Appraisal Scoop

A Comprehensive Blueprint for Residential Appraisal Reform - And the Winner Is?

 

GUEST 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]  Look for the Outside The Boxes category for a collection of Patrick's articles on Appraisal Scoop!

 

For years, Joan Trice via her Collateral Risk Network has promoted the concept of improving the appraisal process. Recently, Joan participated in a whitepaper with the National Association of Homebuilders (NAHB) entitled “A Comprehensive Blueprint for Residential Appraisal Reform”.

Among the findings and recommendations were:

• Streamlining the process (including USPAP) and ensuring effective oversight and enforcement
• Creation of a national real estate data superhighway accessible to all
• Better education and credentialing for appraisers
• Establishing consistent rules, guidelines and standards for appraisers
• Developing procedures to address faulty appraisals

The other day in the Appraisal Buzz, Joan invited appraisers to participate in “improving the appraisal process”. She wants our thoughts, ideas and anything we feel will make a difference and improve the appraisal process.  Regardless of whether or not you agree, or disagree with her direction, you have to respect her effort.

Leading means doing what needs to be done and Joan is leading. She took time and made the effort to assemble movers and shakers along with “inside the beltway folks” that are in a position to reshape the appraisal process. She also has the attention of the NAHB, and the “Collateral Risk Network”, a 300 person “members only” group of chief appraisers, regulators and industry experts, who (according to the article) “are focused on resolving the many challenges facing our profession”.

To that end, I wanted to make some observations and give Joan some thoughts on the appraisal process and ways I think we could make it more effective for appraisers and those that rely on appraisal services. I hope that each of you will do the same.

Definition of the Problem

In my opinion, the form and the process could be improved.  However, I do not believe it is the form or the process that stands as an impediment to a healthy housing market. When you examine what is wrong with housing and the system, changing the appraisal form is not going to fix the problem.

While USPAP has been adopted by the users of appraisal services, its underlying tenets and fundamentals have not been intergraded into the lending system that appraisals support or into the mindsets of those that use or rely on appraisal services. Therein is the problem. 

We are required to develop opinions “objectively” within USPAP compliance. At the same time, those wanting to “make a deal”, often want us to view the value opinion from outside USPAP or lending guidelines. When we do not, we are the problem and we are the ones impeding “housing’s recovery”.
despite the obvious.

Lenders and users of the appraisal have different motivations from those providing appraisal services.  The appraiser does not stand to benefit from the deal. Often the client (lender) or the client’s client (builder, agent, buyer, etc.) does. Appraisers are not incented to come in high or low. We are paid the
same, regardless of the value opinion. We have every incentive to make the deal and avoid the consequences.

On the other hand, builder’s, lenders and other market participants, have skin in the game. They do not earn a commission or a profit if the deal does not close. When the deal is at risk of not closing, due to the value not being there, the debate ensues.

Is it a fair debate, with all parties trying to find the right value for the subject or is it a little one-sided, with some of the participants promoting a value opinion via “their comparables” that, “believe it or not”, supports the deal and a commission earned or profit realized?

Personally, I think USPAP, market value and a long list of appraisal related issues (including the forms), better training, accountability, etc., should be addressed. However, none of this will matter unless we change the system. As long as market participants have a financial incentive to close the deal, any impediment to closing the deal, will be considered counter-productive and will come under attack.

We have changed the form and the appraisal process many times over my 40+/- years in the business. Tell me, what has changed when it comes to users of appraisal services and those that rely on the appraisal, when the appraisal does not close the deal?

Do lenders, agents and builders pat us on the back, saying wow, were glad you came in a little low and saved us from making a high-risk deal? Are they quick to say to their clients, “You should be happy Mr. and Mrs. Smith, that appraiser just saved you from paying too much for the property that I sold you?”

Over the past five plus years, lenders, homebuilders, agents and secondary market investors went out of business and homebuyers lost their homes, when loans did not perform and the effects rippled through our economy. Ask a few simple questions to these same individuals and businesses.

“If you could go back in time, knowing what we now do, would you be willing to pay the appraiser twice as much to hear the truth? Would you give him or her more time complete the assignment, without pressure, and develop a more reliable value opinion? Would you listen to the appraiser and adjust your loan to avoid housing’s collapse? If you could erase the massive loans losses, by merely listening to an objective voice, as opposed to those with skin in the game, would you?”

