Appraisal Scoop

Get It Now: 2013 Cost Vs. Value Report Data Available

The big news: After six years without any sign of improvement, REMODELING's 2013 Cost vs. Value Report shows an overall cost-value ratio increase of 2.9% over the 2011-2012 number. This reflects rises in the cost-recouped percentages for all 35 home improvement projects tracked by the report, with replacement projects leading the way with the biggest gains. Data for all projects in 81 cities is now available, for free, at http://www.costvsvalue.com.

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Source: Remodeling

NAHB says "Flawed Appraisals Killing Home Sales, Hampering Housing Recovery"

December 8, 2011 - One out of three builders are reporting losing signed sales contracts during the preceding six months because appraisals on their homes are less than the contract sales price, according to a recent nationwide survey conducted by the National Association of Home Builders (NAHB).  

“The inappropriate use of distressed and foreclosed sales as comparables in determining new home values is needlessly driving down home prices, killing home sales, causing more workers to lose their jobs and delaying a housing and economic recovery,” said NAHB Chairman Bob Nielsen, a home builder from Reno, Nev. 

Too often, due to faulty appraisal practices, brand new homes with sparkling appliances and interior upgrades get compared to a distressed property that has been sitting vacant and in disrepair. The result, in many cases has been that the new house winds up getting appraised at less than the cost of construction. 

That is precisely what is occurring in today’s marketplace, according to the NAHB survey, where a full 60 percent of respondents reported they were experiencing appraisals coming in below their contract sales price. 

"Of those reporting that they had encountered this problem, 53 percent said the appraisal amount was actually less than the cost of building the home."

“This is not only unfair and unreasonable, but it perpetuates the cycle of declining home values, drives more home owners underwater, harms local economic activity and acts as an obstacle to the recovery of the housing market,” said Nielsen. 

These appraisal practices are a major contributing factor to the current acquisition, development and construction (AD&C) lending crisis that has choked off credit for home builders and threatens to prolong the current housing downturn. 

Falling appraised values for land and subdivisions under development have led some financial institutions to stop lending to developers and builders, to demand additional equity and even to call performing loans. 

Since Sept. 2009, NAHB has held four appraisal summits in Washington with representatives of federal banking regulators, the appraisal industry, the housing finance industry, the real estate and housing sectors and others to find solutions that will allow appraisers to develop realistic valuations based on sales that are truly comparable. 

The need to give top priority to addressing the complexity of property valuations in distressed markets and impediments to the flow of appropriate information on homes between appraisers and interested parties was discussed during the most recent summit, which occurred on Oct. 19. 

“Major reforms in appraisal practices and oversight are needed to ensure that appraisals accurately reflect true market values and don’t contribute to price volatility or harm aspiring home owners and move-up buyers,” said Nielsen. “We will continue to work with all stakeholders in this debate to find solutions.” 

With the decline in home prices appearing to have ended or be coming to an end in most parts of the country, resolving the appraisal and credit crunch issues remain a top priority for the association. 

NAHB’s latest Improving Markets Index has shown modest signs of improvement in scattered housing markets where employment is gaining and distressed properties are not as numerous. 

New-home construction stands ready to serve as an engine for economic recovery. Building 100 single-family homes creates more than 300 full-time jobs and provides $8.9 million in federal, state and local tax revenues. 

“Resolving inappropriate appraisal practices and restoring the flow of credit to home builders will not only help to put America back to work, it will provide badly needed tax revenues that is essential for local governments to support schools, police and firefighters in communities across the land,” said Nielsen. 

Source: NAHB

One Cause of the Uneven Recovery: The Home-Buyer Credit - The Atlantic

Housing stimulus programs are history. Home buyer tax credits are water under the bridge. Still, they're part of explanation for why we're where we are, economically speaking, trying to extract ourselves from a funk the likes of which only those who lived through the Great Depression can remember.

Here, the Atlantic's Daniel Indiviglio tries to shed light on the distortive effect of the home buyer tax credit on reisdential investment, and therefore, the economy, by regraphing the quarters and pulling out the stimulus' impact.

 

Indiviglio's chart takes actual

" GDP growth (red) and then imagined what GDP would have looked like without the credit (blue). In my estimate, residential investment dropped to $321 billion in the third quarter of 2009 -- where it fell to when the home buyer credit was removed last summer and has hovered around ever since.

Here, you see that the third quarter of 2009's pop looks a little weaker. But growth looks better in most of the quarters that followed -- especially the third quarter of 2010, during which time the big fall in residential investment due to the credit's expiration cut GDP.

Better home sales would have had some effect on other aspects of GDP as well -- but just like you're seeing here, removing those effects in later quarters would have created an adverse effect."

Like other important economic events, we'll need more history to run its course before we'll be able to say it's positive or negative.

Source: The Atlantic

"Foreclosure-Gate Deal? Government agencies close ranks - Washington Post

Washington Post reporters Zachary A. Goldfarb and Dina ElBoghdady are working this morning on word that a compromise deal is near that would resolve accusations of fraud and chicanery in banks' handling of failed home mortgages and property repossessions.

Goldfarb and ElBoghdady report that while a number of disparate agencies have banded together in agreement, the Office for the Comptroller of the Currency--which oversees the banks--remains opposed to the direction of the deal. What's more, there's work to do on the final terms of the settlement.

They write, "Even as officials neared consensus over the changes they would require banks to make in foreclosure practices, there was still no decision about how large a penalty banks should face and whether they should pay a fine or devote the sum to helping rework mortgages for distressed borrowers. Officials have told banks they would like the industry to help avert 1.5 million new foreclosures, sources said." It's important this gets settled for the market to work on normalizing supply and demand.

Click here to read more.

Source: Washington Post & Builder Online

 

 

 

 

Fauxclosure Trends

According to the Hanley Wood Market Intelligence blog and newsletter written by Jonathan Dienhart and Ken Lee :

The most acute challenges facing the housing market as it struggles to stabilize in 2011 are an expected flood in foreclosures and weak employment growth.  Despite reaching a record-high level of activity in 2010, consensus estimates call for foreclosures to rise to new all-time highs again this year.  This is in part because a number of the largest banks suspended foreclosure proceedings in October, causing a backlog in activity.  

