Posted by Jonathan Miller -Monday, January 4, 2010, 12:20 AM
A bit of year end housecleaning…
I know this story is two weeks old, but it concerns the appraiser on Long Island who was arrested for making death threats to New York State Attorney General Cuomo. Apparently he was upset about Cuomo’s May 1, agreement with Fannie Mae that was hoped to control mortgage-related fraud.
As I’ve written here on many occasions, the HVCC agreement, despite good intentions, actually made the appraisal profession worse and exposed banks to far inferior appraisal quality by enabling appraisal management companies.
Of course, I’m not condoning this sort of behavior. Whether proven guilty or not, his life is going to change substantially and not for the better.
Ok, back to work.
Posted by Jonathan J. Miller -Tuesday, October 27, 2009, 4:10 PM
Oops! Wrong HVCC (not Huron Valley Corvette Club).
We’re talking Home Valuation Code of Conduct and its quickly running its own course (sorry).
Last week, an amendment was added to the Consumer Financial Protection Act of 2009 that would effectively “Sunset” the Home Valuation Code of Conduct or “HVCC” (pronounced “Havoc”).
From Valuation Review magazine:
An amendment was added late Wednesday Oct. 21 to the Consumer Financial Protection Act of 2009 that
would sunset the HVCC, allow appraisals to be ordered by mortgage brokers again and would make a new
Negotiated Rulemaking Committee responsible for creating one set of appraisal independence requirements
across all the federal agencies.
This amendment was championed by the National Association of Mortgage Brokers (NAMB) who were dead set against HVCC for very different reasons than the best appraisers in the industry are. Regardless, HVCC is a systemic accident waiting to happen.
Setting aside the weak production quality, this video is a great source of clarification about the misunderstands surrounding HVCC.
Mortgage brokers were targeted by HVCC as providing undue pressure on appraisers for overvaluation. Systemically, thats absolutely true – of course there are always exceptions. But you can’t rely on the honor system for a financial system structure – thats what where we just came from.
Mortgage brokers get paid when the transaction closes. Guess what kind of appraiser thrived in this kind of environment? Form-fillers.
However, removing mortgage brokers from the process enabled AMC’s which are even more problematic, providing low biased appraisals. Simplistic assessments of the removal of HVCC as a good thing for appraisers is short sighted.
How about the public getting a lending system that has a neutral appraisal environment so the parties getting paid don’t game the system? That means that appraisers shouldn’t be getting assignments from individuals whose commission depends on the outcome. If HVCC is removed and we revert to the prior way of doing business, its a missed opportunity to give consumers fair valuations.
To demonstrate how detached from reality Freddie Mac is, they seem to think HVCC has improved appraisal quality?
This is an opportunity to break free of the past and break free of HVCC and replace it with a better way.
Posted by Jonathan J. Miller -Monday, August 24, 2009, 11:53 PM
I often disagree with NAR and have frequently pointed out their missed opportunity to earn the public trust despite their interests as a trade organization, but hey – they are coming from a different vantage point. However this time I agree with their view on the Home Valuation Code of Conduct (the position itself rather than how they get to it.)
There’s a good article on HVCC which tells the story from the appraiser’s perspective called: “The Trouble With the HVCC: How new rules meant to ensure the integrity of the appraisal process have infuriated appraisers and stymied sales from coast to coast.“
I am quoted in the opening of the piece.
“You can’t make this up,” New York appraiser Jonathan Miller riffed in his entertaining blog, Matrix, back in June.
Miller was recounting the frustration of a real estate salesperson who was trying to refinance her own New York apartment with her current lender. According to Miller’s telling, the out-of-town appraiser walked into the apartment, threw his hands in the air, and asked “How am I supposed to appraise this thing?”
My always insightful appraisal colleague Francois (Frank) K. Gregoire, IFA, RAA, with Gregoire & Gregoire Inc., of St. Petersburg, Florida has one of the best quotes in the piece:
The HVCC sets up AMCs as the guardians of appraiser independence, and isn’t it ironic that the investigation that prompted the rules centered on an AMC allegedly manipulating the system to please its customer?
