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Posts Tagged ‘Appraisal Pressure’

[Sounding Bored] The Power of Yes! WAMU Pulls The Plug On All Residential Appraisal Department Employees

July 12, 2006 | 2:03 pm |

Sounding Bored is my semi-regular column on the state of the residential appraisal profession. Today I discuss the massive layoff of the appraisal department by WAMU effective September 12th.

Effective September 12, 2006

Washington Mutual Bank, affectionately called the bank of last resort by its own employees (making fun of its Power of Yes ad campaign), told its employees today that they are discontinuing the in-house appraisal department. Going forward, all residential appraisal functions will be managed by First American and Lender’s Service, two appraisal management companies. (Disclaimer: My appraisal firm has worked for WAMU since the early days and choose not to work for the AMC’s.)

This action finally puts the issue to rest.

The appraisal department had been one of the few remaining of the national lenders that actually looks at the reports that come in, to assess the collateral for their loans. Its been an automated slow bleed after the last two series of major layoffs.

Things were never the same after upper management botched the installation of their in-house appraisal management system called OPTIS VALUE, that never really worked. OV was the in-house back end version of AppraisalPort (which worked fine). Most upper management associated with the decision and implementation effort were purged.

The last 5 years has been a clerical nightmare for all. WAMU could never figure out how to make it work effectively. It looks like they admitted it was a failure.

The appraisal staff that currently works at WAMU are good people given limited resources to review the heavy flow of reports that come through their pipeline.

Its absolutely amazing that a federally insured financial institution could be allowed to let an appraisal management company handle the appraisal function. AMC’s are a low margin business who rely on appraisers who generally work for less than half the market rate and therefore can not afford data sources nor the time to verify information. They are essentially there to fill out a form for the file and are rated for turn times, not quality. I have opined about this on many occasions.

The timing for WAMU couldn’t be worse. The real estate market is softening and the pressure on appraisers to make the number is stronger than ever. I think I’d sell their stock if I had any.

I was hopeful that upper management would “get it” when they took over, but it looks like they don’t. I wonder what all those secondary market investors are going to think about the quality of WAMU mortgage portfolios going forward.

I’d call that the Power of No!

UPDATE: All vendors are being turned off on July 31st. The work will move to the AMC’s (40,000 appraisals per month). Can you imagine the deterioration in quality for investors thats going to happen right away? Rumor has it that WAMU is being prepped for a sale to another lender and another 6,000 layoffs are planned. Citigroup has been in the rumormill as a takeover candidate for the past several years. Since Citi uses these AMC’s, it makes sense.

UPDATE 2: Here’s a t-shirt link for those affected sent by a number of ex and future ex WAMU employees [Warning – may offend].

UPDATE 3: WAMU Thanks All Their Residential Appraisers For Doing Such A Great Job And Now Will Let Them Spend More Time With Their Families [Soapbox].

UPDATE 4: According to American Banker, WAMU had 30,336 employees as of March 31, 2006, up 10% from the prior year.

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[Sounding Bored] Appraisers Make Mistakes

May 31, 2006 | 12:01 am | Columns |

Sounding Bored is my semi-regular column on the state of the appraisal profession. I explore how to get an appraiser to re-consider the error of his or her ways.

Appraisers are human, well most of the time. One of the rights of passage for a real estate broker is to deal with the fact that on occasion, the appraiser is going to disagree with the sales price of the transaction.

A wise appraiser once told me: Everyone in the sales transaction is smarter than the appraiser because they already know the number. The real estate listing broker and selling broker, the mortgage broker, the lender and of course the buyer and seller all know the number. The appraiser is the last one to the party.

But sometimes it happens and when its does, life can be difficult for the appraiser. The buyer and seller threaten to sue, the mortgage broker may never use the appraiser again, same goes for the lender. The real estate brokers may never refer the appraiser their clients again.

So why would an appraiser want to go through this? Because its their responsibility, their job as an appraiser to estimate the value of the collateral (in a mortgage appraisal assignment).

Appraisers aren’t perfect, but they have everything to gain by being thorough, accurate, and honest. Encouraging an appraiser to engage in illegal activity in this era of widespread mortgage fraud could lead to a sanction against you and even to criminal prosecution for you and the appraiser. No transaction is worth that.

But what if the appraiser meant well, but either made an error or just didn’t understand the market?

The NAR in the latest issue of REALTOR Magazine provides the best way for a real estate broker to handle the situation and understand the appraiser’s position. Actually, the method they present is respectful to the appraiser and the process should only be engaged if the broker truly believes a mistake was made.

You never want to demand or coerce an appraiser to revise the appraisal. There must be a reason for the appraiser to reconsider an opinion of value other than “This is what we need to get the deal through.”

