I think that appraisers will find this case very interesting from a variety of perspectives! The case went all the way to the Court of Appeals in Nashville, TN and was ultimately decided in favor of the appraiser, but not without some interesting twists and turns along the way.
"The Appraiser contends that the appraisal is an estimation or opinion, and is not a representation of an existing or past fact. Therefore, the Appraiser argues, an essential element of the Homeowners’ claim for intentional misrepresentation is conclusively negated and summary judgment was proper on this claim. Homeowners argue that the appraisal value was not the opinion of the Appraiser, but rather an opinion he gave which the Appraiser did not have or knew to be false. Although Homeowners’ argument applies to the fourth element for fraudulent misrepresentation, their contention does not change the requirement of the first element - that the defendant make a representation of an existing or past fact. In Tennessee, appraisals are not considered facts, but rather estimates or opinions." Id.
"Further, we note that when the Appraiser conducted the Appraisal, he was appraising a home that had not yet been constructed. The Appraiser used the “cost approach” analysis, and referred to, among other resources, the specifications and building plans provided by the Homeowners. At that point, the Appraiser only had plans for the future Home on which to base his appraisal; he could not verify that the materials planned for in the Home were actually used in the construction or examine the workmanship of the construction. In Tennessee, conjecture or representations concerning future events are not actionable even though they may later prove to be false." Id. (citations omitted).
"Not withstanding these risks, Congress is now being asked to go even further and give Fannie and Freddie an unlimited line of credit from the U.S. Treasury and force the taxpayer to buy equity in the companies in order to address any solvency concerns at these companies."
"Fannie and Freddie have always been able to borrow money more cheaply than their competitors by virtue of their implied government backing and other specifically granted government benefits like a $2.25 billion line of credit at the Treasury. Yet such a safety net has not made the companies sounder. To the contrary, it has encouraged them to make even riskier and larger bets than their competitors were able to – which has been a money maker during a housing boom, but a nightmare when housing bubbles burst."
"Granting Fannie and Freddie such broad additional borrowing powers on top of the already generous privileges they enjoy would set a dangerous precedent that if you are big enough and interconnected enough, then you can privatize your profits and socialize your losses. It abandons free-market principles and four decades of assertions that no company was ever “too big to fail.”
On Saturday Sept. 27th, Dawn Kopecki of Bloomberg News, had a follow-up story [Fannie-Freddie exit plan proposed] about U.S. Rep. Jeb Hensarling's proposed plan to giver Fannie Mae and Freddie Mac two years to either return to profitability or liquidate their assets.
"Hensarling, chairman of the Republican Study Committee, said he plans to introduce the bill, which will end federal conservatorship of the companies within two years and require their regulator at that time to appoint a receiver to liquidate assets or allow the companies to return to the private sector with new restrictions."
Also referenced in the Bloomberg News story were the comments from James Lockhart, Director of the FHFA, regarding the delay in implementation of the Home Valuation Code of Conduct.
Author: Cliff Odom, RAA, IFA - Cliff Odom Appraisal Services, Inc. is a residential real estate appraisal firm serving the Birmingham Metropolitan Area in North Central Alabama. Cliff Odom is a Certified Residential Property Appraiser providing timely, accurate residential appraisals to more than 30 mortgage lenders nationwide.
We as appraisers realize that each appraisal assignment begins with a “problem” which is an unsolved question. The term “solution” however refers to both the method for resolving the question and the answer. Every appraisal assignment begins with a question about value and involves a solution that is both a process and an answer. It is important to understand, however, that with respect to these two elements, USPAP addresses the method by which an appraiser arrives at an answer, not the specific answer itself.
The first step in the solution is called Problem Identification or what is sometimes referred to asDefine the Appraisal Problem.
This step involves gathering specific information about the problem in order to identify what needs to be done to arrive at an appropriate and meaningful solution. In appraisal assignments there are certain factors that are included in Problem Identification.
the type and definition of value (these three are considered the drivers)
All seven combined . . . gives us the Scope of Work.
As we all began our appraisal careers, we attend USPAP courses and other type of educational courses each year for our qualifying education. I have set through many courses and I must admit that in many I was totally confused on some of the “terminology”, verbs, adverbs, nouns, pronouns, etc., which we all hear.
Relevant Property Characteristics of the subject property finally begin to flow to the top. After attending many USPAP courses and constant study of USPAP terminologym, I finally realized that this was a very important subject and one that must be fully understood in order to complete appraisal assignments correctly.