He is referring to New York State Attorney General Cuomo’s lawsuit against eAppraisIT and it’s relationship with WaMu.
Posted by Jonathan J. Miller -Monday, August 24, 2009, 11:24 PM
I stumbled on a really great blog on the American Banker site called BankThink and it’s worth checking back on a regular basis.
Webmaster/Journalist Emily Flitter asked me to contribute a guest column on the current state of appraising. I named it:
Then Don’t Call It An Appraisal.
I hope you enjoy it.
Here’s a local copy of the article:
The trillions in adverse financial exposure and lost economic opportunity were supposed to teach us, especially those of us connected with the banking system, something about risk. But a look at the latest trend in home appraisal practices shows that although the relationship between mortgage lenders and appraisers may look different on the surface, its nature remains troubled.
As a rule, appraisers are generally ignored until we make a mistake. Weâ€™re the back-of-the-house worker bees. During the housing boom (actually a credit boom with a housing boom as a symptom), an appraisal was relegated to a commodity status like a flood certification. Without much political clout or public awareness, we werenâ€™t used to being in the spotlight. Weâ€™re finding it not at all flattering.
Mortgage brokersâ€™ business swelled during the boom years and many participated in compromising as much as two thirds of the residential mortgage lending business at peak – they only got paid if they could close the deal. That took an appraisal. Guess what type of appraiser was hired en masse? The ones who provided the â€œrightâ€ value.
How did things work in the banking industry? During the boom, in-house appraisal review departments were closed in most US Banks because they were â€œcostâ€ centers. Mergers and consolidation caused lenders to lose local relationships with appraisers.
After the September financial system tipping point, it seemed like we appraisers might get an opportunity to redeem ourselves. After all, we were part of the problem along with regulators, investment banks, commercial banks, ratings agencies, real estate brokers, mortgage brokers, mortgage bankers and consumers. One big happy party.
Regulators have set out new guidelines on appraisals for lenders. The Home Valuation Code of Conduct, pronounced â€œHavocâ€ is an agreement between New York State Attorney General Andrew Cuomo and Fannie Mae that was intended to change everything.
Comp Checks, inquiries in which an appraiser was often asked to assure a floor value for a property without actually performing an appraisal, are over. Mortgage brokers canâ€™t order appraisals anymore â€“ otherwise the bank canâ€™t sell the paper to Fannie Mae.
But not much else has changed. Lenders now call appraisal management companies who pay the appraiser half their wage (fees for AMCs are lower than appraisal fees paid 20 years ago) and require 24 â€“ 48 hour turn times without exception.
The National Association of Realtors wants appraisers to use â€œgoodâ€ comps and ignore foreclosure activity because we are â€œkilling the recovery.â€
Many of the ethical â€œappraisersâ€ have been forced to seek new types of work or switch careers, as they have been replaced by an army of â€œform-fillers.â€
After all of the financial system turmoil, not much has changed in the mortgage process as it relates to appraisers. A conversation with a loan consultant we had last week perhaps best exemplifies how detached from reality many in the lending community really are.
One of my staff appraisers recapped to me a direct conversation with a loan consultant at a large national bank. The consultant had contacted the appraiser to complain about the appraised value not being high enough on several occasions, even bringing the borrower in without advanced notice to the appraiser on one of the calls. This is a frequent conversation and itâ€™s getting old.
When trying to get an understanding of the collateral, does the banking industry want to know what the value is from a neutral source or not? If not, donâ€™t call it an appraisal because its not.
Jonathan Miller is a real estate appraisal consultant in New York. He is the co-founder of the residential appraiser Miller Samuel, and a managing principal of the commercial appraiser Miller Cicero.
Posted by Jonathan J. Miller -Friday, August 21, 2009, 12:26 AM
In this podcast I speak with Joseph Palumbo, SRA, Director of Valuation and Appraisal Management, Weichert Relocation Resources. He manages a nationwide vendor network and an in-house staff of certified review appraisers.