According to comprehensive transactional information available in Housing IntelligencePro , total foreclosures (non-seasonally adjusted) in the U.S. fell almost 29% from September to October.  Compared to the same period last year, foreclosures were off 21%.  Just before foreclosures were halted by the banks in October, the number of foreclosures in September hit an all-time high for any month since the beginning of our data series in 2005.  This suggests that foreclosures would likely have remained on the rise if the freeze not taken place. 

On an index scale with October of 2005 being equal to 100, that would put September 2010 foreclosure activity at a rating of 451 (or in other words, 451% of the number of foreclosures seen 5 years ago) and with October 2010 falling all the way back down to 323, the lowest level since April 2009.  Expect to see this recent trend turn again around in the coming months. more...

Why Housing Won’t Improve Anytime Soon

Why Housing Won’t Improve Anytime Soon

By William L. Pittenger, MAI

Despite record low interest rates, renewed affordability and other seemingly positive factors, the housing market still faces unprecedented headwinds that will prolong its recovery. An expression frequently used to explain the problem is the “fundamentals are not there.” But what are the fundamentals implied by that rather non-descript and over used phrase? Do they include a couple of readily identifiable and measurable characteristics that are holding the housing market back or are the so-called fundamentals a series or combination of characteristics that make measurement more complex. Our view is the latter. While one or two characteristics may not have a profound effect on the broader housing market, considered together, the fundamentals add up to a serious impact. Here is our view of what those fundamentals are and how they are impacting housing recovery.

Inventories are too highand are likely to remain that way for the foreseeable future. There are two types of inventory which impact or are at least destined to affect housing. They include both the visible inventory of homes which are capable of being identified and the so-called “shadow inventory” which is inventory held by banks and loan servicers which is not yet offered for sale.

The biggest component of visible inventory is existinghomes offered for sale by membersof the National Association of Realtors. At the end of October, that inventory stood 3.86 million homes. That was down fractionally from a month earlier but still a 10.5 month supply at the current sales pace. Add to that about 242,000 new homes offered for sale by builders plus those offered for sale by owners and the visible inventory total grows to about 4.2 million homes. That is roughly where it has been for several months. Note that the inventory of new homes for sale is exceptionally small. Nevertheless, it still represents an 8.6 month supply at the current sales pace. Builders continue to have difficulty competing with exceptionally low priced existing homes.

CoreLogic, a business analytics firm, reported in late November that the shadow inventory of homes increased from 1.9 million to 2.1 million units in August, the most recent month for which data are available. CoreLogic measures shadow inventory as loans where payments are 90 or more days past due; plus those in foreclosure plus those which have been foreclosed upon but are not yet offered for sale. That puts visible and shadow inventory together at about 6.3 million units which is well over a year’s supply and perhaps as much as two years depending upon how shadow inventory moves through the system. Shadow inventory is volatile and the forecasting risk inherent in both measuring it and tracking its movement is huge. For example, the volume of assets moving from foreclosure to bank owned status declined 35% in October. That is a direct result of well publicized foreclosure processing problems. These and previous moratoria have lengthened the timeline and have introduced even more uncertainty into the process.

In our view, the shadow inventory may be the biggest single threat to housing recovery. If banks quickly return large numbers of houses to an already over-supplied and fragile market, prices will almost certainly decline further resulting in even more foreclosures and the cycle repeats itself.

House prices remain unstable. While the free fall has ended (barring additional unforeseen eco-nomicshock) prices are still fluctuating within a narrow range. Nationally, the median existing home price in October was $171,100 little changed from both a month and a year earlier ($171,500 and $172,000 respectively).

The S&P/Case-Shiller Index for the third quarter of 2010 was released on November 30th. Composite indicesfor both 10 and 20 cities are published quarterly. The 20 city index showed prices down 1.5% from the third quarter of 2009 and down 2.0% from last quarter. An important conclusion from the index is that U.S. house prices have generally returned to 2003 levels.

Foreclosures continue largely unabated and the pipeline continues to grow.  The Federal Reserve’s forecast of foreclosures remains grimfor the next few years. They expect about 2.25 million foreclosures both this year and next plus another 2.0 million in 2012. Foreclosures soared from about 1.0 million in 2006, the year home prices peaked, to about 2.8 million in 2009 when prices likely hit a cycle trough. Foreclosure inventories are now over seven times higher than long term historical averages and are continuingto rise. Moreover, as foreclosure activity increases, more six and 12 month delinquent loans are moving into foreclosure and the extremely delinquent category of more than 12 months continues to both grow and age. Payments have not been made in more than a year on one-third of all loans 90 or more days delinquent. Moreover, of loans that are more than two years delinquent, 18% have still not entered foreclosure. The reasons for such delays are not totally clear.

The continuing pace of new foreclosure filings is also alarming. According to Realtytrac data, about 17% of filings in October were new filings as opposed to subsequent filings such as auction notices, etc. New filings surge to over one-third in Florida statewide and over 50% by the hardest hit Florida counties.

Foreclosure Crisis extends the timelineand introduces even more uncertainty into the housing market at a time when uncer-tainty is least needed. The crisis involves signing documents electronically (robo-signing) or without proper oversight or diligence, improper or no verification of who actually owns the property and who has the right to foreclose and much more. There is more than mere anecdotal evidence of fraudulent paperwork and improper activities but it remains to be seen how big the problem really is. Some view it as little more than a paperwork problem confined to a small number of banks, servicers and law firms. Others see it as a far more systemic problem that could derail or at least slow housing recovery and perhaps even upend recovery of the broader economy. Some also view it as a political grand-standing opportunity

The Congressional Oversight Panel that monitors the government’s bailout program issued a warning not to underestimate the reach of the foreclosure crisis. The panel also echoed the predominant view that the true extent of the problem remains to be seen.

