Author: Steven R. Smith, MSREA, MAI, SRA, Smith Realty Advisors, Redlands, CA: Real Estate Appraisals, Consulting, Expert Testimony, Forensic Reviews, Fraud Research and Analysis, Litigation Support, Fraud Training through the Association of Real Estate Professionals.
There still seems to be some confusion over
- who is the Intended User,
- what is the Intended Use and
- the difference between the Client who might order the appraisal but not be the Intended User and never participate in the Intended Use.
Maybe this will help clarify these issues.
Clients to me are the ones who order And pay for the appraisals. It gets confusing for the appraiser when a Loan Broker orders the appraisal and has the Borrower pay for it directly. Not too many residential appraisers have a contract that spells out their relationship, SOW, Intended Use, Intended User, etc.
Not having a contract that spells out the relationships and responsibilities, appraisers find themselves in awkward situations later. A good example is when an AMC orders an appraisal, but is not the one who will rely upon it and is not the one who will pay for it and is located out of state and does not pay for it. Gulp, now what?
The Certification language in FNMA's #23 that went into effect January of last year, should have clarified their position on the life of the appraisal question. It made it clear that others are relying on the appraisals and asks the appraisers to acknowledge this and sign that they know this. It is very clear that they want all of those who rely upon appraisal reports, whiting the stream-of-commerce, to be able to sue the appraiser later.
The Intended User is the entity, often unknown at the time the appraisal is ordered that relies upon it. There can be more than one entity that relies upon the appraisal. One report can be used for multiple functions, relied upon by multiple entities at the same time, or at different times.
In mortgage brokerage situation the Loan Broker is often NOT the Intended User. They only originate and package loans, someone else Funds them and/or Insures them {private mortgage insurance, causality insurance, life insurance, etc}.
Often they do not know which investor they might take the loan too, as they have hundreds that they might be able to broker too. Often they do not know who all will rely upon the report.
Click below to read on . . .
Typically, the Underwriter works for the Intended User. They could be in-house or out-house. They are the ones trying to assess the accuracy and veracity of the appraisal. In some instances, they may simply read the appraisal and make a decision as to whether it is believable.
Often they may check Dataquick, NDC Data, REDI, FATCOLA,Zillow or do an AVM or two or three, maybe even a cascading or waterfall AVM. If they have questions or question data in the report, they may call or send via the Loan Broker, their questions, demands, etc. Or order a Review Appraisal from someone who works for the Investor, again, in-house or out-house. Or do both.
If the loan is over 80% it will be required to have Private Mortgage Insurance. Each PMI company also has Underwriters and Review Appraisers too. Appraisal questions can come up at this level also.
I wrote an article that was published in summary form in the California Appraiser in the Spring of 1999, and in complete form in the Appraisal Journal and in Valuation 2000 on the issue of "To Whom Are Appraiser's Liable".
It was based in part on the Soderberg vs. McKinney case in which I was the expert for the plaintiff. This case was cited on Friday by the Legal Counsel for the California Mortgage Brokers Association conference. It is a 1996 case that remains the most recent. I reviewed the appraisal and testified in this case on the issue of Loan Brokerage and the Mortgage Banking systems Stream-of-Commerce.
The published article also include the Appraisal Contingency clauses in purchase agreements. Because of the breadth of the distribution, more than a few appraisers read the article. If you missed them, they are available on-line at www.orea.ca.gov and www.apprasialinstitute.org
Later I wrote what was to become my Masters Thesis topic on Real Estate Frauds and the Appraisers Role, which turned into two different CE seminars, one still being given by the Appraisal Institute is entitled "Real Estate Fraud: Appraisers Legal Liabilities and Responsibilities". Thousands have attended the seminars. Tens of thousands more, need to do so to understand the arena in which they are playing.