We talk relocation industry, USPAP, HVCC, todayâ€™s appraiser and finding $5 in both your pockets.
Check out the podcast
The Housing Helix Podcast Interview List
You can subscribe on iTunes or simply listen to the podcast on my other blog The Housing Helix.
Posted by Jonathan J. Miller -Wednesday, August 19, 2009, 12:10 AM
Nothing has changed on the appraiser pressure front. with or without HVCC.
Appraisers are subject to the same sales force pressure as before. Here is a [redacted] email conversation with a loan consultant yesterday at a large national bank when the value was not high enough to their liking on a refi. We initially assumed this person from the bank was an underwriter, although in retrospect, it was obvious from the beginning he was not.
Bank (loan consultant): I really hope this is a joke he paid xx and put in xx milllion in work.
Appraiser: …if you have [new] data we can always take a second look.
Bank (loan consultant): please have [appraiser] call the client [actually it was the borrower!] to discuss asap the client [borrower] is furious
Appraiser: …have the head of your appraisal department call us. I didnâ€™t realize you are the loan officer. Itâ€™s a violation of ethics law for you to be contacting us.
Bank (loan consultant): [Another bank] allows us to contact the appraiser.
Isn’t this an amazing conversation?
This practice continues to happen and we continue to be just as flabbergasted each time it does. The loan officer wants the appraiser to answer to the borrower [News flash: the appraisal was done for the bank].
Don’t lenders want the collateral assessed accurately? Are they even aware that this sort of thing remains fairly common?
The mortgage lending process continues to remain broken, a joke.
Posted by Jonathan J. Miller -Tuesday, July 14, 2009, 12:53 AM
NAHB regroup on the HVCC/Appraisal issue from after a very silly press release a few weeks ago to a more coherent message in the to the current press release [FAULTY APPRAISAL PROCESS HARMING HOUSING AND THE ECONOMY} which has more stats.
Twenty-six percent of builders are seeing signed sales contracts fall through the cracks because appraisals on their homes are coming in below the contract sales price, according to a nationwide survey conducted by the National Association of Home Builders (NAHB).
â€œHome builders are increasingly concerned that inappropriate appraisal practices are needlessly driving down home values. This, in turn, is slowing new home sales, causing more workers to lose their jobs and putting a drag on the economic recovery,â€ said NAHB Chairman Joe Robson, a home builder from Tulsa, Okla.
Ok, I can relate to this but the 26% figure is much higher than I would have thought, and I see myself as an appraisal pessimist these days. NAHB essentially defines faulty as “killing the deal” which is a very thin standard, but still their argument has merit.
This press release comes on the heels of the NAR press release in the form of research that said that 37% of all realtors have had 1 or more deals blow up because of the appraiser.
Lost sales were reported by 37 percent of RealtorsÂ® attempting to complete home sales, with 17 percent reporting one lost sale and 20 percent reporting more than one lost sale.
Approximately 85 percent of NAR Appraiser members reported a perceived reduction in appraisal quality.
Although these are trade groups and are known for spinning on behalf of their members, in this case, I do believe they are right. Appraisal quality has fallen sharply and the fact that Appraisal Management Companies (AMC) being enabled by HVCC has a lot to do with that.
Here’s how the AMC trade group responds to appraisal criticism from real estate agent and mortgage broker trade groups.
Realtors and mortgage brokers say the new procedures tend to produce below-market valuations that can delay or kill pending deals. Consumers are paying for the changes in higher fees and subsequent appraisals when the property doesn’t price right initially, they claim.
Such complaints are a “gross mischaracterization” that merely parrot talking points circulated by industry trade groups, said Jeff Schurman, executive director of the Title Appraisal Vendor Management Association, itself a professional organization representing AMCs.
“The way they tell the story, it sounds like we’re a bunch of cowboys who have come on the scene to take advantage of the situation,” he said. “We’ve been around since the 1960s.”
Yes that’s true Jeff, but it became an issue on May 1 when HVCC was implemented. The 1960’s cowboy analogy is like saying the Internet has been around since the 1960s.
