Inaccurate Representation or Misrepresentation?

By popular demand I have decided to delve deeper into the concept of appraisal fraud. In previous posts I have addressed several aspects of appraisal fraud, including its definition and various aspects to try to help the reader to understand that an appraiser can be inept or inexperienced without being a crook .

What I cannot stress enough, is that fraud is a legal term. It is a term that only applies at the time of conviction. A conviction only occurs through the legal process and until such time, we are all considered innocent until proven guilty. Therefore, reviewers, auditors and investigators should be wary of suggesting that a misstatement of fact or an unsupported opinion is “fraud” or “misrepresentation” . By inflaming the language of review we increase our risk in two ways. First, the inflammatory language can be construed as slanderous. Even though the US has a constitutional freedom of speech, if comments that are place in a review document or audit affect the livelihood of an appraiser, there is ground for a lawsuit and frankly, the appraiser has a good case to win.

Secondly, this industry is a relatively small one, therefore if injurious statements are made about an appraiser, they could be forced away from legitimate clients and into the hands of lenders who want appraisers with moral flexibility.

When we come across appraisals that have an appearance of having been inflated or written in a manner that could be construed as misrepresentation, we have an opportunity to make contact with the appraiser to seek clarification. During the process of review, we have the opportunity to support the appraiser and to guide the process towards integrity. It is like raising a child, if we are constantly accusing and critical, this child will only learn to hide better. But if we are honest and encourage integrity then the appraiser “grows up” to be better at their job and better serve the overall community.

Let us all strive to be better at our jobs and to deal honestly with one another. This can only result in an improvement within the lending community itself.

See you around the water cooler!

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Stay Small

While talking to businessmen who have owned their own companies and stayed successfully in business for decades, I found one common thread among them. It did not really matter the type of business, the size of the business, or the condition of the economy. There are common threads of success when it comes to maintaining and/or growing a business. These threads are not limited to the few I am posting here, but the ones that are mentioned are believed to be the most important.

1) Develop relationships. The one-on-one approach is still the best way to foster business relationships. If you are a small business then this means developing a consistent level of communication between yourself and your multiple clients, vendors, and/or associates.

2) Focus on keeping your word. Although trite, the truth really does set you free. When we are completely above-board about what we can or can not do, the client will gain respect for us and will soon discover they prefer to know the truth upon which they can rely, rather than receive a “pretty lie”, as it were, that turns out be unreliable.

3) Know your product/service better than anyone else. Striving for excellence so far exceeds perfectionism that it does not even bear mentioning. In fact, a company that is excellent is never really perfect but their clients really appreciate the degree of professionalism that goes into each and every transaction or service request.

4) Stay Small. Wait, what? That is right, stay small. No matter how large a company becomes the first mistake that many corporations make is that they become bigger than the people they originally sought to serve. Their growth pushes them beyond the “little people” that contributed to their success. If you do not think this is true, try calling an insurance company, or a bank, or a telephone company or an airline. Customer service is not about having some $8-hour person talking from a script to try to solve your concerns. Customer service is about a company that always enables every single employee, associate or manager to speak intelligently about the product or service they are selling and to ensure the client does not have to be transferred many times until the hassle of the call outweighs its benefit.

As real estate appraisers weather the rough seas of this turbulent economy, it is time to focus on customer service, customer contact and customer communication. Know what your customers are thinking, what they are needing, and how they are benefiting from your service. I am painfully aware that this type of communication has been almost completely eliminated by the legislation that was enacted by our current regime, however, remember that this legislation has made it just as hard and cumbersome for your clients as it has been for you. Reach back out to your contacts and ask for referrals. They are now speaking with other managers, other appraisal management companies and the like. Work the network and develop the names. Marketing is the single most important part of keeping an appraisal company alive especially in this day and age.

