Non-permitted Additions

Other the last few weeks I have noted a common theme in my conversations with appraisers across the nation. This topic seems relatively simply and yet since I have encountered endless questions I thought this post may add something to overall community.

The question boils down to “What is the big #$%^&*@! deal with non-permitted additions?”, for residential lending purposes. Of course this stems from the fact that many residential lenders are pushing back appraisals that have given value consideration to an addition which was non-permitted at the time of construction. This is not a new idea to me, but apparently it is very new to some of my colleagues.

Generally what I am finding is that if the origination appraisal report failed: to properly recognize the addition, discuss the functional utility (or inutility as the case may be), discuss the insurability; discuss the construction methods; and address the marketability, then the lender will push back and ask for the addition not to be included in the appraisal.

While that last thought ruminates for a moment, let’s break it down. There are three basic concerns that a  lender has with regard to additions. 1) Health and Safety; 2) Insurability; and 3) Market acceptance.

When a property is first built most of the time the home was built in accordance with local regulations, building permits were obtained proper inspections were made to ensure the home has met the national building codes that are designed to ensure the longevity of the structure and promote the health and safety of the future occupants; however, when the property has an non-permitted addition the lender has no way of knowing if the proper building codes were followed and the wiring, plumbing, and structural components are then in question. If the occupants of this home were injured due to a structural or mechanical flaw of this home (relating to the non-permitted addition) anyone within the chain of title, after the addition, could be considered complicit because legally the lenders are required to conduct due diligence, which includes  the collateral, prior to funding a loan.

Throughout out the course of time this premise has been tested time and time again in the court systems and when the additional non-permitted work was found to have been completed in a “workmanlike manner” the courts have generally found in the favor of the lenders because the absence of a permit does not change the degree of workmanship. Adherence to building codes is generally implied by a workmanlike manner.

All property that has a mortgage must be insurable to safeguard the financial interests of the lender and the borrower as well. Although this is not the law, it is industry standard that has been expected by Fannie Mae and other secondary mortgage investors. An non-permitted addition that was not completed in a workmanlike manner may not be insurable. Thus the lender  will require that hazard insurance will accept either the original property and the addition, or at least will accept the original property and not add any exemptions due to the presence of an non-permitted addition.

Of course even if the health and safety of the occupants are ensured by proper building methods and the home is insurable, the lender will not be happy unless the home also is readily accepted within this marketplace and could be considered a competing alternative to the surrounding homes. This is because it has become widely known that conformity is an important factor of value and acceptance therefore most lenders would prefer to lend on collateral that conforms to its surrounding neighborhood.

It this is last reason that allows the flexibility in most lender guidelines. The non-permitted addition can be considered as long as 1) the additional has been built in a workmanlike manner, 2) the addition is common for the area, 3) the appraisal report provides market data (i.e. closed sales) to show the market acceptance of similar improvements.

The bottom-line is that when the appraiser has determined that a property has had an addition. The report should address: the quality and functional utility, the conformity and acceptance within the neighborhood (illustrated by market sales when available) and the insurability of the improvements.

As far as insurability is concerned, it is my opinion that the report should contain an extra ordinary assumption that the non-permitted addition will not impede the acceptability or insurability of this property.

See you are around the water cooler!

Uncle Zev

 

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Self Evident Reports

Over the span of the last several decades, many residential appraisers were brought into this profession to meet the demand for residential mortgage lending reports. The problem with this has become clear as many were trained with one mindset, residential lending appraisals. They became “self-proclaimed experts” at filing out forms and meeting client expectations. All in the name of doing a good job and making a living.

I hold all residential appraisers responsible for this sad state of affairs. Had more of the professional appraisers taken on one or two trainees and mentored them into producing credible reports then perhaps we could have held back the tidal waves of greed. Although even as I type this, I am already arguing with myself. The mechanism that was purposefully put in place to allow the aggressive lending decisions did and would have demolished and standard that was placed before it. However, if these standards had been in place and hammered into the industry all along, then we might have been able to avoid the debacle that continues to loom above us now.

