Posted by Jonathan J. Miller -Tuesday, June 21, 2011, 3:38 PM
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actual AMC (car) factory
AMC Factory For a year and a half, our firm tangled with the bureaucracy of Landsafe, the poster child for the appraisal management company (AMC) industry. While not all AMC’s are bad, their relationship to the mortgage process is fundamentally flawed. The estimation of market value of mortgage collateral to enable lenders to make informed decisions has been commoditized to the point where most mortgage appraisals are generally not worth the paper they are written on. This series is from an appraiser’s perspective, about a profession left to die by the side of the road.
A little background on Countrywide, creator of Landsafe: About a year and a half ago, we were approached a final time to provide appraisal services for Landsafe, one of the largest AMC’s in the US. Landsafe was founded in 1996 by Countrywide, one of the US largest mortgage lenders accounting for 20% of all lending at their peak. By forming an AMC, Landsafe was better able to control the appraisal process to handle more volume including selling mortgage paper to Wall Street for packaging into a number of exotic financial mortgage instruments.
Countrywide ran into financial trouble in 2007 along with other lenders like American Home Mortgage as the housing market began to collapse.
Think ‘Friends of Angelo’ VIP program, Subprime Lending, Bailouts, Hurricane Katrina, AG Lawsuits.” Among appraisers, Landsafe developed the same reputation over time that Countrywide developed and it wasn’t favorable – they were seen as a factory – only interested in cranking out reports at high volume. Like other financial institutions, the quality function had far less political clout than the sales function which is the basis for Landsafe’s poor reputation in the appraisal industry. I had at least a have dozen meetings with Landsafe senior executives and appraisers in my office to ask us to join them because the appraisal quality they oversaw was so poor. Nothing ever happened.
By 2008 when Countrywide was purchased by Bank of America, it’s name was so toxic it was changed to Bank of America Home Loans. I remember giving a speech at an awards luncheon and the event sponsor was a Bank of America Home Loans rep. When he announced they were no longer known as Countrywide, the audience of real estate agents broke out in spontaneous applause. It was an amazing moment. It remains a mystery why the Landsafe name wasn’t changed at the same time.
The Pledge
One other point and then I’ll get to my story:
In September 2007, after months of negative publicity and the announcement of a reduction of 20% of its workforce, Countrywide launched a public relations campaign aimed at demoralized employees. Employees were expected to sign a pledge to “demonstrate their commitment to our efforts” and “to tell the Countrywide story to all”. Those who signed the pledge received a green rubber Protect Our House wristband.
Landsafe has continued the tradition, requiring their appraisers to sign various draconian documents to pledge their allegiance. Of course the appraiser has the option not to do business with them, but they represent a huge percentage of mortgage appraisal volume. A new generation of appraiser has quickly replaced the more experienced appraiser. Thus the industry is now dominated by an army of form fillers.
Ok, finally – here is this week’s post:
More after the jump…
Posted by Jonathan J. Miller -Wednesday, May 4, 2011, 9:07 AM
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[click to open report]
For years my wife and I have been big fans of Randy Cohen’s NYT column, The Ethicist (He moved on to other pursuits in February)
I came to see that what readers often sought was not a ruling on what to do — they seemed to know — but an argument for why to do it. They sensed that they shouldn’t shoot the dog — but it is a horrible dog: it barks incessantly; it befouls the couch.
And then there’s Strategic Default – when a borrower decides to walk away from their mortgage obligation – otherwise known as jingle mail (mailing keys back to the bank). The chart above is the most recent piece of research I’ve come across which is a year old.
However this post is really about the Wake Forest Law Review paper by Curtis Bridgeman, a law professor at Florida State University (hat tip American Banker).:
Download the paper: The Morality of Jingle Mail: Moral Myths about Strategic Default
He argues that strategic default is immoral and challenges the arguments that have been made to the contrary. In fact, it’s become a cottage industry – here’s a web site, YouWalkAway.com for a fee, will guide you through the process.
