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Posts Tagged ‘Appraisal Pressure’

Being Hyper-Agressive Will Cost You

January 24, 2006 | 8:41 am |

In fact it will cost you $325,000,000.

“The Law News Network – Attorney General Eliot Spitzer and the Attorneys General and banking regulators of 48 states today announced a $325 million agreement with the nation’s largest subprime mortgage lender to overhaul its existing sales, appraisal and closing practices” [LawFuel].

Ameriquest primarily makes refinance loans to homeowners seeking to consolidate credit card and other debt and generate overall monthly savings. After refinancing with Ameriquest, however, consumers were often trapped in mortgages they could not afford, and were left with little or no equity in their homes.

Marketing Opportunity
Of particular interest to me was that the settlement requires Ameriquest to:

Overhaul its appraisal practices by prohibiting sales personnel from selecting, contacting, or attempting to influence appraisers

That is encouraging but there are two major questions here as it relates to appraisers:

  • How does an organization with wide-spread problems in their appraisal process, which sees influencing appraisers is part of the aggressive culture, reform itself? How would they know where to begin? How would they know what is right and wrong?
  • And why are these issues with Ameriquest ANY different than the majority of wholesale lenders?


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Changing Market Gears, Getting Smart

January 3, 2006 | 12:01 am |

In Kenneth Harney’s column Appraising a Shifting Market [Washington Post] he explores how appraisers are dealing with a changing market. The advice is based on good common sense and really applies to all markets at all times, not just in a changing market.

  • Stay current, stay local.
  • Understand behaviors of each price strata. In the Tampa area, for example, the entry-level segments are more solid than the middle and upper price brackets.
  • Get input from local agents, they are on the front lines. Specific transactions may not be representative of current market conditions due to extenuating circumstances.
  • Withstand the intense pressure from all parties to the sale but be open to considering data that was missed in the original appraisal.

Get those who are pressuring you to provide data that is comparable and can be verified. The appraisal that was completed was a result of our best effort at the time. If we missed something that clearly shows we are low, we will consider the new information in the context of what was already presented, but that doesn’t happen very often, because the data usually doesn’t exist.

An appraiser whom I deeply respect once told me in a sarcastic tone: Isn’t it amazing how everyone is so much smarter than the appraiser?” Lenders, mortgage brokers, real estate brokers, developers, buyers and sellers all know the right number. We are just here to fill out a form.”

Depending on how the market does over this next year, appraisers may turn out to be smart afterall.


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AMC’s Put The Pressure On To Take The Pressure Off

December 21, 2005 | 10:33 am |

In yesterday’s American Banker, a column submitted by an executive and board member of ATM Corp. of America in Coraopolis, Pa., which provides settlement service technology to mortgage lenders called: Appraisal Managers Can Take the Pressure Off suggests that appraisal management companies can reduce inflated appraisals because they eliminate contact with the lender so they can be thought of as a buffer for appraisal pressure.

They claim that:

Appraisal management companies were introduced in the 1980s, in part to provide lenders with a way to secure unbiased appraisals.

While I don’t question their genuine conviction that they believe what they are saying, it is amazing how far off the mark they are.

Its been my experience that one of the problems with AMC’s in general is how detached upper management is from the appraisal process, understanding the problems and issues appraisers face every day.

Of course this article is targeted to a publication whose primary reader is their client base.

AMC’s are physically unable to perform true qualitative reviews for their reports. They can measure turnaround times and perform “electronic” reviews, flagging reports for exceeding guidelines. But someone sitting in a cubicle in Maine, doesn’t know the market, block by block in Idaho like a local lender would.

It gets worse. The quality of the reports, which can’t be measured by AMC’s in qualitative ways, are submitted by appraisers who are generally at the lower end of the quality spectrum. Why? Because the AMC is the middleman and the lender still pays the same appraisal fee. They get a piece of the action. The good appraisers are generally unable to afford to work for AMC’s without cutting costs or taking shortcuts that directly impair the quality of their reports. Of course there are always exceptions.

Specifically in our market, you can’t believe the quality we see for reports completed in this manner. They are usually not worth the paper they are written on.

Articles like this in prominent publications are misleading, and because of the lack of a unified voice for the appraisal industry, no one challenges it. After a while, repetition leads to a false sense of truth and the appraiser ultimately loses.


