Appraisal Scoop

Supporting the "Neighborhood Trend" analysis - It's just an opinion - Right?!

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.

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The Housing Market Cycle - Analyzing the peaks and valleys

The following article is by Smith Realty Advisors,  The opinions expressed are the author's and do not necessarily represent those of the Appraisal Scoop blog.Steven R. Smith, MSREA, MAI, SRA,

This morning I responded to a post on the Inland CA Appraisers Forum, about the Fed's statements on the Housing Markets and the Subprime melt down.  The following is my take on the current cycle we are in.  See if you can use this as a model in your markets to test where you are in terms of housing affordability. 

It requires:

1. Knowing the average Household Income of an area, in this example the Zip Code.
2. Knowing the average Home Price, in this case, using Zillow
3. Knowing the average 30-year fixed rate loan rate
4. Knowing the average car payment and consumer debt, taxes, and insurance
5. Knowing the average down payment buyers have in your area.
6. Knowing the rate of decline, or projecting one. I used Zillow's for this example

Armed with this information, the bottom of the market cycle can be projected. Take a look and then see how it works with your numbers in the markets you work. Feel free to post a Comment on how it worked for you.

In terms of cash to the seller, housing prices are down across the board on average.  A 1% Decline in National Housing Prices is a BIG DEAL. The National Housing Price Trend has already been identified by Dr. Shiller of Yale who has tracked it back to 1890. The Feds to not seem to have this information though. This is a first in our lifetimes!

   

When a market tanks, in this case the housing market, it is a cyle of events.  Once the peak is reached, there is a slope that takes us to the bottom.  The steepness of the slope increases, then slows as we reach the valley or trough.  The width of the valley is dependent in any given area on the amount of over-supply and micro economic factors as well as macro economic factors, which can be impacted by the Feds.

[Editor's Note: Pros and Cons of the Various Housing Indicators Wed, 11 Jul 2007 -  Freddie Mac explains the pros and cons of various housing price indicators and reduces several of its earlier economic projections in it's most recent economic forecast. ]

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Fannie Mae Announcement 07-11: Overstating Property Values In Declining Markets

I received a notice this morning from Peter Gailitis, VP, Chief Appraiser eAppraiseIT, LLC saying,

"Recently Fannie Mae announced that it will be alerting lenders if the collateral property for a mortgage is located in an area where house prices are declining. Fannie’s Desktop Underwriter will send a message to the lenders notifying them that they need to carefully review the appraisal to ensure its accuracy and require additional information from the appraiser, if necessary. They expect the appraiser to describe market trends and the effects it will have on the value of the property. Fannie Mae states “It is unacceptable for the appraiser to ignore these issues and not report the factual property value trends and market conditions. The alert process is to begin July 22." Download eAppraiseIT07-19-07notice.pdf (321.8K)

The letter recommends that all appraisers read Fannie Mae’s Announcement 07-11 in full, which discusses determination of market conditions, lender responsibilities and appraiser responsibilities, but doesn't provide the document or a link to it. 

So . . .Here they are! 

• Download Fannie Mae 07-11- FAQ Sheet (33.8K)
• Download Selling Guide - 07-11 (114.3K)

Highlights from Fannie Mae Announcement 07-11:

"An accurate value for the property securing a mortgage loan is important in all markets, but the value becomes more difficult to evaluate when the subject real estate market is experiencing a decline in property values ("declining market"). Recent trends indicate that certain markets are experiencing a decline in property values. One of the potential problems in a declining market is the overstatement of property values in appraisal reports. This may result in the borrower not having an accurate property valuation, and overvaluation of a property could increase loan losses should the mortgage loan subsequently default."

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Runt Rants - Lender Do Not Use Lists - Appraiser BlackListing Series - Part 4

I want want your full attention for three minutes.  That's not too much to ask. Ignore your phone, forget the other activities surrounding where you are just now. Focus here for three minutes. I'll give you a few moments to get ready......

