Runt Rants - The Glass Is Half Full!

The author is the owner of Acorn Appraisal Associates, a 21 year old firm offering a wide range of quality appraisal services to the Financial and Business Communities in the greater Houston SMSA

Last week, Ken wrote about the Inter-agency proposed letter regarding Sub Prime lending guidelines and a coalition of appraisal organizations comments regarding those guidelines.   

This week Ken's article will share his advice on how to:

• improve your business,
• reduce the hassles,
• increase your efficiency,
• enjoy life and your business more
• bring in better, more efficient clients and
• cease doing business as soon as you can with the underbelly of the lending industry.

WOW  . . . .Let's get started:

The news these days is filled with the "Sub Prime Meltdown", mortgage fraud, lender pressure on appraisers, falling real estate markets, a broken relationship between the lending industry and the appraisal profession.

Comparisons to five years ago suggest the situation today is just as it was then. Lenders are bad people. Regulatory efforts and enforcement are failing. Appraiser education is declining. No progress has been made in any of these areas is implied.

The situation would seem to be getting worse by the day. That's a lot of gloom and doom being aired. Depressing. Yet so foreign to my personal experience!

As to the point that nothing has changed; I think the opposite. Much has changed, and for the positive!

Consider these examples . . .

• The sub prime melt down is in full bloom in the media beginning the first quarter of 2007, but that's fluff, that's after the fact.
• Secondary market investors had seen this coming as much as two years ago and began instituting changes in their risk management to protect themselves.
• Portfolio prices began dropping in the market as a result of that investor tightening.
• Late last year it was reported that some CMO offerings had to be withdrawn from the market....no buyers at any affordable price point.
• Regulated Institutions continued the path demanded by their regulators to distance themselves from the appraisal ordering function.
• Regulated Institutions included in their contracts the requirement that quality control formerly done by the institution would be performed by the AMC.
• Regulated Institutions refined that development by increasingly distancing the loan officer from the appraiser. It now takes a significant act to be able to converse with the loan officer in many Institutions
• A much needed market correction is in progress...markets that enjoyed double digit price run ups for several years running started slowing in 2005, flattened and even turned negative in 2006, and in some areas may reach the bottom of the cycle in 2007, in some others the bottom is 2008

Click below to continue . . .

On the enforcement front, there is also evidence of a lot of progress.

Consider these examples . . .

• The FBI is bringing many cases to trial and fraud rings are being exposed.
• Our state, Texas, has shown good working relations between the TALCB and the State Attorney General in investigating cases that don't rise to FBI attention.
• More convictions are being reported....subscribe to the Mortgage Fraud Blog to get regular updates http://tinyurl.com/2fn6xe
• Most states are seeing an increase in the number of complaints filed against appraisers, and I assume against Realtors and mortgage brokers, although I haven't personally seen stats on Realtors and mortgage brokers.
• Our state, Texas, has a regulatory agency TALCB that, while understaffed and under funded, are doing a marvelous job of utilizing the resources they have to assist appraisers in the state improve the quality of the profession. We have had personal, in depth experience with them in the first quarter of 2007 and could not be more pleased with their support. See a recounting of that experience at http://tinyurl.com/3dppxm .
• The ASB has increased their surveillance of the State Regulatory Boards. In Texas they are demanding that the TALCB speed up the resolution of pending complaints, and are doing so under the threat of sanctions if progress is not made. I assume other states are being similarly reviewed.
• The ASC in their National Registry is publishing daily the disciplinary actions and expirations of appraiser licenses across the nation. You can subscribe to that service by going to http://tinyurl.com/ytpjc6 . I review it daily in my business.
• The ASB revisions to USPAP over the last three years has continued to improve the advice and direction available to appraisers. The last revision 2006, is most note worthy for the Scope of Work Rule, which does much to raise the appraiser to a professional level if he/she chooses to do so.

As to education levels. I have a bias. I come from a family that emphasized education. A picture of my grandmother, long deceased, is displayed in my study to look directly down on me. She reminds me daily of the gift, the responsibility, the reward of both formal and continuing education.

Six years ago we made it a requirement in our company to have a minimum of a bachelors degree from a recognized University. My personal preference is for a liberal arts undergraduate degree and a masters degree in an area of specialty. We extend that requirement to our management staff, including our key player, our Administrative Manager/Client Advocate. Continuing education is paid for by the company if taken through the Appraisal Institute. We expect the continuing education to exceed the minimum requirements for state license renewal. We expect our staff to pursue designations from recognized appraisal organizations. If not, the company will withdraw payment for the education. Texas in 2007 now requires a bachelors degree to obtain an appraisers license. I assume other states are moving in that direction if they haven't already. The trend is certainly to increase the education requirements nationwide.