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Unraveling The Pyramid Of Bad Practices

December 19, 2005 | 1:08 pm |

A friend of mine passed along an article by William Apgar called Unraveling the Pyramid. Mr. Apgar is the former Federal Housing Administration commissioner and senior scholar at Harvard University’s Joint Center for Housing Studies and lecturer in Public Policy at Harvard’s Kennedy School of Government.

I found it to be a great article because someone with the gravitas of Mr. Apgar addresses the primary reason that the appraisal profession is in deep trouble and why I started Soapbox to begin with:

The appraiser has not been allowed to remain independent.

The Article

“It cannot be tainted by self-interest or the desire of others to profit from a mortgage transaction. 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. Ever since FIRREA, legislators, bank regulators and consumers groups alike have weighed in on the issue of ensuring sound residential real estate valuations. 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.

The reason for this independence is obvious; everyone, except the appraiser and borrower, benefits monetarily in fees and performance bonuses from a higher-priced home. As it is not uncommon today for a lender to be on both sides of the equation, making the loan and picking the appraiser, the federal regulations seek to separate the appraisers’ work from other aspects of the transaction. That is the idea, anyway, but not always the practice. In practice there are lenders that hire staff appraisers who are picked by and report to the lender’s loan officers. Certain lenders and title companies own or are part owners in appraisal companies.

There are agents and brokers that refer appraisers to lenders who are referred to borrowers by the same agents and brokers. This is all perfectly legal under RESPA, but gets in the way of independence. In May 2005, following the Joint Statement, the regulators again issued guidelines, warning that financial institutions “may not fully be recognizing the risk inherent in their aggressive lending standards.” In June, on the heels of this “shot over the bow” The National Community Reinvestment Coalition, a nationally recognized consumer group, released a report entitled Predatory Appraisals: Stealing the American Dream. [Soapbox] As they determined in their study “problematic appraisal practices exist as a serious impediment to responsible lending, impede fair housing and equal access to credit, and place the American Dream of homeownership and the safety and soundness of the mortgage marketplace at risk.” Today, no one can accurately assess how many homes are overvalued in the U.S. housing market and for how much. There are those who argue that there is no such thing as appraisal inflation and therefore, no problem exists; if a buyer is willing to pay an asking price, then the price isn’t inflated. True enough. But, when appraisal inflation becomes systemic to the loan process and when almost half of appraisers say they are pressured to inflate appraisals by others involved in the loan closing, then maybe it is time to change the way appraisals are ordered. The increased use of creative mortgage products and slowly rising interest rates, combined with predictions of falling prices in the hot real estate markets, concerned Julie Williams, the then- acting Comptroller of the Currency.

In a speech given in March 2005 Ms. Williams raised price declines as part of her warning about the growing credit risks stemming from aggressive retail lending. She said, in an article titled Amid the Housing-Bubble Din, Something Different? [American Banker] that some of the increasingly popular hybrid mortgage products “are often predicated on continued healthy price appreciation for residential properties. No one knows how these loans will perform if housing prices stabilize or fall or, worst yet, if the value of homes fall below what the borrower owes.”

This is a time of transition for the mortgage marketplace. Economists agree that although there is no nationwide housing bubble there are “regionalized bubbles” where housing prices seem to have risen to unsustainable levels and price declines have been predicted over the next two years. The mismatch between income gains and higher real estate values in some cities is particularly striking. How can someone earning $70,000 a year afford a $500,000 home? They can’t over the long run. Regulators have taken steps in the past several months that could exert strong influence on lenders and all vendors providing services to lenders.

Due to the volume challenges of the past two-to-three years, for some time now lower price and fast turn time have been favored over accuracy concerns. It remains to be seen if the real estate market changes and increased delinquencies put lenders in a more cautious posture. The ascendancy of credit risk over production in overall lending management may actually be on the near horizon, where it should have been all along. I applaud NCRC’s report, their veracity on the subject of predatory lending and for asking the hard questions. This issue is systemic, as the entire process from regulators to lenders to the third party interactions of loan officers and the Realtors/builders is broken.

It certainly will take a collaborative effort from the entire industry to unravel the pyramid of bad practices that have occurred over the past ten years.”