“What am I babbling about?”, one might ask. An appraisal report is supposed to be one that is rendered in a way that is free of bias, (i.e. one that is produced independently, impartially and objectively). Enter the form filler. Once the form fill mentality came on board, professional appraisers were swept to the side. The industry took hold of the form filler and provided “three comparable sales” that made the deal. The other 40 that indicated contra-results simply “were not indicative of the subject’s value”. The cost approach was simply discarded because was deemed less than relevant, or too subjective. The income approach was also done away with because this approach was deemed irrelevant. The form filler played their part in creating a false market, because once one appraisal got through everybody else wanted on board.

How could have stopped it? Simple. The truth of the matter was that nobody wanted to hear the appraisers that were telling the truth because there were those people who helped create a false report. Once enough people began to believe these reports the lies spread like wild-fire. After all if enough people say it is so, then who am I to argue.

A marketplace becomes valuable because of the perceptions of the marketplace. Why is it that one neighborhood becomes more valuable than an adjacent one? Why one side of the tracks is “better” than the other? It is perception. Of course the reality is that there are factors that actually do contribute to market perceptions beyond subjective whims of the public, this is why fads come and go. The heat of the moment begins to fade when the purchaser is faced with the fact that they paid three times more than the cost to reproduce the same product, or they paid four times more than they can rent the property for in an open and competitive marketplace.

The founders of real estate appraisal, understood that there were three approaches to value. Granted these approaches are all driven by the same basic influence (i.e. the marketplace); but the approaches to value reflected the motivations of three distinct ways of looking at the value of the same property. When we faithfully apply these approaches to value it keeps us in check and enables us to support our proper level of objectivity. Obviously, there are property types where these approaches are not always applicable; however, this is the exception and never should have become the rule.

According to the Uniform Standards of Professional Appraisal Practice (USPAP) all appraisals must be presented in a way that is not misleading. The opinions and conclusions within the report should be supported by the factual data that is discovered during the appraisal process, furthermore this data should be either presented in the report, or at least referenced within the report, to allow the intended user an adequate understanding. Conclusions and opinions that are formulated should in fact become self-evident as the intended user reads  the report. In fact if the reader is not able to draw the same conclusions as the appraiser, then the report has not been presented in a way that is useful. I am not an attorney, but if a report does not give an intended user adequate information to understand the conclusions and opinions that are provided, then it seems to me that the report has been presented outside of the requirements of USPAP and the appraiser could be liable for providing an incomplete report.

Appraisers, wake up! For those of you who have always subscribed to the philosophy that the market dictates value and each applicable approach is carefully evaluated for its merits in the presentation of value according the intended use, I salute you. For the rest of you, who were misled into believing there is only one approach to value, and that a report is good if it conforms to Fannie Mae and UAD and client requirements… I submit that an appraisal report is only good if it has been conducted in a manner that not only meets the letter of the law, but also meet the spirit of the law as well. The law (USPAP) was written so that real estate appraisers understood that certain steps must be taken by every appraiser, which included all factors that influence value and all approaches that measure it. We should use as many approaches to value as are applicable so that we have a check and balance for ourselves. In this way we cannot be as easily misled by circumstances of “odd sales” but can gain a full understanding of the influences that drive the market.

Case in point. In the late 1970’s and early 1980’s, builders were putting up homes as fast as they could pull permits. Appraisers that were asked to value these homes were carefully “coached” to use the builder sales, because they had conducted the “proper market research” and analysis and the resale market could not possibly reflect a proper alternative. Of course, this fact is not necessarily in correct. A new home does engender a certain appeal; however, this appeal must be demonstrated in the marketplace and not just by the one builder who has a financial interest in their own sales.

I will not even touch condominiums in this discussion, for those of you who have completed these appraisals (or reviews on these appraisals) you already know my frustration on this topic. For those of you who have not completed these, wait for a future rant on this subject.