Technically a true statement but a wildly misleading reference (much like many AMC appraisals).
Posted by Jonathan J. Miller -Tuesday, June 30, 2009, 11:36 PM
I did another stint on Fox Business News covering the The Home Valuation Code of Conduct (HVCC) and how appraisers feel about it.
Last week I did an interview about HVCC on FBN with Neil Cavuto. I’ve been interviewed by each of the anchors Brian Sullivan and Dagen McDowell on prior occasions. Both very nice people. Always fun to do these.
View the clip.
Posted by Jonathan J. Miller -Tuesday, June 30, 2009, 2:54 PM
Here’s a cool WSJ interactive map on the results and here is the official CSI press release.
The general media coverage focus on the April S&P Case Shiller numbers talks a lot about the 3rd consecutive month of the ease in the rate of price declines. But the jobs outlook slipped, sapping consumer confidence.
An interesting, and in my view, likely housing double dip may be seen in the Case Shiller Index caused by performance differences in the bottom and and top half the the market.
Here’s the 20-city breakdown:
While the Case Shiller Index isn’t a tool to price specific property or markets, it shows macro trends and does a lot to set consumer housing market psychology.
Here’s Shiller’s interview on Fox Business today (I was interviewed by the same anchors about 30 minutes later on the issue of HVCC) talking about his new trading tool for housing. Mike at Altos Research does a brilliant job explaining how the new ETF works.
Posted by Jonathan J. Miller -Wednesday, June 24, 2009, 9:55 AM
Ok, so I’m kidding. But read further.
In my previous post, I address the swirl of interest in the appraisal part of the home sale process brought about by NAR’s Existing Home Sale press release yesterday where they blame appraisers for preventing the housing recovery.
On the same day, the National Association of Home Builders issue a press release specifically addressing the need for new appraisal guidelines. Betting money says the two organizations (NAHB & NAR) coordinated release to get more bang for the press buck, so to speak.
Did you ever think something was terribly wrong, but you didn’t understand why? If you haven’t, then you should definitely read NAHB’s press release.
I’ll lay it out here commenting on each paragraph. It you find it to be too much (most sane people), skip to the conclusion at the bottom.
Using foreclosed and distressed sales as comparables with appraisals on single-family homes without adequately reflecting the differences in the condition of the respective properties is needlessly driving down home values, according to the National Association of Home Builders (NAHB).
If foreclosures are competing with the open market sales in the neighborhood – guess what? That’s the market at that point in time. I strongly agree with their point that appraisers need to confirm condition of foreclosure sales if they use them as comps. It’s not that hard. AN APPRAISER SHOULD NEVER USE A COMP UNLESS THEY KNOW SOMETHING ABOUT IT. Otherwise, it can’t be comparable, by definition. Of course, the caliber of appraisers performing mortgage lending appraisals is falling rapidly with the proliferation of AMCs. That’s the real issue here.
â€œAny home buyer can recognize the difference between a well-kept home and a distressed property that is damaged or not properly maintained. So it only makes sense that an appraiser should be required to consider the overall condition of a property and the specific factors related to a foreclosure or distressed property sale when selecting and adjusting the value of comparables,â€ said NAHB Chairman Joe Robson, a home builder from Tulsa, Okla.
We already are required to verify the sales to be able to make adjustments but the Cuomo/Fannie Mae deal called Home Valuation Code of Conduct (HVCC) has enable a whole army of inexperienced or incompetent appraisers at the expense of competent experienced appraisers who can’t afford to work for half price and turn around assignments in 20% of the time without verifying the data.
I was told by a senior risk officer at a national lender that the bank uses several hundred appraisers in Manhattan. There are less than a half dozen long-time Manhattan-based firms here (with more than 1 employee). Where do all these companies come from? Out of state and up state New York. These appraisers will drive 3-4 hours to come to bang out a dozen reports in a day working for half the market rate.
Appraisers are often only required to conduct exterior inspections of properties that are being used as comparables because they are normally unable to enter these homes and examine their interiors. Too often, properties that have been subject to foreclosure or distressed sales have issues related to deferred maintenance or internal damage that an external inspection simply cannot reveal.