The Appraisal has a life of its own once it leaves our office, no matter what form, paper or electronic. The life starts when reports leaves the appraisal office, and an entity relies upon it and acts based upon belief and confidence in it. Reliance can include:
- Funding a new loan request; including multiple loans and PMI at the same time.
- Modifying and existing loan; rate, terms or both
- Foreclosure decision making; judicial, or non-judicial.
- Judicial allows for deficiency judgments
- Bankruptcy; debtors are given an automatic
- Stay from Foreclosure proceedings by filing.
,Appraisals are used to prove the equity in the property, or lack thereof
There are Loan Brokers who originate loans for the Secondary Mortgage Market which represented by FNMA and FHLMC and a host of others.
Then there are those who originate as hard money lenders, for private investors. Soderberg was a private investor in such a case. Soderberg is used, cited, by attorneys who sue appraisers, as case law. Soderberg never saw the appraisal at the point of loan origination, only the results were communicated to him verbally.
Any appraisers who would like to hold onto the idea in their mind that their Loan Broker client is the user, is usually wrong. Loan Brokers rarely sue the appraiser but their Investors do.
If appraisers were required to study Real Estate Finance or Mortgage Banking, much of this would be understood. Any appraiser who majored in Real Estate, did. Unfortunately most who have a degree, did not study Real Estate, and the vast majority do not have a degree at all. This makes it difficult for our industry to understand the arena in which we play, or why we were licensed and how our license is used by those who rely upon us.
Our license, certifications and definitions, processes and procedures are used against us in court by Intended Users. It is that simple.
Additionally, loans are pooled and sold in the marketplace like paper, like investments that provide a stated yield. Holders of the paper sue appraisers too. Angelo Mozello, the founder and Chairman of Countrywide, sells loans to Wall Street saying in essence "Don't worry, all of our appraisers are insured". He is not alone. They all do it. Gulp, Gulp! {what would the average URAR fee be if our industry was conscious of this?}
How many know how much reliance is being placed on the appraisal? Few appraisers are really very aware of what happens downstream. Watch as Fitch Ratings downgrades lenders ratings because of appraisal related issues, watch as stock prices come down on financial institutions, mortgage bankers, loan servicers, builders.
All will be looking to recover. If they have an appraisal in file, verses an AVM, they will use it in their loss recovery efforts.
Before anyone tries to be helpful on an appraisal for lending purposes, they should think about what their report will look like in the future. Will it stand the test of time. Can some one like me be hired to do a retrospective review and find it to be factually accurate, true and correct. Or will it be found to be misleading from the Value Trend on the front page, to the SOW and Selection Criteria used for the data, as well as the adjustments. Often market derived data, graphed, will refute the appraisal. Market derived adjustments, applied to even bad data, will too. Often we see much larger homes or those from better Locations used. When we make the appropriate adjustment for Location or Size, they come down quickly.
Certifying compliance with USPAP and then pushing values or whitewashing or writing a misleading report, is tantamount to hanging ones self. From the certifying compliance with the definition of Market Value, to the use of good appraisal procedures; most production reports cannot be defended.
Here is an example. Market Value in USPAP is a test, first to be applied to the subject, and then to the comparables relied upon. How many know it is a test, few. How many apply the test, few. Can the test be subsequently applied to the Subject and the Comparables, yes. Certifying to being unbiased, and then misreporting what was happening in the market, i.e. declining in today's market, omitting the Listing information on the subject, and selecting comparables from out of the area to the exclusion of proximate sales; all show up during a Forensic Review.
Forensic Reviews typically occur after the loan dies. They are not performed fast. Speed is not the issue on the back end of a loan. Neither is fee. Doing a credible job and using good procedures, is a requirement
Most reports I have reviewed where the appraiser is the target of a suit, civil or criminal, the bias shows up loud and clear. Unbiased reports that are well documented and verify, are less than 1% of what I see. And, my little window on the world is small.
