Appraisal Scoop

UAD Reporting Consistency - Clarification by FNMA and Steetlinks

The following StreetLinks document is re-posted from the WinTOTAL Users Group

On April 10th, Fannie Mae and Freddie Mac announced the publication of a new UAD Update document and an Updated UAD Specification Appendix D, which details the Field-Specific Standardization Requirements for compliance with UAD appraisal reporting. Additionally, StreetLinks' Executive Management Team has been in recent discussions with UAD experts from Fannie Mae regarding their early stage analysis of appraisals that have been delivered via the Uniform Collateral Data Portal (UCDP). As a result of our discussions, we have a few clarifications, which are also included in the Updated UAD documents, that Fannie Mae asked us to emphasize with our appraisal partners.

Fannie Mae is now able to pinpoint significant differences between reported data for a single comparable property or subject property that has been used across multiple appraisal reports.

In particular, they are concerned about information that changes from report to report when the same subject or comparable transaction is utilized by the same appraiser in two (or more) independent analyses.

For example, instances have been identified where a comparable property has been described in one report to have an Adverse View, while in a later report, completed by the same appraiser, the same comparable property transaction is described to have a Neutral View or Beneficial View. Similarly, Fannie has found that Quality Ratings or Condition Ratings assigned by the appraiser have changed for the same comparable property transaction from report to report. Finally, Fannie Mae has identified comparable property characteristics such as GLA, room count and other basic features that have changed significantly from report to report.

With the understanding that this information is now being closely monitored, it is important for appraisers to be very consistent in their reporting of property information or explicitly document the reason for changes to reported data when the same subject or comparable transaction is used in multiple analyses. Since the property characteristics for the subject should be described and rated as they existed on the appraisal's effective date, (or for a "subject to" report, as if the improvements/repairs had already been completed on the appraisal's effective date), and property characteristics for a comparable property should be described and rated as they existed at their time of sale; there are very few instances where the data should actually change from report to report. Only if the appraiser has discovered new information about the property as it existed on the relevant date, or if the property has been involved in a subsequent transaction would a change to how the property characteristics are reported be appropriate. In these rare situations, the appraiser should clearly document the new information which led to the reporting change.

As it relates to this issue, the UAD Update April 2012 document includes the following additional instructions:

Appraiser Selection of Condition and Quality Ratings In other documentation, the GSEs have previously communicated that the appraiser's selection of the Condition and Quality ratings must be based on a holistic view of the property and any improvements.

When selecting the Condition and Quality ratings, an appraiser must:

• Consider all improvements to determine an overall Condition and Quality rating. The appraiser should then select the rating that best reflects the property as a whole and in its entirety.
• Describe the subject property as of the effective date of the appraisal on an absolute basis, meaning the property must be rated on its own merits. This requirement also applies to any other rating or description, including the View and Location. The rating should not be selected on a relative basis, meaning it is not selected on how the property relates or compares to other properties in the neighborhood. Additionally, the Condition and Quality ratings for comparable properties must also be made on an absolute basis (again, each comparative property on its own merits), not on a relative basis, and reflect the property as of the date of sale of that comparable property.

When an appraiser selects a rating and/or description of the subject property for a sales transaction, the selected rating and/or description must:

• Remain the same when reflecting that specific transaction. For example, if a C4 rating is selected for the sale of the subject property, then that property remains a C4 when using that specific sale as a comparable in future reports. The same expectation holds true for ratings and descriptions of comparable sales; when a comparable is used in a subsequent appraisal, the ratings and descriptions of that property should not change from one appraisal to the next when it reflects the same sale transaction.

It is also important to note, however, that properties can have the same rating or description and still require an adjustment. For example, all water views may not be equal. In this instance, an adjustment should be made and explained in the comments section of the form or an addendum.

StreetLinks recognizes that there may still be some subjectivity in assigning quality and condition ratings, particularly when the appraiser believes that a property shares characteristics of more than one rating standard. However, as clarified by these updated Fannie Mae documents, there should always be consistency when the same appraiser is assigning the rating for a particular comparable transaction according to their own interpretation of the criteria involved.

StreetLinks would recommend utilizing the Comparable Database or Comparable Archiving function available in most appraisal forms software packages in order to keep a catalogue of all of the comparable properties that the appraiser has analyzed (along with their assigned ratings), so that they can reasonably verify that the property is being reported consistently between appraisal reports. This is particularly helpful for those situations when a comparable property may exhibit characteristics of more than one rating standard resulting in a "judgment call" on the part of the appraiser.

The UAD Update can be found at the UAD page on Fannie Mae's website at www.efanniemae.com/sf/lqi/umdp/uad/index.jsp by clicking on the UAD Update April 2012 (.pdf) link.

In order to strengthen your quality metrics with StreetLinks, please incorporate these clarifications within your UAD compliant appraisal reports on an immediate basis.

