Appraisal Scoop

Pressure Comes In Many Forms - HVCC, Rotation Lists, Appraisal Regulation

An associate and I were reminiscing the other day about the good ole days when work was plentiful and we were afforded the luxury of turning down certain clients in favor of more desirable ones. The only thing missing from the nostalgic moment was a porch swing and a cold glass of sweet tea.

Times certainly have changed indeed as it seems like no one in the industry, including the leading trade organizations seem to know where we are headed. Blog posts read like bickering matches and opinions become further estranged from one another with less and less meaningful discussion. Appraisers obviously come from varied backgrounds and experience levels but unification increasingly appears unlikely.

Through the years, I have noticed that the common thread of industry talking points has always centered around the so called “pressure on appraisers”. This has uniformly been defined as a mortgage originator’s communicating a desired value to a selected appraiser in order to close a loan. The concept relies on the assumption that appraisers may have completed erroneous reports for fear of reprisal or loss of clients which would then lead to a loss of income. It may be a clear realty that this did occur but the deeper question is to what extent?

Recent months of retrospect have caused me to ask; was it really so prevalent that it actually falsely moved the nationwide real estate market upward which eventually lead to a foreclosure fed collapse?  If this is the case, then how many of us are confident we were doing our jobs correctly. If the majority of appraisers are clamoring about coercion to inflate values, then is it fair to assume they gave in to the pressure and then pointed their finger at everyone else?

I have contended in past articles that moral integrity aside; lender approval, keeping a license, avoiding lawsuits and maintaining a good reputation was more than enough to keep me on the straight and narrow in regards to how my firm and myself completed appraisals. After all, how can an appraisal company continue to exist, if they have been driven out by any number of checks in the system? Were these motivations not enough for most in our profession?

The expression “be careful what you wish for” has come to mind many times recently and our wish may be coming true. I fear that our years of beating the appraiser pressure drum have brought forth changes we were not prepared for. The HVCC, rotation lists and expansive lender control are only some of the recent behemoths of regulation that are touted by their originators as an answer to the problem of pressure on appraisers. The ironic thing about these proposed solutions is that they all have loopholes where abuse can and most likely will still occur.

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Pending Mortgage Reform Bill H.R. 1728 Contains "Property Appraisal Requirement" Provisions

"The Mortgage Reform and Anti-Predatory Lending Act of 2009 (H.R. 1728) was introduced March 26 by coauthors Rep. Brad Miller (D-N.C.), Rep. Melvin Watt (D-N.C.) and Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee. It is expected to move quickly through the House this month and go to the Senate by May. The odds of passage in some form are high, according to banking and housing industry lobbyists." (Kenneth Harvey - LA Times )

The bill is intended to:

To amend the Truth in Lending Act to reform consumer mortgage practices and provide accountability for such practices, to provide certain minimum standards for consumer mortgage loans, and for other purposes.

Click here for the GovTrack Text H.R. 1728

The bill does contain some provisions that will effect real estate appraisers:

   

Runt Rants - Highly Honed Powers of Observation and Analysis Make Us Different

I don’t really know where it started. Maybe born into a family of mental giants, where the only option for the runt is to observe and listen.

Maybe it’s a small town environment, lots of experience with outdoor life learning to observe, listen, drawn conclusions.

Maybe it was the years in correspondent banking traveling to those same small towns in six states, chatting with the grocer, the barber, the gas station attendant, picking up clues, signs along the way…so that when I walked into the bank president’s office I knew more about the commerce of the town than he thought I should, and because of that we could do business, help each other.

I do know that when I came late to the appraisal profession I took all the AI courses that were available in a five year span, all they offered really.

When I began those courses I was already trained to observe, to listen, to accumulate random facts and compose a picture…a hypothesis.

The AI courses built on that base and made me better at it. All appraisers taking the good courses in appraisal theory, learned those same skill and applied what they learned in the field to develop and hone those same skills.

It’s part of what sets appraisers apart, what makes them a professional, part of the skill set that brings value to business transactions. It’s part of what we are expected to provide, why we are paid.

I’ll bet you haven’t thought about that in weeks…maybe even months!

But it happens every day, even if you don’t consciously think about it. A typical sample of that in operation occurred with me the last couple of days.

