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Posts Tagged ‘Appraisal Process’

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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Adjusting for Dragons

October 25, 2005 | 12:05 pm |

Submitted by John Mason, an appraiser…

Hey Folks:

So how much do you adjust for a 15+/- foot high, solid wood, hand carved dragon? It looks like the neck and head is from the base of an old tree trunk (still attached to the roots) with the wings and tail from the upper sections of the tree, which were then attached to the base.

Imagine if your subject property looked directly at this!

Webmaster’s note: Please send along your ideas for unusual items you have had to adjust for…

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Mortgage Scams Create A Whole New Language

October 22, 2005 | 12:03 pm |

“The Colorado Association of Mortgage Brokers submitted a plan last week to regulate the industry in Colorado, one of just two states with no such requirements on the books.” They believe that regulation may stem some of the fraud [Pueblo Chieftain] In every scam, one of the parties to the fraud in that state is usually a mortgage broker.

They list types of mortgage fraud are (in no particular order of importance) as:

  • Equity Skimming — The mortgage broker qualifies the consumer for a larger loan then they need, quitclaims the property to the mortgage broker who rents the house back to them and then the mortgage broker does not pay the mortgage.

  • Inflated appraisals — Overstated appraisals are usually done by appraisers who depend on a few mortgage brokers for business. The lender has less collateral then they think. The borrower has debt greater than the value of the house. Sales of properties in the neighborhood may be influenced by a few above market sales.

  • Flipping — The mortgage broker works with an appraiser to create a false identity for a borrower and artificially inflate the value of the property multiple times within a short period. These closed sales appear in public record and are also used by unwitting appraisers.

  • Silent second — The seller provides a non-disclosed (to lender) down payment to the buyer as a gift. The buyer doesn’t realize that they have to pay taxes on the gift and can’t afford the house.

  • Air loans — Providing mortgages on properties that do no exist.

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Lenders: What Constitutes The Perfect Appraisal Client?

October 20, 2005 | 8:12 pm |

Lets be honest, shall we? As a profession, appraisers are pretty good at complaining about whats wrong with the industry and “how I can’t believe clients (certain banks) treat us this way, blah, blah, blah.” And most of our complaints are well justified…actually more than justified. But what makes the perfect client? Is there a perfect client out there?

Well, I just had my annual meeting with my perfect client. The following criteria defines my perfect client in order of importance to me.

A perfect client:

* respects our judgement and NEVER pressures us to hit a number to make the loan.
* treats us with respect and every employee is friendly, fair and professional.
* meets with the appraisal panel 1-2 times per year, NOT to load us up on their requirements and problems, but to find out HOW each market is behaving, that the appraisal panel covers.
* genuinely wants the real value on all appraisal assignments and appreciates honesty when there are issues with the borrower’s value estimate.
* tells us they want to know the real value (over and over because we are in disbelief), with the reasoning that the value needs to be a constant they can rely on and will make an underwriting decision based on credit or other assets if they still feel comfortable with the deal.
* pays us a fair fee for our services and does not play appraisers against each other to get the lowest bid…and pays us in a reasonable period of time.
* has reasonable turn-around time expectations.
* provides us accurate information in the initial appraisal order.

Who is this perfect client? I’ll never tell. With so few out there, you need to go find your own. 😉

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Appraiser License Renewals Trend With Mortgage Rates

October 19, 2005 | 8:19 am |

As mortgage rates trend up in Colorado, the number of appraisers who choose not to renew their licenses is increasing [RISMedia]. As mortgage rates trended down over the past several years, the number of refinance applications increased, drawing in new appraisers. It follows that when rates rise, appraisers leave the business. This is fairly representative of the remainder of the country.

A common mix of business for a typical appraiser has been 70% refinance and 30% purchases over the past several years, especially those who specialize in work with mortgage brokers. Historically, the home purchase index has not been as volatile as refinance.

