Wanted: 'Credible' appraisals
House Keys
By Marcie Geffner, Tuesday, September 22, 2009.
Flickr image by Bramus!It's the hottest topic in real estate today: The Home Valuation Code of Conduct, or HVCC, is so hot that it's not just inflammatory. It's on fire.
The HVCC is a new set of appraisal-related practices that lenders must follow with respect to loans they want to sell to Fannie Mae or Freddie Mac. These new practices are intended to reduce the incidence of appraisal fraud and prevent inappropriate pressure being placed on appraisers to inflate home valuations in home purchase and loan refinance transactions.
Mortgage brokers, appraisers and real estate agents are up in arms over the HVCC. They've ranted on blogs, called their congressional representatives, written letters to the editor, signed online petitions and more. They want these rules to be stopped, undone, reversed, blocked, prohibited, banned, tossed out, "moratoriumed" or whatever other word might fit. At the very least, they'd like Congress to delay implementation of the HVCC until they can find an effective way to eviscerate it.
Appraisers are especially upset because the HVCC has changed the structure of their business. Rather than having independent relationships with loan officers, mortgage brokers and real estate agents, they're forced to do business through appraisal management companies. These companies have so much market power that they have raised the prices borrowers pay for appraisals and cut the fees they pay appraisers to do the work. Appraisals now take longer to be completed and are more costly and less portable from one lender to another.
It's important to understand that the HVCC is new, and like any bleeding-edge technology added to a legacy system, it suffers from an unfortunate tendency to crash the whole works. But the fact that the HVCC isn't perfect doesn't mean the problem it was supposed to solve wasn't serious.
Appraisals are performed to meet the needs of lenders, and while home sellers may not object to an inflated valuation of their own home at the time of sale, homebuyers, who foot the bill for the appraisal, may have a much different take on the matter.
The issue is more complicated still for homeowners who want to refinance or cash out equity. They may indeed welcome an inflated valuation at the time, but once they've spent the cash, they may be much less sanguine about indebtedness that exceeds the true value of their home. ...CONTINUED
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Submitted by Derek Eisenberg on September 22, 2009 - 2:24am.
Marcie,
Appraisal rules are certainly tighter now but the old rules were the same ones that were in place after the last fiasco; the S & L crisis that prompted the FIRREA and USPAP. They were never loosened since they were last tightened in the late 80s and early 90s. Lenders did order more drive-by appraisals (those without an interior inspection) on what were considered low risk loans but those assignments were always available. They were not created out of a relaxed environment. When the market was hot, appraisers used the comps that were there which were also high but those were the times and it was what it was.
I posted three solutions in a comment on the Inman News Article "FHA changes align appraisal rules". Here is a recap of them.
1) Get rid of the mortgage broker's license status and make all originators be either mortgage bankers or banks with skin in the game.
2) Make the recapture period (the period in which they have to buy the loan back) be three years not just 90 days to one year. Also offer bonding/insurance to cover originators for three years.
3) Do a field or desk review on every single appraisal--EVERY ONE!!! Desk reviews are $100-125 and field reviews are $200-$225. Say the average is $150. Appraisals are $300±. Add the two together and you have the $450± that management companies charge, (note: these are all rough averages that vary by market and not intended to establish a norm in what should be a free market) only you have the same fee with two appraisals. The FHA has field reviewed 1 in 10 appraisals for years. It should be 1 for 1. Do this and lender pressure won't matter because there will be a second check on every report so no unscrupulous appraiser will be able to bow to lender pressure. Then HVCC would not be needed.
After the S & L crisis, the same atmosphere was present. Let's get the appraisers in line. How 'bout let's get the lenders in line?
Derek Eisenberg
http://www.mls2u.com
Submitted by Ruthmarie Hicks on September 22, 2009 - 5:39am.
What I am getting is appraisals that are all over the map with no logic to them at all. The appraisers rarely seem to know the area at all. Most are coming in at or slightly above sales price - no matter what that price is! For example, a buyer of mine practically "stole" a town-house. It was ridiculous. The seller was desperate and they were brutal in pushing the price down. It appraised for what the sales price was. Yet a townhouse that had fewer features (no yard, no walkout basement) appraised out for $30k more within three weeks of my appraisal. Granted, the other unit had more interior upgrades, but the discrepancy was off the walls and appeared to ONLY reflect the sales price.
I only got into real estate at the tail end of the boom - and I did see agents "nudging" the appraisals up a tad here and a tad there. It contributed to the run-up in prices, but the extent to which it did appears to be wildly overblown. At least in my small corner of the world the system was far from broken. That's because the appraisals that I got prior to HVCC had the virtue of making some kind of SENSE. What I'm getting now seems to almost random numbers being thrown up against a wall. When in doubt - appraise at the sales price - what good is that?
