I have made this statement from the podium at six meetings of appraisers and lenders, since I put the current graph of the declining values in Palm Desert up on the InlandCAAppraisersForum at Yahoo Groups, three weeks ago.
It is interesting to me that no one has commented on the dramatic price decline already showing up in Palm Desert, an area that some thought was exempt, some thought had never gone down. It was very interesting that we put on a local luncheon seminar on Appraising In A Declining Market last week, and we had appraisers from five Counties sign up.
We all know what is happening in the real estate market. Our clients do to, so does the Secondary Market and the Feds.
Values are declining in every CA city where the Housing Affordability Index is low, from Vista to Visalia, from Palm Desert to Palmdale. They are still going up where housing prices are still affordable, from Colton to Barstow.
In the next five years, property values will likely go down each year in all 50 States. This will be the greatest recession/depression since 1929-34. Who will remain working as an appraiser, and who will get Black Listed?
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Imagine everything we appraised going down 5-15% per year, before we have to deduct for Concessions. How long will it be before there is no equity left in the property. Assuming we did not inflate the value to begin with. Then, assume that 80% of the appraisers regularly inflate values 5-10% just so they can eat. And, that they have been doing it for 5-years. Read the following article:
Giveaways to buyers skew home values, affect loan and taxes
Next, assume that millions read Lew Sichelmans' column every week. Then, assume there are investigative reporters sniffing out stories about why appraisers are so willing to inflate values. We all get painted with the same brush.
The public cannot tell a good honest appraiser from a bad one, we all are licensed and certify compliance with USPAP, we all certify that we do not take assignments with predetermined values.
Are we all just a bunch of liars? How can the public tell the honest from the dishonest appraiser?
The fastest growing segment that sues appraisers is the borrower, 2nd to only the lender. Lenders and the lender pipeline account for approximately 74% of the civil suits against the appraiser and 100% of the criminal suits for professional activities.
How many purchases have had Appraisal Contingency clauses in the last five years? If the appraisals were inflated, all it takes is a Forensic Appraisal Review to detect. Once that happens and they find the appraiser inflated the value to help make the deal work, they will be a-suing us-uns. I first wrote about this in the spring of 1999. A summary [pg 10-11] was published in the California Appraiser published by OREA and still available on-line, then it was published in the Appraisal Journal by the Appraisal Instate and in Valuation 2000. It is a timeless piece. If you have not read it, you can download it at the OREA or the AI Lum Library.
We have had a lot of young people enter appraisal in the last couple of years. Maybe this is why the ethics of the industry is lower now than in the past.
I have read a lot of books on tape as I drive around doing appraisal work. These titles, along with "Everything I Needed to Know, I Learned in Kinder-garden" and the "Way of the Wizard" are some of my favorites. I recommend them to everyone who cares about their career.
I think we need to have an Ethics course, a 40-hour course mandated and that every existing appraiser and any new appraisers be required to take it. It would include teaching the appraiser about the seriousness of their value opinions and the variety of ways people can be injured by inflated or reckless valuations.
Point's of view could include the Buyer, the Lender, the Secondary Mortgage Market, the Mortgage Insurer or Federal Agency, the FDIC, OTS, OCC, FTC, Justice Department, FBI, HUD Inspector General, Postal Inspectors, etc. How they look to be able to rely on the appraisals at face value. How they want to trust that they are factually accurate, true and correct.
All of this faith and trust in a market where there is no ethics training, it is presumed. All of this in a market that provides no structural support for the appraiser who wants to hang onto their ethics and still be able to keep their job or clients. The marketplace is as those in control want it. The appraisers are not in control. The Appraisal Foundation is not in control.
The appraiser will be blamed, once again for loan losses. Now, with licensing, USPAP and all the certification language; we are in a more worser spot than before. It is easier to sue us.
Appraisal liabilities are created by unethical or incompetent behavior. Pushing values to be helpful to the commissioned agents, is unethical and it in fact screws the borrower or buyer.
Becoming a congruent appraiser is hard if you were trained to be a deal maker, whether in-house or out-house. It is hard in the face of an aggressive and even predatory client base. It is hard because there is no one coming to the rescue of the appraiser. It is especially hard if the appraiser had no real knowledge or understanding of the Mortgage Banking world and the reasons for pressures on appraisers. Often, the extra value needed only helps the commissioned agents stick it to the buyer or borrower. The appraiser is their enabler.
- Through higher education and through the help of courses offered by the major appraisal organizations and their mentoring programs.
- Through building a better client base.
- Through building a recession proof business.
That is how. Making a living off of predatory lender volume has got to be the highest risk category any appraiser can have for their client base. Yet thousands of appraisers have had predatory lenders and loan brokers as their client base from the beginning. They are the easiest for a new appraiser to get work from, as long as the values come in at the prices needed and the property conditions are whitewashed.