The appraisal process is not perfect and nor are the appraisers. I have taught nationwide and met 1,000’s of appraisers. Generally, they are good people who do not know what they do not know. This we can fix with better training. On the other hand, you cannot fix an “incentive based” housing market with a new appraisal form.

Real Estate is “Imperfect” ... stop shooting the messenger

Defining the appraisal problem and fixing nit is really quite simple. Real estate is imperfect, as are its participants. There are many sides to “housing”. However, only one side or two sides have adopted a
definition of market value and a set of standards and criteria that must be followed to determine what market value is, the appraisal profession under lending guidelines.

I agree with homebuilders, real estate agents, loan officers, lenders, secondary market participants, investors, property owners, etc., that the appraisal process should be more transparent. However, I
disagree that “changing the appraisal process or forms” will solve the problem or that it is “one step” towards a possible solution.

This country depends on housing. Housing and its related industries are a considerable contribution to the GDP of the US. Over the past decade, we witnessed firsthand, the importance of housing and the financial systems and related industries that support it and our economy.

Everyone was made acutely aware of what happens to the economy when you disregard the measures in place to prevent pressure and unfair advantages. Market participants want a better “appraisal process” and one that is transparent. I for one agree that it should be and they should have it.

To that end, we do not need to change the appraisal process or the forms. We simply need to have the participants adopt the same rules we have. We need all of “housings participants” to play by the same rules, to be governed by the same principles and subject to the same consequences.

We can start by having the National Association of Home Builders, the National Association of Realtors, and others adopt a modified version of USPAP or Dodd Frank that incorporates many value related principles and the same definitions (including value and how it is determined), that we have.

When builders and agents set the price, those prices should be supportable as market value, using the same criteria we have to. Those involved with the sale (that depends on financing), refuse to recognize the rules adopted (USPAP and Appraisal Guidelines) by those that control that same financing.  

We can edit USPAP to make it easier to comprehend and Congress can adopt it as “Federal Law”, (just like the speed limit), that applies to all housing market participants. This way, it is the law of the land and
anyone violating its principles and provisions are now subject to the same consequences.

We can also adopt a “national market value definition” and “criteria” that will be transparent and that all market participants must follow. If we all know the rules, and those same rules and consequences apply
to us equally, there would no longer be an “appraisal problem”.

Closing thoughts

Housing is multi-sided, complex and vital to the economy. Housing depends and financing and financing depends on a transparent and verifiable appraisal process. At the same time, we cannot have one part of housing subject to rules and consequences the other participants are not.

Our tax dollars support Fannie Mae, Freddie Mac, HUD, VA, etc. If we are taking the risks of funding housing, we need to minimize the opportunity for housing to derail, a result of, “unintended consequences”.

If tax dollars support housing, there should be transparency for the process, the data that supports the process and the rules. Remove the privacy laws and give appraisers access to the data in places where they do not have it.  Share knowledge and common goals and all ships rise with the tide.

My suggestion, invite the homebuilders and agents (and anyone else with skin in the game) to be a part of changing the appraisal process. Give them a say and have them take the pledge to promote and support whatever comes out of this process and to force Congress to modify Dodd Frank and make it the law of the land, applicable to all of housing’s “market participants”, equally.

Your opinion matters

Housing’s health is vital to the US economy. Each of us, have a stake in seeing a vibrant housing market. To that end, there are no acceptable reasons for any market participant to have an advantage or any other one to be disadvantaged, as appraisers have been for many years.

Homebuilders and other participants make valid observations. Appraisals often are not consistent and at times, this will cost the builder or consumer. At the same time, it is easy to point a finger from the stands and tell others what must be done, when you do not have to follow the same rules and you are not subject to the same consequences.

Several years ago, in response to the HVCC, Dave Biggers and Alamode collected more than 30,000 signatures in support of sensible changes (as opposed to what was on the table at the time) and forwarded them to Fannie Mae, Freddie Mac, HUD and others. This effort had an impact and the “powers that be” listened. We need to repeat this effort, this time with Joan Trice.

