular column on the state of the appraisal profession. This time it’s on video.

I caught this on the CBS Evening News last night – about appraisal and mortgage fraud…worth watching.

See the full post on Matrix: [Blackmail & Hot Potato] Appraiser Edition

I was quoted in an article by Emir Efrati of the Wall Street Journal, who has done a great job following the appraisal situation as it unfolds, saying:

“In my opinion, 70% to 80% of appraisals that were done during the housing boom are probably not worth the paper they’re written on because the appraiserswere rewarded with more volume,” said Jonathan J. Miller, a New York appraiser and longtime critic of industry practices. He estimates that home values are overvalued nationwide by at least 10% because of inflated appraisals.

Glenn Beck of CNN read the quote in the WSJ and invited me on the show.

Here’s the clip.

A booker at Fox Business News read my quote in the WSJ above and asked me to speak on the show.

We discussed the agreement between Fannie Mae and New York State Attorney General Cuomo’s office covering appraisal pressure.

Here’s the clip.

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Appraisers Are Front And Center

February 28, 2008 | 3:03 pm |

The appraisal profession has been front and center in the discussions between NYS Attorney General Cuomo and the GSE’s. Hopefully there will be some sort of resolution soon. Here are some recent posts about the latest developments:

There will be a lot more appraisal commentary on Matrix to come over the next few weeks as this situation unfolds. This is a seminal moment in our profession so it is a real shame that we do not have a meaningful way to show our collective voice.

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[Sounding Bored] Bless You: Ten Percenters Needed To Make Toxic Loans Work

January 20, 2008 | 11:51 pm | Columns |

Sounding Bored is my semi-regular column on the state of the appraisal profession. This week get doubly annoyed and also post this on Matrix.

In Bloomberg News Appraisal Problem Opus by Sharon Lynch and Bob Ivry called Appraiser Exposes Toxic Debt Tie to Inflated Values

The article quotes Susan Wachter from Wharton Business School who states that mortgage appraisals are inflated by as much as 10%.

…exaggerate U.S. mortgage values by as much as 10 percent, or $135 billion, in 2006, according to Susan Wachter, a real estate professor at the University of Pennsylvania’s Wharton School in Philadelphia. Such appraisals artificially inflated the value of collateral supporting mortgage-backed securities and are contributing to record foreclosures because borrowers end up owing more than their houses are worth.

The most important concept here is:

There has to be an appraiser who basically blesses the loan,” she said. “There are lenders who are deciding what terms to extend and then there are appraisers indicating it is appropriate or isn’t appropriate.”

When my appraisal firm reviewed appraisals done by other firms in my region of the years, I found +10% to be a reliable number and most often these appraisals done for mortgage brokers or appraisal management companies. The 10% factor was so consistent that we would refer to this caliber of appraisers as “Ten Percenters.”

We could see how easily appraisal reports could be tweaked by comp selection and adjustments made to result in the value needed to make the deal. The reports looked fine to people not familiar with the market. So now remove the local expertise from appraisal review process (which is what has been the ten year trend) and its a recipe for disaster.

Here’s what I said about the topic to Bloomberg.

Lenders and mortgage brokers routinely pressured appraisers to boost values, said Jonathan Miller, a New York property appraiser for more than two decades who writes a blog about the problem [Soapbox]. Protections established by the Washington-based Appraisal Foundation, a non-profit that sets industry qualifications and standards, came under attack in the 1990s as banks cut their appraisal departments to save money, Miller said. The system was further corrupted when lenders began moving mortgage applications to third-party brokers who only got paid if a loan closed, he said.

Market Mentality
“There just became less and less emphasis on quality,” Miller said. “You started to see more and more loan products that would keep payments low, and I see that as correlating with appraisal pressure because those products only work in a rising market.”

As the underwriting pendulum swings to the more conservative end of the spectrum, “done deals” are on the decline. Most housing markets are not rising and appraisals are under more scrutiny by lenders [picture a video of a light bulb turning on] than seen in prior years, which is making deals harder to put together.

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[Sounding Bored] Deja Vu: How Licensing Killed The Appraisal Industry As We Know It

December 29, 2007 | 7:08 pm | Columns |

Sounding Bored is my semi-regular column on the state of the appraisal profession. This week I take license with our law.