Of course the social networks that are online are also a great way to reach out; just remember that you as an individual have something to offer that your competition does not. Why is that?, you may wonder. It is simply because you know your  specific market area, specific niche that you have carved better than anyone. If you take the time to evaluate your skills and your expertise you will find the reasons that make you better than your competition. Of course if you can’t find these reasons, then it is time to develop your skills and knowledge base so that you can compete in this new world in which we have all found ourselves.

To sum this up – “Never become bigger than the people your serve”. Even the President of the United States of America serves people; in fact, in the case of this highest office in the land, this position should be the most humble because this office serves to protect us all.

See you around the water cooler!

So What’s Your Problem?

One of the biggest challenges that appraisers face today is meeting client requirements. Each and every lender is developing their additional requirements that are placed atop the Fannie/Freddie/HUD guidelines which are fairly exacting to start with. Then you add to the mix UAD and most of us go home at the end of the day looking for a good stiff drink.

My suggestion is that each of us take the time to become experts for our clients, to know their guidelines better than they know them. In this way, our value to our client increases as we help them navigate the murky waters of “underwitting” and review. Oh, I know I should not pick on under-witters, some of my best friends are under-witters. In fact some of my friends would tell you I too was once an under-witter, or perhaps I still am – but I digress.

Knowing the client expectations is part and parcel of defining the appraisal problem. It will save you hours of frustration during the review process. It may also save you $1,000’s in court costs. Bear in mind that we are now in an age of kill or be killed and many financial institutes have already died. Capital Investors are now getting very cranky as they determine that the representations and warranties that they purchased to back the derivatives were invalid. The problem is that any portion of a representation can be invalid if a component of the loan package is found to be in error or simply out of compliance. Attorneys have gotten smarter and have started to investigate appraisal reports not only for compliance with Fannie/Freddie/HUD/USPAP/FIRREA but now for compliance with lender guidelines as well. Not only the guidelines of our original clients, but also for the lenders who may have inherited the loan, or purchased the loan before re-packaging and reselling. If the appraisal is found to be out of compliance in any one step, the loan package can be challenged and with enough challenges, the derivative can be sent back to the issuing GSE.

Watch out ladies and gentleman, it is going to get a little crazier around here.

See you around the water cooler!

Market Resistance

Appraisers are often asked to develop their opinion with regard to the value of a home, or piece of property that has some feature, characteristic or location that is atypical or even adverse. When this occurs they knee-jerk reaction of many of my colleagues is to show the physical, functional or external obsolescence and adjust for the difference in the market grid with a sentence or two added to the addendum.

For example, swimming pools. An in-ground swimming pool can cost between $35,000 and $50,000 installed. Of course there are pools that can range upwards to $150,000 with islands, waterfalls and the like. But for the purposes of this blog, I am speaking generally of a common pool that is kidney-shaped, generally a concrete prefabricated item that when installed is expensive to say the least. Nonetheless, buy a home install a swimming pool for $45,000, wait 3 months and try to sell that home for its purchase price plus $45,000. This academic discussion assumes the market has remained completely stable with no changes up or down. The market will not accept this other wise $200,000 home and simply add the cost of the pool. This loss in value is what appraisers refer to as obsolescence. This is a well-known fact in the industry, but how many actually take the time to prove their point. Pools of course are an easy example, because the appraiser can simply provide comparable sales of similar age, size, location, with a pool to demonstrate the market reaction to the pool. But, what if the development that the property is located in does not have any sales with swimming pools. Then if the appraiser proceeds to a neighboring development to find homes with swimming pools, have they completed a subdivision analysis to demonstrate there is no location adjustment between developments? Generally speaking this is often not the case.

With the advent of technology the ability to import MLS data into a spreadsheet for analysis there really is no longer an excuse in the majority of appraisals not to have tabular analysis of items like: location, swimming pools, garage count, bedroom or bathroom count. These adjustments have been made for the last several generations by appraisers using a “rule of thumb” based upon bench market pairings when, the appraisal should have been based upon the development of paired sales for each individual assignment.