Think about what NAHB is saying here in the first sentence. We are not required to inspect the interior of the comps nor can we be made to. Do we have the right to go in all the comps? Simply walk up to the house across the street and say: “I am doing an appraisal of that house over there and the bank requires me to go inside your house and see what you have.” Good grief. A very poorly worded press release.
The actual point they are making here is that they want the appraisers to consider the condition of the houses being sold at foreclosure and adjust for their inferior condition. NAHB is absolutely correct.
However, the alternative bigger picture, between the lines, inference being delivered in the release is: ALL foreclosure sales are INFERIOR in condition to the house being appraised – that’s why they sell for less. That’s simply not true. Are they more likely to be inferior in condition than houses sold that are not foreclosures? Yes. The seller of a foreclosure is often a large institution not as close to the property as an owner occupant would be and may have a different objective/time frame than a typical seller might.
â€œWhile most appraisers do a fine job, there needs to be proper regulatory guidelines for those who use distressed or foreclosed properties as comparables when determining home values,â€ said Robson. â€œIt is essential that appraisers have the proper experience and guidance to accurately assess values in distressed markets.â€
You can’t mandate what comps to use, if they are “comps.” I don’t want the FDIC mandating what wattage of light bulbs I can use in my upstairs hallway either. However, I agree completely with the second point. NOTHING has changed to improve the quality of appraisals since the financial meltdown began. HVCC was intended to remove the high bias in valuation caused by the mortgage brokerage industry’s 60%+ market share of origination controlling and ordering the appraisals. That was removed with HVCC. The growth in mortgage broker market share of bringing business to the banks allowed lender relations with local appraisers and the existence of inhouse appraisal review departments to whither and die. The bank solution appears to be to use AMCs to order appraisals, a process which was enabled by HVCC, which is an accident waiting to happen. While mortgage broker ordered appraisals were biased high, AMC ordered appraisals are biased low.
What about a neutral middle ground? Good grief.
In neighborhoods where comps include a large number of short sales or foreclosures, appraisers should have the option of expanding the geographic area or extending the time frame for eligible sales to get a more representative basket of the value of homes sold in the area, Robson added.
They basically want appraisers to ignore all foreclosure sales because they are “low” and be allowed to expand search guidelines to find higher sales. Property values in a neighborhood that are hurt by rising foreclosure activity isn’t caused by appraisers. They are competition to the non-foreclosure homes (and should be properly adjusted for condition). If the appraiser is determining market value of a property, he/she can’t cherry-pick the high sales. Their logic is a fall-back to credit boom reasoning which was all about finding the highest sales to make the deal happen.
Currently, improper or insufficient adjustments to the comparable values of foreclosed and/or distressed homes often results in the undervaluation of new sales transactions.
The best message in this release and it is absolutely true. Condition of the comps should be discovered and adjusted for. Otherwise they aren’t comps – they are merely sales.
â€œThis practice must be corrected because it contributes to the continuing downward spiral in home prices, forestalling the economic recovery,â€ said Robson.
Overstated but not entirely incorrect, due to the growing AMC issue. The legion of incompetent appraisers being enabled through HVCC and AMCs are resulting in less accurate valuations. This problem sticks like a sore thumb in a declining market with low sales activity, compromising the public trust.
Foreclosure comps are like the new breed of appraisal management appraisers proliferating in a down market.
* The quality of appraisals should be much higher than it currently is, whether or not the housing market is rising falling or flat.
* Nothing has been done to address the poor quality of appraisals performed for lending institutions.
* National retail banks have all gone the AMC route to get their appraisers.
If the user of an appraisal report (bank, Fannie/Freddie, secondary market investor) doesn’t care about the quality and reliability of the valuation process, then the use of AMCs are enabled and becomes the new market for appraisal services, damaging the livelihoods of competent and diligent appraisers.
The use of AMC appraisers is beginning to sound a lot like the way foreclosure comps are being used in an appraisal.
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