Appraisal Ace Blog

This afternoon, Jerry Nagy, who is the Regulatory Policy Representative for the National Association of Realtors, called me to talk about the passage of HR 3221 and the last minute insertion of an amendement that concerns changes to FHA appraiser requirements.

A day after our meeting with Lungren, Glen Wilson, TCAF and REAA member, was flying out on vacation and saw Lungren in the airport. They chatted for a few minutes and Glen asked Lungren what he thought of our visit. Lungren said he was impressed by us and a little overwhelmed with all the information we gave and the number of us present in his office. So, while not an endorsement, at least he knows us now and just maybe, we'll come to mind when he is asked to vote on a bill that affects us.

07/07/2008

REAA Visits Congressman Dan Lungren

On Monday, July 7, 2008, Vicki Keeler, Tinna Morlatt, Janice McNally, Cynthia Sulamo, and I, all of the REAA were joined by Paul Smith, REALTOR, on an informational visit to 3^rd District Congressman Dan Lungren’s office in Gold River.

While we waited in his conference room, everyone present commenced lively conversation about the issues that we are facing today, so by the time Lungren entered, we were fully warmed up.

We started by explaining to him the dangers of the HVCC, which he appeared to know about in a rudimentary sense believing that if Fannie and Freddie enacted it, that was the end. We let him know that there is much opposition to the HVCC including some of the most powerful Federal Agencies and Banks. Tinna Morlatt explained that painting any single part of the industry with a broad brush of blame is wrong and made the point that the laws and regulations are already in place to take care of the transgressors who created the current housing crisis. Creating a whole new layer of bureaucracy is unnecessary if enforcement of current laws and regulations could be stepped up, which should prevent the problems from occurring again.

Once we made our point that the HVCC was probably anything but a done deal, we moved on to AMC’s. We spent quite a bit of time there explaining what they are, why they are dangerous and how they need to be regulated. Cynthia Sulamo gave some great anecdotal evidence about AMC mis-practices and Janice McNally added projected losses of $700M+ should business from independent California appraisers be lost to out of state AMCs.

Next we discussed bills that include appraiser bonding, and I think he understands that it is unnecessary to bond appraisers, who are already insured. I explained that the cost of bonding, estimated at $8,000 to $15,000 per year would drive honest appraisers out of the business. Tinna and Paul Smith added that the unscrupulous appraisers would find a way to play the numbers game and consider purchasing a bond as a “free ticket” to continue to misbehave and a cost of doing business.

While discussing the intricacies of appraising Lungren asked how the dollar for dollar benefits were of adding pools and remodeling kitchens were calculated and Vicki Keeler brought up the point that if the wife wants it, her happiness is what creates the value.

It should be noted that Lungren, as a Republican is against a housing bailout specifically and generally is against more government and against more laws and regulations. But he is also a homeowner and is outside of the Real Estate industry, so his introduction to the world of appraising by ethical, responsible, intelligent and passionate appraisers must have been an eye-opener for him. I think he understood our point that if bills do get passed during this session we want to make sure that they do the least harm possible. Even if we didn’t sway him to our side, I feel that we opened the door and the next time an issue comes across his desk that affects appraisers, he or his office might very well call one of us for our interpretation. At the very least, he is aware of appraisers and the REAA now.

And his aide offered that he might come to speak at one of our dinners some day.

Appraisers Need Your Help in Verifying Sales Data

Have you gotten an email or a phone call lately from an appraiser about a recent sale?

Usually it goes something like this:

“I’m appraising a home near your recent sale at 1000 Main Street and I'm considering using your sale as a comparable. Will you tell me if there were any concessions and what was the amount? How much or what were the seller or builder incentives, if any? What was the condition of the home? Were there any unusual seller or buyer motivations involved in the sale? Based on your knowledge of the market would the same property sell for more or less if you were to market it today?”

Certainly it will take some of your valuable time to answer these questions but the information you provide is of great importance to the appraiser, the client and will ultimately affect the whole market. Knowing a concession, seller or builder incentive is critical in properly adjusting the comparable’s selling price. The condition of the comparable is often not apparent from the MLS or when viewing the outside during the drive by of the comparables. Seller and buyer motivations are rarely discovered except by talking with the REALTOR. And your knowledge of the local market is invaluable to the appraiser who may cover all of the Greater Sacramento area, but not be aware of the subtleties of your neighborhood.

So if you get one of these emails or phone calls, please give the appraiser the benefit of your knowledge and help us provide the best product we can for our clients. The resulting accurate opinion of value in the report will ultimately benefit the whole market.

This is our response to the Home Valuation Code of Conduct. The Home Valuation Code of Conduct (HVCC, the Code) has created many concerns for the Real Estate Appraiser’s Association. The Real Estate Appraiser’s Association (REAA) requests that OFHEO, Fannie Mae and Freddie Mac do not implement this agreement unless it is significantly modified to ensure the intended result is to restore public faith in the process of obtaining unbiased and impartial valuations.

Section I of the Code correctly identifies some of the more egregious practices in the industry. These abuses have distorted the impartial nature of the valuation process and ultimately have undermined the quality of the valuations and have eroded public confidence.

There are several points of concern the REAA has with subsequent sections of the Code.

Section II should be amended to make provisions for a lender to provide a copy of any valuation product, not just an appraisal report, since confidence in the impartial nature of the valuation process should not be only applicable to appraisal reports. A uniform and responsible disclosure of the valuation product is a prerequisite for public confidence. The borrower must also be made aware in written form of the intended use and intended user of any valuation product.

