GUEST 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. He can be reached at [email protected] Look for the Outside The Boxes category for a collection of Patrick's articles on Appraisal Scoop!
For years, Joan Trice via her Collateral Risk Network has promoted the concept of improving the appraisal process. Recently, Joan participated in a whitepaper with the National Association of Homebuilders (NAHB) entitled “A Comprehensive Blueprint for Residential Appraisal Reform”.
- Streamlining the process (including USPAP) and ensuring effective oversight and enforcement
- Creation of a national real estate data superhighway accessible to all
- Better education and credentialing for appraisers
- Establishing consistent rules, guidelines and standards for appraisers
- Developing procedures to address faulty appraisals
The other day in the Appraisal Buzz, Joan invited appraisers to participate in “improving the appraisal process”. She wants our thoughts, ideas and anything we feel will make a difference and improve the appraisal process. Regardless of whether or not you agree, or disagree with her direction, you have to respect her effort.
Leading means doing what needs to be done and Joan is leading. She took time and made the effort to assemble movers and shakers along with “inside the beltway folks” that are in a position to reshape the appraisal process. She also has the attention of the NAHB, and the “Collateral Risk Network”, a 300 person “members only” group of chief appraisers, regulators and industry experts, who (according to the article) “are focused on resolving the many challenges facing our profession”.
To that end, I wanted to make some observations and give Joan some thoughts on the appraisal process and ways I think we could make it more effective for appraisers and those that rely on appraisal services. I hope that each of you will do the same.
Definition of the Problem
In my opinion, the form and the process could be improved. However, I do not believe it is the form or the process that stands as an impediment to a healthy housing market. When you examine what is wrong with housing and the system, changing the appraisal form is not going to fix the problem.
While USPAP has been adopted by the users of appraisal services, its underlying tenets and fundamentals have not been intergraded into the lending system that appraisals support or into the mindsets of those that use or rely on appraisal services. Therein is the problem.
We are required to develop opinions “objectively” within USPAP compliance. At the same time, those wanting to “make a deal”, often want us to view the value opinion from outside USPAP or lending guidelines. When we do not, we are the problem and we are the ones impeding “housing’s recovery”.
despite the obvious.
Lenders and users of the appraisal have different motivations from those providing appraisal services. The appraiser does not stand to benefit from the deal. Often the client (lender) or the client’s client (builder, agent, buyer, etc.) does. Appraisers are not incented to come in high or low. We are paid the
same, regardless of the value opinion. We have every incentive to make the deal and avoid the consequences.
On the other hand, builder’s, lenders and other market participants, have skin in the game. They do not earn a commission or a profit if the deal does not close. When the deal is at risk of not closing, due to the value not being there, the debate ensues.
Is it a fair debate, with all parties trying to find the right value for the subject or is it a little one-sided, with some of the participants promoting a value opinion via “their comparables” that, “believe it or not”, supports the deal and a commission earned or profit realized?
Personally, I think USPAP, market value and a long list of appraisal related issues (including the forms), better training, accountability, etc., should be addressed. However, none of this will matter unless we change the system. As long as market participants have a financial incentive to close the deal, any impediment to closing the deal, will be considered counter-productive and will come under attack.
We have changed the form and the appraisal process many times over my 40+/- years in the business. Tell me, what has changed when it comes to users of appraisal services and those that rely on the appraisal, when the appraisal does not close the deal?
Do lenders, agents and builders pat us on the back, saying wow, were glad you came in a little low and saved us from making a high-risk deal? Are they quick to say to their clients, “You should be happy Mr. and Mrs. Smith, that appraiser just saved you from paying too much for the property that I sold you?”
Over the past five plus years, lenders, homebuilders, agents and secondary market investors went out of business and homebuyers lost their homes, when loans did not perform and the effects rippled through our economy. Ask a few simple questions to these same individuals and businesses.
“If you could go back in time, knowing what we now do, would you be willing to pay the appraiser twice as much to hear the truth? Would you give him or her more time complete the assignment, without pressure, and develop a more reliable value opinion? Would you listen to the appraiser and adjust your loan to avoid housing’s collapse? If you could erase the massive loans losses, by merely listening to an objective voice, as opposed to those with skin in the game, would you?”
The appraisal process is not perfect and nor are the appraisers. I have taught nationwide and met 1,000’s of appraisers. Generally, they are good people who do not know what they do not know. This we can fix with better training. On the other hand, you cannot fix an “incentive based” housing market with a new appraisal form.