I have to say that I was impressed by their tact.

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And The Survey Says…Appraisers Have More Fun Than All But 7 Others

April 12, 2006 | 10:20 am |

Money Magazine and did a survey of the top 10 jobs in the US considering, among other things, growth, pay, stress [CNN/Money].

I believe the results are a little like the cow jumping over the moon.

  1. Software Engineer
  2. College professor
  3. Financial adviser
  4. Human Resources Manager
  5. Physician’s assistant
  6. Market research analyst
  7. Computer IT analyst
  8. Real Estate Appraiser
  9. Pharmacist
  10. Psychologist

Here are the details.

I find this result surprising for two reasons.

• Firstly, the housing boom has passed and the need for appraisers for purchase and refinance mortgages will wane as mortgage rates rise.
• and second, the pressure that is placed on us for delivery of assignments and for “hitting the number” is enormous.

On the plus side, there is flexibility, and its great if you enjoy analytical work and getting outside on a regular basis.

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[Commercial Grade] Slicing Up The Pie Really Fast

March 31, 2006 | 9:45 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. Today John talks about how the compensation formula is, in all reality, based on speed. Thats why the post is a day late – he had to get a flurry of assignments out the door yesterday.

Disclosure: John is a partner of mine in our commercial real estate valuation concern Miller Cicero, LLC and he is, when its not raining, one of the smartest guys I know. …Jonathan Miller

Imagine hospital interns getting paid a percentage of the fee for every patient they sawor associates in major law firms paid 40% of their gross billings. Take it a step further, your mail deliverer getting a cut of the postage for every house he delivers toengineers getting paid based on how quickly they can churn out new plans and designs.

The “fee split” compensation system has become the standard for commercial appraisers. Under this system, professional staff appraisers are paid a percentage of their gross billings, usually on a sliding scale.the higher the gross billings, the higher the compensation. So there is a built-in incentive to do it fastoften very fast. As a result, there are junior appraisers able to churn out appraisal reports who earn in the six figures; the irony is that the professional who is thorough, cautious and methodical in his research and analysis will put out a much better appraisal, and serve his clients interests far better, but earn only a fraction of what the appraiser that churns out reports earns.

According to, the median salary plus bonus of the commercial real estate appraiser is $76,237, nationally. Though they call this a “salary” to my knowledge, the only appraisers (excluding trainees) paid on a salary basis work for financial institutions or accounting firms.

Salesman, of course, get paid on a commission basis, and partners and principals of professional practices will benefit from both their professional and entrepreneurial skills in running their practices. But I can think of no other “profession” in which junior or mid-level staff are paid essentially on a commission basis.

In other professions associates are paid based on their experience and knowledge, often with a merit bonus at year end. In the appraisal business, a 3-year associate could earn well in excess of the 20-year professional.

What’s wrong with this picture?

[More importantly, where’s my slice? -ed]

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[on Matrix] Bank Mergers Increases Need For Moral Flexibility

March 20, 2006 | 11:01 am |

Here is an appraisal-related post on our other blog Matrix: Bank Mergers Increases Need For Moral Flexibility that discusses issue of bank mergers and how the lack of competition influences an increase in crime. The post relates this to the current state of the appraisal profession and its flawed structure.

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Don’t Ask, Don’t Tell: Lenders Take On Significant Unseen Mortgage Risk

March 20, 2006 | 12:05 am |

In the article When Sellers Must Be Flexible [NYT] a buyer illustrates how they were able to purchase a property with a limited amount for a down payment. The seller agreed to pay for closing costs in exchange for the higher purchase price. At the end of the day the seller would net out the same amount and the buyer gets the house.

Everyone wins, right?

  • I’d be willing to bet that the property was overappraised and the seller concession was not considered or known about.
  • The lender did not realize that their asset was inadequate for the collateral.
  • This sale closes and becomes a data point for other valuations.

Whether or not these assumptions are true, this type of creative transaction, no matter what flavor, happens all the time. In other words, everyone but the lender wins. Thats because the lender was exposed to risk that is not built into their cost of doing business. A portion of risk in the transaction was shifted from the buyer to the lender.

What if you multiplied this type of activity by a million? Is the risk significant then?

If you read the entire article, you can see how matter of fact this transaction was handled. The mortgage broker says:

The appraisal has to come in at the increased purchased price, and obviously the credit and everything else needs to be excellent.

If the property was not selling and this was the best the seller could do (why else would they accept this type of arrangement?) then it would seem unlikely that an accurate or well-done appraisal would come in at the sales price. Its certainly possible but does not appear to be a reasonable assumption given the circumstances.