There is widespread concern that Congress could enact more legislation that may seem consumer-friendly on the surface but could have a profoundly negative effect on the mortgage industry and therefore consumers as a whole. For example, some lawmakers are attempting to resurrect so-called “cram down” legislation that would give bankruptcy judges the power to reduce mortgage amounts. Others are pushing for some big banks to spin off their mortgage servicing functions alleging conflict of interest. Still others advocate even more aggressive mortgage regulation at the federal level in addition to what is already being created under the Dodd-Frank and SAFE Acts. Whatever the depth or the out-come of the problem, the result is clearly a blow to a fragile housing market.

Strategic Foreclosures continue to mount as a growing number of homeowners discover they are so far underwater on their home loans that they believe they will never recover. Strategic defaulters, as they’ve come to be known, may have the capacity to repay but choose not to. Some studies suggest that strategic defaults may account for as many as 25% to 35% of all defaults with no end in sight. They are driven by a very large percentage of underwater home loans.

Employment is a fundamental which is currently negative for housing and recovery of the broader economy. The Bureau of Labor Statistics (BLS) announced last Friday that the economy created a mere 50,000 private sector jobs and lost 11,000 local government jobs for a net gain of 39,000 jobs and an unemployment rate that now hoversjust under 10% at 9.8%. The cycle peak was 10.1% in April. Currently the ranks of the unemployednumber 15.1 million, a number equal to the recession peak. More disturbing is that fully 6.3 million people have been unemployed long-term which is defined by the BLS as 27 weeks or more. Additionally, most of the Great Recession job losses have been permanent rather than cyclical and are therefore not likely to be replaced.

The hardest hit sector has been construction. Manufacturing employment growth has been flat for decades and construction became, in a sense, the new manufacturing. It was employment for a very large number of both skilled and unskilled workers in their prime working years of 18-43. Now the construction sector has collapsed and nearly one million jobs have been lost. The outlook for a rebound is not good. Construction jobs were, in large part, driven by the housing bubble. As much of the housing growth was artificial and resulted in widespread overbuilding, much of the construction employment too was bubble driven and jobs won’t be replaced.

The U.S. had a lost decade for jobs in the 2000s. Following the relatively minor recession in 2001, it took over four years to regain lost jobs. During that time, wages stagnated and The Great Recession struck. Wage growth remains flat and the period following The Great Recession is shaping up to be a jobless recovery as well.

Job growth is not keeping pace with a growing labor force or a rising population. Indeed, there were only 400,000 Americans employed at the end of 2009 than were employed a decade early in 1999. Nevertheless, population grew by 30 million during the decade. The U.S. economy actually lost jobs on a percentage basis during the 2000s after having gained jobs every decade since the Great Depression of the 1930s.

Roughly eight million jobs were lost during the recent reces-sion. That left a very deep hole for the economy to climb out of and jobs are not being created anywhere near fast enough to even begin the long climb. The nation’s unemployment rate has averaged 5.7% since 1948 — some 62 years. Given the structural employment changes that have occurred in the last three years, it is likely that the “new nor-mal” will be higher in the range of 6.5% - 7.5% after recovery.

Unemployment, the fear of unemployment, the structural changes in employment, slow growth prospects and the likelihood of continuing stagnant wage growth combine to create a huge obstacle for potential home purchasers. These fundamentals combined will not support growth of housing either in terms of volume of home purchases and price increases r several years.

Underwriting standards are frequently cited as a reason for impaired housing growth.  The reality is that underwritingstandards have returned to those prevalent in an earlier time when there were no exotic mortgage instruments, cash down payments were required and a clear and convincing assessment of a borrowers ability and willingness to repay the loan were underwriting norms. Today, more borrowers are credit impaired than ever before and household wealth has declined dramatically from the heady days of the middle of last decade when people saw themselves as rock stars or oligarchs able to afford their every wish — at least on paper.

These are a few of the fundamentals we often allude to.  When combined, they paint a short and mid term housing picture that looks bleak.

GUEST AUTHOR:  William Pittenger, Bill Pittenger - Real Estate Economics (www.Billpittenger.com ) E-Mail:  [email protected]   Tel.: 321 750-2768

FDIC Announces Open Door Policy for Regulatory Reform Rulemaking

Appraisers……

You can participate with the new appraiser independence regulations that are being crafted as a result of the Dodd-Frank financial reform bill.

http://www.fdic.gov/news/news/press/2010/pr10187.html

"To seek input from the widest audience possible, the public can submit views via email on how the FDIC should implement the new law. These comments will become part of the record and will be posted on the FDIC website. The public will also be able to sign up for a subscription service for receiving notices on major developments. The FDIC has also crafted bill summaries and added a fact sheet that will be regularly updated to reflect policy decisions during the implementation process. This can all be accessed at the dedicated financial reform webpage, http://www.fdic.gov/financialreform/  "

If lots of independent appraisers provide comments, the more likely it will be that your (and our) concerns will be addressed.

If you think direct client ordering of appraisals can be implemented, provide specific methods to do that which will preserve your independence but still allow business relationships.

If you don’t like that idea, then aspects of the current HVCC may be mandated – which will not help your business environment. Remember, the ‘commerce’ section of the HVCC actually had its beginning with FIRREA in 1989. Times change.

AUTHOR: Dave Towne Towne Appraisals & Appraiser Education Service, Mount Vernon, WA

Runt Rants - A "Two Tier Pricing Structure" for Appraisal Services

AUTHOR: Ken Verrett: The author is the owner of Acorn Appraisal Associates, a 24 year old firm offering a wide range of quality appraisal services to the Financial and Business Communities. Overview

We've had a good discussion of the volatile and emotional issue of the AMCs impact on the lending transaction and on the Appraiser Profession specifically.   Several appraisers have added their views.  At least two AMCs have provided their views.  Many of the comments challenged my views and assertions.

It's all good. 

Both AMCs and Professional Appraisers Are Important and Necessary

What I hope I've established is that the Appraisal Profession is a positive force in the local, regional, national, and now global communities.  Professional appraisers are one of only two unbiased participants to most lending decisions these days....the other being a Professional Realtor. 

There is arguement that the Realtor in this age of declining dual agency is no longer unbiased.  That has some merit.  However Professional Realtors have laws governing their conduct as well as a strong code of ethics to follow.  If they remain true to both, their position is largely unbiased and positive.