Source: StreetLinks

UPDATE 2/15/12: Video - QuickenLoans "Appraisal Advice" - Good? or Bad? Let us know your thoughts!

UPDATE!  A NEW video (with comments from Quicken) has been posted to the bottom of the original post dated 2/12/2012). 

The following is from the QuickenLoans Zing! blog:

"Appraisals seem to be a hot topic as of late, and given the fact that we happen to have a gentleman that loves to talk about appraisals, we figured it would make a good Watch-It Wednesday."

"Dan Friedberg is back with another insightful three minutes of appraisal advice. Take a look at the video to see

• what should be fixed up before an appraiser swings by,
• what appraisers are not necessarily interested in seeing, as well as
• where appraisers get their information."

"This is guaranteed to be the most informative three minutes of your day.

Informative? Maybe . . . but are all tips correct?

Here are a couple of quotes:

"FHA appraisals are much more strict . . . .If you have things like a missing handrail, a crack in the sidwalk, you know uhhhh . . .if the carpet is screwed up, or if there's water damage . . . that's ALWAYS going to need to be fixed on an FHA. They're really nit pickey about stuff."

 

On landscaping that cost $15,000. . . . "While it may [increase value] in terms of a "sale", when it comes to an appraiser that makes no difference. All they're looking at is the square footage of the home, the way that it's built, the amount of rooms that it has, in comparison to homes that have sold in the neighborhood." "So they really don't care about how nice your appliances are, or the nice fixtures that you have, or the paint, or the Man Cave in the basement, and things like that. It's really just square footage and recent sales."

Let us know YOUR thoughts after watching the video!

 

 

             UPDATE!!      UPDATE!!       UPDATE!!

From Eric Mally of QuickenLoans - 2/15/2012:

Hi Brian. The other day, you posted a video from Quicken Loans with less-than-perfect information regarding the appraisal process. That video was shot with one of our bankers, not a certified appraiser.

We have since reshot the video with a certified general appraiser with 25+ years of experience. We would appreciate if you would please post this video as well, seeing that it is more informative and correct.

Nice Guys Finish LAST! Clients file complaints after getting appraisers to "Second Guess" their own appraisals.

T.J. McCarthy, of T.J. McCarthy & Associates, Tinley Park, IL has the following assessment of the AMC and Lender practice of making post-closing calls to appraisers to question how some of the adjustments were made and get appraisers to second-guess their original appraisal process.  The following is being reprinted from an Illinois Coalition of Appraisal Professionals (ICAP) alert.  

Good afternoon Appraisers,

I am writing to our residential members regarding a growing problem that ICAP is concerned with regarding lenders and AMC’s filing complaints against appraisers.

THE SETUP:  You receive a call from a lender or an AMC who wants to talk to you about an appraisal assignment you recently completed for them.  The call usually comes from the QC Department at the post closing stage of the loan.  They start questioning you on your line item adjustments.  All the comparables are on smaller lots then the subject property and they feel your adjustment for lot sizes seems a bit high.  You want to be a good little appraiser and not upset your client so you agree that pe rhaps they could have been a little lower.  While they have you on the phone, they also ask you if you think your time adjustments were a little aggressive.  Again, not wanted to upset a good client, you tell them that maybe you were a little aggressive (even though you really don’t think you were…you’re just trying to appease them), and you state that you will try to find another public data source in the future that is more conservative.  Your client thanks you and even tells you to have a nice day.  You hang up the phone thinking you handled that rather well. (The following is simply a hypothetical situation used to get a point across)

FAST FORWARD:  A month later you receive a letter from the Department of Professional Regulation – Appraisal Division.  Your great client filed a complaint against you stating that you openly admitted to them in a phone conversation that you falsely inflated the value of your appraisal by using inappropriate site adjustments.  You also stated that you often use non-traditional data sources to intentionally report market trends that are lower than normal to arrive at higher value conclusions.  YIKES!!

THE REALITY OF THE SITUATION: This is really happening to appraisers and since the Dodd-Frank Act more and more lenders and AMC’s are sending in complaints on appraisers. 

MORAL OF THE STORY:  There is no question that the appraiser is getting slammed here for trying to be a “stand up” guy, attempting to clear up gray areas in their report.  They’re engaging in what they perceive to be an honest dialogue with the QC department (long after the loan has been funded). Unfortunately, at the post-closing stage, the lender isn’t looking for you to have a change of heart on your final opinion of value. There are no changes that should be made, but now you have given the QC department ammo for a state complaint.

Also, you should never change parts of your appraisal because you think it will make your client happy.  They don’t drive the process.  Perhaps you don’t even realize that you are giving someone a reason to file a complaint against you when you agree to the slightest alteration or allow someone elses opinion to dictate how you will complete your assignment.  In the meantime they are on the other end of the phone writing down everything you are saying as they prepare to turn you and your report into the state.

DISCLAIMER:  I certainly am not telling you to ignore errors and omissions on your reports when a client discovers them and asks for corrections.   Nor am I telling you to be unethical.  But, by trying to be accommodating, you could be creating a problem for yourself where one never existed.