Remember the movie where Butch and Sundance were on a bluff, looking into the distance at a cloud of dust and the line "Who Are Those Guys"? It was the Pinkerton Detectives. Now there are Appraisal Detectives. Watch as suits against appraisers rise, as the market falls.
Appraisal Inflation alone has added 25%50% to residential values in the last five years. Flippers might instigate high prices, cash-back schemes and incentives will too, but it is the appraiser's who helped them pervert the data bases as Sales Prices are hit and properties transfer at inflated prices. Market Value is in terms of Cash to the Seller, net of concessions, to a typical buyer. Each Sale needs to be tested to see if it meets the terms of the definition. Forget that it takes time and costs money, we certify compliance with good appraisal procedures, this is one of them.
Watch now as values decline 25%-50% in every previously hot market, from Miami, to San Diego, Los Angeles, to Boston. And watch as blame will be placed on us for the Real Estate Recession we are headed into.
It should take no more than 3-5 years for the down cycle to flatten out, depending upon how hyper the market was in each area. It is a local phenomena, but will impact all major markets in the Nation. Where you see statistics that show prices are still increasing on average, bear in mind, the lower priced area might still be. Housing Affordability Indexes should be looked at by the appraiser.
When our market tanked last time in 1991 the HAI in my Region was in the 65-75% range. Now it is in the 6-19% range. The vast majority of the households cannot afford the average priced home. Why, because incomes did not keep up with housing prices. Inflated prices can be blamed on irrational behavior, flippers, real estate speculators {yes those who were gambling} and real estate investors trying to protect gains by paying too much for the next property.
In my Region, prices are going up and down at the same time, often in the same city, like mine. We have two Zip Codes, one more expensive than the other. The higher priced one is going down, the lower priced one is going up. This is true in many areas. We have a market where values in one Project are going up, but the Zip Code is going down. These things are hard to explain, but easier when a Graph is used. Graphing the Neighborhood or Project Price Per SF Trend and comparing it with the Zip Code, Region, County; helps prove the point and third parties can see and understand it.
Try this, go to Zillow.com and look up your house or a residential address in your neighborhood. Look at the Graph of the Value Trend for 1-year. Has it peaked? Mine has, my house is going down at the rate of -$52,000 per month now. I live in a good Zip Code for my Region. Good thing we don't have a maximum loan. Those who do, will be out of equity soon, unless one more appraiser is willing to inflate the value one more time. http://www.zillow.com/Charts.htm?chartDuration=1year&zpid=17269245 Intended Users today, have the ability to look at the Graph of the Value Trend in all but new homes. When they find Declining trends and an appraisal that states Stable, they are Black Listing appraisers. Tens of thousands have been Black Listed by unknown, unnamed Intended Users in the last 9-months. In the face of all this, we quibble about the small things.
For the first time in 75+years, we will be witness to a National Value Decline. As blame is placed, those holding the loans, those who suffer the losses, will press Congress to act in our direction. The action is likely to be punitive in my opinion.
This should clarify the concept of Client, Intended User, Intended Use. Or at least give it context. When dealing with loan originators, ask who is going to fund the loan, or how many different investors they have, will it have PMI on it, etc. I like to ask that the LTV is and the FICO score too.
My experience with high LTV buyers is that they tend to have lower FICO scores too. Those with little equity capital and low credit scores will pay almost any price for a property if they can get a loan. They are being preyed upon and packed into deals that start out with no equity.
This is not new, it has been going on for years. What is new, is that the market is no longer covering things up. People who purchased with more than an 80% loan in the last three years are subject to ending up with no equity. What will they do? Some will sue the appraiser.
What will the Investors and Mortgage Insurers do? The same thing. It is already happening.
Author: Steven R. Smith, MSREA, MAI, SRA, Smith Realty Advisors, Redlands, CA: Real Estate Appraisals, Consulting, Expert Testimony, Forensic Reviews, Fraud Research and Analysis, Litigation Support, Fraud Training through the Association of Real Estate Professionals.
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