Professional Appraisers are unquestionably unbiased, they perform their duties admirably.  We only need look at the current discourse over the causes of the current credit credit crisis and note that no one even attempts to blame the appraiser.  Our job was done and done well.  We know from talking to our E&O Insurers that appraisers are being named in foreclosure suits at an alarming rate, but the majority of those are lawyers casting wide nets to bring all into the mess that they can.  Such is the weakness of our litigation system today.

We also contend that the AMC is a legitimate industry, has been around for decades, and serves a useful purpose...for both the lender and the appraiser.  Many appraisers dispute that, several here have voiced that view and I'm glad they contributed.  But those arguements don't carry the day in my view.  AMCs are here and will continue to be the principal conduit of appraisal ordering and therefore demand for appraisers working in the mortgage origination niche.

It's Not The AMC That Is The Problem

My view is that the problem is not with the AMC industry, but with the business model that many have adopted, driven by the top 5 representing over 80 percent of appraisal demand.  The problem with that business model is that the vast majority of the AMC volume operates by charging the independent fee appraiser for services that should rightly be charged to their client...the lender or broker.

That charge is 30-40 percent of the fee that the appraiser receives for providing their professional services.   I've offered my opinion that I can see a 5-10 percent charge to the appraiser due to the efficiencies that the AMC can provide to the organized and professional appraiser or appraisal firm.  But that leaves 25 to 30 percent that is a gross over charge....appraisers are paying the price in the form of that haircut for services that the lender or broker client of the AMC are receiving. 

Let me state the problem in dollars.  If the typical appraisal fee is $350, the appraiser is forced to pay the AMC $105 to $140 for the privilege of working with that AMC.  If one accepts my view of a legitimate charge of 5 percent for services the AMC provides to the appraiser, ($17.50) then the appraiser is being over charged $87.50 to $122.50 on each appraisal they perform! 

The appraiser is being forced to subsidize someone one else in the transaction.  That someone else is the lender or broker client of the AMC.  In a competitive market that would not happen, it does not happen.

I've stated that there are two pricing markets in the appraisal process:  the One Off Market, and the AMC Market.  In the One Off Market the fee to the appraiser or appraisal business is $350.  In the AMC Market the fee to the appraiser is $350-140 or $210.

How Can Two Pricing Markets Exist?

Many appraisers, some commenting here, state that two pricing markets exist because of inexperienced, fraudulent, bottom feeding-corner-cutting appraisers allow it to exist.

The top five AMCs argue that the AMC Market IS the true price market by virtue of the fact that they demand and obtain the haircut from the appraiser. 

Both are empty charges in my view. 

The two tier pricing structure of appraisal services is a result of the Oligolopy Market that has been created by the top 5 AMCs who provide over 80 percent of the appraisal demand.   

In the One Off Market the fee for a typical 1004 mortgage origination appraisal is $350.  The One Off Market is a fully competitive market with many buyers and sellers of appraisal services.  The price settles in at $350.  If any buyer or seller attempts to influence that price...higher or lower...they are rejected.  That's the way free markets work.

The AMC Market fee for that same appraisal is $210.  The AMCs are able to obtain that fee because they are part of an Oligolopy.  Together the top five AMCs represent 80 percent of the demand for mortgage origination appraisals.  That is not a fully competitive market; that is an Oligolopy.  In Oligolopies the power shifts to the few who control demand.  They set the price. 

The appraiser in such a market can't afford to ignore 80 percent of his source of demand.  If the client requires such an ignomonious haircut the appraiser has no choice but to accept it.  That's a classical result of an Oligolopy!

The No Spin Wrap Up

Remember the old phrase "What's good for General Bullmoose is good for the USA"?  Originated in the Little Abner comic strip I think, and was a parody of what big business was claiming at one time in defense of the Oligolopy/Monopoly General Motors created and was using to abuse other market participants.

The last twenty years the claim could have been "What's good for the Financial Congolomerates is good for the USA."  The top five AMCs are creations of large Financial Congolomerates.  They created the Oligolopy Market, they set the prices to their advantage because they can.

But just as the General Bullmoose claim was false, so is this current claim.  We've seen what is good for the Congolomerates is not good for the USA.  The Credit Crisis worldwide is a result of short sighted business practices on Wall Street, aided by lax government oversight, ignored by legislators influenced by lobbyists.

HUD/FHA recognized that and is attempting to correct the situation by requiring unbundling of the fees reported on HUD 1 Statements to borrowers.  FHA is attempting to return to One Off Pricing for all FHA loan appraisals. 

HUD acknowledges that a healthy Appraisal Profession is vital to our local, regional, and national communities.  They recognize a healthy Appraisal Profession is even vital to the global economy.

Professional Appraisers agree.  They should be supporting HUD/FHAs courageous effort to correct the situation. 

The largest threat to the Appraisal Profession is the Pricing Structure created by the Oligolopy of the top AMCs, who were created by the large national financial institutions, and which force appraisers to pay for the benefits those same lenders receive from outsourcing their appraisal departments to the captive AMCs. 

Professional Appraisers have endured that Oligolopy enforced artificial pricing for long enough.  It has weakened the Profession which is vital to our local, regional, and national interests.  That Oligolopy has forced the appraisal businesses to accept fees which are below that necessary to maintain a competitive and profitable business.   

The Lenders themselves are damaged when the Appraisal Profession is weakened.  A healthy Appraisal Profession provides underlying value support for the CMOs that the golbal market invests in today, and those CMOs are vital to the continuing business of the national lenders and mortgage brokers.

The time has come to change the AMC business model.  Charge a fair price for the services provided and charge it to those who receive the benefits.  Eliminate the haircut to the appraiser.  Charge the Client for those services.  Do that and the single most damaging problem in the mortgage origination market will be resolved. 

Next time we'll discuss the one remaining thing that must be changed in the current AMC business model in order to restore the Mortgage Origination market to a fully competitive state where all can participate and which supports our local, regional and national communities best.  (Hint...we identified that in the first of this series.)