Ok, admittedly that post title is a bit dramatic and I am not against appraisal licensing at all. However, I do not believe that licensing alone protects the public from bad appraisers. The same concept applies to appraisal designations. Licensing only one tool for the protection of the consumer, investors and financial institutions.

Take a look at this New York Times article of 1990 called Reappraising the Appraisal Industry.

”THE party is over,” said Eugene Albert, a real estate appraiser. ”The binging of the 1980’s is finished.” Mr. Albert was discussing the excesses that characterized the 1980’s real estate market and led to a recent law requiring state certification of real estate appraisers.

”Many of the bad loans made by the banks in the S.&L. disaster were sanctioned by unscrupulous or untrained appraisers,” he said. ”Even some bank lending officers here in the county, in their frenzy to make loans, would call my office and say, ‘I want an X dollar value of this property, can you give it to me?’ Our firm lost business because we wouldn’t cooperate, but there were appraisers that did. And that’s why state certification is important. It will prevent shoddy appraisal practices.

Does this summary sound familiar? Its nearly the same situation as we have today. Appraiser clients pressure appraisers to achieve the needed result.

The real estate correction of the late 1980’s led to appraisal licensing in 1991 which was supposed to fix the problem of inflated appraisals. Yet mandated appraisal licensing made the quality of appraisals worse. Why?

  • A larger unethical element entered the profession because the barrier to entry was actually lowered by licensing. Approved classes, often placeholders for time, and took on the feel of diploma mills making it easy to get qualified.
  • Licensing cut membership in appraisal organizations severely (and I mean severely), which weakened an already weak lobbying presence in Washington DC (compared to NAR, NAHB, MBA and other real estate related trade groups).
  • The growth of mortgage brokers as a source of origination allowed them to select “good appraisers” who were also licensed.
  • Appraisal firms were able to skirt around the spirit of the law by hiring armies of trainees to crank out reports.
  • There was a sense of “job done” by government officials when the law passed that appraisal quality would be better from implementation of the laws.
  • Licensing made it easier to sue competent appraisers falsely, driving up malpractice insurance, placing greater financial pressure on appraisers.

The inability of the profession to communicate the problems with pressure while it was happening was very frustrating to those who recognized it as a serious problem. Very few understood the problem until the subprime mortgage mess became part of the national vocabulary.

What now?

If appraisers are not insulated from pressure, all the laws in the world will not allow them to be honest. Place a hungry person in a grocery store and see how long it takes for them to steal food.

Appraiser licensing alone is not the solution. Licensing is merely a tool to aid government in regulating the profession, primarily as a source of revenue. It doesn’t solve the problem of protecting the public and the financial system from inflated values. Does the public want an appraisal regulator mandate how big of an adjustment should be made for a view?

Now that many housing markets are seeing declining prices, its even more important that appraisers are able to perform their duties free from pressure.

Here are some thoughts in formulating a solution to the problem.

  • Clearly define what appraisal pressure is in legal terms and make it criminal to pressure an appraiser.
  • State appraisal license fees collected should be fully directed to appraisal regulatory departments so they can be fully funded and staffed.
  • Install a Federal regulatory wall between underwriting and sales functions in lending institutions, including mortgage brokers. Anything less than this should be disclosed as a potentially biased collateral valuation. This would affect pricing of mortgage pools.
  • Lending institutions should be required to maintain formal appraisal panels that are reviewed annually for quality by underwriting personnel, not sales personnel.
  • Allow appraisers to file anonymous formal complaints to their state agencies when pressure is applied without fear of retribution (ie whistleblower laws). Those whistleblowers are held to a high standard for proof in order to avoid nuisance actions.

For goodness sakes, let the appraiser be a professional and appraise the property. If the lending industry does not care what the value of the collateral is, then lets do away with the profession or call us something else, like “form-fillers.”

Of course, investors in the secondary markets would continue to be reluctant to buy mortgage paper because they don’t know what they are buying.

Instead of relying exclusively on licensing, lets figure out who, what and why we are appraising.

