It is ironic that the one group of people who could have held the line, kept buyers from paying too much and lenders from being over extended, was the one group that nobody wanted to listen to. Appraisers that told the truth found their work limited to forensic review or REO. All others were re-educated to enable them to “understand their part in the process”. The title wave of incompetence has brought us to this point of demise. It is an old story, but one that requires reliving, until everyone understands the significance of this debacle.
There were multiple levels of bad decisions, break downs of safe guard, and self-perpetuating myths that caused the virtual ruination of the appraisal profession.
Myth number one, if the appraiser is aware of the price that the borrower is looking for the appraiser will lose his or her objectivity. Although it is clear that there was a generation of “made as instructed” appraisals (not a reference to the highly sought after MAI designation) this does not mean that all appraisers were finding ways to make a deal work. The fact of the matter is that when the appraiser was informed up front of the clients expectations and it was clear that these expectations did not fit the market, many appraisers were enabled to let the parties down tactfully and salvage a working relationship with the lender for future work.
Myth number two, appraiser independence means that the appraiser should never speak to the client. Without client interaction the appraiser is reduced to a mere report that is supplied by a management company. This disables the client from ascertaining the level of competence of the appraisal professional who is producing this report.
Myth number three, the appraiser’s impartiality will be maintained by using appraisal management companies (AMCs) the current problem with the majority of newly formed appraisal management companies is that no significant oversight was established for the formation of or management of these companies. While individual appraisers can easily be removed for violation of State Law (i.e. USPAP has been adopted as law in most of the States), the AMC is not subject to USPAP and they are free to act as an advocate to their client base. Appraisers are finding all type of subtle and direct pressures to be more flexible in their opinions and presentations of value.
“What about the multiple levels of bad decisions?”, you may ask. By this, I am referring to the many large lenders that created in-house appraisal companies and hundreds of staff appraisers and review appraisers to shape the lending decisions of the company. The original plan was that this department was reporting to the sales departments that generated loans, by the mid 1990’s this was changed to include an operations division which attempted to stand between sales and appraisal, but the mindset of protect the interest of the lender had already been established. The problem was simple. The appraiser’s job was never to protect the interest of anyone. The appraiser’s job was to accurately report and analyze the market and determine how the subject fit into the market and the report this in a manner that was not misleading.
The underwriters had the job to protect the interests of the lender; however, since the appraiser was trained to think like an underwriter the underwriters were disabled because they rarely got the straight (or complete) story. Therefore lending decisions were formed based upon the desire to make loans, all possible loans, instead of all prudent loans.
“What about the safe guards that were broken down?”, good question. During the early part of the 21st century many of us were screaming that the process of out of control. Appraisals were being reported in a way that, at best were misleading, and at worse were fraudulent. Reviewers were trying to stop the flow of unreliable appraisals, but this process got out of hand quickly because the lenders created national review teams with pools of available national data to determine the adequacy of the report. And instead of slowing down and getting a local review, when the national reviewer had a question, the management would push the national review to “fix the deficiencies” of the report so a deal could be made. Once reviewers stepped here, the process was broken. The flood gates of greed had burst and the resulting damage is still being uncovered.
So, “where do we go from here?”, this is the trillion-dollar question. There has been some legislation enacted and some proposed, but I am afraid that no one has actually touched on the original problem. We have an entire generation of appraisers who were just “doing their jobs” and few even realize that they contributed to the problem. There are a handful of battle hardened veteran appraisers who have always fought the good fight and tried to stay reasonable and accurate in their analysis and reporting of the markets. These people are generally ignored by those in control of the front end appraisals, because these appraisers are not generally people who will “play ball” or “accommodate the clients concerns”. These appraisers are generally hired on the back-end to try to figure out what happened and where do we go from here.
My suggestion? My suggestion, is one that is fairly simple. Credit policies should be form in such a way that all people have a chance to buy or refinance their homes, but the lenders should never loan above a certain Loan to Value Ratio (LTV) that can be determined by greater minds than mine. Appraisers should produce reports, that require them to show the actual sales they had to consider, and a brief description of why the sales they choose were the best in demonstrating the market reaction to the subject property. All appraisals should be reviewed by local appraisers. These reviewers should be allowed access to the property just like the appraiser was allowed. If the appraisals is later found be inaccurate the origination appraiser and review appraiser should be liable to buy the home at their recommended value. Unrealistic? probably. But I guarantee that appraisers would no longer render an opinion of value that could not be supported in the marketplace as of the date of value.