Webmaster’s Note: Lets hope we start seeing some movement in the right direction soon. The American public is not served well by the current state of the profession.

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Welcome To The Club: IRS May Require Membership In Trade Groups

December 12, 2005 | 12:11 pm | |

The Senate recently approved S. 2020, the Tax Relief Act of 2005 that allows the IRS to define an appraiser as being a member of an appraisal trade group [Valuation review]

The measure, which got the Senate nod last month, requires appraisers performing valuations for tax purposes to be designated by the Appraisal Institute or another professional appraisal organization or meet comparable requirements to be determined by the IRS in forthcoming regulations.

“The appraisal reforms contained in S. 2020 are consistent with recommendations that have been made by the Appraisal Institute, American Society of Appraisers and the American Society of Farm Managers and Rural Appraisers,” said Bill Garber, director of Government Affairs for the Appraisal Institute. “The Senate-passed bill has effectively ‘raised the bar’ with regard to appraisals performed for tax purposes, which is a move that is welcomed by the professional appraisal community.”

Wrong.

These appraisal trade groups have worked very hard for passage of this bill since the passage of appraisal licensing in 1991 rendered them inconsequential to the appraisal process and their membership has been in decline ever since. Their argument is that membership or designation would improve quality of appraisals that the IRS sees. This seems hypocritical since licensing came into effect for the very same reason – these trade groups were ineffective at influencing quality, or if they did, it was so poor that it didn’t really matter. It also gives bad appraisers something to hide behind. In other words, I think these organizations are worthy and expand the base of information a professional appraiser has access to, however, it is not the panacea for quality appraisals.

In fact, it has been our experience that appraisal quality is not improved if the appraiser has a designation. The poorest reports we review for lenders appear to be equally represented by members of these organization and those that are not.

The real problem is not whether an appraiser is a member of a trade organization, it has more to do with the structure of the industry and the bad habits it creates so that appraisers can survive.. We need to install some sort of controls to protect appraisers from influence because a change in the structure of the industry is how quality will improve.


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The Lending-Appraisal Industries: A Marriage Not Made In Heaven, Or In Texas

December 5, 2005 | 12:01 am |

The marriage of an appraiser to the County Tax Assessor-Collector in the same Texas appraisal district was determined by the attorney general to break the law [Daily Times (TX)]. It was determined to be a conflict of interest.

“Isn’t that crazy? We thought it was funny that we had to wait for an attorney general’s opinion to tell us whether we could or couldn’t,” Rector told the Houston Chronicle on Tuesday. “I bet that’s never happened before.”

I can only imagine if the same ethical standard was applied to the lending-appraisal industries as a whole. The avoidance of even the perception of a potential conflict would render the structure of the lender-appraiser relationship illegal.

Sigh.


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A Better Bullseye Is Not Enough To Stop Bad Appraisers From Being Bad

December 2, 2005 | 12:01 am |

In Erick Bergquist’s article GSEs Restructure Appraisal Documents to Clarify Liability [American Banker], he discusses growing appraisal and mortgage fraud, both GSE’s are requiring the use of new appraisal forms to be more direct on who has the responsibility (liability) and therefore make it easier for Fannie Mae, Freddie Mac and state licensing boards to go after the bad apples.

Here’s the portion of the article that expresses my concern over the false comfort that this action will provide. FNMA is under incredible pressure right now from many different angles so I believe they are anxious to promote this as a step in the right direction, to show they are doing something about fraud. Well it is a right step. I just hope its not the only step.

Jonathan Miller, the president of the New York appraisal firm Miller Samuel Inc., said he had mixed feelings about the changes.

“From a big-picture perspective, it makes the appraisal industry more accountable,” he said. “The fraudulent appraisers have more of a bull’s-eye painted on their back for future litigation.”

However, Mr. Miller said there is only so much the changes can do. For one thing, “this is just a form, and if people are making up information and being misleading on the old forms, it’s optimistic to expect this will have a significant impact on the integrity and quality of appraisals submitted.”

Also, he said the update is “a baby step” that does not address the main cause of faulty appraisals: the lender-appraiser relationship. “Loan officers or anybody paid on commission should have no direct contact with the appraiser whatsoever.”

