Appraisal Scoop

Runt Rants - AMC "Additional Comp" Request - Pressure or Good Business?

AUTHOR: Ken Verrett is the owner of Acorn Appraisal Associates, a 22 year old firm offering a wide range of quality appraisal services to the Financial and Business Communities in the greater Houston SMSA.  Read all Runt Rants on Appraisal Scoop.

I had an interesting discussion with an appraiser in last week regarding AMCs. I thought we'd all benefit from his situation his view of the market, and his business decisions. Robert D. Mims IV owns 30-A Appraisal group, Inc. in Florida. He sent me the following email.

Ken -

I've read your articles and actually submitted to you an email last year from a broker that was pretty nasty. I subsequently passed it along to New York District Attorney. I was mentored by an MAI, I do commercial with an MAI, and take my SRA designation class in September.

Below is an email I received from an XXX rep when I asked for an additional $50 to consider two additional sales - after gridding 3 sales, 1 pending, and 2 actives for a total of 6 comps.

What alarms me is not that XXX is willing to pay additional $$$ for the additional scope of work, but that she said SSS will pretty much request additional consideration of sales whenever the purchase price is not met. So regardless of the quality, the number of comparables, Certification #7, etc. there will be an automatic request to consider additional sales to try and meet the purchase price?

Before I respond to XXX, I want your take. Am I overreacting here by interpreting this email as pressure to influence value? And a subtle threat that if I don't they'll will simply assign the work to other appraisers?

Here's XXX's response to the fee increase request I sent. What say you?

Click here for the REST of the story . . .

Outside the Boxes: Part 14 - 12 Tips To Increase Your "ODDS" ... Observe, Disclose, Disclaim & Specify

AUTHOR:  Patrick Egger is a Certified General Appraiser located in Las Vegas, NV. He teaches continuing education classes on the housing market, appraisal issues for real estate agents and appraisers. He can be reached at [email protected] 

As licensed professionals, appraisers are required to "promote and protect the public trust" in our profession. Clients and the public have a right to expect ethics, competency and consistency from all appraisers, even when many of those same clients contribute to problems in the market.  We are expected to provide a "credible appraisal", one that is "worthy of belief".

Over the next several years, "odds are the profession will change", perhaps dramatically. During this time appraisers will become the "odd man (or woman) out" as some of the blame for market conditions will be laid at our doorstep and rightfully so as many in our profession were willing participants of "housing gone wild".

The initiatives and actions we take from this point forth will determine the trust placed in the appraisal profession by clients and the public. The real estate industry that we are part of has lost credibility and to restore the confidence, we need to be pro-active and using the "ODDS Rule" will help. 

• Observe the property and the market.
• Disclose to the client what you did and did not do.
• Disclaim that to which you are not qualified to evaluate.
• Specify your reasons and logic.

Often, clients, underwriters, loan officers, buyers and sellers have questions. Some are reasonable and some are absurd, however all are important. We can't become a "culture of no". We must take the steps necessary to respond appropriately since our responses reflect on our profession as well as ourselves. 

Click here to continue reading . . .

Outside the Boxes: Part 11 - Overlooked & Under-reported

AUTHOR:  Patrick Egger is a Certified General Appraiser located in Las Vegas, NV. He teaches continuing education classes on the housing market, appraisal issues for real estate agents and appraisers. He can be reached at [email protected] 

Like the magician's illusions, not everything is as simple as it may appear to be. While appraising isn't "magical: (although I've seen a few appraisals that were "beyond belief") the URAR does pose a number of questions that seem to be straight-forward, when in fact they are anything but.

Property Rights

If the subject is on a longer term lease (say a year or more) without a provision for the landlord to terminate it for reasons other than default and or no law invalidates the lease at foreclosure, what are the true rights being appraised, "fee simple" or "leased fee"? If the rent is below market, would an investor pay less for the leased fee rights? If appraised as "fee simple" (for valuation purposes, you must use a "hypothetical condition" and disclose.

Zoning Compliance

Over time, zoning ordinances are changed. Uses once permitted are no longer allowed and setbacks, building coverages and other requirements may be modified to more current standards. Don't assume that similar zoning designations have similar meaning or requirements in different jurisdictions. While R-1 may may indicate "residential single family" for most cities, the permitted accessory uses, set-backs and other provisions can be very different.

Illegal Uses

In many older areas, owners may have expanded a building to the property line or into the setback area. Assessor records my reflect the improvements, however inclusion by the assessor does not indicate code compliance.

Click here to continue reading . . .