AUTHOR: Ken Verrett: The author is the owner of Acorn Appraisal Associates, a 24 year old firm offering a wide range of quality appraisal services to the Financial and Business Communities.

Runt Rants - The AMC "Business Model" - Myths and Perceptions

AUTHOR: Ken Verrett: The author is the owner of Acorn Appraisal Associates, a 24 year old firm offering a wide range of quality appraisal services to the Financial and Business Communities.

We've talked about Acorn's experience with AMCs and our views of the pluses and minuses of those relationships.  There have been a number of comments on the series, some indicating their experience mirrors ours in some respects, some indicating the experience had been quite the opposite.  That's not at all surprising to me, and likely not to you. 

I'm reminded of the story of the blindfolded folks trying to describe their perception of what an elephant is, each from feeling a different part of that remarkable animal.  Differences are well founded and expected

What we want to do here is to share views and opinions...and let all readers come away with a broader sense of the relationships, and allow each access to a set of facts from which to base their conclusions.  Some appraiser readers may simply be deciding to enter relationships with AMCs, some considering exiting those relationships.  Some AMC Managers may look at this exchange and confirm that their business model is validated, some may conclude that changes might improve their business.  Regulators and elected lawmakers may gain additional insights which will ultimately influence future laws and regulations. 

Its a big tent I'm trying to raise here, large enough and open enough to include us all in the discussion.  With the help of the readers and commenters, we should get a better picture of the real situation...not one biased in one way or another.  As many of you remember, I'm for each of us making our own decisions, reaching our own conclusions. All I'm trying to do is paint a picture of what really exists.  That done, make your own decision and live with it.

Today I'd like to address some myths on the appraiser side....We've seen evidence of them already from the comments that have been offered.

One Size Does Not Fit All

Jonathan S. and RobB noted that clearly and well.  Rural markets are quite different than homogeneous  metro areas.  The Fannie standard of within six months and a mile of the subject are not relevant in rural markets.  It is exasperating for the rural appraiser to have to explain "those ARE the best comps"  over and over.  It is also a drain on profit.  I say in Acorn...each time the phone rings about a delivered report we lose money.  It's true of all of us when dealing with reduced fee clients.  The lender and the AMC should recognize what the local lender knew years ago; each market is different!  If it is efficient to centralize decision making, it is not prudent to make one size fit all!  A lender/investor in loans will lose their shirts if they try to ignore those local nuances.  As we tried to note in the early part of this series....the local realtor and the local appraiser are the last remaining market experts.  Lenders ignore them at  their peril, and lender or AMC attempts to marginalize them puts the economy in peril as well.  (That last point may appear an over statement.  It is not. Realtors and Appraisers are the last local experts and are crucial to the lending process.) 

Appraisers Who Work Alone Produce Inferior Quality

That was inferred a couple of times in comments, and I've personally seen that view often when this subject is addressed.  If appraisers think that of their competition, they might have an incorrect view of the situation which will lead them to make bad decisions. 

Acorn has lost two very qualified appraisers in the last two years, and they took large books of AMC client business with them.  They moved into that spare bedroom of their home.  Why not?  Rent is cheap there.  We spent years training and educating and supporting those fellows.  One left after two or three years, the other after seven years.  I have no doubt that both of those individuals remain true to the ethics and quality standards we taught, preached, demanded.  The quality they are now producing on their own is the same as what we demanded.   

Appraisal Businesses who serve the AMC market must create an average cost business model that supports the fees and the costs the appraiser incurs.  That extra bedroom office is one of the major ways to achieve that cost reduction.  If you think all appraisers who serve the AMC market are inferior you have a biased and mostly incorrect view of the market.  Make business decisions on that basis and you'll surely hurt yourself. 

AMCs Care Not about Quality and Service

A couple of commenters made reference to that fallacy.  Those who do business with AMCs know that's incorrect.  How often do they receive correction requests from the AMC client?  In Acorn we track that by appraiser.  We want to minimize that occurrence because 'each time the phone rings....'  Those calls most often are legitimate points.  Acorn's company policy is that those are dealt with the same day the request arrives.  High priority!  We correct and return the report.  If an appraiser has more than 5 percent correction requests we have a problem that Acorn needs to solve.  I'm sure there are poor quality and poor service appraisers out there.  But they don't last.  The appraiser, the appraisal business, ends up on a do not use list and the client is lost. 

It's the same with service.  Miss too many deadlines without adequate explanation of the reason why?  The appraiser and the appraisal business is moved to the bottom of the pecking order. 

AMCs care about quality and service.  They care because they are judged on those aspects by their clients.  The simple fact that appraisers receive legitimate correction requests and are dunned for missing deadlines testify to AMC concern for quality and service. 

AMCs Pay Market Rates for Appraisals

Read my lips....they don't as a rule.  The few that do pay market rates are the exception.  Anyone who suggests that the AMC Industry pays market rates are either ignorant of the current market (and shouldn't be offering an opinion publicly) or they've taken an ethics course from Ex President Bill Clinton.  The typical AMC takes a 30-35 percent haircut of the appraisers typical market fee.  That's a fact. 

From an appraisal business owner's perspective, a haircut of 7-10 percent could be justified due to the efficiencies that a good AMC offers.  However the remaining 20-28 percent haircut is obtained by the force of their having created an Oligopoly Market.  That an Oligopoly Market has been created is a fact.  The pricing structure of the AMC market for appraisals is a direct result of that Oligopoly.

I intend to address that Oligopoly and the resulting implications to the local, regional, national, and even global economies later.  I hope commenters will read and share their views when that subject is aired.  I hope regulators and elected officials (or their staffs) will read the exchange and consider how the ideas expressed can be incorporated into regulation and law which will improve the status quo of our country, because I really believe that is what is involved here.

Centralization of The First and Second Mortgage Origination Process Is Good and Necessary

Really now, good for who?  Has the borrower benefited?  How?  Have the Financial Institutions benefited?  How?  Have the purchasers/investors in Mortgage Backed Securities (MBSs) benefited?  How? 