The bottom line here is that a professional real estate appraiser must always strive to have independence from the source of data and the participants within a transaction. This is why we can not simply take sales from the REALTOR involved in the sale, or simply take builder sales, or simply take HUD1 closing statements as evidence of sale.

The appraiser must approach every assignment with objectivity, looking at every single appraisal problem from the perspective of the prospective buyer and seller. After all the definition of value, for mortgage related transactions “Market value is the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: (1) buyer and seller are typically motivated; (2) both parties are well-informed or well advised, and each acting in what he considers his own best interest; (3) a reasonable time is allowed for exposure in the open market; (4) payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and (5) the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone”. Perhaps for a future rant I will dissect this definition even further, but for now suffice it to say the appraiser bears the sole responsibility to ensure the definition has been met not only in the development of the opinion of value, but also in the selection of the comparable sales that are presented for comparison.

Lastly, the appraiser must keep up an impartial mindset throughout the entire process. The only real interest the appraiser is allowed to have is wanting to be paid for their efforts. To meet this requirement is actually extremely simple. The appraiser should be paid in advance and be criminally liable for theft if they do not provide a professional appraisal in a timely fashion. If this were the case, some appraisers would drop out of the profession, but most of us would no longer feel the threat of will I be paid and would be able to concentrate on the task at hand… i.e. providing a credible self-evident report.

See you around the water cooler!
Uncle Zev

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

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

Thanks FHFA, for the clarification?

Pre UAD

The subject is a one-story, brick veneer residence, found to be average quality for a site-built home built in 1973. The condition was rated as average, with no deferred maintenance noted and no need for any immediate repairs.

UAD Compliant

C3; No updates in the prior 5 years; no need for repairs noted.
See you around the water cooler!
UncleZev

Back to the basics

The more I read residential mortgage related appraisals, underwriter comments and comments from the quality assurance departments from major lenders, the more I have come to realize that it is far beyond time to get back to “preaching” about the basics of this industry. For those of you who have been in the business back when you would take the photos, pull it out of the camera, wait a few moments before you pulled the front off the photo before coating it with the “magic wand” to keep it from fading (thank you Polaroid), I would recommend moving on to another post.

But for the so-called experts of residential appraisal, the current brand of underwriters, and quality assurance “experts” that are being paid to “play appraiser, lawyer and industry regulator” please pull up a chair and let’s puzzle through a few of the basic of this business.

First of all, if you are going to challenge the appraisal report, and your basis for this challenge is UAD please understand this a Uniform Dataset that was mandated by Fannie Mae for the purposes of selling the loan packages to Fannie and Freddie. These dataset requirements are important and should be honored by the appraiser; however, there is no actionable items with regard to prosecuting the appraiser.

Secondly, USPAP has been made the law in all fifty states with regard to regulating the appraisal process and how the report should be presented; however, before you wish to challenge an appraisal report using the Standard Rules of this document it is imperative to take a few ethics courses so that you understand the proper use of this document. Standard 1 of USPAP is for the development of the appraisal. It is really difficult to determine if the process has or has not been followed by evaluating the report. Standard 2 was governs the reporting of the appraisal.

This is the first of several posts, the next series will address various sections of the report and presentation that seem to get overlooked more often than others.

See you around, the water cooler!

UncleZev

 

Universal Appraisal Dataset or UAD

I am confident that most of us by now are familiar with the commonly known acronyms that are used in the appraisal industry. There are ASC, BEA, CFR, DESA, EPA, FEMA,  FIRREAFHA, FNMA, FREDDIE, GNMA, HUD,  IMF, JEC, KSC (ok that is actually the Kennedy Space Center – but you try and come up with a relevant K acronym), LOCIS, MSA, NAR, OTS, PHA,  UAD, URAR, VA, and SRIP  to name a few.

But how many of you are familiar with the following list. I take no credit for the majority of these as they have been around longer than the Internet.