As for taking the brokers out of the loop in the comment above: The last thing we need is to consolidate more power in large banks. Haven't they done enough damage already? People now think that getting their loan from a large bank is "safe and dependable" and the large banks are using and abusing that perception to no end. The last thing you need is to take more competition for these greedy lenders out of the loop. I'm encouraging my clients to steer clear of large banks - go with small community banks as well as competent brokers.
Submitted by Mary Thompson on September 22, 2009 - 5:54am.
Marcie
As an appraiser I could not agree with you more! The idea Derek had on reviewing every single appraisal, not bad, it will make the first appraiser think twice I agree....but I will tell you that not every appraiser makes a good reviewer! Many will take a cursory "look see" and agree with the first appraisal, because as a review appraiser myself, it takes time and effort to complete a DECENT review appraisal and trust me, when it is a field review they should pay the same if not more as they do for a full appraisal as you have to review and drive by the comps the appraiser used and if you do not agree with them, then you must provide your own comps and sometimes we are looking at 6-8 comps being reviewed, adjusted against the subject, etc. Many appraisers do not want to spend that time when they are getting paid $200-$250.00 for more work than a "typical" appraisal. As for Desk Reviews, I think they are useless, you do not see the home or the neighborhood and you rely on what the first appraiser is telling you about the subject, neighborhood, exterior description of the home, etc.
As for HVCC, sure good appraisers that had good relationships for years with mortgage brokers have lost a huge part of their business, but like any good business, you have to spread your business around. You cannot have all your eggs in one basket, because if you lose that client, you are dead in the water. You have to have a mix of Banks, Brokers, Personal and AMC clients. As much as I really dislike AMC's, they keep the money flowing when others clients are slow.
As for the basis for HVCC, I love it! WHY? Because it sure is nice being able to do my job for which I have been heavily trained over the years to provide an accurate opinion of value for the subject property in question without pressure. Most every appraiser had undue pressure to get that number and if you did not get that number...no big deal the Broker would move onto someone who would give them that number. I have lost several clients over my 16 year career as I would not play their game...PERIOD.
I totally agree instead of complaining about it people need to offer solid workable solutions.
One thing that I really like about HVCC aside from no lender pressure and no "Estimate of Value" noted on the appraisal orders, I like the fact that lenders CANNOT remove you from their appraiser list unless they notify you and they have darn good reason to remove you, like violating USPAP, not because you would not make deals work!
Appraisers were always walking that fine line to provide proper valuations but to please their clients or they would LOSE their livelihood. That is just not a good place to be put in, no matter how you look at it.
Our phone calls for "comp checks" which are against USPAP have dissappeared. That is where they would call and say hey can you run the numbers and see what this will come in at so we can decide if the loan will work.
I dont know about the rest of the appraisers, but I do not work for FREE, no professional should and that is what they wanted. The did not want to pay us to find out what the homes were worth! If the home did not come in at a certain number they did not want our services, yet they wanted us to give them that number for FREE up front. Go figure.
AMC's who are owned by BANKS in many cases, they over bill lenders and cut the appraiser fees in half. It stinks. FHA adopting HVCC in January, well they say the appraiser must be paid the market rate for this appraisal, well I sure hope the AMC's follow that stipulation!! I totally agree they need oversight BIG time!
Thanks for the post Marcie, I am one who believes as you do, if you don't like it do something constructive about it and just dont complain about it.
Mary Thompson
http://www.lakefrontpros.com
http://www.marytappraisals.com
Submitted by Ted Jernigan on September 22, 2009 - 5:58am.
The markets where we operate did not have a bubble. The bubble did not burst. Now comes HVCC. The lenders are placing pressure on appraisers to be more conservative than ever before. We are having an issue with appraisals being so conservative that appraisers are negatively impacting values in some instances. In most situations buyers are not willing to pay more than an appraised value even though they had already contracted and negotiated the higher price. Appraisers are not always working in areas they know well under HVCC. They resort to the lowest common denominator for comps. Here we get a lot of same floorplan comps with not sufficient consideration for location of the house (Golf course, greenbelt, etc.) and the ammenities added to the basic house. I lost a significant sale because the buyer actually bought an appraisal on our listing before making an offer and the appraiser only allowed $40,000 for a $150,000 back yard living area, pool and landscaping that was only two years old. We sold the house a few weeks later for more than the appraisal the first buyer ordered and it appraised for more than the contracted price.