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[Palumbo On USPAP] You Can’t Wing It

November 13, 2007 | 11:52 pm |

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].

This week Joe recalls his time at WAMU. It looks like the stock price could use a wing or two. …Jonathan Miller

October 6th 2006 was my last day as a First Vice President and NE area Manager at Washington Mutual. It was bitter sweet, having attained what I desired all my professional life: a high visibility, well respected position in a major company where I could be an appraiser and a manager all in one. With the help of my staff we managed appraisers both in house and on our vendor list. We had proven efficiencies with regard to cost of service, turn around and quality. We were appraisers talking with appraisers, solving problems, getting the business done while never compromising our standards or ethics. We had the numbers to prove it and the plan “b” solution as well if “cuts” needed to be made. No one was listening, minds were made up.

Still, the bank had grown very fat over the “boom years” and the efficiencies got lost in the fact that we “cost too much”, especially since mortgage volume was way down. Hey what do you do when it stops raining? Yeathrow out your umbrella? The solution was supposed to be simple: replace 323 staff appraisers including management with two large behemoth outsource companies (that take a slice of the action on the APPRAISER Side, while charging the lender even MORE than typical). Why not? Appraisals are all the same, appraisers are all the same and as long as you can get someone to sign the form you can make a loan. Who needs management of appraisals?

Well well, now the bank is in the headlines for collusion with the very business partners that were supposed to save the day. Something about “things wrong with these values: fix it or no more work” per the New York Attorney General. As a result there were “inflated appraisals”.

Some of the appraisals I saw from the Appraisal Management Companies were a far cry from inflated but rather conservative. What happened on October 7th to change all that? Nothing. What did happen was that Washington Mutual decided to remove an integral communication piece within the banking operation that made sense out of these “value” things and replaced it with a “message service”. The AMC “clerk” leaves the appraiser a “message”: “The bank does not like the value.please call us back”. No translation of information or discussion on the complexity of the issue.

Today as I see the WAMU stock price I can not be so naïve as to think it is ALL attributable to the demise of the in-house appraisal department. I do think that there are some things in business that you can not try to “wing”.

Like my friend, (also an appraisal manager for 17 years there) at a major national lender says. those in the ivory tower sure know the cost of everything..and the VALUE of nothing.

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[on Matrix] Finally, A Different Appraisal Pressure, And Thats A Good Thing

November 4, 2007 | 12:11 am |

Here is an appraisal-related post on our other blog Matrix:

Finally, A Different Appraisal Pressure, And Thats A Good Thing that discusses the Cuomo lawsuit against eAppraisIT and what it may mean to mortgage lending.

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[Fee Simplistic] Undue Stimulus

November 1, 2007 | 11:43 pm |

Fee Simplistic is a regular post by Martin Tessler, whom after 30 years of commercial fee appraiser-related experience, gets to the bottom of real issues by seeing the both the trees and the forest. He 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. In this post, applies a caffeine-induced response to the issue of “undue stimulus”.
…Jonathan Miller


Some Monday Morning Quarterbacking Observations

How many of us who think we can quote the definition of “market value” remember that it includes the phrase, “and assuming the price is not affected by undue stimulus”? As appraisers, were we, the past several years, reporting values or were we reporting “prices” generated by a frenzied market? The repercussions from the subprime implosion that has affected the credit markets for even standardized commercial real estate transactions should make us pause to take stock.

Data reported in the 2006 annual report of “Inside Mortgage Finance, Mortgage Market Statistical Annual, Top Subprime Mortgage Market Players & Key Data” revealed some startling statistics on the run-up in subprime mortgages and their Siamese twin mortgage backed securities. The magnitude of the subprime market can be readily understood by the following parameters.

  • Between 2001-2003 subprime mortgage dollar value ranged from $190-$335 billion and comprised 8.5% of all mortgage origination value. Between 2004-2006 subprime dollar value increased to $600 billion (peaking at $625 billion in 2005) or 20% of total mortgage origination value.
  • In 2001 the dollar value of subprime securitizations amounted to $95 billion which peaked at $507 billion in 2005 and leveled off at $483 billion in 2006. This represented an increase in subprime securitization value market share from 50% in 2001 to 80% in just 5 years.