As the housing market cools, more of these creative financing techniques will be necessary to keep the real estate economy going, and its going to require a lot of backbone by the appraisal industry to stay honest. Hopefully lenders will become aware of their vulnerability at some point.

Here’s another creative financing technique discussed in For Home Loan Broker, Troubles Come With Creative Refinancing [LA Times]

This is compelling evidence of the current flawed structure of the mortgage home loan business.

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When Machines Take Over The Earth, Or At Least The Appraisals

March 6, 2006 | 12:01 am |

This recent editorial Tough action needed to stop the deceit [KC Star] illustrates how far gone the appraisal industry is. Betrayal of public trust is something that you can’t undo very easily. The sad thing is that its not an easy fix.

Although we are responsible for the lion’s share of the problems, don’t heap it all on the appraisers because thats incredibly simplistic. Its like telling someone who is overweight “Well, just eat right.”

Here’s a recap of the problems with the appraisal industry today:

  • The lobbying efforts of the lending industry and the GSE’s to reduce costs and reduce the appraisal report to a commodity. Faster turn times and lower fees all that seems to matter since thats all that can be readily measured.

  • The government solution to this problem was to create licensing and pile on the requirements yet appraisal fraud is seemingly as rampant as during pre-licensing (pre-1991). Enforcement non-existent because of lack of resources and is largely a clerical function. In fact, a portion of licensing fees in many states are re-directed to other departments in the government.

  • The appraisal organizations have been largely out of touch with the needs of residential appraisers for decades and have had a limited lobbying role in Washington. This is evidenced by the large drop in membership since licensing. If their services were essential to the appraisal industry prior to licensing, then this would not have occured. Self-policing has not been effective and was largely the impetus for licensing in the first place.

  • Appraisers do share in the blame however, and in a very big way. As an industry, we have been unprofessional in the sense that our loyalty can be sold in exchange for volume. Many of the remaining appraisers that are competent and ethical are leaving the business, which is an incredible loss of a significant intellectual resource to the lending community.

We’re the only profession where you are begged to be dishonest.

AVM’s have already replaced appraisers in home equity lending and there is talk about testing it for first mortgages. However, AVM’s are well-known to be inaccurate and are not the panacea for responsible lending.

It doesn’t have to be this way. In some ways, a correction of the housing market will remove much of the fly-by-night elements of the lending industry.

The solution? Its not as the editorial suggests: Curbing the problem will require a change of culture within the industry itself, as well as a tougher regulatory climate and stricter licensing laws. Also needed: more rapid response by professional boards to complaints. These suggestions are simply window dressing and demonstrates the lack of understanding as to the real issues (which is one of the problems of righting this ship):

  • Protect the appraiser from the sales function of the lending process. This needs to be done with banks, mortgage bankers and especially mortgage brokers. In other words, build a clear and succinct wall between the sales and underwriting functions and the appraiser sits on the underwriting side.

  • Create some sort of mediation board of review within each state that is legally binding. Make the appraiser professionally liable for fraud and negligience but at the same time, allow them to protect themselves against unfair accusations. Provide a practical process for lenders and appraisers to submit suspect appraisers for review but protect the appraiser from frivolous actions.

Until these two issues are dealt with directly, there will be no change in the status quo and eventually, the profession, as it relates to lending, will be obsolete. This will not be because of competition from technology, but because of the lack of trust by the lending community.

Lets rebuild ourselves into an industry of appraisers and lose the “form-filler” moniker.

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Checking Insulation To Protect Appraiser From Production Staff

February 27, 2006 | 8:38 am |

John Taylor is the president and chief executive officer of the National Community Reinvestment Coalition in Washington who wrote How to Insulate Appraisers from Production Staff [American Banker]. He states that:

We believe that appraisal inflation is so pervasive that it requires this type of action. Over 8,000 appraisers have signed a petition circulated by the Appraisal Institute alerting the public to this pressure and warning them that their home may be overvalued. A recent survey of appraisers found that half had been pressured to increase appraisals by 10% or more.

His suggestions to reduce appraisal pressure is to:

  • Restructure internal operations so that loan officers do not select or interact at all with appraisers or approve them for rotating lists.
  • Isolate mortgage brokers from the appraisal process in the same manner.
  • Hire independent appraisers or appraisal management companies. Do not hire an appraisal company that is a subsidiary of the lender ordering the appraisal or of the title company supplying the title, because all stand to gain financially from a higher home price.
  • Never depend solely on automated valuation for an appraisal; each home must be seen by a qualified appraiser.
  • Sign a code of conduct developed by the Center for Responsible Appraisals and Valuations, agreeing to resolve differences between themselves and appraisers through the center’s arbitration pro-cess.

