I’ve already written about the putsch to overthrow the new appraisal rules and probably should leave it at that. However, Diana Olick and the NAR are beating the drums loudly for repeal and Olick’s blog post is just too over the top to let it pass without comment.
She starts out with this quote from Lawrence Yun, the NAR’s chief economist:
“In the past month, we have suddenly been bombarded with many stories of, at the last moment, transactions falling apart because appraisals are coming in unrealistically low,” said National Association of Realtors Chief Economist Lawrence Yun. “As a result it opens up a new round of negotiations between a buyer and a seller or in many cases the buyer just steps away.”
The translation is that a lot of realtors are unhappy because the price that they listed a house for and the price the buyer agreed to pay wasn’t validated by an independent appraisal. Note that Yun says the appraisals are unrealistically low but does not provide any examples and data to backup his claim.
Next a little history on the rules from Olick and a repetition of the Yun’s complaint:
The HVCC went into effect at the beginning of May, an outgrowth of a lawsuit by New York State Attorney General Andrew Cuomo against Washington Mutual. Fannie Mae and Freddie Mac agreed not to buy any loans that didn’t comply with the code.
The HVCC forces a firewall between lenders/brokers and home appraisers. Gone are longstanding relationships between a local mortgage broker or lender and a local appraiser.
Now, lenders and brokers are forced to use appraisal management companies (ironically – or maybe not so ironically—many of which are owned by the big banks). These companies hire independent appraisers across the country and call on them to do the local appraisals.
Realtors say some of these appraisers are not only not local, they don’t even have access to the local MLS. They are doing appraisals using computer models, often incorporating distressed sales as comps, and often not even knowing that the home had extensive renovations or an addition. As a result, the appraisals are coming in far lower than the agreed-upon purchase price.
Let’s get the issue of the bank ownership of the appraisal management companies out of the way first. It would be better if banks were not allowed to own appraisal management companies but the fact that they do is not despositive in this case. In fact, the risk in bank ownership is that the companies will bring in appraisals that meet or exceed the value need to get the deal done and the accusation here is completely the opposite. The fact that appraisals are coming in below assumed value is validation of the system.
Olick phrases her description of the management companies so that it gives the impression an appraiser from Kansas for example is appraising a property in Idaho. Nothing could be further from the truth. The companies are national in scope but employ appraisers on a contract basis that are licensed to practice in their local communities.
Then she gets back to the “realtors say” argument. For example appraisers are not local. Well we already know by law they have to be local so where is the data to back this up? Are the management companies breaking the law?
Then the “realtors say” that these appraisers don’t have access to local MLS. Give me the proof. Hard data please. I don’t buy it. We already know the appraiser has to be licensed to practice in the locality so it’s hard to believe he wouldn’t have access to MLS. An appraiser who didn’t have access to good data with which to derive a value would be putting himself and his license at risk. If indeed an appraiser offered an opinion of value without the ability to professionally validate that opinion then the parties to the transaction would have recourse against him and could easily report the suspected violation to the state appraisal board.
What reallly galls me about this passage is the statement that appraisers are “incorporating distressed sales as comps.” In markets where foreclosure sales make up a substantial portion of the sales, to not incorporate them would be malfeasance. Olick needs to get over the idea that distressed sales can be ignored. That’s a relic of a bygone era when foreclosures were few and far between in a given market.
Olick then quotes a mortgage broker:
“The new HVCC is certainly increasing processing times, raising costs for consumers, and in often cases bringing in valuations that don’t appear to be correct as a result of lesser experienced appraisers from outside the area appraising properties at potentially lower valuations,” says Craig Strent of Bethesda, Maryland’s Apex Home Loans. “When that happens that throws the refinance or the purchase mortgage out of whack of course and creates fairly large problems for the financing, so we’re seeing some really negative effects as a result of this HVCC.”
I’m tempted not to even add a comment. No where does she establish this fellow’s credentials that would support his contention that the appraisals don’t appear to be correct. Again we here about out of market appraisers — the old politicians trick, repeat it enough and people believe it. And, of course, the appeal to give the consumer a break, this is costing him more money. Here’s a news flash, a lot of people wish they had paid a couple hundred bucks more for an appraisal a few years ago. If they had their lives might not be a shambles now.
Finally, Olick admits that there was a lot of fraud in the old system:
The point of the HVCC was to take fraud out of the appraisal process, and let’s face it, there was plenty of that. But they may be throwing out the baby with the bathwater here. Interestingly, after I discussed this on CNBC this morning (see video), we got a call from a Congressional office asking for the transcript of my report.
Olick seems to back off with this statement. After giving a forum to those agitating for back to the future she can’t quite bring herself to throw in with them. As for the comment about Congress getting invloved, all I can say is, uh-oh.
I once took a complete series of courses on appraisal. Though I never did pursue a license, I did complete all of the classwork necessary for a license. This was during the height of the bubble. The instructors were mostly very experienced appraisers with multiple years of experience. Every single one of them was bitter about the pressure that was exerted to bring in appraisals at a predetermined value and every one of them had suffered financially because they refused to do so. We don’t need to go back to those days.
Tom-
I’ve been appraising for over 10 years and hope you can properly consider the following. Appraisals are nothing more than a written argument that provides an opinion of value. Most times, this is for lending purposes. You get 3 different appraisers; you’re going to get 3 different opinions. All can be basically correct. Unfortunately, HVCC rewards the lowest opinion of value. The new system helps canonize AMCs that only have 2 goals. Faster and Cheeper. If an appraiser (rookie or veteran) is to be paid 50% less for work that is being demanded in 1/2 the proper amount of time, you get what you pay for. Very few appraisers are willing to “go the extra mile” and call listing agents about pending sales, fully consider a shortage of inventory, narrate about multiple offers, or give full consideration for upgrades and additional features if they’re being paid $15/hour. What you’ll get is the first 3 or 4 nearby sales (or not so nearby) that will still be a legitimate opinion, just a very “quick & sloppy” opinion. At $15/hour, there’s no incentive to do the necessary research to justify a purchase price at the leading edge of market value. It is dreamland thinking to believe that all appraisers are equal when it comes to their final analysis. A “quality” appraiser is one who isn’t shy about “pushing” a property value to the edge, does the research, provides the evidence and writes a credible report supporting their opinion. Guess what, that opinion comes at a higher price than what can be made available by an over-worked and under-paid professional who no longer has an incentive to do the necessary research to justify a value. There have been numerous times I’ve refused to hit a number because the market evidence was not there. All appraisers will complain about that, its part of the territory. If another appraiser was willing to go higher than me (and take the liability for it) go for it! If the “conservative” appraisers don’t like the heat, they need to get out of the kitchen (or teach appraisal classes). At the end of the day, the opinion of value must be supported by a well written report.
What HVCC will do is push values toward the median. Computer analytics based upon mass data will become the new standard. Only the wealthy buyer (that can afford the cash difference between the “median value” and what a knowledgeable seller who knows damn well what his place is worth) will have the edge in the new defined HVCC market. And maybe that’s what “the market” wants today. But I disagree. An “aggressive” yet thorough appraiser will come to the aide of a solid buyer. A buyer who may lack the large down payment, but is willing to pay top dollar for that house in a better neighborhood with features that command full consideration of market analysis. This necessary market analysis will not likely happen because only a fast, cheep and subsequent “conservative” appraisal will be the result.
In effect the HVCC system is like someone choosing a dentist for you, one who is favored because he or she is the fastest and cheapest at what they do. Are you ready for the drill???
Cheers!
Doug DeMars
Certified Appraiser