To bring this into a more comprehensible perspective, Merrill Lynch’s participation in this frenzy cost their stockholders a $7.9 billion writedown and their CEO, Stan O’Neal his job. And so the question is: was the run up in the housing market attributable to “undue stimulus”, or the low interest environment that spawned the subprime world?

I have always been a firm believer in letting the facts speak for themselves when it comes to reporting the sales market but I have also been a firm believer that market value does not sit off by itself when it comes to mortgage or bond underwriting. Nothing lasts forever including the value of a property and that’s why appraisals always have a date of value. Understanding the dynamics of the market, we know that all cycles must come to an end-the question is when?

Concluding to and reporting market value is only one part of the equation when it comes to securitization and in the final analysis the buyer of CDO or CMBS bonds had better heed the Latin saying “caveat emptor” and if they do not understand Latin at least read the prospectus that accompanies the offering. High yields come with high risk and nobody should be shedding tears for the investors holding these bonds but the clueless homeowners who are at risk of foreclosure are another story.

Yes, it was “undue stimulus” caused by the easy or no credit history verification chicanery on the part of the originators that hoodwinked many innocent single family borrowers and fed a voracious market that could not gobble up the volume of loans fast enough to securitize and sell to investors who thought the cycle would go on ad infinitum. No appraiser worth his three approaches could have stood in the breach and claimed, “no this frenzy is not market value-it is undue stimulus”. The only ones able to do this would have been the underwriters and rating agencies who could have said that their experience on subprime loan failure rates was insufficient to assess the true risk and thus they would have to build in a higher premium to account for this. But this would have cut into their business model and it obviously would not have been managing their customer’s expectations.

One final thought. The losses on Wall Street so far for the subprime debacle have totaled $27 billion which is about $10 billion shy of the 2006 year end Wall Street bonus outlay. I haven’t heard the bondholders asking for disgorgement which just proves that everyone should master Latin.

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[Sounding Bored] Appraising New Construction: What happens in Las Vegas…

October 21, 2007 | 1:59 pm | Columns |

Sounding Bored is my semi-regular column on the state of the appraisal profession. This week I wonder about bulk appraisal fees and their impact on appraisal independence. I also posted this commentary on Matrix.

I’m a realtor in Las Vegas and a regular reader of Matrix and Soapbox. Thank you for both.

I’m writing in hopes that you may be able to address a question I have long had concerning appraisals of new construction…or could direct me to where I could find an answer.

During the boom, a builder would typically have several phases offered…phase 1 might be priced at $160 per square foot, phase 2 would jump to $180 PSF, phase 3 at $210 and so on.

My question is: how was an appraiser able to justify the purchase price of the first buyer in phase 2, when every single comp in phase 1 was so much less expensive? And how did the first buyer in phase 3 get an appraisal for a price substantially higher than all the comps in phases 1 and 2? It never made sense to me and I felt then (and still feel now) that the ability of developers to get appraisals to justify any price allowed them to create sales pitches based on appreciation rather then the intrinsic value of home ownership.

The reason I’m bringing this up now is because it’s happening on the downside as well.

Two years ago, a friend of mine signed a pre-construction contract to purchase a Miami condo for $500,000. Construction is nearing completion.

My friend would love to get out of the deal without losing her entire $100,000 down payment. She was hoping that the condo wouldn’t appraise, but of course it has…for precisely the amount stipulated in the purchase contract and despite the Miami condo market having been in a tailspin since the time she entered into her contract.

For the life of me, I am unable to explain to her how this is possible, so I’m sure I must be missing something. Any insight (or direction to another source) regarding the unique relationship between appraisals and new construction would be most appreciated.

Thank you in advance for any reply you may be able to provide.

Best regards,
Eric Young

Eric brings up a significant issue in the valuation process: appraising in new developments. Here’s a magazine article I wrote about the topic three years ago that may provide some additional insight.

Valuation in a new development project is actually difficult because the sales are not a matter of public record, the contracts are provided by the seller (developer) and not independently verified and there may or may not be comparable sales in the immediate vicinity outside the complex.

In the scenario you provide, the appraisals performed in later phases would only work in a flat market when using early sales, so therefore external evidence must be considered to be able to justify the first sale in a new phase, or a contract when the market is falling.