I don't have the answer to the question, but how do we separate lender appraisals from market value? Every appraiser that I know well has told me that appraised value and market value are probably different and sometimes markedly different.
Ted Jernigan
Ebby Halliday REALTORS
McKinney, Texas 75071
Jernigan@ebby.com
972-489-6173
www.teamjernigan.com
Submitted by Ronald Ogden on September 22, 2009 - 9:16am.
Wow! Where do I start with all this?
First, not all appraisals are performed to meet the needs of lenders. Buyers, sellers, homeowners, courts, and others require appraisals for reasons just as valid as lenders' needs.
Second, appraisals should neither be "inflated" or artificially conservative. They should represent the appraiser's best judgement of the value of a property given current market conditions. And yes, in an advancing market, an accurate appraisal of a given property this year will be higher than an accurate appraisal of the same property last year. Because there is a difference does not mean the appraiser is inflating values, just that the appraiser is recognizing that buyers and sellers value the property higher.
Third, despite your implication, appraiser-inflated home valuations are just a minor cause of house-price bubbles. More significant causes include supply-demand imbalances and over-corrections, general economic inflation, consumer sentiment, and government incentives that reward homeownership. You can't honestly place the blame for housing bubbles on the shoulders of the appraisal industry.
Fourth, if appraisals had been more conservative over the last 5 years, home buyers would have received equity windfalls and home sellers would have had their equity skimmed. This result is no better than our current situation. We do not need to advocate for more conservative appraisals: we just need more accurate appraisals.
And finally, folks, it's always good to keep in mind that an appraisal is an opinion of value, and nothing more. Assign more value to it than it deserves and YOU assume the risk.
Ron Ogden, Associate Broker
RE/MAX Metro - Salt Lake City, Utah
Salt Lake City Utah Real Estate
Dwell Utah Real Estate Blog
Submitted by Barry Noble on September 22, 2009 - 9:36am.
Mary Thompson's Comments above: My Comment to you and Mary:
DITTO, MARY.
Plus: I've never bent to loan broker or bank pressure in the 18 years I have been local to the 8 Desert Resort Cities of Southern California, based in Palm Springs - I have been approached occasionally, over the years, with "hints" as to a value they'd like, yes, but just refused the work and moved on. The loan brokers and banks who became my regular clients, knew they'd get an honest appraisal and the business relationship was excellent. I had steady work and was proud of what I did, using my best efforts for every report - small cottage or large, custom estate property.
Now, most of the loan brokers with whom I worked, have quit or gone broke, after HVCC came into effect, and others have retired or moved on to other professions, to keep from going broke. The same banks, for whom I earlier worked successfully, use AMC's now (and most of them OWN the very AMC they work through, so where's the annonymity for appraisers?) Since HVCC came into effect, I have only received a handful of requests in the past 5 months, of which 50% were offering fees below what it would cost me to do the work and survive, after payment of all the dues and fees I must pay each year to do my work at its best. I am not allowed to attach an invoice to the appraisal, so the AMC can bill twice (or more) what they paid the appraiser, stating it is the "appraisal fee". (Honesty?)
As to conservative appraisals, IF ONE IS SELLING IN AN AREA HARD HIT WITH A MYRIAD OF SHORT SALES AND FORECLOSURES, THOSE LOW VALUED HOMES ARE COMPS, AND SHOULD BE USED TO REFLECT THAT LOCAL MARKET. If foreclosures are few in a neighborhood, then their effect should be notably less to the market values around them.
I love appraising, I am here, ready to work and work hard and honestly -but the phone doesn't ring for refinancing or purchase loans. I do some legal, estate planning or settlement, divorce and insurance restrospective appraisals, to help stay afloat. Don't know for how long though. May have to return to being a Realtor/Broker.
LOOK AT THIS EXAMPLE: This is probably similar to many states and counties across the country.
The Palm Springs home opposite my own was appraised three months ago by an appraiser from Los Angeles (98 miles away) and the appraisal was useless in this special Mid C Modern neighborhood in Palm Springs. I saw a copy and it was $80,000 off its Current Market Value, based on local comps. It has just been appraised again, by someone from a town 70 miles away.
Why was not a true local appraiser used? I will tell you why! In each case, the appraisers probably listed themselves on the internet sources for banks and their AMCs, as"LOCAL" TO EVERY CITY IN SOUTHERN CALIFORNIA AND EVERY COUNTY and are grabbing at any jobs to stay afloat, even if they are unfamiliar with the property and its city and neighborhood.