Where are we going from here, over a slippery slope, down a Black Diamond run that will last 3-5 years. Most younger appraisers barely know how to snow plow, and are not ready for the steepness of what is ahead, the sharp turns and obstacles we will confront.
Where can they turn for help if they want to find a way out. There is no ski patrol coming to look for us. We can't even hold hands to help each other. We each stand alone on the body of our work product, which floats in the marketplace for years.
As we are approaching the exit point from the chair lift that brought us to the top of this market, what can we do to help ourselves if we were not doing credible work all along? Nothing, nothing short of disappearing to a country like Albania that has no extradition treaty. The results of liberal appraisals will create anger in our elected leaders.
More appraisers will be indicted for criminal acts and more will be sued civilly than in any other period in the history of the vocation. Yes, vocation. We are not a true profession. You can get an Appraisers license easier than a Massage license.
Many have been attracted to both fields based on the money they heard you could make. And, many found that they had to operate outside the rules to make really good money. The biggest difference is that appraisers don't often get tips for their "services".
There are very few criminal cases where the appraiser required a bribe to inflate values. Massage therapist who perform illegal acts, always demand a tip. Appraisers are just not as aware or as smart about what they are doing than the masseuses.
Since the AI put up the Appraiser Independence Action Center three years ago, Suspicious Activity Reports have quadrupled. I think appraisers are now turning in clients and appraisal frauds. That is a good thing. We need to turn in predatory clients, and appraiser frauds when we encounter or see them. http://www.appraisalinstitute.org/govtaffairs/appraiser-independence/cmplnt_cntr.asp.
In my opinion, the AI is the best advocate the appraisers have. Though they may not really get the dilemma the residential appraiser faces, they do stand up in front of Congress on the issues of Client Pressures. They stand for all of us. All that needs to happen for the situation to get worse, is for good people to do nothing.
We each need to ask ourselves what we are willing to do to insure a bright future. No one is coming to bail us out. Ask not what your vocation can do for you, ask what you can do to become a professional and be able to hold onto your ethics. Education, and affiliation with professional associations, and people who are better than we are.
In the book on tape "Think and Grow Rich" the author admonishes the reader to surround yourself with people who are better than you, people who are doing what you would like to be doing. Buy some books on tape or rent them. I rent through a company that lets you keep them for a month. There are many different companies out there. Check out the titles previously mentioned and it will change your point of view.
Take the AI Business Ethics course and it will add dimension to what is written here.
Join me at the Los Angeles Convention Center in January. I am looking for a thousand appraisers to stand behind me as we deliver the message to lenders that we will not be pushed around any more. We could all dress alike. Wear REA hats and Badges. Who will join me? Who even believes me? Check out the attached graph before you answer.
Or we could pretend the market is not doing what it is doing. We could wait for things that are going to happen, happen. We could continue with the status queue and hope we are safe Change is required. If we, as an industry do not change, we will be changed and we might not like what is done to us.
Many residential appraisers who do not do court work out of fear of being cross examined, are doing to see the insides of courts but not as an expert witness. They will be there as a defendant. I made up my mind that I would rather be in court as the Expert, it pays so much better.
Court work, yes our office works on litigation cases. We have the approach that it is fun to be cross examined about the principles and processes we used, the Scope of Work we performed, the procedures we followed. Embracing and employing proper valuation techniques can take a long time to explain. Some times we have to repeat ourselves to make things clear. Some times the opposition will ask the same question in several different ways. We always take our time and answer slowly, even asking for clarification or to have the question repeated. No one seems to mind going back over stuff. We are all their being paid by the hour. It is kind of like a dance. The Dance of Professional.
While I am not a Litigation Specialist as some wear that moniker, because we operate in the marketplace as Neutrals. Not every lawyer can hire us. If they need an Advocate, we are not for them. We do a lot of litigation work, and work on a lot of professional liability cases.
We need to each be looking forward at the current market Supply and Demand, and Inventory issues, not in our rear view mirrors for "Comps". Stepping up to Market Analysis is a good thing and we have seminars and courses on how to do it. Employing Market Analysis is a whole paradigm shift for our industry. "Comps" are little more than recent history. Try calling an agent who sold something 3-months ago and ask if they could sell it at the same price again today without concessions. The answers may be surprising.
Negative Time Adjustments are warranted but not being used by the majority of the residential industry. Doing things wrong on the way up was one thing, all appraisal sins were forgiven by the rising market. Doing things right as the market turns down, will be the best thing an appraiser can do. For those who do not know how, it will be nasty. Those who can step up to it, will look brilliant a year from now. The hard part for many is going to be in telling the truth and not being fired or put out of business.
AUTHOR: Steven R. Smith, MSREA, MAI, SRA, Smith Realty Advisors, 936 San Jacinto St., Redlands, CA 92373, Real Estate Appraisals, Consulting, Expert Testimony, Forensic Reviews, Fraud Research and Analysis, Litigation Support, Fraud Training 909-798-8855, fax: 909-798-0139
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