My challenge to appraisers is to sharpen up and utilize the tools in front of you. My challenge to underwriters and/or reviewers is to develop market pairs as appraisers provide them, or to ask appraisers for the paired analysis that was used to develop their adjustments. Condition adjustments will be a topic of a future post and is not germane to this particular discussion.

See you around the water cooler!

 

Fear of the unknown.

My father taught me that one of man’s biggest challenges in life is learning to kick the FUD out of it. That is to say fear, uncertainty and doubt. While fear can save the young from devastating mistakes it is also the leading cause for failure in business and in life. We often fail because we do not try. Fear is currently driving many real estate markets in and around the country. I was speaking with a charming lady, I will call her Silvia. Silvia recently turned 67,  she has outlived her husband and has three adult children. She has paid off her car, and two of her children’s cars and is three payments away from paying off her house.

Her youngest daughter, who is in her forties, has asked mom for help purchasing a home so that she and her two children can move out of a very small and dangerous apartment complex and enjoy the relative security of a home of their own. When Silvia found out what I do for a living she immediately began to tell me her concerns and fears about buying a home for her daughter in this current economy. She told me she was really afraid that her daughter would end up owning a home that would lose value and that lenders might sell the note and who knows what would happen then.

I spent some time with Silvia telling her that while her fears were certainly understandable, there was more to be considered than the current economic madness. Real estate is one investment that if handled wisely, will continue to perform. I told her that the uncertainty in the marketplace were of course valid concerns, but that we should not throw out the baby with the bath water, so to speak. People have to remember that common sense continues to work even in a bad economy. Unemployment is high and under employment is higher. Market prices are being pressured by the continuation of REO homes that will be marketed over the next several months. According to the latest report, foreclosure modifications are on the rise, however, the looming 2.5 million homes to be foreclosed is still on the horizon and will be affecting neighborhoods all over the nation. Therefore, it is not time to aggressively bid up sale prices or take out mortgages that exceed 80% of the market value.

What consumers should be asking is, what is the potential income to this property that I am considering. Can I rent the home to someone else should my job situation change? Would a potential investor be interested in this home, i.e. would the property cash flow?

People still need housing and the demand for rental properties will continue to remain strong. So for those people who have good credit or mattress money that needs to be invested, real estate is still an investment that will continue to perform and, as the markets improve, the equity position will also improve.

Remember FUD is not a new concept that was created by chatterers or the cyber world. Because of FUD the masses continue to rent from those of us who have kicked the FUD out of life and replaced it with common sense.

See you around the water cooler!

Uncle Zev

Who’s on First!

Lender Automated Servicer Hotline: Thank you for calling the automated Servicer Hotline, where we pride ourselves in giving instant answers. For your convenience we have given code names to our departments so that you are not burdened with trying to remember all those cumbersome names. Who is handling your payments, What is handling your complaints and I Don’t Know is handling all foreclosures. Please press 1 for Who, 2 for What and 3 for I Don’t Know. Or 0 for an operator now.

Borrower: Um, pressing zero.

Operator: Thanks for calling how may I direct your call?

Borrower: Well, I am not sure who I should speak to.

Operator: Perhaps if you can tell me the nature of your call we can start from there.

Borrower: Well I need to talk to someone about my payment…

Operator: Oh, payments.. You need to speak to Who – transferring you to 1st.

Borrower: Uh..

Payment Department: Thank you for calling Who, how may I assist you.

Borrower: I am speaking with who?

Payment Department: Yes.

Borrower: Well, I have a complaint about this new system it is so very confus…

Payment Department: Oh, Complaints – Transferring you to what,  2nd.

Borrower: uh…

Complaint Department: Thank you for calling What, how may I assist you.

Borrower: Um, What?

Complaint Department: Yes.

Borrower: I am speaking with Who?

Complaint Department: No this is What Department.

Borrower: I dont know.

Complaint Department: Hold Please.

Foreclosure Department: I Dont Know, how may I help you.

Borrower: Um.. Who am I speaking with?

Foreclosure Department: No. This is I Don’t Know, how may I help you.