External influences should include contracts in other competing developments (contract dates as of right now) to show trends, current contracts of re-sales in the same or competing developments to show trends, current listings of similar properties in the new development to show trends. In other words, in a third phase where a re-sale of a phase one listing is less than your contract should be enough to prove the purchase price is above market levels (assuming its comparable).

The problem with appraisals done in new developments can be more about independence of the appraiser than the use of comps. If the developer arranges financing, they are likely going to own, hire or or have a financial relationship with a mortgage broker or local lender. The appraiser may have been offered a package deal to appraise these properties in bulk or more efficiently for the lender or mortgage broker. The act of saving the applicant $25 on an appraisal fee may also serve to remove independence from the process since killing a sale could cancel 100 future appraisal assignments. duh!

At the end of the day, the appraisal is supposed to reflect market value as of the effective date of the report. If the market is falling, it has to be evidenced by market data so its probably worth reviewing the report that was completed on the property. I don’t know the laws in those markets, but I suspect copies can be obtained before closing. If contracts were used to substantiate the value, they are only valid if the contract date is recent. Otherwise, they reflect a different period in time and are equivalent to using old closed sales.

The appraisal needs to reflect market value in place as of the effective date of the report, otherwise its just another silly form to fill out.

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[Sounding Bored] Appraisal Fees Aren’t Inflated: Treading Lightly Instead Of Communicating Our Value

August 31, 2007 | 8:02 am | Columns |

Sounding Bored is my semi-regular column on the state of the appraisal profession. This week I create my longest (and most inflated) rant list ever on the state of the profession.

An appraiser from North Carolina wrote me looking for historical data on appraisal fees going back to the 1970’s (I graduated from high school in 1978 so I didn’t have a clue of what an appraiser actually was back then).

From what I’ve been told by some older appraisers…many appraisers are charging about the same fee today that they were charging 15 years ago. I think all appraisers could benefit from a historical overview of the evolution of appraisal fees to where they are today.

This comment triggered some thoughts on how bad our profession is as a business. Here’s why.

  • We have little lobbying influence in Washington, DC to suggest legislation favorable to our profession (unlike NAR) so its easy to be blamed when things go sour. No one really understands what the problem is except those within our profession.
  • Appraiser licensing laws have little teeth to them and as a result, its tough for good appraisers to compete with “good” [wink] appraisers.
  • Our national appraisal organizations have lost membership by the thousands since licensing laws were enacted because a license is all that is needed to be qualified for many lenders (we take the state license test among dog groomers and pool cleaners applying for their industry licenses…whom are often more professional than we are).
  • There is no teeth to the enforcement of bad appraisers, because resources allocated to the problem aren’t adequate and lenders are reluctant to turn them in because of (the real) fear of litigation liability.
  • Good appraisers are being forced out of the business by high volume shops who employ trainees acting essentially as form-fillers rather than valuation experts.
  • We have let the mortgage industry remove the barriers between the quality and sales function subjecting us to obvious as well as subtle pressures to be results orientated. Most of us serve those who are on commission and thats a fundamental flaw in the integrity of the lending system.
  • Some of us work for Appraisal Management companies at half the going rate as our other clients with turn time expectations of 24 hours but provide slower more expensive service to loyal and sophisticated clients.
  • We act defensively when our values are questioned, even if the client concerns are legitimate.
  • Forget who our client is and speak to anyone about an appraisal who calls and asks. For example, a borrower who calls about a refi appraisal done for a bank client.
  • We often backstab our own colleagues when reviewing their work, not because the work was substandard, but because we see it as a way to get more business from the client or we assume thats what the client wants us to do.
  • The measure of our services (speed and “makin’ the number) was based on the desire for short term profits during the housing boom rather than long term gains. As a result, clients are moving to AVM’s and other alternatives because more and more we can’t be trusted as a profession. “What do you need the number to be?” With the credit crunch, do we really think the lender’s who need a real valuation are going to think we, as a profession, have changed our reliability overnight?
  • Government regulators and legislators do not understand what we do and how important it is for us to be free to independently assess collateral without pressure, which is now the exception not the rule.
  • Our industry guidelines such as USPAP and various associations are unwieldy, complicated and change frequently. Most importantly, theses guidelines and rules, although created with the best intentions, are disconnected from the real world making us appear less professional than the assumption of greater integrity. Less is more.
  • The consumer and the lending industry have lost the understanding as to why appraisers are here: to estimate the collateral, not make the deal.
  • We are afraid to charge the market rate for our services and instead let the client, rather than the market, dictate what the fee will be (not always the same) because we are not good at communicating the value of our services. We cave in to a lower fee at the first sign of rejection of work. There is always someone willing to charge less.

