Posted by Jonathan J. Miller -Sunday, June 14, 2009, 1:16 PM
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 canâ€™t be inspired on a specific day of the week.
The Wall Street Journal article of June 9th entitled, â€œAppraisals Roil Real Estate Dealsâ€ 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, â€œnumbersâ€ high enough to justify a loan. In comparison, todayâ€™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 â€œusual suspectsâ€- house values that have plummeted from the sky high years to todaysâ€™ nadir with some added color such as:
â€¢ A Fairfield County CT appraisal that came in at $50,000 below the contract price necessitating either a new appraisal or renegotiation.
â€¢ 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 bankâ€™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 â€œan automated appraisal system on our portfolioâ€ 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.
â€¢ 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.
â€¢ 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 AMCâ€™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 AMCâ€™s. Thus, the conflict of interest is ever present.
Reports are prevalent that AMCâ€™s shop around for the lowest appraisal fees that frequently end up on the desks of appraisers who are geographically distant from the subject propertyâ€™s market, are not fully familiar with the local market and thus present sales that are not directly relevant.
It is obvious that AMCâ€™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 armâ€™s length from their fiduciary role where they require the borrower to buy the service. As for tools such as JPMorgan Chaseâ€™s â€œautomated appraisal systemâ€ 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 Iâ€™m not sure that it allows the borrower to select the appraiser as the article implies and, if so, itâ€™s a violation of FIRREA if not the Code.
If no reforms of the Code are made to disallow AMCâ€™s from ownership by lenders it is my opinion that history is doomed to repeat itself in the next frenzied lending cycle. Letâ€™s get the stake ready now.