This is Wrong, Yes. When you're family's sole income is suddenly cut to shreds, you will do anything for you and your family and kids to survive. We who advertise exact local areas only -get few calls and those we get, offer fees we wouldn't expect as apprentice appraisers.
Some suggestions? Step back a little, and let the banks work up panels of LOCAL city appraisers with good reputations, and, as they already know who the appraisers are, because the banks own and control their own AMCs, eliminate the AMC's and their "extra fees", then the banks can rotate the appraisers from a list of, say, 10 appraisers for each local area, without favoritism, and have spot checks of their procedures, in this respect. Forget the AMCs, it was a very bad and costly idea.
Have all appraiser's reports desk checked at the very least, and field checked for difficult ones - Sounds great!
If the appraiser is paid a livable fee and the reviewer a reasonable fee, the fee charged to the client will be at or below what the AMC's are now charging for being lucky middle-companies, getting rich in a period of utter confusion.
Barry Noble
Certified Residential Appraiser
and Broker
http://www.MyPropertyIsWorth.com
Submitted by Derek Eisenberg on September 22, 2009 - 8:01pm.
Ruthmarie,
For the record, I just meant that Mortgage Brokers should have to upgrade their licensure to Mortgage Bankers. That means they must have a net worth of $250K-$500K and have a higher grade of licensure with more responsibility that goes with it. I was not suggesting that small business people be eliminated. Lots of Mortgage Bankers (which are very different than banks) are small businesses.
Mary, as for the review, that would be ordered by the investor buying the loan and those feeds were just ball park and should be commensurate with the market for the necessary amount of work. Even if it was a second appraisal in lieu of a review, it would be $600 for 2 appraisals which is only $150 more than a typical management company for real security derived with checks and balances.
Derek
Derek Eisenberg
http://www.mls2u.com
Submitted by Jason Berman on September 23, 2009 - 1:47am.
Derek, How does a net worth requirement help the consumer? Net Worth requirements raise the cost of doing business, which in turn reduces competition. Rates go up, fees go up. It costs more to buy a home. That hurts home values. Econ 101.
Go back and look at the biggest mortgage fraud cases. They were perpetrated by mortgage banks. Not mortgage brokers. Search Iowa. There is a reason why Countrywide, ABC, & those of similar ilk were the first to fall.
The answer shouldn't be to fix HVCC. HVCC is structurally broken. The answer is to kill HVCC and then go about understanding the problem before we try to fix it.
For example, how many people are aware of the actual number of appraisers that lost licenses or were reprimanded for inflated valuations in 2004, 2005, & 2006? It's minuscule.
The entire appraisal industry was complicit. Blaming another industry for pressure? Doesn't add up. Appraisers caved. It takes two to inflate. One to pressure, One to comply.
Let's look at bureaucracy in action, the small business appraiser has been decimated. The cost of an appraisal has gone up 50% the last three years. A middleman is now carving up the pie to the detriment of homeowners & frustration of real estate professionals everywhere. Loans are taking longer, costing consumers more money. Some would argue the quality of appraisals has declined.
No, changing HVCC isn't the answer. Getting rid of it is the answer. Tough enforcement of existing laws. Creating uniform national standards for competency, education, & background checks for loan originators. Getting appraisers to enforce the rules and kick out the bad apples. Put banks on an even footing with their competition. Get real estate agents out of the financing function.
All these things will help. Not some backdoor rule designed to strong-arm FNMA & FHMLC into enacting guidelines that squash small business and eliminate competition.
Submitted by Marcie Geffner on September 23, 2009 - 8:16am.
A very interesting discussion with many excellent points made. It certainly will be interesting to watch how the HVCC dilemma continues to unfold.
Marcie Geffner
www.marciegeffner.blogspot.com
Submitted by Derek Eisenberg on September 29, 2009 - 6:57pm.
Jason, you took one of my bullet points out of context by commenting on it alone without how it relates to the other bullet point.
The bullet point you omitted was my second one which suggested that the recapture period be extended to three years.
I suggested that lenders whether they are banks, bankers or brokers be made responsible for 3 years from issuance of the loan. If you take that premise and go with it, what good is it if the lender has no net worth; hence my point for eliminating brokers? So the two bullet points go hand in hand.
Another point you make flies in the face of your whole comment. You said "Get real estate agents out of the financing function." Besides the fact that this is just as wrong as the NAR lobbying to keep banks out of real estate, the rest of your comments deal with increasing competition and lowering barriers. So how is excluding dual tradesman consistent with that philosophy?
Derek Eisenberg
http://www.mls2u.com