Tell Joan and the CRN the problems you see and share your thoughts as to how they could be and should be addressed, with new regulations, or modifications to existing ones, better forms, systems and accountability for all.

Joan is leading and like or not, industry participants are looking to her for answers.  Let her know
how you feel and give her and the CRN the chance to hear what you have to say. If the NHAB really has a “blueprint for change”, let us make sure to include them and all the others in the plan.

 

GUEST 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]  Look for the new Outside The Boxes category for a collection of Patrick's articles on Appraisal Scoop!

Appraisal Scoop Authors to speak at ICAP Summer Seminars - July 7 and Aug 11

The Illinois Coalition of Appraisal Professionals (ICAP) is pleased to announce registration for the 2010 summer seminars is now available on-line at http://www.icapweb.com/education.php. As usual, two seminars will be held this summer. The first seminar will be held on July 7th in Springfield at the Crowne Plaza hotel. The second seminar will be held August 11th in Lisle at the Hilton hotel.

“We are extremely excited about the seminars this year. The committee did a fantastic job of selecting topics and speakers. The people in attendance are really going to enjoy the day and will find the seminar to be pertinent to their daily work as real estate appraisers”, said Randy Neff, seminar chair. "As is tradition of the seminars, Mr. Brian Weaver, IDFPR appraisal coordinator, will be the keynote speaker."

The seminars will be headlined by Mr. Patrick Egger of Las Vegas, NV and Mr. Anthony Young, of San Ramon, CA. Mr. Egger will speak on the importance of analyzing key economic indicators in projecting trends in the real estate market. Mr. Young will speak on graphing market trends and then incorporating the graphs into appraisal reports. Ms. Markie Lemons of Chicago will give a presentation on short sales. “ICAP seminars are not typical real estate appraiser CE seminars.

Here's a little more info on the speakers this year and their topics . . .

Patrick Egger is from Las Vegas. He is an appraiser, professional educator, and author of many articles on the Appraisal Scoop blog under the blog category "Outside The Boxes".  He speaks extensively about using key economic indicators to project housing market trends. Patrick is nationally known among appraisers through his participation on blogs, forums, and speaking engagements. Mr. Egger will be speaking about…

Market Analysis: What moves the market? Indicators, Ratios and Relationships.  

"It’s often said that an appraisal is merely a “snapshot in time”. While snapshots provide a glimpse of what’s happening, they’re like tombstones, telling the reader little more than born when, died when an who’s in the grave. Presenting a simple matrix of key indicators will turn a market glimpse into market perspective. The key to any report is how you communicate your observations and conclusions to someone reading that report. A simple matrix of key indicators will inform the reader on what is motivating the market and why. In turn, you can use the same matrix and indicators to logically support your conclusions in key sections of the report, such as market trends, adjustments and the reconciliation."

"Not only is the information readily available, it only needs to be updated monthly or quarterly; and it can be used with any type of report, transforming static snapshots into dynamic perspectives. Clients expect reasonable conclusions. They also require rational explanations and support for those conclusions. The Data tells us what happened, however it doesn’t tell us why it happened. This is where the matrix will help the appraiser and the reader comprehend where the market was, where it is now and what factors may determine where it is headed."

Another one of the ICAP guest speakers is Anthony Young. Anthony is an active appraiser from San Francisco. He is going to illustrate how to graph housing trends using excel and inserting them into appraisal reports.  Here's an example of one of his Appraisal Scoop articles.

Real Estate Trend Analysis and Graphing

Anthony Young is a Certified Residential Appraiser and principle of Young & Associates Real Estate Appraisal Company in San Ramon, California, where he specializes in the valuation of complex and "high-end" residential properties and housing market trend analysis.

He enjoys showing Real Estate professionals graphing and charting techniques for studying the buying behaviors to conclude adjustments in valuations and has developed a How-To-Do-Trend-Analysis DVD that teaches professionals to measure (and visually graph) the behavior of the Real Estate Marketplace over time and to provide supported and credible results within the appraisal report.

Both Patrick and Anthony will be speaking in the afternoon. The afternoon session will include a real estate agent from Chicago, also known as the foreclosure queen, and Brian Weaver from IDPFR.

Marki Lemons will give a presentation on short sales, what they are, how they impact the market, how price is negotiated and other fundamental items about short sales. She specializes in short sales and foreclosures.

