Posted by Jonathan J. Miller -Monday, March 19, 2012, 1:11 PM
Federal Reserve Bank of Cleveland
I ran across this story in the Financial Times, based on a research piece by the Cleveland Fed, called Overvaluing Residential Properties and the Growing Glut of REO.
ALERT: There is a significant financial penalty to banks and homeowners when a lender uses shoddy valuation methods to determine the market value of a home.
This finding especially interesting to me because so many rant about appraisal values being too low, when in the case of REO, its because the values are too high. In either scenario it comes down to the banks’ reliance on cheap and fast automated valuation models (think garbage data in, garbage results out interpreted by gum chewing teenagers just out of high school) or appraisal management companies who rely on appraisers with limited, if any local market (requirement: licensed in the state, 24-48 hour turn times, agree to work for 50% of market rate).
Call me crazy but I have been ranting about this for years and yes, I have a vested interest in the outcome. The banking industry now sees the appraisal process as a cost function have-to-do and not a tool to mitigate risk. By encouraging the use of cheap automated valuation models and appraisal management companies to save money, they end up with an invalid benchmark to make a decision that adversely impact people’s lives. Crappy appraisal quality becomes a self-fulfilling prophecy for the bank which then drives their desire to automate and pay virtually nothing for valuation services even though the product is awful.
The research suggests banks could reduce the number of foreclosures by improving their estimates of what such homes will be worth. If their estimate of foreclosure value is lower, banks may choose to offer a loan modification to a struggling borrower instead, letting them stay in their house.
The Cleveland Fed concluded from their research the following items that impact REO policy decisions as a result of faulty valuations:
- The first is that they may not actually be overvaluing property at all, but rather placing the minimum bid knowing the property is not worth it.
- Lenders may be overvaluing properties because their valuation methods—which they use because they work well in most markets—don’t happen to work well in weak ones.
- Finally, there may be incentives that encourage lenders to overvalue foreclosed properties. Doing so would allow them to shift accounting losses from their loan portfolio to their REO portfolio.
Posted by Jonathan J. Miller -Thursday, June 10, 2010, 10:04 AM
Ahhh, 2007 seems like only yesterday when I wrote about NY AG Cuomo’s lawsuit against First American’s appraisal unit, eAppraisIT
Please note: eAppraisIT’s tagline is “redefining value.”
“The attorney general claims that defendants engaged in fraudulent, deceptive and illegal business practices by allegedly permitting eAppraiseIT residential real estate appraisers to be influenced by nonparty Washington Mutual,” presiding justice Luis Gonzalez wrote in today’s unanimous decision. “We conclude that neither federal statutes, nor the regulations and guidelines implemented by the OTS, preclude the Attorney General of the State of New York from pursuing litigation.”
The institutions in my 2007 post have seen change:
- OTS…soon to be gone!
- First American…renamed CoreLogic.
- eAppraisIT…business as usual.
New York can proceed with a lawsuit accusing title insurer First American Corp of colluding with Washington Mutual Inc. to fraudulently inflate home values, a state appeals court unanimously ruled on Tuesday.
Attorney General Andrew Cuomo had accused First American and its eAppraiseIT unit in a November 2007 lawsuit of having “caved” to pressure from Washington Mutual to use a list of pre-approved appraisers who provided inflated appraisals, in an effort to win more business.
I have to confess I’m not too neutral here on this issue – a few years ago, I decided not to renew one of our FirstAmerican subscription resources (floorplans) since we had access to more cost effective resources. Despite the cancellation at the end of the contract period, FirstAmerican continued to bill us every month for a year despite dozens of calls by me, then proceeded to threaten us with collection and then ultimately sent us to collection. This was because I opted not to renew my subscription. They couldn’t get us out of their billing system. Scary. On top of that, they never sent the product (they always send the product and then bill you).
I finally resorted to screaming and yelling until I finally got it resolved. I’ve never experienced anything like that before.
So its hard to believe an appraisal management company owned by FirstAmerican was above reproach but the courts will decide, not a disaffected (you should see the emails between Wamu and FirstAmerican presented in the Cuomo lawsuit. The link to the original lawsuit document is broken now but trust me, the emails were a doozy – here’s the Wamu 10k filing).
A False Premise and a Certain Irony
Here’s irony I can’t shake. Cuomo’s Home Valuation Code of Conduct agreement between Fannie Mae and his office change the landscape of bank appraisal work forever. What started out as good intentions to stop the conflict of interest between mortgage brokers and appraisers, ended up enabling the appraisal management company (AMC) institution which is what eAppraisIT is. The lawsuit shows that AMC are MORE exposed to bank pressure than individual appraisers are.