Declining Market: New LSI Policy — Two Pendings/Listings on all appraisal forms except REO reports

The following is from a notice sent from LSI's Chief Appraiser - Download LSI_Pending_Sales.pdf

As of January 7, LSI implemented a major policy change designed to help appraisers determine the direction (increasing, stable, declining) of the submarkets, by requiring two listings/pendings be added to every analysis.

Even in markets that have had no declines, there are submarkets that are deteriorating, and unless we provide some support for this, we run the risk of assuming the stability is still there, and only listings will tell you when the slide is beginning.

FAQ for New Policy of adding 2 Pendings and Listings to your analysis;

1. Fees: While LSl does not dictate fees, we do not expect this policy change to impact our costs. The scope of work in a declining market would dictate the prudent appraiser performs an analysis of listings and pendings, so we expected this research has been performed all along. Gridding of these offerings is to assure our clients of the direction of the submarkets in every region of the country.
2. Maps/photos: As with any gridded item, we expect the appraiser to include a comp photo of the listing or pending sale and its location noted or, the sales location map.
3. Duration of Policy; Until further notice. This policy is to be applied to all residential appraisals with one exception: REO reports that already have a page adder for consideration of competing listings need not add still more listings We expect to maintain this policy until the murky national picture clears and it becomes apparent that most markets are turning from a threat of decline to a likelihood of increases. At that point, we expect to suspend this blanket general policy for all but the known remaining areas in decline.
4. Granularity: Several have written to argue that you track and report the supply and demand, price changes, etc. based upon a broader database. This might be regular MLS statistics, or an online database that breaks it down to single family or condo. Use of average LP to SP ratios offered by MLS statistics may tend to mislead. They are incorporating properties of different types, locations, pride ranges, and attractive to different buying groups. This averaging process is not granular enough. To better support the estimate LP to SP ratio, build your adjustments from the data you find which is similar, proximate, and most current in your subject's locale, in other words, from your closed comparable sales.

Download LSI_Pending_Sales.pdf

Transactional Analysis: Terms, Motivations, Concessions, Cash-Back

AUTHOR: Steven R. Smith, MSREA, MAI, SRA, Smith Realty Advisors,  Redlands, CA, Real Estate Appraisals, Consulting, Expert Testimony, Forensic Reviews, Fraud Research and Analysis, Litigation Support.  All opinions expressed in this post are the author's and may not reflect those of the Appraisal Scoop blog.

During the past boom period, mistakes from unverified data were masked by market price increases.  Today, many markets are experiencing steep declines in value and those types of mistakes are beginning to see the light of day!

The Motivations of the parties, the Concessions or Cash Back are not published.  It requires primary research and is part of the "good appraisal procedures" that USPAP refers too. Transactional analysis is now the most important thing for the residential appraiser to verify. 

Here are some clipped comments from a Florida Realtor's article on "Transaction Terms":

"Contrary to popular belief, the bottom line in contract negotiations is not always the bottom line. Obviously, how much you're going to pay for or gain from the sale of a house is on the top of the spreadsheet; however, there are a certain percentage of contracts that fall apart because of the terms or non-sales price parts of the contract, rather than the financial bottom line."

"Let's take a $350,000 offer on a house listed at $350,000. You would think that's it. Full price contract, what more is there to talk about? Well -- seller subsidies, sale of home contingency, settlement date, financing, earnest money deposit, inspections (and who's going to pay for them), appraisal, third-party approval, just to mention a few."  Click here for the complete article

"As you can see, it's not always about dollars and cents. Many times, it's about dollars and common sense."

The FNMA form actually asks us for the name of the person we verified the sales comparables with, not just the source of our information.  In our office we list the sources and the person with whom we verified the transaction terms and motivations as well as the Physical aspect of the property we are relying on as a comparable.

Click below to continue reading . . .

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."

Click below to continue reading . . .

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.

When the Appraisal gets “stuck” at the end

Ardell DellaLoggia of Rain City Guide blogged about some of the issues (from the Realtor's and lender's perspectives) when the appraisal gets kicked out at the last minute for review. ( click here )

Ardell points out:

In a 30 day escrow, usually you know that the property has appraised for loan purposes by day 10-15.  Usually that’s the end of it and everyone is working on getting the loan documents to escrow.  But sometimes as part of the final process to get the docs done, the appraisal kicks out as a “desk review” or a “field review”.

The times that I have seen this happen it is a combination of two things.  One the lender is a little nervous about the loan.  Maybe it’s zero down, maybe the ratios were squeezed in with a shoe horn.  Secondly there are insufficient like-kind comps within a reasonable distance to the property.  This happens most often when the property is unique to an area or in a remote setting.

