Appraisal Scoop

Runt's Rants - The World Is Flat! - Appraisers in a changing competitive environment

According to Pulitzer Prize winner and The New York Times columnist Thomas Friedman, the technology you use every day -- from computers to cell phones to Internet browsers -- has changed not only how you work, but also how businesses compete. It has certainly removed barriers to trade -- making it easier to sell digital cameras in India -- but it has also broken down the geographic and cultural barriers that previously kept countries like China and India from competing on the same level with western business. -The World Is Flat: A Brief History of the Twenty-first Century.

Last week Ken Verrett introduced the concept of brand and generic products in the market place.  This week, Ken discusses how the lending industry has taken advantage of market opportunities to modify their businesses to better compete in today's Flat World.

Brand products are created as a result of a marketing campaign to distinguish the brand from their competitors. The perception must be created in the consumer's mind that there is a difference between Cambell's soup and the others on the shelf. Once that perception is achieved in the market, the higher price is justified by that perceived difference.

Generic products make no attempt to create such a perception. It is what it is. We can't conclude that generic is a poor or unacceptable product...there are certain standards that must be met for the product to be offered and accepted in the market place. But generic products didn't have the investment in marketing necessary to differentiate that product from the others on the shelf, so no price premium can be earned.

Part of the marketing campaign for the brand product is to suggest that there is such a difference by inference if nothing else. It's a perfectly legitimate marketing tactic as long as it is done by continuing to reinforce the positive attributes of the brand. It is not legitimate to accomplish the differentiation by attacking the generic product. That brings law suits.

We also discussed the evolution in the finance industry over the last few decades, how the changes shaped by technology created opportunities to change the fundamental way those institutions conducted business. The lending industry has taken advantage of those opportunities to modify their businesses to better compete in today's Flat World. Local and regional financial institutions sold out to money center conglomerates on the left and right coasts. Loans were modified to be grouped as inventory in packages (CMO's) to be sold in the secondary market.

The lending industry became more like the local retailer, with profits made from inventory turns, not as much from net interest margins as previously. The loans, now inventory items, had become commoditized; a generic product had been created. That is a truly fundamental change in the lending industry.

Click below to continue reading . . .

Appraiser's Letter to FDIC on Client's "Do Not Use" Blacklisting

The federal financial regulatory agencies are seeking comment on the proposed Statement on Subprime Mortgage Lending (Subprime Statement). The Subprime Statement addresses the risks and emerging issues relating to subprime mortgage lending practices, most notably certain adjustable-rate mortgage (ARM) lending products. Comments are due by May 7, 2007.

Dan Tosh [mailto:[email protected]] took this opportunity to address some of his concerns regarding advocacy and client blacklisting. The following has been taken from the FDIC web site: 

Click here for the source comment.

The biggest problem with this industry is that the "appraiser" has no advocacy. If a lender, broker, loan originator, loan processor, underwriter, homeowner or any other third party doesn't like the results of a market study conclusion, they threaten you with reprisal.

I believe that the "blacklist" otherwise known as a "exclusionary list" is a violation of my constitutional rights. I have a right to work in my chosen profession and if I have a bad mindset (ethics) or a poor skill set (competency), my license should be in jeopardy. The regulatory agencies that govern appraisers have the power to revoke or limit my license if I do not perform my duties correctly. That is the correct thing to do. The individual lenders that don't make public policy have no right to prevent me from providing for my family.

I am on 3 do not use lists, one for Merrill Lynch because they said we (our company) was rude; we couldn't complete an appraisal assignment without the purchase agreement, since there were four different reported sales prices and the VP at Merrill Lynch indicated that he did not want us to see it. We politely declined after doing the inspection and all the analysis at no charge to them, although I paid my field appraiser; but we were rude.

Coldwell Banker put us on the do not use list after we came in low on two deals, we have the e-mail from them to prove it.

Click below to continue reading this letter . . .

eAppraiseIT Enhances Popular PMI Release Program

POWAY, Calif., March 26 /PRNewswire-FirstCall/ -- eAppraiseIT, a leading provider of real estate valuation products and services, announced today that it has enhanced its Private Mortgage Insurance (PMI) Release Outsourcing Program by offering low-cost automated valuation models (AVMs) to homeowners to help them determine whether they will qualify for mortgage insurance release if they order a full appraisal.

Under the Homeowners Protection Act of 1998, borrowers can cancel their PMI -- an insurance that protects lenders from borrower defaults -- two years into their existing home loan if payments have been made on time and the equity in their home has grown to more than 20 percent.

