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Posts Tagged ‘Appraisal Pressure’

[on Matrix] Another Appraisal Firm Enters Pressure Realm + 20,000 Reports

June 11, 2007 | 11:24 am |

Here is an appraisal-related post on our other blog Matrix: Another Appraisal Firm Enters Pressure Realm + 20,000 Reports that discusses the new appraiser subpoena and how that appraiser seemingly has superhuman time management skills.

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[Commercial Grade] Better Late Than Never

May 24, 2007 | 10:24 pm |

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

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

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

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

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

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

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

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

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

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[on Matrix] Good Appraisers, If Speed Is Only What You Need

May 23, 2007 | 8:30 pm |

Here is an appraisal-related post on our other blog Matrix: Good Appraisers, If Speed Is Only What You Need that ranks the items a growing number of mortgage clients emphasize from their appraisers.

Guess where quality ranks?

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[Sounding Bored] Managing To Give The Industry The Eye

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

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

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

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

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

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

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

Until then, I’ll have to manage.

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[on Matrix] Badge of Irony: HALTing Appraisal Pressure Despite Ghost In The Machine

May 19, 2007 | 5:05 pm |

Here is an appraisal-related post on our other blog Matrix: Badge of Irony: HALTing Appraisal Pressure Despite Ghost In The Machine that discusses the issue of appraisal pressure and the recent subpoenas issued to a Manhattan appraiser and mortgage broker.

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[on Matrix] Molasses Primer: The Subtext on Subprime

May 18, 2007 | 9:21 am |

Here is an appraisal-related post on our other blog Matrix: Molasses Primer: The Subtext on Subprime that discusses Fed Chair Bernanke’s muted reaction to the subprime lending problem.

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[Straight From MacCrate] Consider Review Appraisals

April 29, 2007 | 4:07 pm |

Jim MacCrate, MAI, CRE, ASA, has worn many hats in his career. He taught a number of the appraisal classes I have taken through the Appraisal Institute. and I think he is one of the few people who actually understands the “J-Factor.” His wife Judy is an SRA and is an accomplished appraiser in her own right, having managed an appraisal panel for a large lending institution throughout its various mergers for a number of years. I can only imagine the riveting conversations at dinnertime. This week, in his inaugural post, he dashes dogma and talks non sequitor to get to the topic of appraisal review. …Jonathan Miller

Non Sequitor cartoon strip
“A pinch of preconceived notions, a dash of dogma, mix well in a bowl of innuendo, then just say the magic word” . . . and what do you get? A real estate appraisal? Or just a quote from Max in the cartoon Non Sequitur.

With all the players in the appraisal process, it’s no surprise client pressures from all sides can create biased reports. Unfortunately, lawyers, accountants and other real estate advisors who work on a performance fee basis sometimes suffer ethical lapses. They opt for fat fees, rather than fair appraisals. Even government reinforces subtle pressure on real estate appraisers by failing to protect society with required standards (minimal licensing and limited resources to monitor unscrupulous appraisers and their clients). Without such oversight, appraisers must learn to walk away to avoid compromising their ethics and professionalism.

Thus the need for unbiased professionals to review appraisal reports for fraud, incompetence, or human error. The Uniform Standards of Professional Appraisal Practice (USPAP) defines the review function as distinct from real estate valuation/consulting, so different standards apply.

Many review appraisers are independent professionals who are educated, trained, and experienced to evaluate appraisal reports. They must know the property type, the market, the geographic area, and the correct analytical methods for an accurate analysis. They judge the quality, completeness, and adequacy of the appraisal report to determine if its information is relevant and the correct valuation techniques support reasonable conclusions.

Max also concludes

Facts are a lot more fun when you get to make them up.

That’s why appraisal reviews offer good insurance and professional appraisal reviewers make qualified industry watchdogs.

Note: a special thanks to Nancy Reiss of The Write Stuff and Max Ramsland, MAI for their help with this.

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[Sounding Bored] High Pressure = Appraiser Inflation, Systematic Inattention And False Markets

April 22, 2007 | 4:06 pm | Columns |

Sounding Bored is my semi-regular column on the state of the appraisal profession. This week I notice some are now finally paying attention to the inflated truth in the real estate market: its apparent that failure to protect an appraiser from influence, results in meaningless reports and financial misery to innocent people. (Thanks for the head’s up, Jose!)