This article is being written with reference to USPAP and Advisory Opinion 23 (AO-23), to help other appraisers who may have had (or still do) some misunderstanding and misconceptions of this subject article.
The Associated Press is reporting that James Lockhart, director of the Federal Housing Finance Agency, told the House Financial Service Committee that the agreement with New York Attorney General Andrew Cuomo is still being worked out.
"Lockhart said the agreement will be delayed by one to three months from it's original Jan. 1 start date. While the agreement should be finalized in the coming weeks, "it's taken us longer than we expected to do it," he said."
I penned an article in August 2007 [What's the probability of a loan appraisal "coming in short"?] that was posted to Appraisal Scoop in which I described a probability variable I termed the Loan Officer Coefficient. The Loan Office Coefficient is the variable which acts upon an appraiser's ability to accurately, and independently, estimate the market value of a property. Here is an excerpt from that article:
Loan Officer's DCL* (*Desire to Close the Loan) = Appraiser's(monthly bills + spending money) x Remainder of Life / Desire to not declare bankruptcy
Obviously, using this formula each side must balance. The fewer toys the appraiser has, or the more outside income the appraiser has, the better the appraiser will tolerate a high loan officer coefficient. The only way to lower the loan officer coefficient is to make loan officers compensation fee or salary based or make them subject to mandatory licensing.
I think it was apparent to all of us who work at the street level what was happening one year ago. High Loan Officer Coefficients were making it difficult for all of us to perform at our peak abilities because we were at the height of the Subprime Lending Boom. Mortgage brokers were as successful at originating mortgages as newbie stockbrokers were at picking stocks in the late 1990's. For some of us, it was hard to say no because there was so much business that the thought of "cutting a value" meant cutting off our very life flow of income. How ironic it is that the vast majority of those charlatans have now moved on and those of us still in business have the cold pleasure of seeing what they left behind.
How many times in the last few weeks have we heard on the TV or the radio, or read in the newspaper, someone plaintively asking, "How did we get in this mess?" And what a joke it is to watch the talking heads on TV News and the stuffed shirts on Capitol Hill make such a big deal out of it. Well, it is a big deal. And, it's going to be a long time and very expensive to dig our way out of it. A good way to ensure that it doesn't happen again is to enact legislation that will fulfill what I described to be the only way to lower the Loan Officer Coefficient: mandatory loan originator licensing.
Author: Terry Shannon, Certified Residential Real Estate Appraisers, Indianapolis, IN. Terry has been an appraiser for 22 years and actively writes for his Indy Boomer blog and on BlogCritics.org. This article has been reprinted with permission.
Out of all the cacophony caused by the current meltdown of this country's financial industry, one of the sources in the grass roots mechanics of how all this housing mess came about has been largely ignored: The appraisal.
In the past, until a few years ago, FHA maintained a list of approved appraisers who were given assignments by FHA, not the lender. While there is no sure thing, this system made it more likely that the appraiser would be impartial, that she or he would be an advocate for the property - not the lender, the buyer or seller, or even the Realtor, if one was a participant. This system allowed the appraiser to maintain an arm's length relationship with others involved in the transaction.
Under pressure from the banking/lending industry, plus the efforts in Washington to downsize government, FHA abandoned that system in favor of allowing each lender to choose its own appraiser. While HUD still requires that those performing appraisals for FHA-insured mortgage loans be approved via application and testing, the arm's length situation that formerly prevailed is no more.
Also, until a few years ago many banks and other mortgage lenders employed one or more staff appraisers, who valued properties being secured by that institution for conventional or insured conventional loans. A few lenders still maintain appraisers on staff, but the obvious appearance of a possible conflict of interest finally made the maintenance of them untenable for most lenders.
On the surface, this seemed to be a good thing - not for staff appraisers of course, but for the lending industry as a whole - in that it would promulgate that arm's length relationship. That, however, has not been the case. Pretty much across the board, lenders maintain a list of approved appraisers who are not employees, but who are, in effect, fee paid contractors. The same pressures remain; in order to remain on that approved list, each appraiser must play ball, as it were.
Of course, it has become more complicated than that. Three major factors have developed over the past 15 to 20 years:
First, the advent of so called "mortgage brokers." By and large, over time, these people became the real bottom feeders. Most of their clientele were people who could not obtain approval from any of the more mainstream lenders. If purchasing a home, many of these wannabe mortgagors came into the game often with little cash, questionable income, spotty employment records and weak credit scores. If refinancing existing loans, many brought to the table some or all of the above, plus the added problem of attempting to borrow against a property having little or no equity. More often than not, these were the people on behalf of whom mortgage brokers were attempting to obtain approval. Note that a mortgage broker makes nothing unless the loan is closed.