An appraisal or other acceptable form of valuation is needed for the cancellation request to be fulfilled by the mortgage servicer. PMI is automatically canceled when a loan amortizes to 78 percent of the original value, but the ability to assess value sooner in the life of the loan and cancel unnecessary PMI can save a homeowner thousands of dollars per year.

In 2006, eAppraiseIT's PMI Release Outsourcing program helped more than 32,500 homeowners qualify for PMI release, an increase of more than 300 percent from the prior year.

Click below to read on . . .

Runt's Rants - Brand vs Generic Appraisal Services - Where Do YOU Fit In?

This issue keeps presenting itself time and again to me, most recently in a series of exchanges on this very blog this week in the comments area. I've discussed it many times in different venues. Maybe it's time to address it here.

In my view, the market for Appraisal Services is best viewed as generally split into two basic types, and results in two very different basic business models required to serve each of those markets. We in the appraisal profession often fail to understand that distinction. I'll try to explain the basic types of demand and how that demand results in different business models built to serve the differing needs of the Clients.

No, I'm not referring to commercial versus residential. I'm referring to brand products versus generic products. The product differentiation is a better, clearer way of looking at the profession and the markets we serve than any other perspective provides. The market for appraisal services clearly understands it better than we do!

I'm going to try to discuss these two variations of the profession, what differences those markets represent, and what affect they have on our businesses. Click below to read on . . .

Lender Urges Creation of "National Valuation Registry"

It is "up to us as an industry, to take a lot of action ourselves," says Richard Wohl, president, IndyMac Bank, Pasadena, Calif., noting that this is both a "good time and a bad time to be addressing mortgage fraud." The industry is in a "pronounced down cycle," says Wohl, conceding: "I've seen deals that we push in our shop that should never have come through the front door."

In arguing for better data sharing, he says the industry needs to create a national valuation registry, like MERS (Mortgage Electronic Registry Service); a national database where appraisal information would be attached to each file."

The mortgage industry spends $3 billion to $4 billion on appraisals, compared with $6 billion in fraud losses each year, figures Wohl, so "doesn't it makes sense to share that $3 billion of work product to help prevent that $6 billion in losses?"

Click here to read the complete Inman News Article.

Mortgage Bankers Call for Appraisers to Carry More than E&O Insurance

The Mortgage Bankers Association, at its National Mortgage Fraud Conference, called for legislation that would require appraisers to carry “fidelity” insurance to cover instances of mortgage fraud and for mortgage appraisals to be submitted to a central database to increase transparency. Details of the proposals were unavailable but are under development by an MBA mortgage fraud task force

The fidelity insurance requirement would apparently be different than errors and emissions insurance in that it would cover fraudulent activity. Currently, most errors and emissions policies cover negligent, but not fraudulent, activity.

Other items of note from the conference include:

• The Mortgage Asset Research Institute previewed their 2007 Mortgage Fraud Index, which indicates that appraisal fraud declined from 2005 to 2006. The Index also cites Utah and Florida as the No. 1 and No. 2 ranked states respectively for mortgage fraud activity last year.
• Greg Harding with the California Office of Real Estate Appraisers spoke about appraiser licensing enforcement in his state, where some 30 percent of cases pending before the board involve forged appraisals.
• The MBA and the FBI announced and signed a memorandum of agreement for the two organizations to work together to promote the FBI’s Mortgage Fraud Warning Notice. The FBI’s Mortgage Fraud Warning Notice states that it is a federal crime for any person to make any false statement regarding income, assets, debt or matters of identification or to willfully overvalue any land or property in an effort to influence the action of a financial institution.  The Notice reminds the reader that fraud is investigated by the FBI and is punishable by up to 30 years in federal prison or a $1,000,000 fine or both.

Click here for links to the MBA Conference presentations.

Thanks to Steve Smith, MAI for the article summary.

Zaio Sponsored "National Appraisal Congress" Scheduled for Fall 2007

A National Appraisal Congress will convene in Washington D.C. in the fall of 2007 to build consensus solutions aimed at reducing the threat of rapidly increasing mortgage fraud and preserving the independence of appraisers.

The inaugural congress, hosted by October Research Corp. and sponsored by Zaio Corp. and Valuation Review, will compile specific recommendations for federal, state and association-based initiatives.

The exclusive invitation-only event will bring together top thought leaders from the valuation industry, consumer groups, regulators and appraisal trade organizations. One objective is to develop solutions to the increasing pressure appraisers have been reporting from mortgage brokers, lenders and real estate agents to hit a predetermined value, or to overstate a property's condition.