Sounds like a great lineup this year!!!

ICAP is using the Appraisal Institutes online education platform to register for the 2010 summer seminars. This is the second year we have used this platform.

You will have to create a username and password before you can register for the course.

As an ICAP member, you will receive a $25.00 discount for the class if you use the following promo codes. These codes are case sensitive so please type them as they appear below.

Springfield Seminar July 7: icap7sf

Lisle Seminar August 11: icap11lisle

Click on the following link to register….DON’T DELAY!!!

http://www.icapweb.com/education.php  

Reinventing the Appraisal Process: What can be done to change the market's perception of the services the professional appraiser provides?

Why do consumers prefer Toyotas or Hondas vs. Chevy's, Fords or other American cars? It would seem that most cars provide basically the same features, but year after year Toyota and Honda continue to provide reliability and value beyond that of their competitors in the eyes of buyers.

While American car manufacturers have closed the gap, the public's perception has been fashioned by years of import performance that wasn't matched by American cars. Check any of the automobile rating agencies and at the top will be a long line of “imports” with high marks for quality, performance and reliability.

The appraisal profession is faced with a similar "perception problem".

From the client’s perspective, how reliable are real estate appraisals? Are they better off by letting an AMC (Appraisal Management Company) “handle the hassle” or could they be getting something better and more reliable?

What can be done to change the market's perception of the services the professional appraiser provides? When you consider that the consumer is making perhaps the largest investment of their life with the purchase of a home, logically, they should want assurance that it is a sound investment, something a good appraisal would provide.

We all know that the purchase of a home is an emotional decision and that tends to over-shadow logic. Still, you would think that with the median price of a home in the $200,000 plus range, a $300-$400 investment by the consumer would be a cheap insurance policy and in their best interest prior to taking the housing plunge.

Click Here To Continue Reading . . . .

1004MC – The Real “April Fools” – Part Two

How appropriate is it that the 1004MC addendum to the URAR will be required for all valuation assignments for Fannie Mae, Freddie Mac, VA and FHA, that became effective on April 1 2009 – "April Fools Day"?

Picking up where we left off in part-one, here are a few more FAQ's from my workshop on the 1004MC.

FAQ #4 – "At the effective date (mid-month or near month end) there were zero closings in the current to 3-month period however, there are 10 pending sales. Should I use zero in the grid?

This is a judgment call, but then most of what we do is based on "judgment and communication". There are reasonable arguments for both sides. Many pending sales never close. At the same time, if a high number of them do close, you'll post a "goose egg" on the effective date (along with a declining trend) and several days later (when the sales close) it may shift to "stable".

The primary objective of any valuation assignment is to inform the reader so they can make an effective business decision. I would suggest that you verify the pending sales (call the agents to see if they expect them to close), record the details and place a number with an asterisk (and footnote) that these are pending and expected to close.

The key here is not to mislead. You must verify the pending status and document the same. Wishful thinking is not going to help the client. If you ignore the pending closings (and they close) you'll look like an idiot a week or two after your report.

FAQ #5 – "Many markets are seasonal or have anomalies how do I explain this"?

Seasonality generally exists in most market due to families with school-age children and or severe weather conditions. There seems to be a tendency to have higher sales volumes between March and August as opposed to September through February.

Click here to continue reading . . . .

1004MC – The Real “April Fools” – Part One

How appropriate is it that the 1004MC addendum to the URAR was required for all valuation assignments for Fannie Mae, Freddie Mac, VA and FHA, on 1 2009 – "April Fools Day"?

The looming question on the 1004MC, who will be "the fools", those filling it out (without consideration to or analysis of the "four forces that influence value trends in the neighborhoods"), or those using the conclusions on the 1004MC that are absent (by design of the form itself) of the impact of those same forces during the time-periods specified and therefore have rendered the 1004MC Market Conditions form useless and misleading?

Introduced by Fannie Mae and Freddie Mac in November 2008 and now adopted by FHA and VA, the 1004MC has generated far more questions than answers.

