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

For Clarity Sake

Once again I find myself harping on the original intent of USPAP. The purpose of the Uniform Standards of Professional Appraisal Practice (USPAP) is to promote and maintain a high level of public trust in appraisal practice by establishing requirements for appraisers. It is essential that appraisers develop and communicate their analyses, opinions and conclusions to intended users of their services in a manner that is meaningful and misleading. (quoted from the Preamble of USPAP).

Why is it then that GSE’s can then dictate forms, like the MC Addendum (or affectionately known as the Market “Confusion” Addendum). Of course the “market conditions addendum” I have railed on before, the inherent difficulty of trying to suggest a trend from a very small sampling of data is that erroneous assumptions and statements are made in an attempt to try and gain an understanding from information that has now been mandated by the guardians of the industry.

It is like being asked to evaluate the ocean by analyzing a teaspoon of water under a microscope. While this may be a fascinating exercise in microbiology it could easily produce erroneous results for an oceanographer.

The ever popular UAD (Universally Audacious Development of irrelevant facts) which was published by well meaning, well educated individuals who were clearly not appraisers.

The idea of creating a system of rating condition, for example, is a good idea. The problem is that since the majority of appraisers can not handle the concept of a property that typical for its market area is rated as “average” condition, is not really going to handle the idea that a home that was built in 1950, with no updates in the last 15 years, but in market accepted condition is now rated a c4 rather than a c5.

Think of it is this way, when you want to communicate to a child you do not devise charts and graphs and hand them an appendix so that they can figure out what you are trying to say. No, instead you use commonly understood words, phrases, and concepts. You “paint the picture” and “walk them through the logic” so that at the end of your attempt at communication the point has been made and the information received and understood.

An appraiser rarely has the opportunity to be reviewed by another appraiser, but must constantly train, explain, and provide further clarification to an industry that is now filled with new players, with new rules, and new ways of communicating the information. This was all done for the sake or creating a clear and simple process?

The function and role of the appraiser has now become even more important, because now even more they need individuals who understand the process and communication of results, but also can translate the definitions and though processes that have been imposed upon the residential mortgage appraisal industry as a whole.

See you around the water cooler!

UncleZev

Signed or Unsigned that is the Question

There is an interesting discussion taking place on some of the forums over the last 9 days with regard to USPAP 2012-2013. Whether or not the additional certifications require a signature. Before weighing in on an esoteric discussion, I would like to remind everyone that the first and foremost intent of USPAP is clarity. To provide an opinion in a manner that is clear, easy to understand, and professionally derived. Therefore, as long as you pay attention to the particulars of USPAP and provide your reports in a manner that is clear, easy to understand, and professionally derived you should be able to withstand the scrutiny of a peer review and or the state board.

Often times it seems as though or reaction to situations are driven by an inane desire to avoid litigation which is easily understood given the very nature of this litigious society; nonetheless, I maintain that our basic responsibility as objective professionals is to provide an opinion of value that is shaped by the foundational concepts of real estate appraisal. Over time the provision of this opinion has evolved from index cards with a Polaroid on the back to computerize forms with maps that are automatically generated with digital photos, and aerial views. Still the appraisal report of today is less clear, in many ways, that the reports of old. Why is that?

Back in the early 1980’s my father announced to me that the appraisal industry was “going to hell” because the industry was filling up with women and children. Of course that was tongue-in-cheek, because my mom and I both worked as a appraisers in his office at that time. The longer I stay in this business I understand the sentiment, of my playful father. I do believe the the ruination of the appraisal industry was allowing clients, specifically lenders, to control the content and form that an appraisal report must take. What I mean to say is that allow, USPAP has grown to provide a basic definition and structure, the revelations of USPAP were not new or earth shaking in any manner. Any old school appraiser who was “worth their salt” already provided appraisal reports that exceeded the expectations and requirements of USPAP. The foundational idea of provide a report that is clear, concise, and supported by sound reasoning was hardly a new way to think of the appraisal report.

So what was the catalyst  began the fiasco that now know and “love” to be form appraising? I personally believe it was a phenomenon that occurred during the decades that followed WWII. No one reading this blog will likely remember those days except for the stories our families told us, or what we have read. But at that point in our history America was at its strongest financially. We had a very large majority of our population returning home and rebuilding their lives. Demand and expectations of profits began to rise and escalate with each passing generation. Very soon the generations that did not work to create anything, began to wonder why can’t we make more than “the old man”. Respect for the elderly diminished, the “youngsters” of the sixties, seventies, and eighties raised their children through proxy because most of them were working and creating “bigger and better ways” to become wealthy. This hunger for more, eventually created the circumstances that lead to our biggest real estates booms and busts. The mortgage industry was born out of these times; however, due to the demands by consumers there was very little training or education required for this newly formed “experts” and rules and regulations were developed as the need arose.

We have not changed very much, we still react to issues that we have created. While it is of course most important to take evasive actions during a crisis, there really needs to be more and more understanding by those who dictate our futures with the piles and piles of “stuff” that is created in response to epic portions of greed, corruption, abuse and mistakes.

Due to the melt down of our financial sectors, many of us are looking around, doing a lot of soul searching and trying to figure out “what the hell happened?”.

My suggestion? I say it is time for each and every professional who is objective, to stay focused on providing the services we have spent our lives learning to provide. Breathe and remember that many of those in power today, believe that the 1980’s was a life time ago. There is absolutely nothing wrong with youth, and age alone does not create wisdom. But we all should develop a sense of respect and appreciation for each and every individual with whom we interact. The process of real estate appraisal is not complicated. The reporting of an appraisal should also be “easy”, but in the process of communicating we often find ourselves in the role of consultant or teacher. Because the majority of our clients are checking boxes and filling out forms and if everything fits in the box you must be a good appraiser. If everything does not, you must be bad.

We really need to “preach” the basics and provide reports that take the time to explain why we have taken the approach, why we have used the comparables we choose, or why we excluded a particular data set. I know I can already hear, I do not have time to teach. I do not make enough money to educate my clients. But my response to this I also “steal” from my father (who I am sure borrowed it from someone else). “Education always costs… but ignorance costs more.”

Back to the original question, Do additional certifications within a residential appraisal require a signature? There is case to be made on both sides of the debate, to reconcile this and move on to the next assignment. Simply make room for the certifications on page 3 of the form (above the cost approach). All the information on this six page form is covered by the signature.

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

 

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!