Little known to a large majority of currently practicing appraisers, the use and expectations of those seemingly impertinent little boxes in the neighborhood section of a FNMA/FHLMC form are now creating liabilities of an untold magnitude.
- What is inventory and supply?
- What are housing prices really doing?
- How long is the marketing period for the average home?
After years of misuse and general neglect, the importance of fields that state conclusions pertaining to supply, demand and pricing were often overlooked during the recent period of rapid appreciation in home values and required little or no thought or support. Now, the housing market has changed and the importance of this data has recently become a major topic that is now bringing into question the competence of the average residential appraiser.
Too long has the argument been made that “these fields are subjective and open to interpretation – after all, it’s only an opinion, right?”
In a recent civil litigation case, the lender sued the appraiser for damages sustained on the resale of a foreclosure that had declined in value by at least 15% in an area of rapidly declining home values. The defendant appraiser had concluded that the supply was in-balance and that property values were stable; after all, it was only an opinion.
Only one piece of data was brought into the courtroom by the prosecuting attorney’s expert witness/appraiser: a 3’x5’ cardboard slide depicting a market area in decline by as much as 20% off the highs for the prior 12 month period. The data presented was acquired from the same local MLS of the market area where the properties in question were appraised. This was all it took to convince the jury that the defendant having concluded that home values were “stable” was guilty of negligent misrepresentation.
When the appraiser was asked by the prosecuting attorney “What was the process you executed to arrive at your conclusion?” the appraiser claimed he had analyzed MLS data – but, there wasn’t a single shred of evidence in the workfile to show that any analysis had been completed at all.
Additionally, the defendant appraiser was unable to define, explain or outline a reasonable analytical process that would have resulted in a credible opinion.
Even more recently (July 2007), FNMA posted announcement 7-11 which basically states that they are aware that appraisers are failing in their responsibilities to arrive at supportable conclusions pertaining to market conditions and have issued the following response:
Q16. How can a lender verify that the appraiser has accurately indicated the property is not in a declining market?
Generally accepted appraisal standards and our appraisal report forms require the appraiser to include support for his/her conclusions regarding market conditions, including housing trends. The Neighborhood Section of the appraisal is the primary area where the appraiser would indicate whether property values are increasing, stable or declining. If the lender believes the property is in a declining market and the appraisal indicates otherwise, the lender should request additional information from the appraiser that supports the appraiser’s conclusion.
Simply put: They know!
In the face of overwhelming evidence, news, reports and economic analyses that is both publicly and readily available, a large percentage of appraisers continue to conclude on stable, in-balance market conditions. Banks, lenders, investors, Fannie, Freddie – even the NAR (hence, those with the gold) all know that housing markets nationwide are experiencing some degree of decline – yet they continue to accept appraisals marked stable – why?
In many cases, the appraiser is pressured with the threat of lost business fully aware that by marking one of the negative indicators could result in the loss of a client or other faced with other means of “economic coercion”. Stories of appraisers that have reported the truth about market conditions and have lost business have become commonplace. Continue as one may, the liabilities for developing reports that do not report the truth and that are based on unsupported conclusions ("it’s just an opinion") are mounting. Appraisers can opt to pay now – or pay dearly later.
Appraisers: if you do not know how to measure supply, demand and pricing trends, by all means keep your E&O insurance policies up to date. The banks don’t want you – they only want your E&O to cover their losses.
For more information on how to measure, support and present market conclusions, please visit our web-site at www.express-appraisals.net.
[Editor's Note: The author has modified his business model in response to market conditions. Dennis is offering free webinars for a limited time only. Click here for more information.]
AUTHOR: Dennis Jorgenson, Licensed Staff Appraiser, Express Appraisals Group - Associate Member of the Appraisal Institute 7375 Day Creek Blvd. Ste. 103-149
Rancho Cucamonga, CA 91730 Phone: (909) 428-9199 Fax: (909) 428-4815
Recent Comments