So back to the original topic of fees. These points are all negative but I don’t think I am too far off on most. If all of the above are true, what client in their right mind would want to pay us more than they did 15 years ago? What “value” does our profession of us bring to the table?

I suffer from fear and loathing of the appraisal industry’s future. For those of you (I suspect most who bother to read this blog) are doing a professional, credible job in your work. You believe there is some honor in the profession and its ok to do the right thing no matter what the personal or financial consequences.

For the rest of you, I hear there are openings as a dog groomer.

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[on Matrix] Appraisal Pressure: Declaring The Obvious, Is A First Step

June 20, 2007 | 3:21 pm |

Here is an appraisal-related post on our other blog Matrix: Appraisal Pressure: Declaring The Obvious, Is A First Step that discusses the New York Attorney General’s request of appraisers to make a declaration that appraisal pressure is a problem.

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[Commercial Grade] A Few More Words About Appraisal Pressure

June 17, 2007 | 9:49 am | |

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. In this post, John piles more on the plate appraisal pressure buffet, providing additional insights, that even years of pressuring him, I didn’t fully appreciate he had. He sends the clear message that appraisal pressure is like going to a bad restaurant. The customer won’t complain if the food and service doesn’t meet their standards, they simply won’t come back.

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

Just a few more words about appraiser pressure before I let this go. When I teach my Valuation class at NYU, I ask on the first day, “Why do appraisers get hired?” The answer “Because they have to be.” Sure, on occasion there will be someone willing to come out of pocket to find out what the professional appraiser says the value of their property is, but 90% of the time appraisers are hired because they have to be:

  • When a mortgage loan is made, the federal government mandates an appraisal to assess the collateral
  • When securitizing a loan, the rating agencies require an appraisal to assist in rating the debt
  • When paying estate taxes, the IRS requires an appraisal to assess the value of the inheritance
  • When doing estate planning, an appraisal is similarly required by the IRS
  • When negotiating an equitable distribution in a divorce, the two sides need an appraisal for their settlement
  • When an investment fund acquires real estate, it requires an appraisal to monitor the value of the asset for periodic fund reporting

And the list goes on. And in each case, the client has a strong interest in the outcome of the appraisal. The investment banks want to see it high to get a higher rating on its debt. The estate wants to see it low to minimize the estate taxes. The pension fund wants to show its investors that it made a good purchase and is creating value over time.

The investment banker makes a bigger bonus if he pushes more money out the door. The asset manager at the pension fund is rewarded if his assets perform well. And so on.

Appraiser pressure is not just the sleazy mortgage broker threatening to pull the plug if you don’t make his number. In most cases, appraiser pressure is oh so subtle.

I was told recently by a prestigious investment fund that they thought our appraisal was low (even though we concluded to the 2 month old purchase price, and confirmed that the circumstances of sale were “market-oriented”) and that if our conclusion was not higher the report was “going to get a lot of attention and be reviewed to death.” The sub-text: we will not be permitted to finalize the report that is out in draft and submit the invoice until we have been raked over the coals to “prove it.” Sticking to my guns will be a long, painful and ultimately costly process, whereas if I agree to change my value during this draft phase, no one will be the wiser, I can finalize the report, submit my invoice and move on.

In most cases, appraiser pressure is impossible to prove. If you kill a deal or “disappoint” the client, you just don’t hear back. In most cases, nobody is so stupid as to make an overt threat. It is just understood.

I get excited when I read all the press about the AG cracking down on appraiser pressure, until I realize that our system is so fundamentally flawed that it is likely beyond repair.

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