Instructors have prepared courses, various individuals have offered free or low cost solutions using Excel, online programs and the MLSs are scrambling to provide 1004MC statistics via their systems, yet despite the efforts there still are disconnects and conflicting opinions vs. cut in stone answers and there is a reason for that. The instructions on the 1004MC are vague and pose a problem with respect to USPAP and Generally Accepted Appraisal Practice.

With that in mind, I'll try to cover some of the many of the issues raised in my 1004MC Workshop and provide you with my observations. At the very least, you get the idea of the tasks ahead and some suggestions on what you may have to do to meet the challenges posed by the 1004MC.

FAQ #1 – "Should we transfer the conclusions and trends on the 1004MC into the neighborhood section of the URAR"?

The instructions on the 1004MC state: "The appraiser must use the information required on this form as the basis for his/her conclusions and must provide support for those conclusions, regarding housing trends and overall market conditions as reported in the Neighborhood section of the appraisal report form".

Click here to continue reading . . .

First Impressions of the 1004MC: Part 5 - "Closing Thoughts"

Having completed several "1004MC Workshops", read numerous forum posts and talked to many appraisers, one thing is clear, confusion reigns! Most do not see the merits of the 1004MC. They see the problems, including opposing opinions, various interpretations, and few immediate solutions given the limitations of their MLS data services.

At question is not the concept, but rather the execution. While many believe this to be a step in the right direction of mandating a standard for measuring trends, the format is a "time-consuming problem" versus a "problem solving solution". The unintended consequences over-shadow any potential benefit.

The 1004MC is not about medians, totals, percentages, and ratios, no more than it is about the neighborhood. The form is about "the collateral" and "the trends related to the collateral". While market conditions and neighborhood trends are important, the trends of properties similar to the subject are critical.

Lenders are not making a loan to the market area or the neighborhood; they are making a loan on the subject property, the collateral. As goes the trend for properties similar to the subject, as goes the value of the collateral securing their loan.

Highs and lows

The 1004MC gets an "A" for effort and the focus on the subject verses the neighborhood, "C" for layout and "F" for format and function. I understand the need to "standardize trend analysis", however, the format is such that the numbers may mislead more than "make transparent".

It does get a high mark for two factors, first for attempting to replace opinion with statistical fact, limiting subjectivity and secondly, it requires the analysis to focus on "competitive to the subject from the buyer's perspective", removing the influence of lesser or better properties in the neighborhood that do not compete with the subject.

Click here to continue reading . . .

First Impressions - The 1004MC - Part Four - "House Cleaning"

I have been developing a workshop on the 1004MC and as I work through the process, every day is one of discovery. Despite having read 08-30 and the FAQ's, along with the existing appraisal guidelines, I am not certain that I have all of the answers, but I do have more than a few questions and observations.

On the plus side, reading and re-reading has provided perspective and possibilities as to what Fannie Mae wants, how we can provide it, efficiently and effectively. Still, I am no expert, and like others, I am second-guessing based on what I know thus far. With that understood, here are a few more of my observations.

First, the 1004MC is not (and I repeat not) a new appraisal form. The 1004MC, like its number-sake is an underwriting form that appraisers are required use. If appraisers designed the 1004MC, it would look different, as would the URAR    Download MCA_Appraisal_Report.pdf

Haves and Have Nots

The 1004MC requires the appraiser to provide "all of the information to the extent it is available or provide explanation if the data is not available". With the advent of multiple listing systems, computers and technology, how will you sidestep providing the data? If someone in your market area is "filling in the form", you will need to do the same.

"Use sales and listings of properties that compete with the subject, determined by the criteria the buyer would use". Your assignment, appraise a home in a new tract. What (from the buyers perspective) is competitive to the subject, only new homes? People "buy new" for a reason, often because they want to be the first ever in the home, at other times because it is the best deal. Are re-sales in the same area "competitive", from the buyer's perspective?

Click here to continue reading . . . .

First Impressions of the Fannie Mae 1004MC Marketing Conditions Addendum: Part 3 - "Medians & Misleading"

In parts one and two of "First Impressions of the 1004MC", we identified the challenges presented by the new form. While its purpose is "to provide the lender/client with a clear and accurate understanding of the market trends and conditions prevalent in the subject neighborhood", the "unintended consequences" may (in all likelihood), provide the opposite.

