The following article is by Steven R. Smith, MSREA, MAI, SRA, Smith Realty Advisors, The opinions expressed are the author's and do not necessarily represent those of the Appraisal Scoop blog.
In response to the Declining Value thread on the Inland CA Appraisers forum I thought I'd post on a topic I have written and given speeches about before.
For appraisers who have not majored in real estate, or have not studied mortgage banking, real estate finance or the secondary mortgage market . . "Having a license is a distinct disadvantage as they may not know the context of why we were licensed and what kind of risks await those who write inflated or misleading reports."
One of the first things one needs to do in my opinion is to appraise what type of client they want to have. Not knowing one from another is a BAD thing, BAD for the appraiser. An appraiser telling the truth is difficult whether the market is rising or falling when their client base does not want the truth per-se.
I fired an S&L once when their Chief Appraiser told me I had to take out Time Adjustments in a market that was going up double digits. We agreed that he would never call me again, and he has honored my request for 20 years. I saw him at a luncheon last month and he nodded and smiled at me, not speaking. We know where we stand. He is in the pocket of the loan department. I am and independent appraiser.
Loan originators are advocates for getting loans approved, by definition. They will lie to appraisers to get them to bend to their will on issues that will allow a loan to be approved. Having a client base of loan originators ordering appraisals is the highest pressured, highest risk aspect of being in the appraisal business.
FIRREA, 1989, was supposed to put a firewall between lending and appraisal at the regulated lender level (any FDIC insured institution). It has been circumvented for the most part. Mortgage Brokers and even Mortgage Bankers are NOT regulated at all and can do anything they want to, anything they can, to do business and book loans.
Mortgage Bankers, like Countrywide and Wells Fargo Financial do more loan residential volume than banks. In terms of the reported loan funding statistics. They make money funding loans, with all the points and fees collected and they make money servicing loans. They make money every month on every loan they service. The goal is to increase the amount of servicing. Such is the nature of Mortgage Banking.
Records are kept on who is the biggest in the servicing sector, just as it is for loan originations. A lender, regulated or not, that is servicing a loan portfolio, may sell their loans and retain the servicing, or create Mortgage Backed Securities (MBS) that are sold via Wall Street, to investors, based on their yield.
Grandma's and Grandpa's all across America and beyond, buy financial investment instruments for their stated yields. They may buy dividend paying stocks and bonds too. I know, I am a Grandpa.
Unfortunately,the perceived Risks of MBS's may have been wrong, so very, very wrong. Many investors are likely to end up with no YIELD at all, the underlying collateral may have been miss-valued, over-valued in fact. A financial crisis is brewing and the underlying problems will be blamed on over-inflated and misleading residential appraisals.
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A lot of the loan volume is originated by Loan Brokers who do not care about investors, whether they are their own Grandparents or someone else's. There are 20-something Loan Agents who made upward of a million dollars a year originating residential loans between 2001-2006. They bought lots of toys and speculated by buying houses like playing Monopoly.
When loan volumes are high, the pressure on appraisers is lower than when the volume declines, as every loan is that much more precious. If a Loan Agent was originating 30-50 loans a month a year ago and is now only doing 5-10, do you think they might even lie to an appraiser to get them to write misleading reports? Sure, that is a no brainer.
My recommendation is that when the pressure comes, get them to put it in writing, at least an email. Once the solicitation comes, ask for a BRIBE. In CA the maximum the OREA can fine an appraiser is $10,000. That should be the minimum to lie for lunch. If they bite on the BRIBE, and it is something like an illegal Flip, ask for a KICKBACK too! ! !
No down buyers will overpay for any product, be it an engagement ring, washer/dryer, TV, car or a House. Period. It is a Fact. And it is perfectly OK for the uninformed, even impetuous, financially unsophisticated buyer to over pay for anything they want. No problem, we cannot protect them from themselves, even if their behavior is self destructive. Or even if they are being duped or packed into a deal that is not worth it.
Appraisers are not the Policemen of Real Estate Ethics and Moral behavior. Or are they expected to be? If so, by whom?