The well thought out paper is actually an accessible read, not written in a pure academia style – here’s one of his closing thoughts:
It is unpopular to take the same side as banks
these days, many of whom acted recklessly at best or downright
criminally at worst. Some banks have recently compounded the
problem by engaging in fraudulent foreclosure practices. We should
be compassionate to those who were taken advantage of by banks, as
well as those who simply suffered great misfortune in the economic
downturn. But it is counterproductive to that aim to argue that
everyone has a legal and/or moral right to refuse to pay back money
they have borrowed whenever they can get away with doing so.
However, easier said than done. In business, I’ve been burned many times where people made me jump through hoops and legal fees to forge a written agreement only to reneg on their obligation and it’s too expense or time consuming to go after them. As the saying seems to be embedded in our culture:
“Contracts were made to be broken.”
That’s up for debate – right?
Posted by Jonathan J. Miller -Friday, March 18, 2011, 10:13 AM
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Even St. Patrick must have had enough of the housing market woes as evidenced with this week’s housing related personnel announcements:
FT/Alphavile writes about FDIC going after former WaMu CEO Kerry Killinger for $900M:
The FDIC is seeking $900m in damages from three former executives of Washington Mutual
and their wives!
The wives of Washington Mutual Inc.’s two top executives when the nation’s largest thrift collapsed in 2008 were accused by the Federal Deposit Insurance Corp. of illegally moving cash and houses into trusts in an effort to shield the assets from legal claims.
It looks like the SEC may go after former Freddie Mac CEO Richard Syron
The former chief executive of Freddie Mac has received notice that he may face civil action from the Securities and Exchange Commission as part of its continuing probe of whether the firm properly disclosed its exposure to subprime loans.
And Daniel Mudd, former CEO of Fannie Mae is being investigated by SEC as well.
The CEO of Fortress Investment Group is likely to face a Securities and Exchange Commission lawsuit over his stewardship of mortgage giant Fannie Mae.
Posted by Jonathan J. Miller -Thursday, March 3, 2011, 10:30 AM
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[click to expand]
We did some work for this hard money lender during the height of the boom and found them to be very conservative with appraised values in the NYC region. We got the impression that much of appraisal work (oddball, complex properties) in NYC had market values written down during the mortgage process.
They began to have trouble as the market dropped and we haven’t worked for them since the market correction. When I read yesterday’s OTS notice, I stumbled onto a familiar former client.
The “factual allegations” are fascinating.
III. FACTUAL ALLEGATIONS AND CHARGES
19. Without the knowledge or consent ofESSA, and contrary to the intention of ESSA, Respondent altered his Restated Guaranty so that instead ofrestating his personal guaranty ofthe Loans. the altered Restated Guaranty released Respondent from all personal liability for the Loans.
Respondent concealed the changes he made to his altered Restated Guaranty by having the changes typed in an identical type size and font as the original Restated Guaranty. In order to conceal the changes further. Respondent duplicated ESSA’s internal document management system authentication and identification mark in the original Restated Guaranty in Respondent’s retyped altered Restated Guaranty.
Respondent made the modifications to his Restated Guaranty without the knowledge, authorization, or approval of ESSA.
Respondent returned his altered Restated Ouaranty to ESSA without disclosing that he had made modifications to the document that materially changed the legal effeet ofhis Restated Guaranty.
With the belief that it had obtained unaltered executed Restated Guaranty documents from each of the members of Ivy Ridge, ESSA approved an extension on the maturity date ofthe Loans.
On or about August 7, 2008, Ivy Ridge defaulted on the Loans.
Yikes!
Personal guarantees are what join developers and construction lenders at the hip. Nothing is likely more sought after by developers than removing that guaranty from the books.
Posted by Jonathan J. Miller -Friday, January 28, 2011, 11:27 AM
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Guest Columnist:
Joe Palumbo, SRA
Palumbo On USPAP is a column written by a long time appraisal colleague and friend who is currently the Director of Valuation at Weichert Relocation Resources and a user of appraisal services. He spent seven years at Washington Mutual Bank where he was a First Vice President. Mr. Palumbo holds an SRA designation, is AQB certified and he is a State Certified residential appraiser licensed in New Jersey. Joe is well-versed on the ever changing landscape of the Uniform Standards of Professional Appraisal Practice [USPAP] and I am fortunate to have his contributions. View his earlier handiwork on Soapbox and his interview on The Housing Helix.