Herein lay the problem for the appraiser. Especially with refinances and home equity type loans, the pressure came loud and clear from brokers that a certain figure must be met in the appraisal for the deal to work. Failure to comply meant that the broker would simply make a phone call or two until he or she found an appraiser who would get the value up where it needed to be.
Second: The advent of computer generated Automated Valuation Models, or AVMs. AVMs are created via large data bases maintained by companies which gather real estate sales data, much like locally maintained multiple listing services (MLS), but on a regional or national level. These AVMs use this accumulated data to determine the value of individual properties via computer generated models. Many lenders have adopted their use in lieu of standard appraisals. In some instances, an AVM valuation may be backed up by a so called "desk top" or "drive by" appraisal performed by either appraisers or real estate brokers. Neither the desk top nor the drive by report involves an actual "feet on the ground" inspection of the property.
Marshall & Swift (M&S), a MacDonald, Dettwiler and Associates, Ltd. (MDA) business, and the leading worldwide provider of residential and commercial building cost data to the real estate appraisal market, announces new support for the appraisal process through its appraiser certification program.
As the appraisal industry experiences increased regulatory oversight and a demand for evidence that appraisers use best practices, M&S, (a co-founder of one of the professional appraisal organizations that in 1987 helped to establish the Appraisal Foundation) has joined the fight to demonstrate the quality of valuations performed by appraisers. M&S demonstrates this by giving appraisers proof of licensed access to its industry-standard replacement cost data for their property valuations.
The new M&S Licensed User Certificate is available to M&S licensed customers athttps://certification.marshallswift.com, and is for attachment to any appraisal report. The certificate is written confirmation that the appraiser maintains current building cost information in accordance with appraisal best practices, and supports the residential appraisal form requirement that the appraiser list a source of current data when calculating a cost approach valuation. Marshall & Swift also provides an online registry of certificate holders should lenders wish to confirm appraisers’ access to current building cost information as part of their underwriting process.
M&S President Peter M. Wells notes, “Marshall & Swift cost data remains one of the most important and defendable sources of property valuations in the lending process required by the mortgage and appraisal industries today.” Wells states that he believes there will be a resurgence in the use of the cost approach in the lending process because the current debacle in the mortgage industry was fueled by uncertainty in valuations and the market approach alone was unable to find the low point for valuations.
“Restoring the cost approach to the underwriting process is inevitable,” says Wells, “since it is a measurable component to valuation that is not at the whim of emotion.”
Overlooked since 1996, the cost approach has always helped define objectively the total amount of money that can justifiably be lent against a property. It also serves as a baseline to compare market trends with the cost trends of real property.
Author: Warren K. Hoppke, SRPA - Principal of http://www.appraiservalues.com specializes in Los Angeles commercial and industrial real estate. He provides full real estate appraisal services throughout Southern California, including mortgage lender reports and detailed forensic appraisal reporting requirements for court testimony.
As Wall Street reels from major losses many cash starved Wall Street firms, financial institutions, and some insurance companies are scrambling for capital to shore up struggling balance sheets. Liquidation of real estate assets will be one of the first places firms will look for cash.
Prices are on the decline and many firms will soon be in the market hocking their commercial real estate in trade for cash. To top it off, unemployment has doubled over the past year and continues its upward spiral.
This double whammy will result in investors placing upward pressure on capitalization rates as vulture funds hover around looking for fire sales on commercial real estate. Unfortunately, one feeds on the other and as Wall Street layoffs start commercial office and industrial markets will be hit.
For example GE has been selling off its commercial real estate and many other cash strapped corporations and financial institutions will follow. Credit has contracted by almost 400 billion dollars. As credit contracts it has a multiplier effect. The multiplier effect can be 3 to 4 times the amount of the contraction. As Leman Bros. goes under approximately $150 billion of bonds will default.
As reported by AFX News Limited, besides banks and other financial institutions pension funds have been among the top investors in mortgage backed securities (MBS) and collateralized debt obligations (CDO). After years of channeling money into MBS and CDO portfolios of mortgages bundled and sold as debt securities the total size of pension fund securitizations are massive. Thomas Martin, president of the Homeowners Consumer Center estimates pension funds will take a 1 trillion dollar hit from devalued securities.
The nations largest public pension fund the California Public Employees Retirement System (CalPers) could take a hit as large as their $2 Billion dollar residential mortgage portfolio.