Our business, overwhelmingly first and second mortgage appraisal work, has seen the significant impact of all of these positive things that I have listed above during the last five years.

• Our dollar volume has grown by over 300 percent.
• Our active client base has grown from 53 in 2002 to 145 last year; a similar 300 percent increase.
• Our NOI as a percent of gross revenue has increased from 9.1 percent to 11.4 percent.
• Our actual NOI has increased 380 percent over that period.
• We are up 20 percent this year to date compared to last year, a record year.
• "Appraiser Pressure" so big in the news these last few years, has dropped drastically in Acorn.

We ain't extraordinary people in Acorn. Individually we are just like everyone else. You can see us and our backgrounds at www.acornappraisal.net Together with our cherished clients, we have achieved these things.

What's beginning to dawn on me these days, is that we may have done one thing different than many in the market over the last five years.

Joan Trice of http://www.appraisalbuzz.com/ mentioned a few weeks ago that 80 percent of all first and second mortgage business goes through mortgage brokers. I challenged her on that point, asking the source. It just didn't make sense when I looked out in the community and saw all the regulated financial institutions branches sprinkled about. Those networks are expensive. I know. I created one of those in Texas in the 80's. At that time, I and my peers could not afford to have 80 percent of a major loan niche go somewhere else. We wouldn't have allowed it. I'm sure the same is true today.

Joan's frank response (I love you gal) was the 80 percent was what her "chief appraisers" clients were telling her. That set me on a quest. I just couldn't buy that number. I'm still seeking those stats. But I have found a couple of clues along the way.

• Buried in the recent Inter-agency Guideline letter on Sub Prime underwriting standards is this quote "At least 80 percent of sub prime loans are now originated by unregulated entities, according to Scott Polakoff, Deputy Director of the Office of Thrift Supervision. "
• Conversations with folks who are chief appraisers of regulated institutions and who talk regularly with their peers tell me that they think about 50 percent of all first and second mortgage originations are from regulated institutions. (Gee guys, that seems low...who's managing your branch networks?)
• The sub prime market has grown from 6 percent of the total US mortgage market to 20 percent in 2006 according to Inside Mortgage Finance.
• Let's do the math....if 80 percent of that 20 percent is from unregulated entities, then 16 percent of the total US mortgage market in 2006 was sub prime generated by unregulated entities.

One last set of stats on Acorn's business:

• In 2002 my records show that 43 percent of our volume was from regulated institutions.
• In 2006 the records show 80 percent of our volume was from regulated institutions.

Acorn set an objective five years ago to move away from mortgage broker business. In 2002 we were too heavily into serving unregulated entities and incurring the inefficiencies, the hassle, the client turnover that goes with that niche....not to mention the insomnia inducing risk that comes with those clients. We are still moving toward our objective, eliminating those clients that are inefficient to deal with (value pressure is certainly one of those elements.)

Our business has improved, we enjoy what we do for the community and our cherished clients, our staff earns top tier incomes, and we make a profit. All in a period where I read that the appraisal process is broken (it is not), that fraud is rampant (it is), and that the quality of appraisers is declining (it is not) and many appraisal firms are experiencing a reduced demand for their services (we are not).

If your experience is what I read (as opposed to what Acorn has and is experiencing) one potential area of the cause may be the percentage of your clients and volume is coming from unregulated entities. If it's significantly over 50 percent, then it's time to consider a change.

If the percentage of your clients and appraisal orders from unregulated entities who specialize in the sub prime market exceeds 16 percent, if it's very much larger than that....say 25, 50, even 75 percent of your business, then it's really time to institute changes in your client mix.

If you choose not to, then deal with the realities of the market you are in....beef up your quality control, find ways to school your staff to resist the value pressure, increase the support staff to handle the inefficiencies of that market, and be content with a lower NOI.

However, if you choose to improve your business, reduce the hassles, increase your efficiency, and enjoy life and your business more...set out a plan to gradually, consciously, bring in better, more efficient clients and cease doing business as soon as you can with the underbelly of the lending industry.

You'll begin to see the benefits within a few months!

The author is the owner of Acorn Appraisal Associates, a 21 year old firm offering a wide range of quality appraisal services to the Financial and Business Communities in the greater Houston SMSA