ARTOR = Appraiser Really Tired of Rebuttals

BAFV = Best and Final Value

BISS = Because I Said So

CREATURE = Certified Real Estate Appraiser Turmoil Under Rebuttal Episode

FFLOP = Forum for Licensed Objective Professionals

FNMA = Florida National Mortgage Association (inside joke)

FOLO = Freaked Out Loan Officer (some times misspelled, by switching the L with the last O)

FROG = Finished Room Over Garage

FU = Functional Utility

For New Appraisers  – – IMHO = In my humble opinion

For Used Appraisers – – IMNSHO = In my not so humble opinion

Language used by the client – – RUSH = Really Unusual Sh*tty House

Language used by the client – – SUPER RUSH = A particular value needs to be reached

MC Addendum = Market Confusion Addendum

TROUSE = (Trailer house with stick-built addition)

Enjoy – – I know there are several others.. but it is late.

See you around the water cooler!

Uncle Zev

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!

The Approach to Value

Does anyone remember why the “men of old” developed the three foundational approaches to value in the first place? Today, an “appraisal” has become a recitation of the Direct Sales Comparison Approach. Few if any, complete the Income Approach and even less complete a Cost Approach.

These approaches to value were not merely an exercise in academic prowess, they were the fundamental tools that professional appraisers used to determine the market perceptions of the various forces that affect the value of a property. Yes, I am painfully aware that lenders stopped wanting to hear about the cost approach or the income approach. Also, I realize that the “appropriateness of a given approach will depend upon the nature of the appraisal problem and the quantity of available data to develop the approach” (as taught in many textbooks); however, for the majority of single family residential properties all three approaches are reasonable and relevant to develop. “But, what about the difficulty of determining the obsolescence of the property? Or the GRM?”, I have heard this question for 28 years. The answer is simple. All three approaches to value rely on the development, analysis and understanding of competing market data; nonetheless, each approach represents a differing mindset of the prospective purchaser.

There is the purchaser who wants to keep up with the “Joneses” and for them, the Direct Sales Comparison Approach is relevant because it should reflect the buying and selling decisions of the predominant homes in the market. The definition of market value that was handed to us by the federal regulators requests that the value should reflect the “most probable” price, not the highest possible price. Therefore, when an appraisal reports the highs and lows of the market and then compares recent, relevant sales to demonstrate the most probable price, this approach to value is the best indicator 99% of the time. But, what if for some reason the appraiser misses the mark during the research phase and excludes a portion of relevant data, thereby skewing the numbers by not talking about 30% of the homes that were REO sales or the like? Or, by only focusing on the REO market and not taking the time to accurately assess the motivations of the buyers and sellers within the marketplace.

The Cost Approach to value, when developed appropriately, enables the appraiser to recognize physical, functional and external influences that affect value. This approach generally will set the uppermost limits to value, thus when REO markets begin to sell well below cost to reconstruct, a very large red flag should be waved by the appraiser to discuss this depressed marketplace.

The Income Approach to value, when developed appropriately, enables the appraiser to recognize the investor market that considers the anticipation of future benefits of ownership. This approach generally should set the lower limits to value because the value of the property is limited to its ability to produce income. This approach will take into consideration the competing properties in terms of competing rents, vacancy and demand.

Of course the marketplace, driven by Fannie Mae, has dictated the information that an appraiser is expected to present in an appraisal report, but does not diminish the  professional appraiser’s responsibility to develop all relevant approaches to value as required by USPAP.

I will suggest even further, had we as an industry been tougher on ourselves and our colleagues to enforce the use of all three approaches to value, it would have been more difficult to ignore the signs that were in the market that the prices were being manipulated. Yes, an appraiser’s job is to report the market data, then analyze this data and form an opinion on these findings, but when two of the three approaches were taken out of the fray, our opinions were rendered less relevant.

“But wait”, I am hearing you say already, “USPAP always required the development of all three approaches to value, when appropriate. So how could it be that the majority of residential real estate appraisers still only complete the Direct Sales Comparison Approach?”. This is an excellent question, and one that I would love an answer to myself.

Under Valued Appraisers

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.