Borrower: Well I dont know, What Department I am speaking with, Who?

Foreclosure Department: Hold Please. Transferring to 1st.

Payment Department: Who speaking, how may I help?

Borrower: Um I am getting really confused, what is the name of this department?

Payment Department: No, this is Who. How may I help?

Borrower: I DON’T KNOW!

Payment Department: Hold Please.

Foreclosure Department: I Don’t Know, how may I help?

Borrower: Um, I am trying to determine Who to speak to about my payment, which is going to be late.

Complaint Department: Oh, Payments. You need to speak to Who. Transferring you to 1st.

Borrower: uh..

Payment Department: Thank you for calling Who, how may I assist you.

Borrower: I don’t know…

Payment Department: ok, transferring you to 3rd.

Borrower: Hangs up.

2011 – Mortgage Fraud Update

It has been seven years since the FBI targeted mortgage fraud as one of the nation’s leading problems of crime. California and several other states have created a Mortgage Fraud Task Force and yet according to several news sources, the instances of mortgage fraud are on the rise. “How can this be?”, after all the money, time and resources the government has spent on tracking, analyzing, and prosecuting mortgage fraud, “How is it possible that crooks don’t just stop trying?!”. Of course, I am being a bit sarcastic. I believe the real problem has yet to be unearthed. This type of white-collar theft takes a very long time to detect. Unlike the passé bank robberies of the late 1800’s and early 1900’s, thieves are no longer required to just use tommy guns and wheel-men. With a good acrobat adobe and a lack of a moral center, people are able to abscond literally millions of dollars, and if they are smart, they leave the country to someplace without extradition.

The problem is not as simple as finding better appraisers, or educating loan officers or mortgage underwriters, or having a risk analyst look at the loan prior to funding. Although all of these steps are good ones, the resources should be set in place to enable a potential lender to check a loan file through a federal database that is driven through the analytic machine of FNMA, the FBI and the IRS. These three leaders in fraud detection and prosecution have the data for the majority of the players and schemes that are being perpetrated. If there was a central base of intelligence for mortgage fraud and all loan profiles were run through this system, much like a background check, then looking at the major players, routing numbers for transfer etc., the fraudsters would have to work a lot harder to steal “the banks” money.

This of course is just the personal ranting of a tired real estate appraiser/fraud investigator. But I continue to live in the hope that sense, like courtesy, will some day become common once again.

See you around the water cooler!

There are no reported sales! Now what?

How many times have we, as reviewers, heard the following: “But there aren’t any sales within the subject’s development.” Or, “But the subject is the finest house in its development.” Of course there are rare instances when this is true; however, even in the instance where there are no sales that have taken place in the subject’s development within the last 12 months, the appraiser should be able to show sales at some previous point in time if the development is not newly developed. New construction appraisals will be a topic for a future post, but for the sake of this discussion I am going to focus on well established developments.

Oftentimes appraisers will find a property that has been improved beyond its development, or will be faced with valuing a home that is located in a development where there has been no market activity in the last 12 months. First, we will address the non-conforming property appraisal, then we will address an appraisal in a stable market.

When a property has been improved to a point that it is now larger than any other home of similar age, quality or location, this property is often referred to as an over-improvement for the area. A property that was once 1,000 square feet in size with a garage conversion, had an addition and now totals 2,000 square feet in gross living area is a great example.

It, of course, would be best to find a home that had a garage conversion and addition exactly like the subject on the subject street with the same prevailing winds which sold and closed on the date of value; however, in the real world appraisers have to demonstrate two things with this type of property.

First, they must demonstrate what improvements were made and how those particular improvements have affected the value of the property. This is generally accomplished by showing all of the sales in the subject’s development that were similar to the subject before any changes were made. Then, in lieu of a model match sale, the appraiser should find other competing developments that share the same basic location that was built in the same decade, had similar homes (prior to improvement) and find homes with additions and conversions that would reflect the same functional appeal as the subject.