AMCs are an outgrowth of Financial Institution dis-intermediation which resulted from forces initiated decades ago.  The S&L crisis created the opportunity for money center banks to purchase local and regional competitors.  The development of the personal computer, it's powerful growth in chip processing power truly permitted centralization and data exchange virtually impossible when I began my business career.  The World indeed "Flattened" as Freeman described.  We are part of a global economy on a scale that was not physically possible just a few decades earlier.

As the banks centralized demands on management grew complex.  Anyone who has been responsible for managing distant offices appreciates the problems. Few managers have the skills to do that well.  Profits from mergers generally did not materialize as expected and cost cutting resulted. Outsourcing of operations functions  resulted; customer service call centers, loan servicing, appraisal departments. 

Anyone who has dealt with those functions in a local institution, even a very large one, before the Great Dis-intermediation began knows that customer satisfaction has declined in today's centralized world.  Indian customer service call centers is an oxymoron and serves as the example of a depersonalized world that has evolved. 

I believe that local institutions with local management and local decision makers serve their communities better than ones with national or even global centralized management and decision making.  That's based on my experience as a customer over 50 years, and as a corporate manager over a twenty year span..a span that included the beginnings of that centralization process.

AMCs Are Responsible For All That's Bad in the Appraisal Profession

That is an overstatement of most appraiser's opinions.  No doubt in many's minds AMCs have no reason for being, contribute nothing to the appraisal process itself.  Lou M commented along those lines, but his reasoning was at least unemotional.  The AMC elicits some of the most emotional responses I see in our profession.  In my view that is understandable.  The AMC business model has truly brought major challenges to the Appraisal profession:  the reduced pricing structure combined with the dominance of the AMC as the process by which an estimated 80 percent of first and second mortgage origination demand is handled has dealt the profession major problems.

For those readers who are not appraisers, consider a business where product prices have not increased in twenty years yet operating costs have kept up with inflation over that period.  Consider a business which is totally dependent on maintaining local expertize, with very limited opportunities to achieve economies of scale.  Consider a business where eighty percent of the demand has been centralized into an Oligopoly which has reduced prices of the principal product by thirty percent. 

How many businesses would be able to survive in those conditions?!   

The obvious answer is not many.  Since the conditions of the business have been brought about by the business model of the larger AMCs it is understandable that appraisal business owners would identify the AMC as the culprit.

We've hopefully established that the Appraisal Profession is essential to a healthy local economy, and in aggregate very important to the health of the national and even global economies.  Shouldn't the elected officials, the regulators, even the Lenders themselves be concerned with the health of the Appraisal Profession?  Isn't it in the long term best interest of all to have a healthy Appraisal Profession?

I maintain that it is not the AMC that is the problem, but rather their business model. 

One Example of a Business Model Decision That Creates Major Problems

Centralization of Financial Institutions resulted in outsourcing of certain functions that were able to take advantage of economies of scale.  Lower cost per transaction likely was achieved by that process.  To the extent that AMCs resulted in greater productivity in the process, that's good for the overall economy. 

Appraisers want our local and national economies to grow and prosper.  If the outsourcing of the appraisal departments of lenders to AMCs improves the lenders business, great!  There are advantages to dealing with the competent AMC as we noted earlier.  Acorn could see 10-15% of price reduction from the One Off Market prices for those efficiencies.  But 30-35% is excessive. 

Who benefits from the additional 20% haircut?  Not appraisers!  The lender has reduced the expense of the appraisal department by outsourcing.  The AMC has transferred some of that expense to their own business, but by serving other lenders and increasing volume they should gain economies of scale to offset some of that expense. 

The lender should be willing to pay for the AMC services at least what they saved by eliminating the appraisal function.  Prior to the AMC the lender was paying On Off Market prices for the appraisals.  That shouldn't have changed.  But it did! 

The AMC should be charging the lender for the functions they perform and they should be paying the appraiser for the appraisals at the same rate as before, less perhaps that 10-15% that the appraiser finds in benefits from dealing with a competent AMC. 

Lets use an example.  A typical 1004 with MC whose On Off Market price is $350.  The appraisal business owner might see a reasonable fee for dealing with a competent AMC to be 10% of that fee or $35.  That would be a haircut to the appraisal fee.  If the current business model requires and additional 20% in order for the AMC to make a profit, they should charge that fee for service to the lender....$70 for each appraisal order processed and delivered through their systems.

That would result in the lender paying $420 to the AMC, of which $70 was billed to the lender from the AMC, the remaining $350 was passed to the appraisal business, with a deduction of $35 for the AMC services to the appraisal business vendor.  The Appraisal business nets $315.

Compare that to the current situation where the Appraisal Business nets $245 for that same 1004 appraisal because the AMC takes a $105 haircut from the Appraisal Business. 

The current AMC business model makes a pricing decision to take too large a fee from the Appraisal Business, simply because it can.  Remember AMCs have created an Oligopoly Market for their services.  They have cornered 80% of the first and second mortgage appraisal demand.  The top five AMCs are reported to control 80% of the AMC business.  As such they operate with extraordinary power to influence the market and for twenty years they have exercised that power to demand payments from the Appraisal Businesses who operate in a fully competitive market. 

That's one example of harmful business practices that can be, are imposed by Oligopoly Market participants.  Isn't it time that practice changed for the benefit of all?

Next time we'll discuss the AMC Oligopoly market in more detail, and discuss some of the movements underway to bring balance to that market.

AUTHOR: Ken Verrett: The author is the owner of Acorn Appraisal Associates, a 24 year old firm offering a wide range of quality appraisal services to the Financial and Business Communities.

 

Runt Rants - The Good and the Bad - AMCs from the Appraisal Business Perspective

AUTHOR: Ken Verrett: The author is the owner of Acorn Appraisal Associates, a 24 year old firm offering a wide range of quality appraisal services to the Financial and Business Communities.

Background

Last week we provided a brief history of the Appraisal Profession and the Appraisal Management Company (AMC).  We received good comments from appraisers and an AMC who shared their thoughts on what was written.  Very helpful folks, thanks!  The week prior we discussed the Coester Survey, an AMCs survey results of their appraiser panel survey...what we agreed with in our experience, what we didn't find as representative of the market as we saw it.  Good comments from folks there also...and another great help.

