GUEST AUTHOR: Micheal W. Armentrout, VP AM Appraisals, Inc. Mike has been involved in full time real estate valuation since early 1992 and has experience in numerous Central Ohio markets. He served as a staff appraiser at several local firms before forming AM Appraisals, Inc. with business partner J.M. Massey.
Almost one year after HVCC was implemented, it seems as though little has changed in how the vast majority of appraisers view it. Issues like downward fee trends, geographic competence, and unrealistic turn-time expectations have all been largely proven to be accurate predictions. It makes it easy to understand why many appraisers are frustrated when all they wanted was someone to ask them what they thought before enacting such massive changes.
There is however, an issue that has not received much
attention publicly. Could HVCC be promoting an environment where appraisals are
actually being deflated? The blogosphere has generated some comments that hint
to this but then something came across my desk the other day that may have supported
this suspicion. It was a memo from an appraisal management company who shall
remain anonymous and it warned of a potential trend forming in regards to
contract prices not meeting purchase prices.
The memo Download Amcletter specifically pointed out the use of data from the “depressed” market and how it might be affecting values. Now I think we need to pause and take a look at this. I believe a few issues are in play here which need further explanation.
First, if “depressed” is referring to foreclosure related sales, we need to understand that REO and similar sales cannot automatically be discarded. Historically, these sales have been considered distressed and represented market segments such as speculators and investors but there are some markets which are comprised of almost all bank-owned and/or short sales. The longer this saturation continues the more likely these will become the predominant transaction types and thus accepted by the typical buyer. Naturally then, the few isolated traditional sales will be negatively affected. On the other side, markets that have a small percentage of foreclosure activity may not affect traditional homeowner-to-buyer transactions as much or at all.
The term “fair market value” implies and requires that we identify what the market is, not only in terms of geography but also in terms of conditions and considerations that the typical buyer will weigh. It is premature then to automatically dictate that we cannot or will not cite particular transaction types without first identifying the market.
The memo also noted a possible effect on future appreciation. Every appraiser knows that a contract price is not necessarily equivalent to market value and could be derived from any number of factors. That’s why a thorough review of the actual contract is critical in our analysis. We must however look at the overall trend in the individual market. If typical buyers across a market are making offers free of duress and incentives and of their own volition, then isn’t it fair to conclude that these lead to valid sales and are accurate indicators of market value? How exactly does a market ever move upward if they are not?
One other issue involves a potential shift in how we complete appraisals. One of the primary goals of HVCC as well as many appraisal professionals was to distance us from the pressure to attain predetermined values. Since HVCC was adopted, it could be argued that this has initially worked to some small degree but may have also fostered a situation where appraisers are producing reports from a fetal position. We appraisers tend to be a cautious bunch and are naturally prone to limit our exposure to risk.
As an appraisal value is inflated above an accurate value range, our liability expectedly rises but as a value is deflated, liability actually falls. Clearly a report is just as erroneous on the low side of accurate as it is on the high side but liability only tracks in a straight line.
Here is where it gets radical. I wonder if the comp selection issues noted above could be conflicting with our desire to lower our risk. I’m not alleging that we are intentionally selecting the lowest sales possible, but might be defaulting to the low side of adjusted ranges as well as not fully considering all buyer perspectives. In an effort to reduce callbacks and meet lender guidelines at any cost, are we just selecting 90 day sales regardless if they are truly the most representative or not?
Are reports morphing to what an AMC wants them to “look” like without concern for fair consideration? We are not to be advocates for anyone in regards to appraisal conclusions but if we are honest, it is possible for appraisers to advocate for themselves by being overly conservative.
In the months prior to the enactment of the HVCC, I feared that this could become an issue. The topic seems to be taboo among many appraisers while realtors, originators and now AMC’s have predictably been expressing their concerns. Hopefully, we would all agree that appraisers would be a better voice to represent themselves on this.
Many might contend that lower appraisal values are nothing more than a long overdue correction. This theory holds that the lack of pressure resulted in a natural adjustment to what values should have been all along. Ultimately time will tell but these recent developments do raise serious challenges.
So that no one misunderstands, decline can still occur for market-based reasons independently of any secondary influences. Appraisers however, must take every step to make sure they are not influencing the market in any way. We may not like the current state of affairs in our industry but we cannot allow any further degradation of our reputation.
Problems did exist prior to HVCC but any pressure that was applied ideally was held in check by our liability. At the end of the day, distancing appraisers from origination may be futile. The AMC model and rotation lists will likely do little to curb pressure since loan origination departments and lenders still exist to make money. Once they sense a problem with maintaining or growing a profit margin, they will apply “pressure” to whomever necessary to achieve their goal. This will include shopping AMC’s, manipulating HVCC principles to their advantage and shaping regulation through government lobby. The full implementation of the IVPI has been delayed for nearly a year and one could wonder if it has anything to do with being a possible roadblock to lenders having the ability to continue pressure under a new umbrella. It’s starting to make the old appraisal system look like a dream world.
GUEST AUTHOR: Micheal W. Armentrout, VP AM Appraisals, Inc. Mike has been involved in full time real estate valuation since early 1992 and has experience in numerous Central Ohio markets. He served as a staff appraiser at several local firms before forming AM Appraisals, Inc. with business partner J.M. Massey. e-mail: marmentrout@amappraisals.com web address: www.amappraisals.com
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