-Jonathan Miller
USPAP {Un}common Sense
It’s hard to believe that I am now reading the 4th exposure draft issued by the Appraisal Standards Board of the Appraisal Foundation on December 10, 2010. It seems like only last week when we all clamored about the 2010-2011 changes to USPAP, most notably, the changes to the Ethics Rule and the disclosure of prior services performed on a property. I leave that to rest for now since we have had plenty of time to debate the impact on the appraisal community and benefit to the public, which is the major impedes for all USPAP changes. There were certainly many lively debates that took place on the topic in and out of classrooms all over the country.
As we move on to 2011 and look ahead I want to present some perspective of the entire USPAP concept, brought to light interestingly enough, by a non-licensed appraiser- student in a 15-hour USPAP class that I had presented in November. Actually this person has very little practical experience to speak of but like many of the newcomers in the industry today she is taking all the courses in succession. This approach, while not the best approach to say the least, is what is happening these days, like it or not. The just-add-water=career concept has invaded the appraisal profession. Years ago it was the practical experience you gained first or in conjunction with the course work. Licensing has a lot to do with the “fast-track” mentality. Whatever the case or the disposition of the students, I usually give the 15-hour USPAP class the speech about how “difficult or different” the 15-hour USPAP course is say versus a Capitalization or Appraisal Principles class. Numbers and definitions are one thing, ethical concepts and interpretations are another. In a math class there can only be one answer, in a class of terms and principles, they are usually straight forward. Even so, there are several areas of USPAP that can be seen as common sense. This discovery was not mine alone but it was made by “Student X” during our 15 hours together.
Here are a few of “Student X’s discoveries. While discussing the merits of the Competency Rule, “Student X” asked, “Are there appraisers out there who take on assignments without knowing how to do an appraisal?” It seems to me like one should be confident in his or her ability or don’t do the appraisal”. “Isn’t this common sense?” “Right!” some of the students quipped, “problem is they think they are competent but their work indicates something else”. One of my favorites occurred during our discussion of Standard Rule 1-5 both “a” and “b”. This Standard requires the appraiser to “analyze” both the current agreement of sale and the prior sales that have occurred in within 3 years. When I gave examples of “shortcomings” I noted that some appraisers don’t indicate what efforts they made in the normal course of business to obtain a sales contract let alone provide a “dissection or breakdown” of the agreement. We talked also talked about the details of the current listing information sometimes missing. Student X responded about this being a “no-brainer”. Her comment was something like, “I would think the details of the contract, what the listing says would be very important in determining possible fraud, what may be included in the sale, or even just trying to piece the transaction together”. Student X went on about the 3-year prior sale, “geez aren’t most users going to ask about it anyway?”. “Just stating what it sold for does not seem like a big help either”, “a lot of this stuff seems to be common sense”. BINGO I cheered….and these types of dialogues went on a few other occasions over the 2-day class. During an extended discussion regarding Advisory Opinion 22 the concept of advocacy came up. Given Student X’s keen and consistent application of what seems logical I shouldn’t have been surprised to hear her take on advocacy relative to example of the lawyer who provides litigation support services (page A-71 line 272). His comment paraphrased was, “ I would imagine that if one were to gravitate toward advocating a client’s cause that would clash with the independence, impartiality and objectivity required when performing as an appraiser”. “Yes correct” I replied, “you cannot perform both roles at the same time, you must pick one”.
After Day 2 of the class there was an exam. As the room started to empty I noticed Student X, clearing out her belongings and leaving. “Good luck in your new career” I said. “How do you think you did?” I asked? She replied, “Ok I guess, I believe I answered most of them correctly except a few. On those that I was not sure of I just used some common sense”.
Policy prohibits me from revealing if Student X passed the exam. Regardless though, that’s not the point. Here is someone who has little practical experience in our industry. She took a few concepts that give some tenured appraisers a bit of trouble and she applied rational logic. Is all of USPAP that easy to get in its entirety? NO, definitely not. I don’t know what kind of appraiser Student X will be, but I like her approach using the “common sense approach” to problem solving.
In the words of Ben Franklin, “the problem with common sense is it is not so common”. Happy New Year.
Posted by Jonathan J. Miller -Monday, November 29, 2010, 10:49 AM
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The past week saw me replace blogging with eating. Time to lose some weight.
