AUTHOR: Scott A. Austin - owner of Austin Appraisal LLC - is a Certified Residential Real Poperty Appraiser. Scott specializes in Relocation Appraisal, Forensic/Review Appraisal, and Rehabilitation/ Investment Appraisal, and REO/Foreclosure Appraisal. S
When considering whether to join a appraisal organization, one claim of every association is that as a member, one will have a voice of representation in legislative and political matters. Appraisers depend on organizations to be aware of pending issues, and to correctly assess the impact of those issues on the appraisal profession.
Appraisers expect the organizations who represent them will choose the correct side of issues, those which will strengthen the ability of the appraisal profession to perform in a manner worthy of the public trust.
"Yet every appraiser with whom I have spoken has been incredulous that the coalition of appraisal organizations did not immediately stand in opposition to the so-called "agreement" brokered last week between New York Attorney General Andrew Cuomo and Fannie Mae/Freddie Mac to implement their "New Home Value Protection Code" including the "Home Valuation Code of Conduct" (HVCC)"
Instead of overwhelming opposition, the coalition of appraisal organizations wrote a letter of support, on the same day the Attorney General held a press conference announcing the agreement, for a plan which may have grave, albeit unintended, consequences for the appraisers for whom the agreement is intended. Additional consequences will extend to the borrower and lender.
Unlike the appraisal organizations, the various appraisal blogs were abuzz with condemnation for the agreement, not for its good intentions, but rather for its unintended consequences. Chief among those consequences being lower quality appraisals, and a likely mass exodus of the most skilled residential appraisers from the industry.
Clearly, the intentions of Attorney General Cuomo were to force the government sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, into a system whereby undue pressure on appraisers would be eliminated.
Unfortunately, the prescription as one appraiser confided to me, "is going to be like chemotherapy for the appraisal industry. You can't kill the bad without killing the good." In this case, the "bad" are those who routinely pressure appraisers to make mortgage deals "work". The "good" are the appraisers least likely to succumb to such pressure. This is a well-meaning, but destructive plan.
How did the appraisal organizations miss the red flags? How is it that the appraisers in the field see a doomsday scenario, and the organizations that represent them see blue skies ahead?
The coalition that represents appraisers in Washington knows many of the problems appraisers face. But our lobbyists have not been in the trenches. They have not personally encountered the nuances of undue influence. And they certainly have not had to walk away from a potential client because the client wanted to take half of their fee.
THE AMC DEBACLE
When appraisal management companies (AMCs) first appeared several years ago, their purpose was, in part, to solve the problem of appraiser independence by separating the appraiser from the persons with a financial incentive to see the mortgage loan close. Not only did this problem not get solved, the use of AMCs has generated another problem: lower quality appraisals.
Appraisal independence has not been achieved because the AMCs receive the same pressure from lenders as appraisers. When the deal doesn't close, the appraiser is to blame. If the AMC can't get the right appraiser, then the mortgage lender simply finds another AMC that will choose the "right" appraisers.
The recent case with First American and eAppraiseIT was hardly unique, in that Washington Mutual pressured them. In fact, the only thing unique in this case was that the executives at Washington Mutual were brazen enough to put their demands in writing. Be assured: that is rare, and is unlikely to be repeated in the near future. Honest appraisers rarely get verbal or written explanations so succinct, as to why their services are no longer being utilized. Their former clients just keep trying new appraisers, until they find one who doesn't let the market data get in the way of a "good" appraisal.
The second problem with AMCs is that they tend to settle on the most desperate of appraisers. As alluded to earlier, that would include those who are going to rubber stamp every appraisal. The other trait of this brand of practitioner is that they are generally willing to accept a fee that is far below what is the norm for the market. Most AMCs do not offer full fees for appraisals. Instead, they promise lots of volume and no hassle payment. Some have low set fees. Others demand as much as 60 percent of the fee just for placing the order with the appraiser.
As a result, the most highly qualified appraisers are refusing to work for the AMCs. The principled appraiser spends a great deal of time doing research, inspecting the subject property and its surroundings, and analyzing market data to come to a conclusion of value. More time is invested in effectively communicating their findings and explaining the support for their opinion of value. Most of what the appraiser includes in the appraisal report is required by law, although the lender may only look at the bottom line to determine whether or not it is a "good" appraisal. Regardless, the best appraisers have been faced with a decision: reduce the scope of required work performed (in violation of USPAP) and accept lower fees while turning out more poor quality appraisals, or simply walk away from a large segment of the appraisal business.
So, if the best and brightest of the residential appraisers will not work for the AMCs, what remains is that segment of the appraisal community who has the least training, the least experience and the lowest skills and ethics to determine the value of the lender's collateral. This ineptitude is, no doubt, a contributing factor in the current "mortgage meltdown."
It is hard to imagine how transitioning to such a demonstrably failed system could be seen as a good idea, but that is exactly what is being proposed. We have seen the effects of sending some of the appraisal volume through the AMCs. Does the nation really want to see what will happen if we send most of the appraisal work through AMCs?
Yet that is exactly what lenders will do to comply with this plan, if imposed. Already many lenders have begun using AMCs to avoid the appearance of impropriety. The GSEs will have to require any lender who does not use an AMC to "be able to clearly demonstrate that it has prudent safeguards to isolate its collateral evaluation process from influence or interference from its loan production process." That's a tall order for any company - small or large.
Reversing the momentum created on March 3rd will take an overwhelming flood of responses from appraisers at all levels of the profession. Organizations, state appraisal boards and individual appraisers must converge in a unified voice and urge Attorney General Andrew Cuomo and the GSEs to rethink the unintended consequences of the initial draft of the HVCC. We should urge adoption of a less radical version of the agreement before implementation occurs.
Part II of this article - Mixed Signals and a Call To Action - will appear tomorrow!
Scott A Austin, Certified Residential Real Property Appraiser
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