Though Mr. Miller called one of the new certifications – a warning that appraisers can be subject to civil fines and penalties – “highly commendable,” he had reservations about the other one, which reads, “The borrower, another lender at the request of the borrower, the mortgagee or its successors and assigns, mortgage insurers, government-sponsored enterprises, and other secondary market participants may rely on this appraisal report as part of any mortgage finance transaction that involves any one or more of these parties.”

That certification, as it is worded, could significantly increase appraisers’ liability to almost anyone else in the mortgage process, he said.


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Redlining Is Alive And Well

November 29, 2005 | 9:19 am |

Several months ago, our appraisal firm completed an appraisal of a one family in an urban market that has been undergoing gentrification for about five years. The property was renovated (not to excess) and if it closed, would be the highest property sold there recently. It was exposed to the market for a typical period of time and sold near the list price. We used sales from the immediate area that were renovated and recently transferred. The market is rising rapidly and this property was slightly larger than the recent sales, hence its record price. It was not a white elephant.

Because the sales price was above $1M, two appraisals were completed as SOP and we believe the other firm also came in at or near the purchase price.

The lender then ordered a field review and their local staff appraiser (who was located out of state) commented to the real estate broker before walking into the property that “There is no way any house in [neighborhood] could ever be worth more than [price]. Needless to say, this field review came in approximiatley $1M low or about half the purchase price. The field review contained sales that we either inspected or we were familiar with. The sales were basically shells (wrecks), or multi-family properties with rent stabilized tenants. Amazing.

The buyer went to another national lender who did the deal and I believe they relied on the two appraisals.

Myself and another principal, who was the appraiser for this assignment, were removed from the approved appraiser list without notice (because I reviewed the report), yet the remainder of my staff, including trainees were still approved. A mortgage broker who submitted our reports to this lender was told they would accept our firm’s reports if we would simply remove our names from the reports and they could jam it through the system. Of course we would never do that.

We dogged the lender for weeks for an explanation since we did nothing wrong. Ultimately we were reinstated after other work of ours was reviewed.

In summary, it appears that:

  • This lender was redlining.
  • Their appraisers are being pressured to come in low on sales in marginal areas because of pre-conceived opinions about values and risks. It ironic that appraisal pressure in this case is clearly the opposite of what we typically see, which is to come in higher than the value.
  • Competent appraisers can be easily weeded out in favor of form-fillers. We fought them on principal for our reputation despite the fact that we do very little work for them.
  • Out of state review appraisers are not always experts in the markets they review. How can lenders base significant loan decisions on out of state review appraisers, even if they are on staff?
  • If lenders take this position, how do emerging neighborhoods have a chance to develop?

Is anybody out there listening?

UPDATE Since this incident, there have been a number of sales in this neighborhood over the $2M threshold. I forgot to mention in the first paragraph of this post that we also received calls from their underwriter telling us to bring down the value because they didn’t think the neighborhood could support the price.

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Appraisal Pressure Applied By Unwitting Clerical Staff: Appraisers Are Seen As Snails

November 18, 2005 | 10:51 pm |

Today we got an email from a client contact that read:


From: ############
Date: November 17, 2005
To: XXXX@millersamuel.com>
Subject: RE: Status

why does it take your office  1- 1 1/2 weeks to write up a report!?

This email was sent by an appraisal management company, who took over a long standing account that handles high end properties. They have been mandated to use our firm. Of course, you have to remember that we provide our service in a market where 80% of the housing stock is not a matter of public record, and we have no MLS system. To my knowlege this AMC does not review quality (or at least substantively) and simply track their vendors by turn times.

Its an ongoing battle with this client and eventually, the original bank’s loyalty, which has protected us from the AMC’s pressure, will fade as time passes since the original client doesn’t interact with us directly anymore.


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Regulators Lip Service On Loan Standards Goes Unheeded: Now Its Hammer Time

November 15, 2005 | 9:40 am |

Federal regulators have been warning lenders for months about home mortgage underwriting standards but little has changed [American Banker] According to a survey by the Federal Reserve, only 5 in 60 banks have made changes. This seems out of step with the tone of the guidance on home equity lending, AGENCIES ISSUE CREDIT-RISK MANAGEMENT GUIDANCE FOR HOME-EQUITY LENDING [pdf pg. 7], which was issued by the Fed, the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the National Credit Union Administration.