A supplier (bank) provides a vendor (appraisal firm) tens/hundreds of thousands of dollars worth of work over the year and the vendor wants to show his appreciation and extend the relationship by sending a box of candy and a thank you note. It’s meant to be a genuine sign of appreciation. Not a huge gift like a weekend jaunt to the Monaco via private jet, but a modest symbolic gesture…like sending a thank you note when receiving a birthday gift.
All during the credit boom and continuing through today we get compliance letters like this from banks:
Supplier Gift Policy
November 16, 2010
To: [Appraiser]
Dear [Appraiser],
[Bank] values the working relationship built with you and your firm as a provider of appraisal services. A very important aspect of this relationship is maintaining the independence of our respective roles related to the valuation of commercial real estate in support of the Bank’s credit transactions. During past holiday seasons, we have received gifts from suppliers that have been taken as an expression of appreciation of our working relationship. However, supplier gifts have the potential to create perceptions of less than strict independence and even conflict of interest. So, while we appreciate the wide variety of holidays and associated traditions at this time of year, we encourage you to refrain from sending gifts to individuals within our group or to the group as a whole.
Thank you for your consideration and, of course, your services to [Bank] in the future.
Sincerely,
I do realize that this gesture can and was abused but where is the line for common sense?
I remember during the credit/housing boom, we got these letters while I observed collusion and self-dealing that banks, mortgage brokers, Wall Street firms and others were perpetuating.
Translation:
I can’t give you a box of chocolate but if I never kill a transaction by appraising something low I will get lots and lots of work [wink].
In our jaded post-credit crunch world I still find it especially grating and hollow to receive these letters in our newly found “awareness” of the problem.
I have an idea! Let’s regulate the &^%* out of everything and like a rare disease then we’ll never see this problem again.
Right.
Posted by Jonathan J. Miller -Wednesday, October 20, 2010, 11:01 PM
6 Comments
This past Sunday I drove to Philly from New York and was 4 blocks away from my destination: The Counselors of Real Estate Conference. As I passed through the intersection at 15th Street and Vine, a young kid blew through a red light and hit my car hard without warning and then ran into an SUV.
My car was rocked and I had no idea what happened. I pulled over, numb and saw the two other cars in the intersection. I scrambled out of my car and called 911 for help. The other cars were able to limp out of the intersection to safety. No one was hurt but I’ll spare all the details.
And then something happened that I hadn’t expected.
The kid driving one of the cars came up to me and apologized profusely – he was talking to his brother and friend in his car and wasn’t paying attention. He turned away from the road and when he turned back, he hit my car. If I had entered the intersection less than a second later, he would have t-boned me at 45 mph instead of shearing off my bumper and I probably wouldn’t be typing this post.
His honesty cleared the air and made all three of us with damaged cars actually relax despite the stress of the situation. We ended up chatting sports, etc. for the next few hours as the state and city police tried to figure out who had jurisdiction at the intersection.
Porsche: There is no substitute.
The fact that this happened (it was the first time a car I was driving was hit by another car) was especially ironic because I was on an ethics panel discussion at the CRE conference the following day. Not the “how do I not get in trouble” ethics, but rather the “how do I be a better professional” ethics.
Business ethics remain a challenge in todays post-credit crunch meltdown. Anyone that lived through the credit boom and its “flexible morality” is probably involved in rebuilding the system (a scary thought) – but hopefully with better values (no pun intended).
The recent mortgage debacle is an example of the moral flexibility rampant in our financial services industry – surprisingly, much of that flexibility seems to be on temporary hiatus rather than a structural change.
Here’s a new one:
Honesty: There is no substitute.
Posted by Jonathan J. Miller -Thursday, September 16, 2010, 7:46 AM
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Since everyone is into self-loathing these days, I thought I’d wrap in two other related thoughts.
The Lowball Culture
My friend Dan Gross provides a provocative twist to the “why is the economy taking so long to recover” discussion in his Rock-Bottom Prices! How our new lowball culture is hurting the recovery piece for Newsweek I remember feeling this way beginning in early 2009 when a sale wasn’t worth investigating unless the discount was at least 70%. I’ve since marveled at how retail sales didn’t fall more than the sales suggested.
