[Vortex] Fee Simplistic: Needed – Driving the Wooden Stake In the Bank/AMC Vampire

Posted by Jonathan J. Miller -Sunday, June 14, 2009, 1:16 PM
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Guest Appraiser Columnist:
Martin Tessler, CRE

Fee Simplistic is a regular post by Martin Tessler, CRE whom after 30 years of commercial fee appraiser-related experience, gets to the bottom of real issues by seeing both the trees and the forest. Marty has never been accused of being a man of few words and his commentary can’t be inspired on a specific day of the week.
…Jonathan Miller

The Wall Street Journal article of June 9th entitled, “Appraisals Roil Real Estate Deals” should be required reading for anyone who has opined to an opinion of home value. For those who missed it, the article details the swing of the pendulum from the high flying days of pre- 2007 when appraisers could not come in with values or, should I dare say, “numbers” high enough to justify a loan. In comparison, today’s lending world has swung 180 degrees to the low end of the pendulum where no value can presumably be low enough. The article goes on to portray the “usual suspects”- house values that have plummeted from the sky high years to todays’ nadir with some added color such as:

• A Fairfield County CT appraisal that came in at $50,000 below the contract price necessitating either a new appraisal or renegotiation.
• A JPMorgan Chase home equity line of credit predicated upon a 2,650 sq ft Manhattan duplex appraised at $1.475 MM in 2005 being reduced due to the bank’s estimate coming in at $600,000. The borrower then was able to produce a new appraisal that valued the property at $1.8MM. A spokesperson for the bank said that they use “an automated appraisal system on our portfolio” and that they encourage borrowers who feel that if their valuation is too low to order an outside appraisal and will reimburse them if it supports their claim.
• Banks requiring appraisers to use sales comps that closed within the past 90 days with some asking for at least one sale within 30 days.
• Agreement by the appraisal industry and Fannie/Freddie to adopt the Home Valuation Code of Conduct intended to prevent loan officers, mortgage brokers or real estate agents from selecting appraisers. This is to shield them from pressure on coming up with pre-ordered values, a major issue raised by NY State Attorney General Cuomo and on several postings in Matrix/Soapbox last year.

A significant issue not quelled by the Code is that it allows if not encourages lenders to outsource the selection to appraisal management companies or AMC’s who will charge the appraisal firm anywhere from 30%-40% of the fee for administration, overhead and, pardon the sarcasm, quality control. Exacerbating the problem is that lenders can own stakes in AMC’s. Thus, the conflict of interest is ever present.

Reports are prevalent that AMC’s shop around for the lowest appraisal fees that frequently end up on the desks of appraisers who are geographically distant from the subject property’s market, are not fully familiar with the local market and thus present sales that are not directly relevant.

It is obvious that AMC’s are clearly conflicted if owned either partially or fully by a lender. They are recipients of profits generated by a company that is not arm’s length from their fiduciary role where they require the borrower to buy the service. As for tools such as JPMorgan Chase’s “automated appraisal system” these are only rough guides to average or ranges of value from a large data bank of properties and extreme care must be taken in applying such macro data to a specific property or micro set. It is therefore not surprising that Chase allows for an independent appraisal although I’m not sure that it allows the borrower to select the appraiser as the article implies and, if so, it’s a violation of FIRREA if not the Code.

If no reforms of the Code are made to disallow AMC’s from ownership by lenders it is my opinion that history is doomed to repeat itself in the next frenzied lending cycle. Let’s get the stake ready now.

[Vortex] Fee Simplistic: Staying Ahead of the Curve – What’s Next?

Posted by Jonathan J. Miller -Sunday, May 3, 2009, 7:57 PM
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Guest Appraiser Columnist:
Martin Tessler, CRE

Fee Simplistic is a regular post by Martin Tessler, CRE whom after more than 30 years of commercial fee appraiser-related experience, gets to the bottom of real issues by seeing the both the trees and the forest. Marty has never been accused of being a man of few words and his commentary can’t be inspired on a specific day of the week. View his earlier handiwork on Soapbox.
…Jonathan Miller

Having recently attended the Counselor’s of Real Estate (CRE) Mid-Year Conference at the Waldorf Astoria I came away with one speaker’s astute findings on where the market is likely heading. Robert White, Jr. CEO of Real Capital Analytics wins the cigar for the most astute commentary on where we are in the marketplace and for not belaboring the obvious: * US commercial property prices are down 21% from ‘07’/08 peak to October ’05 pricing levels * Sellers are adjusting slowly to pricing changes while investors are in no hurry to buy * Banks are not dumping REO assets as it would jeopardize their capital base * Troubled assets are increasing by $6-$8 billion monthly in foreclosures but deeds are not changing hands due to capital base problem * Sales are rare but offerings are growing as sellers head toward distress

What does this mean to the appraisal world and how are we to gauge the market in the absence of sales and financing?

One must take into account that we are readjusting to a frenzied market that extended over many years fueled by easy credit and low interest rates. A new market reality will be evolving over time (if it is not already underway) that will replace the mindset created by the financing bubble best summed up by an article in the Wall Street Journal of April 6th entitled, “From Bubble to Depression”.

In the article the authors note that “Bubbles can arise when some agents buy not on fundamental value but on price trend or momentum” (emphasis added). There is no question that the market through mid 2007 acted in this manner and appraisers were ethically and legally bound to implement this reportage in their valuations.

What this portends to the appraisal world is that valuations stemming from discounted cash flow analyses is that most emphasis will be placed on income in place compared to projected income based on assumptions of growth in rents or lowered cap rates.

The caveat to appraisers is: “watch those assumptions”.

It will no longer be: “tell me the value you need and I’ll tell you what assumption you need to get there”.