Now. Imagine you are in your office. It's a quiet Monday morning. No one else is there yet...a perfect time to relax before another hectic day, another hectic week begins. The coffee you just made is perfect! Hmmm, smell the aroma!

On the middle of your desk is the morning mail. Top of the stack is an envelope from your best client, one you've had for years, a good working relationship, built over time until they represent 15, maybe 25 percent of your business each month. Pay like clockwork, no value pressure. Great client.

Maybe another check is in there...let's open it and enjoy looking at the fruits of your labor, an example of all the hard work you've put into building your business over the years. You've worked hard, you still work hard, but you know you've built a business based on quality and service. The American Entrepreneur's dream.

But it's not a check. It's a letter. It reads.....

On Behalf Of Appraisal Review at XXX Bank

Sent: Monday, May 21, 2007 7:55 AM

To: AAAAA

Cc: [email protected]

Subject: Re: FW: Your XXX Appraiser Status

We are not able to accept new appraisals from you because one or more of our Investors or MI Companies is not accepting work from you. We sell loans not only to Fannie Mae and Freddie Mac, but also to large end investors such as YYYY or ZZZZZ.  We do business with all of the MI Companies.  I do not know which entity excluded you, but we are not able to share that information specifically even if you were to speak to a manager.

Thank you for your business.

XXXX Bank, Appraisal Review Department

Your day is ruined . . .

Your week is ruined . . .

Your business is in jeopardy!

Years of work to build a successful business is threatened. What happened? Who can I call to discuss this? How can I address the issue? The cold, hard answer is; You can't. Read the notice again. No recourse. Goodbye. Thanks for your business.

How would that make you feel?

What thoughts run through your mind?

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2007 Hotel Valuation Index Shows Increased Per-Room Value

The U.S.hotel industry experienced a 22 percent increase in per-room value in 2006, according to information recently released by Hotel Valuation Services. This marks the third year in a row with at least 20 percent growth.

On average, per-room values in the United Statesrose by roundly $18,000 in 2006, and all but four of the 66 markets reviewed experienced increases in per-room value, according to the 2007 HVS U.S. Hotel Valuation Index.

"Even more telling is that the decline of capitalization and interest rates in the United States indicates continued favorable financing conditions for investors to refinance or buy lodging facilities for the next two years,” according to report authors Steve Rushmore, MAI, president and founder of HVS, Sumit Kapur and Michael J. Pajak.

The HVI tracks and discusses hotel values in 66 major U.S.markets and for the United States as a whole. Created in 1987 by HVS, a global hospitality consulting and hotel appraisal firm, the HVI is derived from an income capitalization approach, utilizing market area data provided by Smith Travel Research and historical operational and capitalization rate information from HVS’s extensive global experience in hotel feasibility studies and valuations.

The 2007 HVI also features a Volatility Index, an investment analysis tool that assists in identifying markets in which to buy or build hotels. Index developer Rushmore explains that the Volatility Index determines the standard deviation in market per-room value changes since 1987, and divides this standard deviation by the overall average per-room value of a market during the same period. “Markets with historically minimal changes in value (volatility) that are expected to record strong increases in per-room value demonstrate favorable market conditions to buy or build hotels,” Rushmore said.

To download a free PDF of the 2007 Hotel Valuation Index, click here, or contact Joan Raffetto at [email protected].

Source: Appraisal Institute

Comp Checks - Appraisal investigation changes the way ONE firm does business

According to the story Mitchell Maxwell Revises Appraisal Rules Amid Probe (Update1) by Sharon L. Crenson,

"Mitchell, Maxwell & Jackson Inc., the real estate appraiser subpoenaed in a state mortgage industry probe, said it won't provide preliminary values on homes it hasn't seen or allow customers to include their own estimates on orders."