Welcome to the lowball culture. In a world of sluggish growth, excess capacity, and depressed expectations, buyers of goods and services—labor, houses, and restaurant meals, among others—have come to believe that desperate sellers should take any offer they make. But that kind of systemic bargain hunting can create a dangerous spiral: employers short-change workers, workers buy fewer goods—and the overall economy suffers.
Here was my take on the housing sector:
But plenty of smart people simply are taking advantage of changed circumstances. Take the housing market. In 2005 and 2006, at the height of the bubble, real-estate agents advised clients to offer the asking price and be willing to bid higher. In today’s housing market, which is glutted by inventory and foreclosure sales made by banks, the opposite dynamic is in play. Buyers toss in a lowball offer and see if it sticks. The most a seller can do is decline. During the housing boom, the listing discount—the difference between the list price of a home and the price at which it went to contract—was usually about 2 percent below the asking price. In the New York region, a comparatively healthy housing market, the discount was 9.1 percent in the second quarter. “The chasm between buyer and seller is wider than it has been in the past, and the wider the chasm, the lower the amount of sales activity,” says Jonathan Miller, chief executive officer of New York–based appraisal firm Miller Samuel.
Walking Away is OK
Strategic defaults, the the idea of walking away from your home intentionally doesn’t seem to bring the same level of shame it once did. Likely because so many homeowners never had skin in the game, paying little or no money down.
A majority of Americans say it is “unacceptable” for homeowners to stop making their mortgage payments and abandon their homes, according to a Pew Research Center survey. But more than a third (36%) say the practice of “walking away” from a home mortgage is acceptable, at least under certain circumstances.
However, this phenomenon that is getting so much attention, seems to be overshadowing the basic tenet that:
Even in the worst of economic times, most Americans believe in paying their bills. Majorities of every core demographic group measured in the Pew Research survey agree that walking away from a mortgage is unacceptable.
Posted by Jonathan Miller -Tuesday, March 16, 2010, 12:01 AM
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I was provided an interesting solution to the AMC appraisal issue from Tony Pistilli, a certified residential appraiser who has been employed for over 25 years in the appraisal area, at governmental agencies, mortgage companies, banks and has been self employed.
He wants appraisers to get the word out. His solution is compelling.
Anyone who reads Matrix knows what I think of the Appraisal Management Company and the Home Valuation Code of Conduct (HVCC) problem in today’s mortgage lending world.
Here’s a summary of the his article before you read it:
- Appraisers, Realtors, Brokers HATE the HVCC.
- AMC’s and Banks LOVE the HVCC.
- Regulators are disconnected from the problem just like they were when mortgage brokers controlled the ordering of appraisals during the credit boom.
- Appraisers and borrowers are paying for services the banks receive.
- Banks should pay for the services received from the AMC’s.
- Appraiser’s fees should be market driven.
- Banks should be held accountable for the quality of the appraisal.
AMC/HVCC appears to violate RESPA (Real Estate Settlement Procedures Act) since a large portion of the appraisal fee is actually going for something else coming off the market rate fee of the appraiser.
(RESPA) was created because various companies associated with the buying and selling of real estate, such as lenders, realtors, construction companies and title insurance companies were often engaging in providing undisclosed Kickbacks to each other, inflating the costs of real estate transactions and obscuring price competition by facilitating bait-and-switch tactics.
The Ultimate Solution for the Appraisal Industry
by Tony Pistilli, Certified Residential Appraiser and Vice-Chair, Minnesota Department of Commerce, Real Estate Appraiser Advisory Board, Minneapolis, Minnesota
—
Since the inception of the Home Valuation Code of Conduct (HVCC) in May 2009, there has been much discussion, and misinformation, about the benefits and harm caused by the controversial agreement with the New York Attorney Generals office and the Federal Housing Finance Agency. This agreement, originally made with the Office of Federal Housing Enterprise Oversight, requires Fannie Mae and Freddie Mac to only accept appraisals ordered from parties independent to the loan production process. Essentially, this means, anyone that may get paid by a successful closing of the loan cannot order the appraisal.
In the past 6 months while the Realtors© and Mortgage Brokers associations point fingers at appraisal management companies for their use of incompetent appraisers who don’t understand the local markets, appraisers are complaining that banks are abdicating their regulatory requirements to obtain credible appraisals by forcing them to go through appraisal management companies at half of their normal fee.