As mortgage rates trend up (assuming this will continue) then the amount of refinance business available usually contracts proportionally. Two things will happen:

  • Pressure on appraisers to “hit” the number will increase
  • Appraisers will leave the profession

Historically, this is not a unique phenomenon. What makes this pattern troublesome is the number of appraisers that have succumbed to lending pressure has surged as the business has changed. More focus on turn times and overstating values has made the remaining appraisers particularly vulnerable to being even more morally flexible.

A telling quote from the article:

The pressure to appraise in Colorado is terrible,” Shannon said. “I don’t think the normal person is threatened with losing work if they don’t do something unethical.”

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Lip Service: Inadequate State Staffing Makes Appraisal And Mortgage Enforcement A Clerical Function

October 16, 2005 | 8:02 pm |

Ohio is beefing up its enforcement of predatory lending. They hope to add 14 additional staff to their [Valuation Review] 25 person department that overseas 10,000 mortgage brokers and loan officers. The small number of employees in Ohio as well as other states to oversee this industry represents the lack of commitment or understanding as to how big a problem this really is and what the cleanup will cost in the future.

A key dynamic here is that some states are not authorized to spend all the money they bring in. The VR story says that Ohio collects $5.8M but can only spend $4.3M.

This sounds eerily similar to the problem facing the states in regard to the appraisal industry. The average state has about three officials to enforce appraisal-related laws. With about 75,000+ appraisers certified nationally, these staffing levels would appear to be woefully inadequate for any meaningful enforcement.

As the real estate market cools, there will likely be more issues with appraisal and mortgage fraud as individuals need to make up the shortfall from the drop in business.

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Automated Valuation Models (AVMs), A Day Early And A Dollar Over

October 13, 2005 | 10:15 pm |

Technology is good. I love it almost to a fault. One of the skills of using new technologies is understanding where its use is appropriate, cost effective, reliable, etc. One of the technologies that has polarized the appraisal industry is the use of AVM’s aka Automated Valuation Models. Just check how many entries in Google come up using the words avm “real estate”? About 111,000 entries at last count.

Here’s a simple summary of AVM’s in the appraisal industry

AVM’s or Automated Valuation Models are computer programs that use relevant real estate information (sales prices, property characteristics, demographics, etc.) to calculate a value for a specific property. Public records are the primary data source. One weakness in AVM’s is the lack of a physical exterior or interior inspection of the properties utilized. AVM’s in the private sector are primarily used for residential home equity or credit loans.

They also have been popular with homeowners trying to find out a value of their home for a nominal fee [LA Times]

Appraisers seem to be generally against AVM’s because they are viewed as a threat, syphoning off potential business. For example, how much home equity work have appraisers done in the past 5 years? Not much, its pretty much all done by AVM’s.

But lets be honest here, based on the ever loosening lending practices, it doesn’t matter what the result of the AVM search is, the home equity deal is relatively low risk and the deal usually gets done. AVM’s reduce upfront costs and can handle higher volume (I am not addressing costs of defaults and additional exposure for the lender).

Yet there has been resistance to the use of AVM’s in the first mortgage business. Why? Because the accuracy is not there.

Here’s the problem: There’s not a great way to test the results. The data is often flawed. I have had conversations with a number of lenders who indicate that of the 8 to 10 national AVM services, 1 is fairly reliable, 1 is barely acceptable and the remainder are not worth the paper they are reported on. However, an AVM report is still something that can be placed in the files for the regulators.

In a rising market, “rising waters float all boats.” As the real estate market begins to weaken across the country, this is the moment of truth for AVM’s.

Don’t get me wrong, AVM’s are here to stay and have their purpose and function. What I object to are the overpromises and inappropriate use of the technology perpetrated by the industry, especially from appraisal management companies seeking out new revenue streams. Remember, these are the same firms passing off poor quality appraisal reports as the real thing – AVM’s are a lot more complicated to manage.