This research project is not as difficult as it once was because of the MLS systems that are prevalent in most major markets. The appraiser can export the sales data to excel and easily demonstrate the market reaction to garage conversions and homes with additions and then apply this pairing to the valuation of the subject. The selection of the comparable sales should reflect as many of the subject’s characteristics as possible in order to minimize the required adjustments. Nonetheless, when an adjustment is warranted and has been proven in the market, the appraisal report should reflect the proper adjustment.

It would not be an appropriate comparison to simply find other homes that were built in the same year as the subject that originally contained 2,000 square feet in gross living area. The reason that this comparison would be inappropriate is for several reasons. 1) The quality of a home originally built containing 1,000 square feet and 2,000 square feet are quite different; 2) the functional design and appeal of a home that was originally designed by an architect would have a logical flow and professional design as compared to a home that converts the garage to living area and adding additional space generally will increase the number of private rooms or public rooms.  However, the functional utility of an existing home with an addition or garage conversion is not the same as a home that was professionally designed to contain 2,000 with a garage.

Remember market reaction is what the appraiser is measuring, thus, if the appraiser does not select comparable sales with similar features and characteristics, the market reaction can not be accurately measured. Oftentimes to develop an accurate market reaction the appraiser may have to consider sales from differing time periods. This is a reasonable approach. The reaction should be measured as a percentage of price so that this percentage can be applied to data that sold within the time period that represents the date of value.

The second thing the appraiser must demonstrate is how the subject relates to its particular marketplace. This market reaction is closely tied to the first question, but what you are really asking is: “How does this additional space add to or detract from value in the area. In other words, if a 1,000 square foot home is in a homogenous area of other homes of same size, design and quality it has one value. A home that has had an additional 1,000 square feet added to it with neighboring homes that do not share the same additions will suffer functional obsolescence because the marketplace will not pay “full price” for the improvements. This obsolescence should be addressed and proven within the market data.

When appraising in a stable marketplace, the first thing an appraiser or underwriter/reviewer should look for is how many homes have been listed for sale in the last 12 months and what was the market reaction to these sales. A truly stable market area has very few listings and when these listings are placed on the MLS they sell in a short time frame. When this is the case, a simple historic comparison between the subject development and an active competing development should be sufficient to demonstrate the location adjustment.

Well – I realize this post became pretty hands on and technical – but that is the advantage of a blog where there are few responses. I get to write about anything and everything on my mind.

See you around the water cooler!

Assigning Blame

Even though the redirection of blame is an ancient approach to avoid taking responsibility for ones one actions, this seemingly innocuous tactic has become the leading downfall to the financial industry today.

Consider, the consequences of shifting blame:

1)    The actual party who has made poor lending decisions escapes taking responsibility, and often times will even get promoted. Thus the initial behavior does not change.

2)    Since the poor decision has not been corrected, the pattern will continue.

3)    Redirecting the blame combined with the continuation of the faulty decisions expands the direction of investigation, because now a larger pool of appraisers appear to be at fault – even though the initial behavior was to blame.

4)    Much time and money was devoted to the regulation and education of real estate appraisers, but no actual safeguards were put into place to ensure the soundness of the lending decisions.

Therefore, the consequence of improper decisions only expands and the innocent continue to take the fall.

Those appraisers who do accommodate sale prices or refinance loan amounts are certainly harming the reputation of the rest of us, but the real culprits continue to shape this industry to accommodate a larger objective of repackaging loans and selling them as derivatives.

What can be done? From the position of a real estate appraiser, actually very little can be accomplished. We must continue to be accurate in our reporting and analysis and strive to only produce reports that are supported by the market data.

However as a larger group, I believe it is time for each and every one of us to stand together and direct our legislators to take a courageous stand against those that are encouraging a continuation of unregulated derivatives and support regulations that has enabled the pressure that used to come from mortgage brokers to simply be shifted to appraisal management companies.

I would love to hear some thoughts on this.

See you around the water cooler.