The nation is in turmoil, many markets have been in recession for a couple of years. Houston hasn’t had that problem…not until recently. Houston is an oil town. It’s much less so than in years before, but still an oil town. West Texas Light at $150 last summer created a boom in the oil patch and in the oil service business. That same West Texas Light is now in the $40-50 range, and the oil services businesses are beginning to hurt.

Houston housing markets have been in balance for the last ten years…good solid value growth in the 3-5 percent range each year. But the clouds are building and it is not just what is being reported in the newspaper…that statistic that one in three Houston houses sold in January were distress sales. That’s certainly not good, but heck! It was 24 percent distress in January 2008.

I saw clouds building as I drove to an appointment recently. Established small strip centers one after the other, all with one or two suites vacant. Three closed bank branches…now vacant.

Yet big dirt is being moved…a 50 acre commercial site to the right in vacant land that I thought would stay vacant for another couple of years. To the left a 75-100,000 square foot shopping center with a large anchor…the anchor not yet announced. That’s another one I thought would be delayed another couple of years…but there it is…tilt wall already in place!

A highway overpass gave me bird’s eye views of two large businesses on either side. To the right was an equipment rental business with a yard full of equipment. To the left was an auction house with its yard also full of equipment. Good for the auction company…bad for the companies that could no longer afford that equipment. Bad for the equipment rental business…when the lot is full the equipment is not earning revenue.

Both those yard statuses mean the unemployment rate is going to tip up in a month or two…the yards are leading indicators.

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Neighborhood Boundaries and Life Cycles

The knowledgeable real estate professional will understand the boundaries and influences that characterize a neighborhood and will be able to recognize the stage or cycle that a neighborhood is undergoing as well as its future prospects. This knowledge is fundamental to knowing how a property fits into its surroundings and the community and the likely desirability of an area to a given buyer.

Neighborhoods and Boundaries

A neighborhood is a geographically localized community within a larger city, town or suburb. Neighborhoods are often social communities with considerable face-to-face interaction among members, usually feature some sort of boundary lines to distinguish themselves from other areas, and neighborhoods typically exhibit distinctive types, sizes, ages or styles of homes.

Neighborhoods boundaries can be determined in a variety of ways. They can a set of physical geographic characteristics such as roads, rivers, etc., the geographic area served by a particular school or place of worship, or perhaps social bonds where people share similar interests. Availability of and access to employment opportunities might form a boundary. They sometimes are formed around distinctive ethnic or cultural communities where people share similar backgrounds or heritage. Some neighborhoods encompass a single subdivision or development, while others may encompass many. Some are very small in area and others are very large, and some may actually overlap.

Many neighborhoods have associations (voluntary or mandatory) that maintain and enforce regulations or facilities, provide information, or offer opportunities for neighbors to interact. The Austin, Texas area has a large number of neighborhoods and is known for the strong bonds and influence that neighborhood associations have in the community and the grassroots aspect of the political process.

Knowing the boundaries and characteristics of the neighborhood where a property is located is very important in the real estate business, and neighborhood analysis is a fundamental aspect of both sales and appraisal valuation. Visiting neighborhood association websites can be a great starting point to understanding boundaries and other basic characteristics that comprise a given neighborhood. A driving tour will reveal much about a neighborhood as will informal interviews with people who live there. The ideal candidate for knowing the ins and outs of a area is someone who lives there.

Neighborhood Life Cycles

Neighborhoods typically begin in a growth phase as construction begins and continues over time, creating new housing. Growth ends where there is no longer any land available. The neighborhood will usually enter a phase of stability which is characterized by a lack of growth or decline and a period of relatively stable ownership. With advancing age a neighborhood will gradually enter a phase of decline evidenced by deteriorating property conditions, increasing crime rates, etc. and is sometimes combined with a certain neglect of public facilities or infrastructure by local authorities.

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First Impressions of the 1004MC Market Conditions Addendum - Part Two

It's been a week since the announcement of the new 1004MC Market Conditions addendum. My first thoughts generated a lot of responses, so I thought I would take a closer look. The 1004MC is required for appraisals with an effective date of April 1 2009, however you can expect (and we have already heard of cases) that lenders will be requiring it long before that date.   Download MCA_Appraisal_Report.pdf

The replies to my post pointed to some of the short-comings or conflicts and raised the possibilities of even more, depending on your location Multiple Listing Service, etc. While the form is only one-page, the appraiser "must also provide support for the conclusions". Considering the questions and the limited space provided, I would expect the final product will be several pages.   New FAQ PDF from Fannie Mae regarding form 1004MC and other items.