What are YOUR thoughts about this event?

IRR-Residential: National Residential Appraisal Organization Continues To Grow

Westwood, Kan.  March 12, 2007)—The reaction from lenders was positive and immediate to the launch of IRR-Connections, a technology that allows IRR-Residential unlimited capacity to automate the delivery and management of residential property valuations nationwide. IRR-Residential is the only organization of independently owned and managed residential appraisal offices with this capability.

“We began receiving appraisal orders immediately after IRR-Connections was launched on February 5 said Mark Oliver, senior vice president of business development for IRR-Residential. “Lenders like the idea of an appraiser-centric organization with national processing capabilities.”

With IRR-Connections, lenders can order residential appraisals nationwide through a single point of contact. The Web-based system is flexible and designed to meet the needs of a variety of customers through its centralized order processing and delivery system.

“Appraisals are a critical component of loan originations,” said John Wood, president and chief operating officer of IRR-Residential. “We provide a streamlined process for lenders to place large numbers of orders nationwide. During February, we placed appraisal orders in 25 states.”

IRR-Residential is unique in the industry because of its appraiser oriented approach.

The company utilizes as its foundation a franchise affiliation with more than 49 locally owned and operated residential appraisal firms. Currently the offices are located in 35 markets and 17 states with plans for 100 offices by the end of 2007. It also has a vendor panel of approximately 5,000 appraisers to provide service in areas where there is not affiliate coverage. IRR-Connections also provides significant advantages to IRR-Residential affiliates.

“As an independent appraisal firm, I simply could not afford national marketing and this type of technology,” said Scott L. Burdette, SRA, managing director, IRR-Residential Valuation Consultants, Ft. Worth, Texas.   “As a result, my ability to market and provide services to regional and national clients was limited. Since affiliating with IRR-Residential, I already have had the opportunity to participate with my colleagues nationwide in performing residential appraisals for national lenders." 

Click below to read on . . .

Just How Secure IS your PDF Appraisal Report?

Recently, we received very disturbing news from one of our appraiser comrades who indicated that he was sent PDF copies of his own appraisals BUT, the final value had been modified upwards significantly. Pretty frightening stuff, no?

I’m writing this topic to dispel the myths that about document security, because quite simply, it does not exist.  Having been a top IT Consultant for many, many years prior to entering the appraisal profession, I say this:

"Every bank, every lender and anyone else that receives a copy of your appraisal has the ability to reverse engineer your document into their automated underwriting system. I was the senior designer for such a system and there was no file format that stood a chance against our team."

The file standard created by Adobe, the Portable Document Format (or “PDF”) has long been recognized as the defacto standard of cross-platform electronic document storage. Regardless of the operating system, a PDF document can be opened and read and for the most part, provides a level of protection from modifications. Although many assumptions are made regarding the security of this format, the PDF, indeed, any electronic (binary) file, is not truly secure.

If the file is password protected, it must be secure, right? While this meets the requirements of the GLB Act of ‘99, these feeble attempts at file security loll us into the belief that a) our documents are truly secure, and b) the file cannot be modified under any circumstance.

Do not be alarmed but: Under no circumstance is any file stored in electronic format truly secure nor is there existing technology now or planned for the next 10 years that will offer a level of security truly capable of total document security.

This is not the fault of the software maker but is the fault of nearly all commercially available computer operating systems sold in today’s market. Let me explain. . . .

Mortgage Insurers Add Stress for Lenders

For months Wall Street firms and other secondary market buyers have been in a faceoff with mortgage lenders, returning loans that defaulted early and in the process pushing several originators to, and past, the brink. 

Now lenders are finding that mortgage insurers are also pushing back.

National City Corp. said Wednesday in a filing with the Securities and Exchange Commission that an insurer had rejected "a meaningful number of claims filed" on a portfolio of second mortgages for reasons the Cleveland company considered "inappropriate" under their contract. Though it said it would sue the insurer if necessary, National City warned that it may have to add $50 million to reserves.

Several lawyers who represent lenders said such tensions have become more common as parties all along the mortgage food chain seek to minimize damage from mounting losses. At least one insurer has talked openly to investors about its intention to scrutinize contracts more thoroughly, and to deny more claims. Industry observers said such dust-ups are more likely to happen over policies insuring mortgage pools rather than those covering individual loans.

Click here for the complete American Banker Online story.

Related Link : Nat City Kills Loan Sale After Failing to Find Buyer