From my perspective, the 1004MC perpetuates a long tradition of two flawed premises in FIRREA (The Financial Institutions Reform Recovery and Enforcement Act); "all appraisers (by virtue of being state licensed) are qualified to appraise" and "the secondary market (by virtue of its policymaking authority) understands USPAP and the appraisal process".

From Fannie and Freddie's perspective, they want consistent application of underwriting and risk management criteria. If appraisers report the same types of information, presumably you get consistency, which is the foundation of risk management. Eliminating "subjectivity" promotes reliability, a step in the right direction. 

As I am developing a seminar and an automated solution to the 1004MC for appraisers, over the past several weeks I have been working through the form to "fill in the blanks", analyze the results and better understand what Fannie and Freddie hope to achieve with the form.

On the surface, the questions are "mere mathematics", medians and counts, products and percentages, along with the trends they foretell. However in practice, the math and the trends are neither simple nor clear. In fact, when examined from a broader perspective they can be "misleading" in terms of how they are calculated, applied and their indications of change and neighborhood trends.

"Competitive to the subject vs The Neighborhood"

How you define "competitive to the subject" will determine the "calculated results" and therefore the "overall trends". In the same dataset, a broad definition could indicate very different trends from a narrow one. How the appraiser determines "the criteria that would be used by a prospective buyer of the subject property", is the key.

Click here to continue reading . . . .

First Impressions of the 1004MC Market Conditions Addendum - Part Two

It's been a week since the announcement of the new 1004MC Market Conditions addendum. My first thoughts generated a lot of responses, so I thought I would take a closer look. The 1004MC is required for appraisals with an effective date of April 1 2009, however you can expect (and we have already heard of cases) that lenders will be requiring it long before that date.   Download MCA_Appraisal_Report.pdf

The replies to my post pointed to some of the short-comings or conflicts and raised the possibilities of even more, depending on your location Multiple Listing Service, etc. While the form is only one-page, the appraiser "must also provide support for the conclusions". Considering the questions and the limited space provided, I would expect the final product will be several pages.   New FAQ PDF from Fannie Mae regarding form 1004MC and other items.

After a trial run, even with the availability of a "statistics feature" in my MLS, the typical user will have to make multiple searches to provide the answers. If you share my view that "competitive to the subject" isn't always reflective of "neighborhood trends", you'll need to do the job twice to get both sets of answers. What about other issues? 

Inventory Analysis

What caught my attention was the layout and time periods for the data. There are three time periods specified, the first a 6-month period, while the other two are 3-month periods. With one being twice the size of the others, logically the number of sales in the first column will be larger as compared to the others. 

Imagine the "underwriter calls" you'll get when the first column shows 18 sales and the second and third columns show 9 sales and 10 sales. Do you think someone, somewhere, will want to know why sales have dropped from 18 to 9 and 10 and why you selected stable? 

Click here to continue reading . . .

First Impressions: Fannie Mae's New Market Conditions Addendum

If you attended my class at the "a la mode Regional Appraiser Conventions", I mentioned that Fannie Mae was working on a "one-page Market Conditions addendum" (similar to Wachovia and RELS forms). Fannie Mae has released the 1004MC form as part of Announcement 08-30, which also includes clarifications and amendments to the existing Fannie Mae Selling Guide. Download MCA_Appraisal_Report.pdf

Key Highlights of Announcement 08-30:

•  New Market Condition Addendum form 1004MC

• Supervisory appraisers must now inspect the subject property

• Reporting prior sales and listing history

• Appraising a property on sites over 5 acres

• Effective age adjustments

• Cost approach for insurance purposes

The 1004MC: "Houston, we have a problem"

My initial thoughts, I think we have some bridges to cross here, one of the reasons I started the series on URARS – Uniform Residential Appraisal Reporting Standards. While I believe this is a step in the right direction, the form and instructions appear to be in conflict with other Fannie Mae Appraisal Guidelines, The Appraisal of Real Estate and "generally accepted appraisal practice". 

As an example, the 1004MC requires the appraiser to report housing trends based upon "sales and listings of properties that compete with the subject property, determined by applying the criteria that would be used by a prospective buyer of the subject property".The conclusions for those trends (based on properties that are competitive with the subject) are to be "reported in the "one-unit housing trends" area of the URAR.

Click here to continue reading . . .