Banking regulations allow banks to utilize the services of third party providers like appraisal management companies, but ultimately hold the bank accountable for the quality of the appraisal. Unfortunately, the banking regulators have yet to express a concern that there is a problem with the current situation.
I need to state that appraisal management companies can provide a valuable service to the lending industry by ordering appraisals, managing a panel of appraisers, performing quality reviews of the appraisals, etc. However, banks have been enticed by appraisal management companies to turn over their responsibility for ordering appraisals with arrangements that ultimately do not cost them anything.
The arrangement works like this, the bank collects a fee for the appraisal from the borrower; orders an appraisal from the appraisal management company who in turn assigns the appraisal to be done by an independent appraiser or appraisal company. During this process the appraisal fee paid by the borrower gets paid to the appraisal management company who retains approximately 40% to 50% and pays the appraiser the remainder. So for the $400 appraisal fee being charged to the borrower, the appraiser is actually being paid $160-$200 for the appraisal. Absent an appraisal management company the reasonable and customary fee for the appraisers service would be $400, not the $160 to $200 currently being paid to appraisers.
Rules within the Real Estate Settlement Procedures Act (RESPA) have allowed this situation to occur, despite prohibitions against receiving unearned fees, kickbacks and the marking up of third party services, like appraisals. RESPA clearly states, “Payments in excess of the reasonable value of goods provided or services rendered are considered kickbacks”.
Banks are allowed to collect a loan origination fee. This fee is intended to cover the costs of the bank related to underwriting and approving a loan. Ordering and reviewing an appraisal is certainly a part of that process. Understanding that banks ultimately have the regulatory requirement to obtain the appraisal for their lending functions, why is it that borrowers and appraisers are paying for these services that are outsourced to appraisal management companies? Does the borrower benefit from a bank hiring an appraisal management company? Does an appraiser benefit from a bank hiring an appraisal management company? The answer to those two questions is a very resounding, no! Clearly the only one in the equation that benefits is the bank, so why shouldn’t the banks be required to pay for the outsourcing of the appraisal ordering and review process?
It is here where I believe the solution for the appraisal industry exists. Since banks are the obvious benefactor from the appraisal management company services, the regulators should require that the banks, not the borrowers or appraisers, pay for the services received. This one small change in the current business model would allow appraisers to receive a reasonable fee for their services and in turn they should be held more accountable for the quality and credibility of the appraisals they perform. Appraisal fees would be competitive among appraisers in their local markets, much like the professional fees charged by accountants, attorneys, dentists and doctors. Appraisal management companies would suddenly be thrust into a more competitive situation where their services can be itemized and their quality and price be compared to those of competing providers. This will ultimately lead to lower fees and improved quality of services to the banks. The banks will then have a very quantifiable choice, do they continue to outsource their obligations to an appraisal management company and pay for those services or do they create an internal structure to manage the appraisal ordering and review process? Either way, the banking regulators need to hold the banks more accountable at the end of the process.
When all of the previously discussed elements are present, I believe the appraisal industry will be functioning the way it was intended. Appraisal independence will be enhanced and borrowers will be rewarded with greater quality and reliability in the appraisal process. This is exactly the change that is needed, in addition to the HVCC, to stop the current finger pointing and address the poor quality and non-independent appraisals that have been and are still rampant in the industry.
Posted by Jonathan Miller -Tuesday, February 2, 2010, 1:43 AM
2 Comments
I always thought “The Appraiser” was a good name for a reality tv show. Unfortunately, the reality is real and the appraisal process is one of those accidents waiting to happen.
There is a tongue in cheek style article by Sheree Curry in the recently ramped up HousingWatch page on AOL
Are Appraisals the New Organized Crime?
that essentially takes some of the burden off of other parties in the real estate transaction such as mortgage brokers, and places it on the shoulders of appraisers. In many cases, rightfully so.
Of course this doesn’t apply to all appraisers and in fact many appraisers aren’t really…appraisers. More like form fillers.
And some are appraisers are going to have their day in court – but not enough of them.
Here’s a related article I authored for American Banker last summer called:
Then Don’t Call It An Appraisal.
Hey, you got a problem with that?
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