Our intent is to set the record straight...no spin allowed...as our appraisal firm sees the market from a major MSA in the country.  We've all seen the influence of public writings on our profession.  Look no further than the HVCC impact...a result in part of the New York Attorney General reading the October Research Survey Results which proclaimed over several years that their Appraiser Surveys reported Value Pressure  a major problem in the market...one problem appraisers evidently couldn't control themselves.   

The Coester Survey was an example of public writings that generally spoke to an issue of the day....one of which was appraisal fees paid by AMCs...but their findings and conclusions were opposite of what appraisers have been reporting for years.  If we don't set the record straight with reasoned alternative views, we'll have yet another well meaning effort to solve problems that don't exist...or which produce changes which make matters worse because the true picture was misconstrued.  Not that Coester spun their results...it's just that their results weren't reflective of the market.

Why Is This Important?

Professional Appraisers must answer to the requirements of our Profession (USPAP), Regulators (State License Departments), and our Clients.  Appraisal Businesses must also conduct our appraisal activities within the prudent constraints of good business practice.  If we don't meet both of those needs, we'll eventually be out of business. 

We hopefully established last week that Professional Appraisers provide an important role in the real estate market, both Residential and Commercial...a market that represents a key component of our country's Gross Domestic Product, and indeed a major component of the world economy.  The current global recession started with the collapse of the USA residential lending market, and we are still trying to recover worldwide from that crisis.  That's support enough to emphasize the importance of maintaining a healthy market in which all participants can contribute and be compensated adequately for their contributions.

Appraisers didn't cause that market collapse, if anything we reined it in somewhat.  In the current environment of various groups trying to recommend changes to prevent another credit crisis from occurring, we'll see many views written, recommendations floated. 

Some recommendations will be made to correct certain elements of the market. Appraisers and Appraisal Businesses will be affected by those recommendations.  It is important to the US economy and even the global economy that the facts are presented without spin, that recommendations are made based on those facts, not on misconceptions. Congress, Regulators, Lenders, AMCs, Appraisers, all need the facts. 

AMCs From An Appraisal Business Perspective

Appraisal Management Companies have been around for decades, but have come to dominate the market within the last 15-20 years.  Major lenders sought to outsource certain functions in an effort to achieve greater efficiency and lower cost.  The Appraisal Department was one of those functions outsourced.  Most major lenders have done that now, often by spinning off major functions of the appraisal department to another entity in which they sometimes maintain some ownership and control. 

It has been estimated that 80 percent of the residential valuation products are ordered through AMCs.  It has also been estimated that the majority of the AMC business nationally is done by the top 3-5 major firms.  AMCs are now a major funnel of appraisal demand from the lenders and brokers, and they represent a major client niche for the Appraisal Profession. 

The larger AMCs function as a classic Oligopoly Market, in which those few providers define and influence the market within their sphere of control.  It is quite factual to state that two markets now exist for residential appraisal services; the AMC Market, and the Lender/Broker/Special Use Market, referred to as the 'one off' Market.

What's Good about AMCs from Our Prospective

As noted before, Acorn is a major supplier of appraisal products in the Houston MSA for AMCs.  Years ago we determined that they would be a major factor in the business for the future and we organized our business to serve them, and we market to them, now serving up to twenty AMCs on a regular basis.  We also provide our services directly to lenders and brokers who prefer to deal directly without the AMC middleman; the 'one off' market.  In our twenty year experience with most of the major AMCs, here is what we find good about the relationships.

AMCs provide a steady and dependable volume - Whether it's five orders a day or five orders a week, that volume forms the foundation of our work flow and creates certain efficiencies within our business. 

AMCs provide efficient communications channels- Most are web based portals which allow communications back and forth to be posted and the history of the assignment retained automatically.  The Scope of Work, contact details, pertinent data, unusual conditions, are usually posted on web sites for download or sent as attachments to the order form as a PDF document.  We strive to establish an honest and friendly relationship between our Administrative Manager and the AMC staff to handle all but appraisal issues.  The AMCs tend to do the same.

AMC staffs are reasonably knowledgeable of Appraisal Issues- Most AMCs train their staffs and provide clear procedures to guide them.  Our experience is they are also open to being educated about special situations relative to our market.  Our staff appraisers are trained to be non confrontational in dealing with appraisal issues when informing the AMC staff of those special situations that occasionally develop.  We don't take the position of preaching, but rather of informing.  It generally works.

AMCs provide no value pressure- We can't remember the last time an AMC tried to influence our value conclusions.  That's a huge plus in dealing with the client....the issues are very straight forward and clear cut, and never about hitting a certain value.

AMCs often provide quality control- Many AMC clients conduct reviews of our reports for certain technical requirements, and will return those for correction before the report is delivered to their customer.  We never like to receive such returns....but they become high priority for the appraiser when they do arrive.  We strive to correct and return all such returns within the same day.  Such efforts on the AMC's part aid us in ensuring quality to our end client...something we both are interested in achieving.

AMCs process invoices on dependable schedules - We do very little follow up on outstanding invoices.  We experience very little collection losses.

That's not a small list of positives AMCs bring to the market.  Not all AMCs provide those strengths, but most provide the majority of them.

What Could be Improved From Our Perspective

Most business relationships can be improved. That's certainly true of the relationship we have with AMCs.  I'm a reasonable entrepreneur.  I don't expect to be protected from the market.  I expect to compete for business on quality, service, and price.  I acknowledge it when someone else provides better quality, service, and price.  I hope others share that approach.  That is certainly the spirit in which this is written.  There are two policies that could be changed in the AMC market, and if they were, the niche would be profitable and a positive contributor to our economy for many years to come.

AMCs should acknowledge the existence of Appraisal Firms in Addition to Individual Appraisers - Many appraisers operate as a sole proprietor, with a single appraiser.  Many operate as a Partnership or C Corporation with a staff of appraisers. The multi appraiser firm tends to be a Partnership or C Corp. 