After a trial run, even with the availability of a "statistics feature" in my MLS, the typical user will have to make multiple searches to provide the answers. If you share my view that "competitive to the subject" isn't always reflective of "neighborhood trends", you'll need to do the job twice to get both sets of answers. What about other issues? 

Inventory Analysis

What caught my attention was the layout and time periods for the data. There are three time periods specified, the first a 6-month period, while the other two are 3-month periods. With one being twice the size of the others, logically the number of sales in the first column will be larger as compared to the others. 

Imagine the "underwriter calls" you'll get when the first column shows 18 sales and the second and third columns show 9 sales and 10 sales. Do you think someone, somewhere, will want to know why sales have dropped from 18 to 9 and 10 and why you selected stable? 

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First Impressions: Fannie Mae's New Market Conditions Addendum

If you attended my class at the "a la mode Regional Appraiser Conventions", I mentioned that Fannie Mae was working on a "one-page Market Conditions addendum" (similar to Wachovia and RELS forms). Fannie Mae has released the 1004MC form as part of Announcement 08-30, which also includes clarifications and amendments to the existing Fannie Mae Selling Guide. Download MCA_Appraisal_Report.pdf

Key Highlights of Announcement 08-30:

•  New Market Condition Addendum form 1004MC

• Supervisory appraisers must now inspect the subject property

• Reporting prior sales and listing history

• Appraising a property on sites over 5 acres

• Effective age adjustments

• Cost approach for insurance purposes

The 1004MC: "Houston, we have a problem"

My initial thoughts, I think we have some bridges to cross here, one of the reasons I started the series on URARS – Uniform Residential Appraisal Reporting Standards. While I believe this is a step in the right direction, the form and instructions appear to be in conflict with other Fannie Mae Appraisal Guidelines, The Appraisal of Real Estate and "generally accepted appraisal practice". 

As an example, the 1004MC requires the appraiser to report housing trends based upon "sales and listings of properties that compete with the subject property, determined by applying the criteria that would be used by a prospective buyer of the subject property".The conclusions for those trends (based on properties that are competitive with the subject) are to be "reported in the "one-unit housing trends" area of the URAR.

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URARS Part 4: Three Basic Rules - Patience Persistence and Compromise

Getting back to the original story, Dorothy, the Tin Man, Scarecrow and Lion arrived at OZ with great expectations. After all, the Wizard was known for his powers, however they quickly discovered that he wasn’t about to grant their wishes without some showing of worthiness on their part. He gave them a test to measure their patience; their persistence and in the end, their willingness to compromise.

The same holds true for us. To be successful, we will need patience with others (and trust on both sides), we will need to be persistent (continue to get appraisers involved) and we will need to recognize that in the end, compromise will be necessary to develop a version of the URARS that will be acceptable to a widespread group of professionals. 

The Basic Setup

The original intent of the URARS was to compliment the URAR – Uniform Residential Appraisal Report by specifically addressing reporting requirements related to residential mortgage transactions as opposed to a more comprehensive addendum that would cover a wide range of issues related to residential appraising in general.

To get us started and as a general direction to take, the focus here will be on Fannie Mae, Freddie Mac, HUD and VA appraisal guidelines along with USPAP, to develop both the URARS addendum and to create the URARS.org website.

• The URARS addendum can serve as a general outline of what the appraiser did and did not do (clarifying the scope of work), cite general definitions and reference material used in development of the report and direct the reader to the URARS.org website for more specific and definitive references (along with examples, publications, etc.), to provide the users of appraisal reports with "the actions of our peers" and "generally accepted appraisal practices" that are "verifiable and measurable"

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You've ALWAYS Had The POWER! Creating Uniform Residential Appraisal Reporting Standards (URARS)

Most of us remember The Wizard of OZ, the characters, their plights and the journey that served as a lesson to be learned. The Scarecrow wanted a brain so he could think of great things, the Tin Man desired to be more human with a heart, the Cowardly Lion needed courage to face his challenges and Dorothy was looking for a way back to Kansas.