There is a great article written by Kenneth R. Harney of the Washington Post in his syndicated Nation’s Housing column called Appraisal Inflation. Kenneth’s writings are always a must read.

Appraiser inflation results because there is no check or balance in the power relationship between lending institutions and the appraisers who work for them. Like panting dogs, the appraisers who crank out this work are wholly dependent on their master.

I had a strikingly similar experience in the mid-1980’s when were just launching our appraisal firm, Miller Samuel.

and it goes like this…

Back in the mid 1980’s when I get into this profession, there was a pattern of mortgage fraud abound, that I dubbed “creating a false market” that bears striking resemblance to the fraud that occurred in the subprime market (and just about every market) today.

A particular mortgage broker (who went on to become national and successful) specialized in marketing co-op apartments to recent college graduates. If the apartment was actually worth $100,000, they would sell it for $125,000 to the student who was unaware of the market but enticed by the no money down, no closing cost package. It was really +100% financing.

The mortgage broker approached appraisers in the market and promised them heavy volume, or asked them to simply hit the number. Surprisingly, it was more the former and the appraiser never shared in the fraud on a financial level. These apartments were typically in 10 unit walk-ups and the sponsor (landlord) was happy because they were getting high prices for their apartments. Once the first unit closed, it became easier to perpetuate the fraud. The appraiser was provided sales that closed and relied on them exclusively.

When we were approached to provide appraisals for one of these firms in particular, as far as I could tell, they had no idea that this was fraud. In other words, these students were saddled with apartments that were worth $100k but the mortgage was usually well above that and they were in effect, creating a false market based on misleading information.

We were provided “comps” that closed as a result of the faud, but we used our own sales and “killed” the first few deals we were sent, not because we knew what they were trying to do, but because the value wasn’t there. It wasn’t even close.

This firm then complained to a large national lender they were sending a lot of this work through, and we went through a series of meetings, phone calls and visits to some of the apartments we had appraised with senior bank officials. We had the spectre of losing one of our major clients hanging over us (aka assumed guilty and had the burden of proving our innocence), just as we were getting our company off the ground. It was stressful to say the least.

But to our lender’s credit and because the appraisal department was protected from sales function pressure, we were exonerated as being competant (pretty degrading, really). However, the mortgage broker was still allowed to provide work to this lender and were allowed to avoid using us. But it effectively killed the mortgage pipeline for this mortgage broker through this national lender since the lender was now aware of what was going on and scrutinized every deal.

Of course the mortgage broker simply found someone else to do their deals.

The subprime mess worked essentially the same way. Find an incompetant or morally flexible appraiser to channel the deals through, and the system takes care fo the rest. The current mortgage does not allow ethical appraisers to thrive. In fact it is just the opposite.

It would be great if the lending system could be incentivized to provide collateral assessment that actually meant something, instead of creating paperwork to throw in a file.

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[on Matrix] Appraisers: Band-aids Don’t Prevent Cuts

April 13, 2007 | 11:02 am |

Here is an appraisal-related post on our other blog Matrix: Appraisers: Band-aids Don’t Prevent Cuts that discusses the real issues related to appraiser’s access to sales contracts.

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[Fee Simplistic] The Perfect Storm: Is Appraising the New Sweatshop Profession?

March 22, 2007 | 9:01 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, he chews the fat with us about the easy credit syndrome and begs the question: “Do you want fries with that?.” …Jonathan Miller

This past Wednesday the Wall Street Journal reported on how US auto parts suppliers were successfully resisting the price-cuts demanded by Detroit’s Big 3-GM, Ford & Chrysler. The article explained how attrition among the US parts suppliers through bankruptcies, consolidations, etc. had resulted in giving the remaining survivors the necessary leverage to resist Detroit in price reductions demanded by the Big 3 in their attempt to lower costs. Thus with fewer plants, smaller operations and lower overhead the suppliers did not have to take on unprofitable contracts in order to keep their plants busy as they were now more efficient than in the past.