"The appraiser, which valued about 9,000 Manhattan properties last year, won't do quick valuations based on comparable homes nearby, the New York-based company said in a note to clients on its Web site. It also won't accept orders from mortgage brokers or lenders that include estimated values. Such practices have come under scrutiny in several state investigations."

``Value, comp checks, or pre-comps of any kind (written or verbal) will not be performed prior to us being engaged for that assignment,'' Mitchell Maxwell said in its client note. ``Although most are used for legitimate purposes, some individuals use them to `fish' for the appraiser with the highest value estimate.''

Mitchell Maxwell wanted to address the issue to set an example for the industry, said Y. David Scharf, the company's attorney.

`Bad Business'   ``We decided, if that's an industry problem, we should address it,'' Scharf said. ``We didn't do it for other reasons, for other business reasons. We thought it was bad business to do that.''

Click here for the complete article

Related Appraisal Scoop Stories:

• Comp Checks: Shifting Liability to Appraisers?
• Runt Rants - Comp Checks -- A legal opportunity -- Update
• Runt Rants - Comp Checks -- A "Legal" Opportunity?
• Fishing For Appraisers - The Comp Check "Bait & Switch" Technique
• Comp Checks - Value Opinions Put Appraisers "On The Hook"
• Value Checks, Comp Checks, Compouts: An Understandable Desire, But a Bad Idea
• "Can you check comps for me? I want to know if I should order an appraisal"

Report Card - How Much Your Appraiser Values Your Business

AUTHOR: David Hutton is the editor of Valuation Review the leading source for news and analysis for the real estate appraisal industry. Valuation Review provides its members with relevant content that informs them about the valuation profession and helps keep them ahead of the competition.

A recent survey was sent to more than 300 review appraisers and underwriters in financial institutions across the country, including the Top 10 banks and small community banks after it was completed by their customers. NAIFA received a statistically significant 39 percent response rate.

"The responses to each question were analyzed with consideration to the respondent's specialty (commercial or residential review or underwriting)," Foley said. "For example, review appraisers who review commercial appraisals exclusively did not answer the questions relative to residential appraisals. The identity of the respondents has been kept confidential."

Through other eyes

The report offers a revealing look at how financial institutions view appraisers and what they are looking for from a valuation professional. Kern said the information will be used to structure NAIFA so the trade group is providing as much information as it can to help its members be better appraisers and better professionals.

“We are also going to use this information in our long-range planning with regard to educational offerings,” she said. Kern said options include developing courses to help appraisers improve their communication skills. Courses also could be used to help other mortgage professionals understand appraisals.

The survey contains some telling responses, including what lenders are looking for when considering appraisers for their approved lists. Foley noted financial institutions typically look at resume/qualifications, sample appraisal reports, copy of state license and E&O insurance.

According to the report, 34 percent of the respondents indicated that they also interview other review appraisers (references), and 40 percent stated that they consider designations or membership in professional organizations.

“Interestingly, 46 percent indicated that they do not necessarily receive a better quality product from designated individuals,” according to Foley. “Fifty-four percent of the respondents indicate they do generally receive better quality products.” Foley pointed out that a frequent comment from respondents is that appraisers who hold professional designations have demonstrated a commitment to education. Several indicated that they would first seek designated appraisers in markets where they was not already an established appraiser list. According to the survey, 35 percent of the respondents had responsibility for dealing exclusively with residential appraisals.

The report card says...

eTrac Delivers Web Forms to Appraisers for Free

LAS VEGAS, July 16 /PRNewswire/ -- From the floor of the Appraisal Institute's 75th Anniversary Conference and Expo, eTrac, the technology company that pioneered appraisal management software on the web, announces the launch of eTrac WebForms, a revolutionary solution for producing
appraisal reports online.

The new software is the first of its kind and is the culmination of years of research and development by the eTrac team. The proliferation of high speed Internet and state of the art development tools has provided the ideal condition for the birth of this new platform. The "Lite" version of eTrac WebForms will include the most popular residential appraisal forms including the 1004, 1025, 1073, 2055, 1004D and the 1075.