There is a long tradition in the industry for specifying the name of the appraiser when placing an appraisal order.  That should remain an option.  Historically, the lender/loan officer had relationships with the appraisers and they were comfortable and confident in that appraiser's opinion.  Where that continues to exist, it should be allowed. 

However, the tendency now due to the centralization of the loan underwriting and decision process is that those personal relationships are much less frequent or important.  The HVCC requirements for a firewall between the lending officer and the appraiser make that personal relationship even less prevalent. 

In multi appraiser firms, it is the Appraisal Firm that trains and supervises the quality and performance of the staff appraisers.  It is the Appraisal Firm that carries the E&O Insurance, that monitors service commitments, that maintains the proper license status of it's appraisers. 

AMCs should adopt the policy of assigning orders to the Appraisal Firm when orders are placed, rather than to individual staff appraisers.  Many do.  A few do not.  The few that do not create significant inefficiencies in the performance of the Appraisal Firm, inefficiencies that over the long run impact service and quality.  Let the Appraisal Firm determine who best among their staff can handle the assignment.

Studies in Acorn suggest that having the Appraisal Firm assign the order to the appraiser best suited for that assignment results in a 30 percent improvement in field efficiency in our firm.  That is huge.  The efficiencies are brought about principally by allowing the Firm to schedule assignments in large Metro areas grouped by location. 

For example, Certified Appraiser A has two assignments scheduled for field work tomorrow morning.  A third assignment arrives within that same quadrant of the market.  It is immediately assigned to Appraiser A.  The travel time in the field is reduced by 30 percent on all three assignments.  If it is one assignment scheduled tomorrow and a second one arrives, the field travel time is reduced by 50 percent. 

There are other efficiencies that are gained by this simple change, but field work and turn times are the most significant.

Un-bundle the AMC Fee for Service from the Appraisal Fee- As we noted in our review of the Coester Survey, the typical AMC takes a 30-35 percent haircut from the Appraisal Fee as it's charge for providing the advantages of their central ordering and control function.  The haircut means that the typical Appraiser or Appraiser Firm is paid 65-70 percent of the 'one off' fee in that local market for completing the assignment. 

To put that in dollar terms, the 'one off' fee for a typical 1004 residential appraisal is $350.  The AMC places the order at 30-35 percent less, or $227 to $245.  In some cases it is reported that the AMC may charge their customer $400-550 for that same 1004 appraisal.  Most appraisers and Appraiser Firms will agree that the 30-35 percent haircut is too large and results in margins that are too thin to maintain a professional business in the long run.  

The AMCs will likely respond that they do not set the AMC fee...that the market does.  That is true to an extent.  Remember my point earlier that the AMC Market for residential appraisals is an Oligopoly Market?   A study of the history of AMCs would demonstrate and conclude that by virtue of the Oligopoly status, AMCs have been able to influence appraisal product prices and have thereby created a two tier pricing market.   

One off appraisal fees in the market have held at $350 for typical 1004s for the last twenty years.  There have been significant improvements in the efficiencies Appraisers and Appraisal Firms have adopted over those twenty years.  When inflation is taken into consideration, the fee of twenty years ago in today's dollars is reduced by roughly 40 percent.  The $350 equates to $211 in today's dollars, which suggests that the appraisal fee should have been adjusted up to $583 when inflation is considered.  Yet in the typical AMC market, the appraiser or appraisal firm is paid a lower fee not higher....

AMCs provide some efficiencies for the Appraisal Firm...that's an impressive list of 'goods' above.  From Acorn's perspective I'd feel comfortable paying a 10 percent haircut for those advantages.  Any additional efficiencies or savings provided by the AMC accrue to the lender.  Un bundle the fees; let the AMC bill the lender for that additional fee for service. 

That's essentially what FHA was encouraging when they announced the adoption of a modified HVCC.  Un bundle the fees AMCs charge for their services, separate those fees from the appraisal fee.  Pay the standard fee for 'one off' appraisals in each market for the FHA appraisal ordered.  Darn positive step forward!

Since the implementation of the FHA Modified HVCC in mid February, AMC fees have begun to rise in Acorn's experience.  There are significant exceptions, but the trend is in the right direction...fostered by FHA's stand.  However, Oligopoly Markets tend to be able to resist changes that fully competitive markets adapt by the actions of the participants. 

Summary

Many AMCs currently assign appraisals to the Appraisal Firm and depend on the Firm to determine how best to handle the assignment within it's staff and time constraints.  A significant few do not.  If that change were made in those remaining few the business would improve for all parties.

Several AMCs provide 'one off' fees the Appraiser, and have for years.  Since they have remained in business and provide high quality services from the Appraisal Firms' perspective, they most likely adopted an unbundled fee structure from the beginning.  It can be done, and all parties to the transaction are better served.  If the FHA unbundled fee model were adopted for all appraisal ordering the lender and the consumer would know what the cost breakdown really is and each party would make better decisions.

Finally, let us be clear on the points made here.  Recent events have underscored the importance of the residential finance market to the overall national economy.  It is important to the health of the US economy and to the global economy that the residential finance markets function in a prudent and efficient manner. 

The Appraisal Profession provides an important service to that market as the only unbiased local market adviser/expert to each transaction.  AMCs also provide an efficient and useful service.  Lenders utilize both appraisers and AMCs to provide important information to support their loan decision process.   It is in the best interests of the lenders and the economy to ensure the long run financial health of all participants in the loan processing system.  The One Off Market for appraisal services is a fully competitive market, where the market truly sets prices.  The AMC market is an Oligopoly Market, and those AMCs who exert influence on that market should consider the consequences of their actions and adjust if necessary for the financial health of their customers and their vendors.

That's why it is important that the facts and records be clear.  If one party or another attempts to spin the facts or records in order to create a false impression of activity that does not exist, we are all damaged in the long run.  If one party provides a snapshot of data that is accurate but not representative of the full picture, we need to correct that record so that the best decisions are made...among the parties....by regulators or elected officials.

AUTHOR: Ken Verrett: The author is the owner of Acorn Appraisal Associates, a 24 year old firm offering a wide range of quality appraisal services to the Financial and Business Communities.