Remember the AVM mantra: Garbage in, garbage out

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Mortgage Fraud: Fannie and Freddie Not Using Their Advantage To Their Advantage

October 12, 2005 | 7:59 am |

Fannie Mae and Freddie Mac are in an interesting predicament. After benefiting from one of the largest housing booms in history, making it their mission statement to making housing available to more Americans than ever before, they didn’t count on the widespread mortgage fraud that has permeated the industry [Houston Chronicle/AP]. (Of course, I am not considering their own internal irregularities.) They have their own team of investigators to flush out fraud.

Looser underwriting requirements, automated valuation, dependency on wholesale lending (mortgage brokers) and exotic mortgage products are all part of the problem. Usually a member of the real estate industry is involved such as an appraiser, real estate broker, mortgage broker or lawyer.

It would seem to me that this is only a punitive effort and not preventative. These government sponsor enterprises already have a competitive advantage over other secondary mortgage market players and should be using some of this muscle to reduce the risk of mortgage fraud.

The danger here is that investors, at some point, are going to actually see the need to measure the risk associated with mortgage fraud, which will be reflected on the portfolio values that are bought and sold.

Other articles of interest:
Fannie and Freddie Now Have To Tell [Soapbox]
FBI sees double the Suspicious Activity Reports [Soapbox]
White Lies: Study Shows Occupancy Fraud in 53% of Claim [Soapbox]
Predatory Lending Results From Overzealous Efforts To Increase Homeownership [Soapbox]

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Appraisal Fee Payment: Hurry Up And Wait

October 11, 2005 | 9:11 am |

Today I finally received payment on an appraisal delivered in March, almost six months to the day. The appraisal was prepared for (and contracted by) a major financial institution. There was no problem with the appraisal. It was well prepared (if I do say so myself!) and there were no questions or issues during the review.

We called no less than a dozen times to follow up on the payment status; first we were told that they’d “look into it.” Then we were told, “don’t worry, you’ll get paid” and “you know we’re good for it.” The reason for the delay, we learned, is that the loan hadn’t closed and the Bank’s policy is to pay for all third party costs at closing; they do not collect the appraisal fee from the borrower up front.

This policy is wrong on so many levels:

  • The Bank should not expect their appraiser to subsidize their borrower for six months
  • While I know that the Bank “is good for it”, our landlord and phone company still expect their payment on time.

Ironically, in this instance, the appraisal was a 2-week rush assignment, where we worked through two weekends to get completed on time.

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Averaging The Good And The Bad Appraisals: Everyone Loses, But The Loan Closes

September 28, 2005 | 10:12 pm |

About two months ago, one of my staff appraisers purchased a home, went through a reputable national lender and then waited for the loan to be approved. They paid list price and there were two higher offers submitted as backups.

The lender hired and sent their approved appraiser to complete the assignment. The appraiser inspected the 3 story 3,000 square foot house that needed a lot of TLC, completed the appraisal and delivered it to the lender.

That’s when the trouble began

The appraiser came in at about 11% below the purchase price (even though there were 2 backup offers and the property sold in about a week). As it turns out, the appraiser missed about 17% of the house during the inspection. The square footage was significantly different than the amount in public record and the floor plan appeared to be of a different house. The lender provided a copy of the report to my employee. All comps used were verified by my employee and were found to be generally accurate so the issue was really the selection of inappropriate (non-comparable) sales due to the incorrectly calculated size of the house.

My employee and his wife had to agonize through this situation for about 2 months before the lender decided to began to deal with the issue.

The appraisal department of the lender, hoping to keep their “Chinese Wall” in place to keep the appraisal review separate from the loan reps, finally contacted the original appraiser with the flawed report and requested that he review the inaccuracies. Not surprisingly, he said all was in order and he was not going to look at the report any further.

Here’s the problem

The lender’s policy was to average the two appraisals together. This means that the flawed appraisal would be averaged with a second (hopefully) accurate appraisal. This would make sense if the complaint was simply a difference of opinion. However, in this case, the issue was not over a value opinion. The original appraiser missed part of the house he was appraising.

While the lender should not automatically assume that any borrower’s complaints are valid, they should have the ability to get a handle on the major issues without a lengthy delay.