By most accounts, fierce competition, coupled with banks’ general comfort with the practices, has kept the industry from changing its product offerings or lending criteria much.

“Regulators said in the guidance that, along with rising interest rates, there were several other issues that warrant extra caution: interest-only features; loosening documentation standards; weaker loan-to-value ratios, debt-to-income ratios, and credit scores; and the increased use of brokers and automated appraisals…Agency heads’ speeches have grown more ominous, and bank executives report a recent uptick in questions from examiners and written warnings of coming scrutiny.

However, regulators say they are making progress and are concerned about moving too quickly for fear of causing a credit crunch, but are concerned about unsafe lending practices.”

Web Master’s Note: As a matter of record, there is no real wall between the sales function and the underwriting function of many, if not most national lenders. In other words, the structure of lenders today is flawed related to matters of collateral assessment. Perhaps this movement by regulators is the proverbial “light at the end of the tunnel.” There is still hope that good appraisers will be able to continue working whether or not they “play ball.”

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A Disputed Possible Solution To Appraisal Disputes

October 26, 2005 | 9:32 am |

We have outlined in great detail within Soapbox, that appraisal pressure is prevalent in the lending industry, encouraged by the structure of the lending process and the lack of political clout held by the appraisal industry.

A consumer activist group National Community Reinvestment Coalition has set up a trade group to arrange for the arbitration of business disputes over appraisals [American Banker]. “Members of the Center for Responsible Appraisals and Valuations would also agree to follow a “code of conduct.” They would include all parties to the process – lenders, appraisers, and various intermediaries.”

Here is the NCRC press release. [PDF]

One of the issues the lending industry has problems with, and rightly so, is that in a mortgage situation, the appraisals is being done for the lender, not the borrower. However, the problem with this structure, is that the lender is not incentivised to weed out appraisers that are there strictly to make the deal. Problems usually occur years down the road. Lack of focus on competency is clearly evidenced by the proliferation of appraisal factories (very large shops largely manned by trainees) and appraisal management companies who largely measure appraisal quality by turn around times.

Curently, lenders typically sue the appraiser’s E & O insurance company which is difficult because the insurers are in the business of litigation and its often difficult to extract claims.

I believe the objective here is to improve the reliability of appraisals. Since appraisal licensing came into effect in 1991 through FIRREA, the focus has been on licensing, required coursework and continuing education.

However, the reality is that licensing has been ineffecive because the states, who are charged with administering their interpretation of the federal law, have limited budgets and minimal staffing. Even if they did have adequate staffing, is a state agency really in the position to determine whether the appraiser used reasonable comps? I don’t believe so.

Erick Bergquist, the author of the American Banker article provides a quote from a lender:

[A National Lender’s] spokeswoman said Tuesday that appraisals are “something we already have some pretty stringent guidelines around and monitor on an ongoing basis.” As a result, “we really haven’t seen a big issue.”

This is the typical lender response to this issue which shows how, in rising markets, there are generally no problems since the deals usually get done. Stringent guidelines usually refer to more quantifiable requirements that generally do not impact quality. Its very difficult to measure quality and therefore most emphasis is placed on turn times. For a lender to say there is really no issue, really is the issue.

Perhaps the outcome of this effort will be to create additional awareness of the problem, but I doubt it will be universally accepted by the lending industry. It has to be for this to be universally accepted. However, I believe it is a step in the right direction.


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Mortgage Fraud: Hiding True Occupant Of Apartment From Lender [part 6 update]

October 25, 2005 | 8:48 am |

About a month ago, we had a situation where the lender called us to hide the true occupant of the unit we were appraising. Mortgage Fraud: Hiding True Occupant Of Apartment From Lender [Soapbox].

The same lender (clarification: loan officer for a national lender) calls us up a month later and decided to go with the original appraisal after all (option 1). This was the report with the effective date that was the same as the inspection date making the occupant a tenant at the time of inspection.

Apparently the panic emergency call last month was not a deal killer. I think thats the lesson here. If you stick to your guns and always remain consistent, and of course ethical, most of these emergencies will go away. Of course this calibur of loan officer will move on to the next appraiser who will accommodate.

Just imagine for a moment…if this lender could not find anyone morally flexible enough to make the initial change the client wanted.

What a wonderful world this would be…


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