Part of the answer lies in the OREA web site Mission Statement:
- Our Mission;To protect public safety by ensuring the competency and integrity of licensed real estate appraisers.
- Our Values We believe in: Excellence; Leadership; Loyalty; Integrity; Accountability
What does this mean? Background In 1989, Title XI of the federal Financial Institutions Reform, Recovery and Enforcement Act was adopted by congress mandating states to license and certify real estate appraisers who appraise property for federally related transactions. The federal law was enacted as a result of the savings and loan disaster.
In response to the federal mandate, the Real Estate Appraisers Licensing and Certification Law was enacted by the California Legislature in 1990 (AB 527, Chapter 491 of 1990). OREA was established within the Business, Transportation and Housing Agency, and charged with developing and implementing a real estate appraiser licensing and certification program compliant with the federal mandate. To date, OREA has received over 25,000 applications and has licensed over 18,000 real estate appraisers.
Check with your State License Board and see what their Mission Statement is, see how they represent to the Public and to the Politicians what it is that they do.
We were licensed for the public good, the public needs to be protected from us. That is WHY we were licensed. Lie on an appraisal and state the "values are stable", when they are "declining", in a sale transaction to a member of the public [the buyer] for a loan that might be insured by a Federally Regulated institution? I don't think so, that would be like playing Russian Roulette.
You might get by for awhile, even make some good money for writing lies, inflating values, putting misleading reports into the stream-of-commerce. Literally we are hearing stories of appraisers who are going to jail, or who are in jail and/or have gotten out of jail and still do not know what they did wrong.
Whew, it is bad how ill informed the world of licensed appraisers is in terms of liability issues. There are tens of thousands of licensed appraisers who just do not know that licensing created liabilities. USPAP and licensing were created for one reason, enforcement. They are being used in civil and criminal cases and by license boards. Being used against appraisers.
Want to limit liabilities and give the clients what they want? Certify that the report:
- does NOT Comply with USPAP or good appraisal procedures, that it
- was done to help get the loan approved,
- was done with a specific value, direction in value and cause of the client in mind.
That will reduce criminal liabilities to zero. Any fool who relies upon the appraisal is on their own, they can't come back on us. Or are we the fools for certifying just the opposite?
Fraud charges, be it bank fraud, mail fraud, wire fraud, appraisal fraud, communications fraud; are not covered by insurance and cannot be escaped by filing bankruptcy. They do lead to jail or prison time, fines and restitution. Check the box to give service to the scummy loan broker client, I don't think so, not with out a BRIBE.
My idea is to eliminate all high risk assignments and clients. Any loan with a LTV over 80% is high risk for the appraiser. Any appraisal for a sub-prime loan is high risk for the appraiser. Hear the one about the Ameriquest appraiser in OK? Her fine was $164,000, which she will have to pay, After she gets out of prison. Too bad she did not understand the arena in which she was playing and the risks involved in her actions. I'll bet she would have asked for a BRIBE if she had any idea she could go to prison.
That is not as bad as A.E. Williams of Corona, CA, who got 56 months in Federal Prison, a big Fine AND a $2,000,000 Restitution order.
Want to eliminate most client pressures and limit liabilities, do not do loan origination appraisal work. OK, so other work might require more education than required to get a license. So it might actually take true skills. Both are attainable to anyone with an IQ over 98.6.
Stick with loan production work for a loan broker client base and you might want to start putting your property in someone else's name, start moving assets off-shore, check countries without Extradition Treaties, like Albania. I hear real estate is cheap there, a person can live like a King/Queen.
One observation I have made this year while researching Appraisal Liability Appraisal Fraud issues, is that more women are getting sued than ever before. It might be that they are more nurturing, wanting to give service to the client, part of the mothering nature we all cherish. If their client base is loan brokers, they are serving the highest risk client base.
Buyers are now suing appraisers for over-inflating values. Buyers are the largest growth section of suits against appraisers. Lenders and the lending pipeline still accounts for over 73% of the suits against appraisers for Professional Liability. Lender work accounts for essentially 99% of all the suits against appraisers for Fraud.
"Appraisal is only hard if you try to do it right, or if the market is going down, or both."
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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