Averaging good and bad appraisals to arrive at a value is unreasonable since the flawed report should not be considered at all. The lower of the sales price and the appraised value were going to be used for this loan, so the borrower is still penalized for the original appraisal.

My employee never lost his cool and kept hammering away at the fact that the good and bad appraisals are being averaged and he kept hoping someone would hear him. I called someone I know, who knew someone at the lender, who knew someone, but ultimately, we do not know if this made any difference.

To give my employee proper credit, he never raised his voice or got personal with the lender. He relentlessly stated the facts orally and in writing, and documented everything. He was resigned to the fact that his seller would get cold feet and one of the other 2 backup offers would take the property.

And the good news

Out of the blue, the lender called and threw out the original appraisal. The mortgage was approved.

Raises the question of fairness

Unlike my appraiser, how can a person who does not understand appraiserspeak and not have access to confirmed data get a fair deal? In this example, the borrowers were appraisers and understood what data to present to the lender and how to interact with them.

Would typical borrowers have the same ability to research and argue the flaws of a report? I doubt it. In the lender’s efforts to separate the sales and underwriting function of a loan, sometimes the chasm is too far between underwriting and sales.

The questions we have are: what took the lender so long to deal with this unfortunate situation and what made them change their minds?

In the end, the lender did the right thing and for that, we can all be thankful. However, my employee plans to file a complaint against the appraiser with the Department of State for negligence after the loan closes and will demand a refund of the appraisal fee simply on principal. We can only hope that the lender will rethink their procedures for approving, reviewing and removing appraisers, so that no one else has to go through this again.

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Mortgage Fraud: Reviewing Appraisals Inflated By Millions [part 7 of a series]

September 27, 2005 | 10:32 pm |

Our appraisal firm tends to stay away from wholesale lending other than clients who pay their invoices and do not pressure us. Mortgage brokers tend to hook in with specific appraisal firms that make the deal, especially on cash out refi’s. We are not one of those firms. As a result, lenders tend to gravitate to us to perform desk and field reviews.

Here’s a typical scenario that happened today:

We are asked to review a report for a national lender who like many lenders, has better control over the quality of their retail channel appraisers than their wholesale channel appraisers. High volume mortgage brokers are often able to muscle “their appraiser” in by flooding the lender with high loan volume for short bursts.

The report we reviewed was a condo unit and relevant sales in the building were excluded and adjustments for amenities such as expansive views of the comparables were ignored. The appraiser gridded a listing as the first comparable that had been on the market for 6 months with no activity and yet the estimated market value was much higher than this sale. The other sales used were not comparable. The sales used had significantly superior views or locations and they were as much as 50% larger with token adjustments for square footage differences.

The result?

The estimated market value was overstated by about $2,000,000! Now I’d like to point out that this lender gives us a hard time about not measuring up to their turn time standards. Guess what? This appraisal firm can get the reports in faster than we can.

A while back, I reviewed an appraisal by this same firm that was about $9,000,000 over valued. The report had been shopped around to several lenders.

Lenders and appraisers that see this type of activity have little recourse in our state. We have to disclose our name in public and therefore would be subject to retaliation.

When is Congress, the secondary mortgage market and financial institutions going to figure this out? The end is near and good appraisers will be ready.

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NCRC: Hitting The Campaign Trail For Responsible Appraisals

September 26, 2005 | 9:48 pm |

The National Community Reinvestment Coalition (NCRC) has initiated a Responsible Appraisals Campaign [NCRC] and has published some of the most direct anti-preditory lending materials I have seen to date.

NCRC was formed in 1990 by national, regional, and local organizations to develop and harness the collective energies of community reinvestment organizations from across the country so as to increase the flow of private capital into traditionally underserved communities.

The focus is primarily on the appraiser, who is commonly pressured to “hit the number.” This web site provides extensive descriptions on predatory lending practices and who the appraiser is typically involved. The documentation seems to place more blame on the lender but there is still plenty left for the appraiser.

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