Section III speaks to lender responsibility in selection, retention and payment of appraisers. While the intent is to channel the valuation requests away from potential influence; our view is that it leaves few options but for the use of unregulated appraisal management companies.

The lack of any regulatory oversight for appraisal management companies is a concern for the ordering process.

For lenders, the impartiality of the ordering process becomes suspect by later provisions noted in section VI (6) that allow a lender to have an ownership interest of up to 20% in the ordering entity.

We would rather have all entities that order appraisals be 100% accountable and be subject to the same stringent guidelines to maintain a more consistent application of impartiality to the valuation ordering process.

Section IV seeks to establish the need for “absolute independence” in the responsibilities of those that select, retain, recommend, communicate, order valuations from or manage appraisers. Being cognizant of the small size of some originators, we support the mandate that “The lender must show that prudent safeguards were in place to prevent the loan production side of the business from influencing value.”

The REAA supports both concepts of absolute independence and prudent safeguard in Section IV but suggests that the mission of Section V, “appropriate training and qualification in the area of real estate and appraisals” include the study and demonstrated understanding of the Uniform Standards of Professional Appraisal Practice (USPAP) for all entities that order appraisals.

The fundamental flaw in the current system of appraisal ordering that invites many the abuses outlined in Section I, is that appraisers adhere to the Uniform Standards of Professional Appraisal Practice while clients are almost completely unaware of the standards that govern licensed and certified appraisers.

If undue influence is to be minimized, the regulating authority must ensure the appraisal request and the assignment are completed in conformance with USPAP by both parties.

Section VI - Remove the exceptions allowing a lender to own portions of an appraisal management company, regardless of percentage. Any percentage of direct ownership would reduce the concept of “absolute independence” of the valuations provided by a management company. The use of internal Automated Valuation Models (AVM) for the purposes of collateral valuation should come under the same “absolute independence guidelines” that apply to appraisers or remove the ability to use AVMs internally. Furthermore, remove the ability for a lender to own and operate, in whole or in part, an internal AVM used for valuation.

Section VII - Remove the provisions allowing the lender to serve as its own investigator, and shift the hotline ownership to the IVPI (Independent Valuation Protection Institute) which can independently choose to refer cases to law enforcement authorities or any other regulatory bodies. Modify the hotline notification language to apply to all parties to the transaction, and to all valuation products, instead of unfairly singling out only appraisals and appraisers for implications of potential impropriety.

Section VIII - Valid sample sizes and testing methodology are more properly determined by risk analysts. The responsibility of the lender to show that prudent safe guards were taken to show no undue influence in the ordering process should extend along the chain of processing to post funding analysis to show all safeguards in place perform as warranted.

Section IX – The reporting mandate should be extended to include the reporting of unethical or improper conduct of any party associated with the transaction that violates the guidelines of Section I.

Section X – Any type of valuation should carry the warrant that it was performed in accordance with the HVCC.

Section XI - The distinctions and higher standards associated with an actual appraisal prepared by a licensed or certified appraiser should be made clear. Exclusions given to alternative valuation methods provide a subtle hint to lenders that these valuation products are equal to USPAP compliant appraisal reports.

The Real Estate Appraiser’s Association believes that the solutions outlined above, as well as additional education requirements for appraiser certification enacted by the Appraisers Qualifications Board (AQB) in January 2008, will promote increased competency of appraisers and improve independence in the appraisal process.

We respectfully ask that OFHEO, Fannie Mae, and Freddie Mac please give these terms consideration and modify the agreements so that all the concerned parties- appraisers, mortgage brokers, loan originators, lenders, banks and most importantly, the public, are protected in an equitable manner.

For all reasons mentioned above, The Real Estate Appraiser’s Association calls on OFHEO, Attorney General Cuomo, Fannie Mae and Freddie Mac, to amend the HVCC agreement in order to address these fundamental concerns before the unintended consequences of this plan cause further damage to the mortgage industry and to the appraisers who serve the nation’s lenders.

Dear Loan Officer,

I met you briefly at the SAR meeting and I thought you said you worked for Chase, but perhaps I mis-heard. At any rate, when you mentioned that you were looking for appraisers that "don't check the box", I assume that you were talking about Stable Vs. Declining market check boxes on the URAR 1004.

Most lenders, CAR, NAR and FNMA have identified Sacramento, San Joaquin and Placer counties generally as "declining".  Since none of these entities specifically defines what a declining market is, the burden of proof is on the appraiser to demonstrate stable or declining values based on historical, recent and current sales analysis.

Part of my job as an independent fee appraiser is to determine how the subject's neighborhood fits into the market. As we all know, each neighborhood is distinct and, while the market, county or zip code as a whole may be declining, the subject's neighborhood may at the moment or for a definable period be stable. If evidence exists that the subject's neighborhood is stable, then the Stable box can be checked as long as the appraiser fully supports that decision with market data, paired-sales data analysis and even graphing the data if necessary to show the period of stability.

If the subject's neighborhood is truly declining, then the Declining box must be checked, and that decision also must be fully supported by the same method of data analysis as noted above. 

In any case, if the wrong (Stable or Declining) checkbox is marked, the lender's underwriter or reviewer will condition the appraisal or reject the appraised value based on their own underwriting guidelines, especially if no supporting data is in the report to justify why either box was checked.

I always base my decision on my own independent research of each subject neighborhood and fully support that decision in the report. I don't automatically check either box which, if wrong, could lead to a rejection of the appraisal or a review that could end up costing the borrower or delaying the loan.

I hope you don't mind that I took the time to respond to your question in a way that may clear up some of the confusion about Stable Vs. Declining markets and the appraiser's responsibility to accurately report and support market conditions.

Home Valuation Code of Conduct