Federal regulators, such as the Office of the Comptroller of the Currency, have urged lenders to ensure the independence of appraisers from their loan production staff. Creating this independence, however, requires more than a few superficial steps that an aggressive loan production staff can easily dodge. Lenders must build a corporate structure that does more than simply hide the conflict of interest.

Currently, there is no promising solution for this problem. Associations that represent lenders and appraisers generally tout self-policing or the pending Responsible Lending Act (HR 1295) bill (which is currently stalled in Congress), but these issues amount to window dressing since the problems are inherent in the structure of the lending system and don’t address appraiser indepenedence.

A potential solution is not politically popular since few representatives want to go on record with a solution that will potentially increase loan application costs (near-term) and reduce turn around times.

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Not Everyone Is Ready For An Appraisal Of Reality

February 27, 2006 | 8:13 am |

As comedian Robin Williams once said:

Reality, what a concept

Kenneth Harney writes that Appraisers supply a dose of reality [LA Times].

See Not Everyone Is Ready For An Appraisal Of Reality [Matrix]

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Trying To Sway Some Action On A Stalled HR 1295, Says A Lot

February 21, 2006 | 12:01 am |

Appraisal Groups Call For Action on Responsible Lending Act [RISMedia]

As mortgage fraud remains a serious problem for communities across the country, the Appraisal Institute, the American Society of Appraisers (ASA) and the American Society of Farm Managers and Rural Appraisers (ASFMRA) continue to voice their support for congressional action to abate mortgage fraud, particularly The Responsible Lending Act (H.R. 1295).

Mortgage fraud is going to get a whole lot worse before it gets better. There is no incentive for Congress to act on HR 1295 anytime soon. As mortgage volume declines as rates increase, lobbying groups for lenders, mortgage bankers and mortgage brokers will be at full throttle.

The bill been stalled since the spring of 2005 when it was heralded as a step in the right direction. Now that one of its co-authors, Bob Ney, is in legal trouble, it seems like the fate of HR 1295 is sealed.

The bill places certain language in the legal pervue of applying pressure and a few other housekeeping issues.

The problem with this legislation is that it includes membership in these appraisal organizations as part of the solution. I think that membership in a private organization as a way to solve mortgage fraud is window dressing, honestly. Its great for the organizations but I fail to see how professionalism will improve on a large scale.

Do I think membership in these organizations enhance professionalism? Of course. But thats not the point.

The problem is about enforcement, civil and criminal penalties, standards and possible mediation solutions.

Bill Getting Eaten By Predatory Lending Concerns [Soapbox]
The Responsible Lending Act (HR 1295) [Soapbox]

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Responsible Lending Defeated By Irresponsible Lobbying As Congressman Ney Steps Down

February 6, 2006 | 12:01 am |

For all the hoopla the Responsible Lending Act garnered last spring, it appears to have stalled and one of the bill’s co-sponsors, Representative Bob Ney, is implicated in the Abramoff lobbying corruption scandal [MSNBC]. Here’s more on that [LA Times].

So much for congress to act on predatory lending and tightening appraiser accountability [Businessweek].

The bill was introduced on March 15, 2005 and referred to referred to the Subcommittee on Housing and Community Opportunity [Thomas] on May 13, 2005.

The Responsible Lending Act HR 1295 [Soapbox] met with mixed reactions with several agencies going on record stating that it would weaken laws against predatory lending [Soapbox].

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Taking Orders, Separating Mortgage Functions

January 30, 2006 | 11:37 am |

William Apgar, the former head of FHA said it is time to change the way appraisals are ordered in the article Unraveling th Pyramid [BrokerUniverse].

This article addresses the fundamental issue with appraisals today – the independence of the appraisal function. To paraphrase: Its so important that on Oct. 27, 2003 the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, and the National Credit Union Administration, issued a Joint Statement that requires the separation between loan production, appraisal ordering, and the appraisal review function. In May 2005, the regulators again issued guidelines and warned that financial institutions may not understand the risk of aggressive lending standards.

To say that our mortgage system is unique would be an understatement. The American Dream of home ownership has become a reality for more people than anywhere on the globe. Lending money based on the securitization of loans backed by real estate has been the rock on which this phenomena has been built. Fundamental to this system is the fair, objective and unbiased valuation of the real estate that secures these loans and provides the confidence Americans have in the value of their home. For this reason the industry has created and depended upon a profession that has been central to our mortgage economy – the independent fee appraiser. This profession is wholly based on its separation from all others within the mortgage system. It cannot be tainted by self-interest or the desire of others to profit from a mortgage transaction. It is the cornerstone upon which the value of real estate is dependent. In fact, one of the key features of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 was to make certain that trained and certified licensed professionals completed the valuation process.

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