Real Estate is “Imperfect” ... stop shooting the messenger
Defining the appraisal problem and fixing nit is really quite simple. Real estate is imperfect, as are its participants. There are many sides to “housing”. However, only one side or two sides have adopted a
definition of market value and a set of standards and criteria that must be followed to determine what market value is, the appraisal profession under lending guidelines.
I agree with homebuilders, real estate agents, loan officers, lenders, secondary market participants, investors, property owners, etc., that the appraisal process should be more transparent. However, I
disagree that “changing the appraisal process or forms” will solve the problem or that it is “one step” towards a possible solution.
This country depends on housing. Housing and its related industries are a considerable contribution to the GDP of the US. Over the past decade, we witnessed firsthand, the importance of housing and the financial systems and related industries that support it and our economy.
Everyone was made acutely aware of what happens to the economy when you disregard the measures in place to prevent pressure and unfair advantages. Market participants want a better “appraisal process” and one that is transparent. I for one agree that it should be and they should have it.
To that end, we do not need to change the appraisal process or the forms. We simply need to have the participants adopt the same rules we have. We need all of “housings participants” to play by the same rules, to be governed by the same principles and subject to the same consequences.
We can start by having the National Association of Home Builders, the National Association of Realtors, and others adopt a modified version of USPAP or Dodd Frank that incorporates many value related principles and the same definitions (including value and how it is determined), that we have.
When builders and agents set the price, those prices should be supportable as market value, using the same criteria we have to. Those involved with the sale (that depends on financing), refuse to recognize the rules adopted (USPAP and Appraisal Guidelines) by those that control that same financing.
We can edit USPAP to make it easier to comprehend and Congress can adopt it as “Federal Law”, (just like the speed limit), that applies to all housing market participants. This way, it is the law of the land and
anyone violating its principles and provisions are now subject to the same consequences.
We can also adopt a “national market value definition” and “criteria” that will be transparent and that all market participants must follow. If we all know the rules, and those same rules and consequences apply
to us equally, there would no longer be an “appraisal problem”.
Housing is multi-sided, complex and vital to the economy. Housing depends and financing and financing depends on a transparent and verifiable appraisal process. At the same time, we cannot have one part of housing subject to rules and consequences the other participants are not.
Our tax dollars support Fannie Mae, Freddie Mac, HUD, VA, etc. If we are taking the risks of funding housing, we need to minimize the opportunity for housing to derail, a result of, “unintended consequences”.
If tax dollars support housing, there should be transparency for the process, the data that supports the process and the rules. Remove the privacy laws and give appraisers access to the data in places where they do not have it. Share knowledge and common goals and all ships rise with the tide.
My suggestion, invite the homebuilders and agents (and anyone else with skin in the game) to be a part of changing the appraisal process. Give them a say and have them take the pledge to promote and support whatever comes out of this process and to force Congress to modify Dodd Frank and make it the law of the land, applicable to all of housing’s “market participants”, equally.
Your opinion matters
Housing’s health is vital to the US economy. Each of us, have a stake in seeing a vibrant housing market. To that end, there are no acceptable reasons for any market participant to have an advantage or any other one to be disadvantaged, as appraisers have been for many years.
Homebuilders and other participants make valid observations. Appraisals often are not consistent and at times, this will cost the builder or consumer. At the same time, it is easy to point a finger from the stands and tell others what must be done, when you do not have to follow the same rules and you are not subject to the same consequences.
Several years ago, in response to the HVCC, Dave Biggers and Alamode collected more than 30,000 signatures in support of sensible changes (as opposed to what was on the table at the time) and forwarded them to Fannie Mae, Freddie Mac, HUD and others. This effort had an impact and the “powers that be” listened. We need to repeat this effort, this time with Joan Trice.
Tell Joan and the CRN the problems you see and share your thoughts as to how they could be and should be addressed, with new regulations, or modifications to existing ones, better forms, systems and accountability for all.
Joan is leading and like or not, industry participants are looking to her for answers. Let her know
how you feel and give her and the CRN the chance to hear what you have to say. If the NHAB really has a “blueprint for change”, let us make sure to include them and all the others in the plan.
GUEST 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. He can be reached at [email protected] Look for the new Outside The Boxes category for a collection of Patrick's articles on Appraisal Scoop!