Sense is like courtesy it is no longer common!

I dealt with an old question recently that I felt was pertinent and worthy of repeating.

The question arose in  Brooklyn, NY when an underwriter demanded that the appraiser include the basement area as part of the gross building area when comparing the subject to the comparable sales.

After all they reasoned, Fannie Mae guidelines, i.e. Property and Appraisal Guidelines,  XI 405.07 state, “Gross building area, which is the total finished area (including any interior common areas, such as stairways and hallways) of the improvements based on exterior measurements, is the most common comparison for two- to four-family properties.  The gross building area must be consistently developed for the subject property and all comparables that the appraiser uses.  It should include all finished above- and below-grade living areas, counting all interior common areas (such as stairways, hallways, storage rooms, etc.), but not counting exterior common areas (such as open stairways).

We will accept the use of other comparisons for two- to four-family properties (such as the total above-grade and below-grade areas as discussed above in Section 405.06), as long as the appraiser explains the reasons he or she did not use a gross building area comparison and clearly describes the comparisons that were made.”; however, within this definition of gross building area was the appraiser’s response. Although the “appraisal gods’ have clearly mandated that gross building area must include the area below grade, this only applies when this space is also generally included by the market area.”

The basic problem, as I see it, is that there are way too many people trying to decide how to apply the guidelines that really are very straight forward. Fannie Mae set forth guidelines because there are no hard and fast rules that would uniformly apply across all states in the Union. The guidelines attempt to address what is considered to be the norm for the country; however, attempting to find a norm for 50 states is the height of hubris in a of itself. Still it is better to have guidelines in place rather than have none at all, but not at the expense of replacing common sense. In fact if you were to actually have the benefit of interviewing a Fannie Mae review appraiser you would find that they are very down to earth and understand that their guidelines are not hard and fast. They provide a framework of acceptability but with the proper analysis and explanation Fannie is very open to appraisals that must report outside of their guidelines. On the other hand, many underwriters (especially the relatively new batch which have recently hatched out of the most recent debacle of the ongoing mortgage lending saga) simply do not understand that appraisers are given the flexibility to present an appraisal that is reflective of the subject property and its market area which may, or equally may not, conform to Fannie Mae guidelines.

My point is simple, and  fairly consistent (I believe), common sense needs to take the place of algorithms and automated valuation models. In the case of Gross Building Area versus Gross Living Area; it is imperative that lenders allow their local market experts report the market reaction to the properties that are being submitted as collateral; and not attempting to dictate a set of general guidelines that were designed to enable an appraiser to report their findings in a consistent manner.

The root of this problem, of course, is one of responsibility and enforcement. Our long honored legislators decided long ago that the lender had the ultimate responsibility to select, review and audit the real estate appraiser that was submitting the assignments to the bank. The problem is that this has never been a good idea. Then we wrap this notion in the most current legislation that dictates that the lender is able to use appraisal management companies to direct appraisers, but appraisers no longer have the ability to reach out to their actual client (the lender). This simply places the appraiser in the worst possible position. Now they must try to develop a business without any personal contact with the client and must attempt and defend their reports without any chance of actually communicating their findings except in writing.

The report is now cloaked in the use of UAD which is a format and series of codes designed to dehumanize the process of analysis and decision-making all for the purposes of making money. Personally I am all for making money, but not a the cost of disabling appraisers from promoting and growing business relationships.

There really needs to be a modification of thinking that Lenders are responsible for the appraisers conduct or performance. The thinking that a management company can solve this is naïve, because a management company has no authority or power. They themselves try to wield a “sword of authority” by controlling work flow; however, this is a quasi-legal practice and very soon you will find appraisers begin to figure out that their rights are actually be diminished by economic sanction. This type of pressure was supposed to be eliminated by the Frank Dodd Act but instead it has simply been exacerbated.

It is time that appraisal organizations actual engage in re-engineering the foundational concepts of direction and control when it deals with mortgage lending. Appraisers never should have been controlled by lenders; in fact lenders should have to deal with an appraisal report once. If the report has passed the clearing house (so to speak) then the report should be accepted once and for all and move on. Of course this is naïve because loan officers will never go quietly without a fight this how they generate their 6-figure income, while appraiser deal with ever diminished fees and are asked to provide evidentiary support for each word provided within an opinion of value (aka an appraisal).

See you around the water cooler!

UncleZev

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If you want to stop crime, make it against the law!

It is this type of thinking that has made it increasing difficult for honest appraisers, while providing a buffer for the true criminal that seeks to manipulate the system. Is it really as simple as the best appraiser is the one who is always on time, always fills out the form according to UAD, and never strays from a Fannie Mae guideline? The report reads clean, passes review and never makes the slightest ripple when place in the loan pool, so how could it be wrong?

The ugly truth is that often the “prettiest” report is the one that is the best fiction. If our goal is to receive professional opinions of value, then we need to be selective of individual appraisers that are honest, industrious and able present well-reasoned arguments that are based upon verifiable information.

Of course, the real question is how do you determine that a man or woman is honest. Can we simply ask them, “Are you an honest appraiser?” The chances are they ones that answer something like, yes I am 100% honest and have never ever lied or stretched a value are the crooks of the bunch. The ones that answer something like, well I try to be as honest as possible. Sometimes over the years there may have been assignments in which I lost my objectivity and favored the cause of the client; but, I believe that was mostly from inexperience and a subconscious need to be liked. Yes, I believe I can say that I am honest. I have not purposefully ever taken an assignment, or completed one that required me to lie. This is the appraiser that I would personally do business with.

Can we stop crime by making it against the law? Well the absurdity of the question bears examination, but the short answer is best explained by two very short statements my father told me of the years. #1 – Locks just keep your friends out. and #2 – A contract is only as reliable as the parties involved in the agreement.

The gatekeepers of this industry have become machines and analytic tools, this is what has allowed the unscrupulous to thrive. It is not any more simple than that. When an experienced review appraiser, or underwriter actually reads a file and calls an appraiser on the file, this is best approach to safeguarding the process and making sure the person who is writing the report is not an advocate to the client, or a nitwit who could unwittingly mislead the process.

Points to ponder as we continue in “the good fight’…

 

See you around the water cooler!

UncleZev