Compare this to the current state of the appraisal industry and you will find the exact opposite in terms of the relationship between supply and demand. The appraisal world has burgeoned over the past decade as a result of the vast residential and commercial CMBS market that has sopped up the investment capital pouring into US real estate. Preceding this boom, however, the supply side of appraisers had already expanded thanks to the enactment of FIRREA in 1989 in answer to the savings and loan debacle in the mid- late 1980’s when state certification enabled every Tom, Dick and Harriet to take a core of appraisal courses, pass a test and hang out their shingle as either a residential or general property appraiser. Moreover, and equally as important, many of these newly hatched appraisal savants were single practitioners operating out of their basements with no staff and little overhead. This is not meant to belittle the capitalistic society in which we operate but merely to set the competitive scene.

To handle the growing volume of deals and the expanding need for appraisals as well as keeping their overhead costs low the financial institutions commoditized the appraisal process and resorted to on-line standardized engagement letters that gave almost no information to the appraiser as to the number of tenants on the rent roll other than being told it was an office building or single-user industrial building, along with the property’s address and a contact name and telephone number; organized the lending process into a production line so that the loan officers had little knowledge of the collateral. Anecdotally, in the large bank that I worked for I found myself fielding requests for appraisals from our out-of-state branch offices whose customer/borrower may have banked at that location but whose property was somewhere back in the New York area (when I requested information about the property, its gross building area, rent roll, leases, etc. so that I could talk intelligently to the various appraisers in order to obtain a fee quote and timing in many instances the field office had no basic property information). To handle either appraisal reviews and/or engagements (especially by the smaller institutions) banks retained appraisal management companies (AMC’s) to administer the process. And thus conditions for the PERFECT STORM in the appraisal world were set in motion:

  • growing appraisal volume
  • growing appraiser supply
  • 3rd party AMC’S under orders to obtain lowest bid fees
  • newly minted appraisers eager to obtain work
  • AMC’s & institutions able to exploit the appraiser oversupply
  • contented client-lenders able to comply with FIRREA/USPAP minimum standards where any appraisal mistakes were bailed out by geometrically rising sales prices

Fast forwarding to the present and the various SOAPBOX articles of my fellow bloggers reporting manifestations of today’s appraisal business world: lenders shopping to see if the appraiser can support the loan/value amount; a quick “verbal” value before the written report arrives and any other quirky requests to prevent the deal from being lost due to the appraisal and it is apparent that business can be rough.

There is no question that today’s appraisal world has been transformed into a high volume rush business stoked by Wall Street’s need to keep the bonfires of CMBS in ample supply to sop up the large capital flows seeking investment outlets. The vast volume of business means that the originators, lenders and underwriters are the bosses while the appraisers have become the sweatshop workers if they want the business. State certification of appraisers has raised the supply of people willing to work at sweatshop fees. As often cited in SOAPBOX commentary, appraisers have become “form filler-outers” and downloaders of web-based data, sales comps and practitioners of applying sales price or rental rate averages to subject properties. Lucky is the appraiser if Co-Star has a photo of the selected comps. If not, a trip to the field may be mandatory if the reviewer does not accept the caption: “no photo available”. Gone is the appraiser who can look his client in the eye and say-“you know what, my experience tells me that market value is not represented by the average of the sales comps and here are the reasons why”.

If I have given the impression that appraisers are being paid for their production and not for their ability to discern market value based on market dynamics you are not mistaken.

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[Sounding Bored] Appraiser Pressure, Or What Got Me Into This Blogging Gig

March 17, 2007 | 11:50 am | Columns |

Sounding Bored is my semi-regular column on the state of the appraisal profession. This week, all the pressure venting starts to get the word out.

For the past 5 years I have watched the appraisal profession go through a pretty dramatic change, most of it bad, accelerated by the housing boom. In 2005, I decided to beginning blogging about it to try to get the word out because going through normal channels (ie appraisal organizations and politics) didn’t seem to be effective enough, plus, I had no idea how to do any of that.

So I simply said what was on my mind in this blog, and later on, got others to join me. These include appraisers and former appraisers that I have met during my career including Chip Wagner from Chicago, my commercial appraisal business partner John Cicero, Marty Tessler from New York City, Butch Hicks from Virginia, John Mason from suburban New York and Todd Huttunen from suburban New York.

The subprime mortgage market woes expose the problems we have been discussing for years. Two articles were released this week that are starting to shed light on the situation. These authors got our attention through Soapbox and my other blog Matrix.