In the end, each realized that what they wanted, they had all along. The journey merely served the purpose of letting them discover what they hadn’t to that point, similar to what appraisers haven’t discovered to this point. Like the characters in the Wizard of OZ, we have the power to effect the changes desired, we simply need to band together on a journey to discover it.

In the series "The Right Start", I wrote of things we could accomplish by working together. The theme was simple, "what if", something I borrowed from an old TV commercial. "What if" represents the possibilities when we abandon preformed conclusions, no longer seeing the glass as "half-full or half-empty" by opening our minds to possibilities.

Objectivity allows us see the glass differently, neither "half-full nor half-empty", but rather twice as big as it needs to be to hold the same amount of water, which leads to new thoughts and possibilities. We have lived with a foregone conclusion that Fannie Mae or Freddie Mac must take action or that USPAP must apply to all to resolve the issues, overlooking the possibilities of our own action to "fix that which is broken", at least to some degree.

What can or should be done?

A good place to start would be to consider appraisal fundamentals and the types of issues taken for granted by many professionals, but confusing or points of debate with others we deal with. The mortgage industry lacks consistency in application, definitions and comprehension of what we do and how it should be done.

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The "Right Start" - Epilogue

AUTHOR:  Patrick Egger is a Certified General Appraiser located in Las Vegas, NV. He teaches continuing education classes on the housing market, appraisal issues for real estate agents and appraisers. Click on Outside The Boxes for a collection of Patrick's articles on Appraisal Scoop!

To some, "The Right Start" represented good ideas and to others, well, it was just Patrick on his soapbox again. Both have merit. I do not have all of the answers. Most of the time, "its just me thinking out loud" and you being polite enough to listen.

The Appraisal Scoop and various forums, serve as "quasi-mentors", providing news, commentary and direction to appraisers. With Web 2.0, we found a "missing link", one lost when the profession left the financial institutions to become a cottage industry of sorts.

While the quasi-mentors serve appraisers, there is still a "disconnect" and as a result, we still have "blind men describing the elephant differently".  We all have views and opinions. After all we are in the opinion business. The problem (one that generates the "but my other appraisers don’t do that") is that while we have a "uniform appraisal report" we lack a "uniform perspective and application". [Blind Men and an Elephant]

Where do we go from here?

I began with "what if" and it will end with the same thought. "What if" does not represent the questions; it represents the possibilities and the answers. "What if" is an exercise for the mind imagination and spirit, designed to recognize the problem, conceive a solution, while developing enthusiasm to energize thought into action.

I suggested "a la mode, inc." as an ally in our quest to shift direction and control (to some degree) our destiny. Some have written, suggesting that I am drinking "a la mode’s kool aide", far from it. Dave Biggers and a la mode "stepped up and took a swing", when the others we not even on the field.

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The "Right Start" - Step 5 - Touchstones

AUTHOR:  Patrick Egger is a Certified General Appraiser located in Las Vegas, NV. He teaches continuing education classes on the housing market, appraisal issues for real estate agents and appraisers. Click on Outside The Boxes for a collection of Patrick's articles on Appraisal Scoop!

From Merriam-Webster, "Touchstone is a noun that can be a test or criterion for determining the quality or genuineness of a thing, a fundamental or quintessential part or feature.

From Wikipedia, "the metaphorical use of touchstone means any physical or intellectual measure by which the validity of a concept can be tested, akin to "acid test, litmus test, etc."

I like both of these because they embody "testing and fundamentals", something many appraisers never learned because their mentors never taught or stressed them. From my viewpoint, touchstones are benchmarks and "benchmarks are fundamental to appraising".

In my "grand scheme" of things, no plan would be perfect without a series benchmarks to measure where we have been, where we are and project, where we could be, in the market and our profession. Touchstones serve as "road signs", forming a map that all can read and understand. 

What "touchstones" should we have?

In part one, I referred to touchstones in the form of standards and I believe that would be a good place to start. Other areas would include providing "market measures" in a uniform format (the Housing Market Addendum) or what we did in the form of a "Clarification to the Scope of Work" addendum, that provides the client and readers with a reference, common to all appraisal reports.

What should we mandate for all residential appraisal reports (that would provide the "actions of our peers" and define "generally accepted appraisal practice"), to impart a new standard of care? Wachovia and RELS have "Housing Market Conditions" addendum's. Are they adequate, too much, too little? Could we improve them and in doing so, better communicate with clients?   

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