Ken Crotts, in the comments section points out:

Appraisal reviews are going to be with us for some time to come as lenders make underwriting adjustments to mitigate growing losses in their portfolios. Any time a deal goes through underwriting with marginal qualifications the appraisal is going to get a greater level of scrutiny than they did in the past. While this is a pain to those working on the deal it is healthy for the market in the long run.

Click here for the complete article and commentary.

Appraisal Review - Avoiding "Reviewer" Liability

Author: Todd F Stevens is a partner in the law firm of Keeney Waite & Stevens in San Diego. He specializes in real estate litigation with an emphasis on the defense of real estate professionals. His telephone number is 619-238-1661. Mr. Stewns is the immediate past-president of the San Diego County Bar Association.

Here's a trend in real estate law: attorneys are waking up to the potential liability of review appraisers. Couple this with the common misunderstanding among review appraisers that their risk is less than the author of the original report, and you get a burgeoning new area of litigation.

Here's how to protect yourself . . .

Why Reviewers Get Sued

In my practice review appraisers increasingly are being named as defendants in lawsuits. In the typical transaction, the review appraiser has a contractual relationship with the lender while the appraiser retained by the mortgage broker to perform the original report does not. Lenders usually include language shifting some of the risk of loss to the reviewer. Lender/reviewer contracts often contain provisions permitting the party prevailing in a lawsuit to recover court costs as well as the fees paid to lawyers.

Carefully read any contract you are asked to sign by a lender who is hiring you for review work. You may be able to negotiate out some of the more onerous provisions. As a rule, lenders tend to insist that appraisers on their approved list be covered by errors and omissions insurance. When a loan defaults, the lender, armed with the contractual language just discussed, sues the appraiser, confident that insurance coverage exists for the claim.

I frequently hear the common myth, "If I didn't have E & O insurance the lender would not sue me." Wrong. I often get calls from uninsured appraisers who have been sued. In fact, until you are sued, the lender cannot be absolutely sure whether coverage exists for the claim.

In my opinion, the need for E&O coverage has never been greater. The real estate market is strong in most areas of the country with non-performing loans being relatively rare. This being the case a lender may litigate even if the loss is modest.

Reviewer Liability

Another big myth is that reviewers have less liability than the original appraiser. In fact, I have heard some attorneys argue that reviewers have more liability than the original appraiser since reviewers have the "last" opportunity to correct any problems with the report.

Click below to continue reading . . .

Trimming The Fat? Lenders Admit To Lowering Appraised Values

"You face foreclosure. You quickly move to refinance but qualify only for a double-digit subprime rate.  You take it, pay for an appraisal and learn your house is worth $425,000. Then the lender reduces your appraisal by $100,000."   That's the way the Examiner article Low appraisals hurt subprime borrowers begins.

"A loan officer from Quality Home Loans, a lender that downgrades appraisals, said, “Appraisals can be downgraded for a lot of reasons, like market saturation, houses that stay on the market too long, or if when doing a public records search we see that though additions were made to a residence, the proper permits were not obtained. So then we disallow those additions.”

One has to question that practice on a number of levels!

1. Equity - It seems to me that this practice [lowering values] could lead to claims of discrimination if a policy of adjusting appraised values is not adhered to in an equitable manner.   For example, “Imagine your neighbor with the identical house in the same condition gets 100 percent LTV, and not only do you get double-digit interest rates and only 60 to 70 percent LTV, but now they drop the value of your home by tens of thousands of dollars” .
2. Double-Dipping - The reasons quoted above may be legitimate for a value differential, but is an unlicensed loan officer or processor qualified to assess if those issues have already been addressed?  Do the comparable sales already reflect the changing market conditions? Are they qualified to determine the level of adjustment?  AND come on . . .What loan officer is verifiying building permits?!!
3. Legality - I understand the need to make underwriting decisions based on credit reports, appraisals, and other criteria . . .but I don't agree with actually changing the results of those reports.  Where does it stop!   Can a loan officer run a credit report and then change the FICO score? 
4. Responsibility - Who bears the responsibility for that report once the value has been changed?  I can foresee a borrower filing a complaint against an unwitting appraiser for an unsupported "Low" value.

There have always been reports, by appraisers, of clients demanding that appraisals be delivered without any "security" features enabled on the electronic file.  Doing so would make it simple for anyone to alter the report.   Of course they always claim that this is so they can add their watermark (or something similar) and that "We NEVER change your report!".

The Examiner article (click here) gives fuel to the fire that there may be MORE changes going on than one might think?