"We have listened to our clients and we know there is a definite market for our web forms technology," said Vladimir Bien-Aime, president of eTrac.

A breakthrough for the appraisal industry, eTrac WebForms frees appraisers and makes them completely mobile and autonomous. The technology gives appraisers the power to work anywhere an Internet enabled computer is available, requiring no installation or networking. Freeing up time and money, appraisers can do business without the costs of expensive servers, high-end desktop computers or pricey techies that bill by the hour.

Additionally, the software will be available for Macintosh and Linux operating systems and will address important security issues by ensuring a third party verification to protect from liability in addition to built in
automated fraud detection.

Instead of charging a high premium for eTrac WebForms, eTrac is offering this innovative technology free of charge with its "Lite" version.

"We believe this technology is going to truly change the way appraisers work and it should not be cost prohibitive. We want every appraiser to be exposed to a technology that can truly have an immediate impact on their bottom line," said Bien-Aime. All appraisers need to do is register and provide eTrac with feedback for improvements.

For more information and to register for eTrac WebForms, visit http://www.myetrac.com or call 877-693-8722.     eTrac, established in 1999, is the number one provider of web-based appraisal management solutions on the market. For more information about eTrac solutions visit http://www.myetrac.com.

Video: Joan Trice describes her new automated residential analysis tools for appraisers

I attended the Illinois Coalition of Appraisers (ICAP) update seminar in Springfield, IL last Wednesday 7/11/2007.    In attendance were such notables as, Debra Brown from the Anti-Fraud Division of Fannie Mae, Joan Trice from Appraisal Buzz and Brian Weaver, our new Illinois Director of Real Estate Appraisal.

This was the first chance I've had to meet Joan Trice, of Appraisal Buzz fame, having followed her ventures and writings on the Internet for years.  If you get a chance to hear her speak . . .make the effort!  I know that many do not agree with some of her points of view on AVMs, but there's no denying that she knows her business.

I knew that Joan was scheduled to speak at the seminar but I didn't know what to expect?  I was sort of anticipating a 6' tall two-headed "AVM She-Beast"! (wink)  So, when a petite brunette with a big smile stepped up to the podium I was caught off guard. 

Joan began the presentation with some results from her 2007 National Residential Appraiser Survey. But, of more interest to me was her newest venture into "Interactive" regression analysis tools for the residential appraiser. 

In the video below, Joan briefly describes the concept . . . .

Click here for some of the key highlights about this new product . . .

Portellus Offers CollateralLogic Service for Appraisal Review Automation

Portellus, Inc., a leader in business-user driven change-management solutions, today announced it will offer CollateralLogic, a transaction-based service that automatically reviews appraisal reports against guidelines for fast, accurate risk identification and scoring. The solution allows lenders and investors to mitigate risk, realize best execution, minimize fraud and achieve straight through processing (STP) of appraisal reviews.

Traditionally, appraisal reviews are a laborious, time consuming and risky process whereby numerous data points must be manually evaluated. This method is difficult to manage and consequently creates a high margin for error, which can result in funding a loan with risky collateral.

CollateralLogic works by using automated data capture to extract all key data points off a PDF or scanned appraisal report, then translates the data to XML, stores it to a database, and runs the information against a rules engine. The engine houses customer specific risk tolerance guidelines and a library of specific logic verification.

CollateralLogic's evaluation results include flagged risks along with explanations behind each issue, thus allowing users to immediately identify a detailed process for risk resolution and informed decisioning.

About Portellus

Headquartered in Irvine, Calif., Portellus Inc. is a leader in the application of Service-Oriented Architecture (SOA) for the mortgage banking and insurance industries. Portellus' solutions are in production with mortgage bankers, financial institutions, insurance companies, due diligence firms and Wall Street investors. For more
information, visit www.portellus.com or call 949-250-9600.