“Drive to make deals fuels mortgage woes” by Holden Lewis of who writes an excellent blog called “Mortgage Matters

“In the current real estate market, an accurate appraisal is more important than ever” by Carol Lloyd of the San Francisco Chronicle who writes a must-read weekly column “Surreal Real Estate

The subprime lending woes we are all reading about illustrated the problems all of us have been shouting about in this blog and on a personal level for the past several years if not more.

  • Competent appraisers are being replaced by form-fillers and 10-percenters.
  • The lending industry structure has evolved into a flawed system where those on commission determine which appraiser gets the work.
  • The appraisal industry is being commoditized into the equivalent of a title search or flood zone certification rather than a professional analysis.
  • Appraisal licensing, while a good idea overall, has legitimized a legion of hacks and given the good ones a bad name.
  • The lack of political clout for the industry has made appraisers the poster child for all that is wrong with lending (aka mortgage fraud).
  • Lending institutions don’t understand the value of their collateral, affecting compliance with bank reserve requirements by federal regulators.
  • Mortgage portfolio pricing in many cases is grossly inaccurate, because the secondary mortgage market investors don’t realize nor have access to accurate collateral valuation.

Let’s hope there is more coverage of this specific issue in the future.

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[Sounding Bored] What About The Chinese Wall?

March 5, 2007 | 11:54 pm | Columns |

Sounding Bored is my semi-regular column on the state of the appraisal profession. This week I talk to a wall.

In Today’s Inman News, there was an article written by a pretty sharp real estate reporter named Marcie Geffner, called: Real estate appraisals are outmoded. (If the link is expired and you don’t have access, I have included the salient parts.)

At first I was in agreement with the article because it addressed the pressure appraisers are faced with every day. Its what I have been preaching for more than 20 years. Lenders, agents and appraisers are all to blame in the process because the appraiser, in their unique position in the transaction, is vulnerable (willingly or not) to outside influence. Quite often their only sources of business systematically apply pressure.

The fundamental problem is the conflict of interest among the lender who selects the appraiser, the borrower who pays for the appraisal and the investor who relies on the adequacy of the appraiser’s opinion.

Here’s where 90% of all consumers, lenders, agents, appraisers and the reporter for this article miss the boat.

The fundamental problem is the conflict of interest among the lender who selects the appraiser, the borrower who pays for the appraisal and the investor who relies on the adequacy of the appraiser’s opinion.

  • A mortgage appraisal has nothing to do with the borrower — The appraisal for a home purchase that is ordered by a lender or mortgage broker for a mortgage has nothing to do with the borrower. It is purely an assessment of the collateral (the asset) of which to lend against. It makes no difference what the buyer wants the value to be or to feel comfortable about the purchase. This issue needs to be reinforced with loan officers and underwriteres, as well as real estate agents.
  • An appraisal ordered by the buyer, by law, can not be used by the lender for the mortgage — If the buyer wants to feel more comfortable about the transaction, they can hire their own appraiser to get an estimate but they need to make sure the appraiser is getting their data from an independent source and has limited contact with the agents involved in the sale.
  • A client is not defined by who pays the appraiser — An appraiser’s client is determined by who engaged the appraiser for the assignment. Just because a borrower pays an appraisal fee for their mortgage application doesn’t mean they have any right to speak with the appraiser directly.

The author’s solution to the credibility problem is more about enforcement and an update of current laws. This is not likely to happen, nor will it effect change. Licensing actually made the quality of appraisal work decline because it lowered the bar on the entire profession. With a few classes and some simple training, anyone can get a license and all appraisers are on a even playing field.

Enforcement is virtually impossible unless the report is out and out fraud. Licensing departments in most states are understaffed and lack adequate resources despite best intentions. Plus, its tough to deal with subjectives. Boy, that value was a little too high – let’s get ’em on that.

Most of the substandard work that gives the profession a black eye is done by ten-percenters. Those are typically appraisers who always seem to be a little high on their values which coincioedntally gives their clients more flexibility. This practice was reinforced to me today as I reviewed an appraisal today done for a mortgage broker by a ten-percenter and the appraiser used no real logic but kept using the phrase…based on my vast experience… in his text.

The solution has to be regulatory needs to be resurrecting that Chinese Wall between the sales function and the underwriting function of a bank.

Until then, we might as well keep talking to a wall.

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