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


It may be trite, but truth tends to get repeated…

The acting of appraising, is one that is complex but simple, commonplace and quite rare. We as appraisers should take a moment to remember that our profession was borne out of a time mistrust and calamity. Actually it has been said, that the appraisal profession is the second oldest profession in the world… that is to say, somebody had to put a price on it… but I digress.

So often we can get sucked into the practice of trying to balance the guidelines, the time restrictions, the unreasonable client demands and (a little thing I like to call) life, that we can forget that ours is a noble profession. We are the ones that people turn to when they are seeking accuracy and reliability. They want to know that value they are placing on an item is one that others would also agree with or tend to accept.

The reasons for this need vary greatly, but the basic foundational premise is that we all need someone who we can trust to make sure our thoughts on a matter are reasonable or accurate.

Of course, you can put this in the context of real estate and mortgage lending, and greed and profit, and people pushing the limits just to close a deal and once you do place your mindset into their realm, then you run the danger of being sucked into the vortex of endless attempts to satisfy unreasonable demands using antiquated methods and approaches that were designed years ago by men who understood the need to place objectivity into the world of money. They wanted to make sure that the process of lending money was backed by solid reasoning unimpeded by greed or corruption. At least that is the “truth” I choose to believe. It helps me sleep at night to believe there are still a few good men and women out there who are not only interested in lining their pockets at whatever cost necessary.

To all who continue to treat appraisal as a profession, I tip my hat.

See you around the water cooler!


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!


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!

Be Prepared to Change

With the new expectations that are placed upon the real estate appraisal, Real Estate Appraisers are becoming very familiar with change. First of all, it generally describes the type of money found most prevalent in our wallets, purses or bank accounts. More importantly, it describes the only thing that is considered constant in this ever evolving industry.

At a certain point in time a real estate appraisal was looked at as a tool to decide if a particular property, or collateral, was appropriate to support a loan. Appraisals of course, are not just used for mortgage lending purposes, but for the purposes of this rant, I am going to focus on mortgage lending. How many reading this blog can remember when a real estate appraisal was placed on an index card with a Polaroid of the subject taped to the back? Ok, so how many people had to Google Polaroid to see what I am ranting about? I digress. Lenders once were quite careful to evaluate the capacity, character and collateral of a potential borrower to make sure the loan was sound. The collateral process was almost an after thought because the lending standards were tough and credit was a privilege of careful consistent money management and not a “right to all Americans”.  If the idea was to better the lives of Americans and provide a more equal base of opportunity, then the solution was to first educate us all to be better money managers. It is odd that we learn so many things in school, but there is no mandatory class or curriculum  to teach us how to manage our money, develop and maintain good credit and the like. Again, I digress.

In order to affect changes that are beneficial, there needs to be a unification of thought and purpose. If real estate appraisers are to act as more than the eyes and ears of the lender, then there needs to be re-education. With the introduction of the Market Conditions Addendum, as discussed in a previous post, many clients seem to believe that appraisers are now expected to forecast values and demonstrate the direction  of the market so that the lender can determine if prices will continue to decline or continue rise within a given market area.

Of course, it is possible to forecast prices using models of data to demonstrate trends and predict future happenings. The predictions are of course no better or worse than the sampling of data that was used to develop the model. The further out the forecast predicts, the less reliable the prediction becomes. Am I suggesting that appraisers should now focus on the micro-economics of the subject’s market area? No. I am suggesting that there is an indication that many clients are changing their marketplace expectations. In response, real estate appraisers need to change their ability to understand the client expectations and fulfill these expectations.

The challenge is to continue to present a report that will be easily understood and will not mislead the user. If any information is presented in the appraisal that may be less reliable because the conclusions are based upon a sampling of data or because  like with the market conditions report, as mandated by Fannie Mae, the appraiser is asked to report a portion of a cycle in real estate instead of the complete cycle the conclusions can lead to erroneous results.

We must take the time to explain the full impact not only of the information that is recent and relevant to the subject appraisal, but now we must also take the time to explain the full impact of the data that is mandated by the use of forms that by their very design are misleading to the appraisal process.

Mark my words, there will be much more to this as this saga unfolds before our very eyes.