I can assure you that the State of IL is receiving these types of complaints.  I can’t tell you [which] lenders or AMC’s are filing these complaints.  Also, I am not saying that all lenders and AMC’s support this type of practice. 

It’s getting pretty scary out their folks.  We don’t have to make it harder on ourselves by reverting to a submissive position every time an angry client calls.  We are appraisers not pacifiers!

TJ McCARTHY AND ASSOCIATES, LTD.
Real Estate Appraisers and Consultants
7903 West 159th Street, Suite B
Tinley Park, Illinois 60477

Email: [email protected]
Phone:  (708) 614.7200      
Fax: (708) 614.7228

You Can Write an Appraisal on a Napkin..... But you probably just didn't

Guest Author:  Ken Shure, Certified Residential Appraiser in the Los Angeles, California area.  Contact: [email protected]

We've all heard the phrase - "You can write an appraisal on a napkin if you want to". And yes, USPAP does give a wide berth in terms of reporting format but it is important to recognize that other than expanding upon the scope of work in order to accommodate the appraisal process, this does not provide appraisers with the authority to deviate from an agreed upon and expected scope of work or violate the sometimes extended list of certifications that are present on many of the pre-printed appraisal forms.

The most common reporting formats for appraisals are found within the lending arena and those typically used are the forms issued by Fannie Mae. These forms have a designated intended use, a specific minimum scope of work, a set of assumptions and limiting conditions, and certifications. If the appraisal process or specific client mandated assignment conditions cannot be properly completed when following and staying true to those items then it is much better to request a different reporting format, perhaps a napkin would be one alternative, or decline to proceed with the assignment. Proceeding within the framework of the forms despite it being contrary to producing a credible report or misusing the form in a manner that could be construed as misleading could have negative consequences for the appraiser and the appraiser's client.

Appraisers need to remember that Fannie Mae and other agencies delegate the responsibility of appraisal credibility and compliance to lenders. They rely on this delegation and receive documents signed by state licensed professionals that outline a minimum scope of work and have a set of certifications. Based on this it is clear that the agencies conceivably do not have to review every aspect of the appraisal reports they receive but can limit their review to key parts that indicate the appropriateness of the collateral for the loan being applied for. The basis for making this determination could depend on any number of factors including but not limited to the opinion of market value, conformity of the subject to the neighborhood, and zoning compliance to name a few examples.

One notable and critical area of the report that would always be necessary for any user to review would be the reconciliation section of the forms where it is clearly indicated via checkbox if the appraisal is made "as is" or if it relies either on an extraordinary assumption or hypothetical condition in order to reach its conclusions. A report that indicated "as is" within this section but did in fact rely on an extraordinary assumption or hypothetical condition, even when these are written out somewhere in the body of the report, could be viewed as misleading. Appraisers that indicate otherwise within the reconciliation section but still rely on extraordinary assumptions or hypothetical conditions outlined elsewhere in the report are in danger of being accused of trying to "slip one by" the agencies and the agencies would be well within their right to claim damages in the event of a loss.

The zoning compliance box is also a very important factor that should be taken seriously by anyone that completes one of these forms. In many jurisdictions with complex zoning codes it is arguably beyond the skill level and scope of work of the appraiser to absolutely ensure that all aspects of the property are in compliance with zoning however a certain level of due diligence would absolutely be expected. Properties that have significant and readily observable discrepancies from available public records should give cause for pause to an appraiser assigned the responsibility of checking that box. An appraiser that checked "legal" with regard to a property that in fact had substantial and readily observable elements that were built without permits or had an illegally converted garage, in violation of many zoning ordinances, could be held to task if the agencies were relying on the report to determine the zoning compliance status of the property. Adding in a cost to cure or an extraordinary assumption can easily be viewed as a misleading tactic in these cases where both the "legal" and "as is" boxes are checked.

Appraisers hold the ultimate responsibility towards determining the appropriate scope of work needed for producing a credible result. Despite this, appraisers are not free to pick and choose which portions of the lending forms they will abide by when this is the format that has been agreed upon. If these forms are modified by agreement with the client then it is best to avoid any chance of confusion and remove all reference to the publisher of the form and the form number. Should an altered form used to complete a report end up being utilized by the agencies (whether by accident or by design), the mere presence of the form number on the report gives ample cause for the final user to claim certain expectations with regard to the minimum scope of work and other items typically associated with the completion of, for example, a 1004.

Making use of the lending forms is a common and often necessary practice. It is important for appraisers that utilize these forms to be aware of the minimum scope of work they have agreed to follow and the certifications that they are signing. In addition it is important to be aware of the mechanisms within the forms designed to ensure that the agencies are making appropriate funding decisions and to make sure that these mechanisms are not bypassed, contradicted, or ignored. Inappropriate actions in this regard could result in large consequences being directed where the agencies have been sure to delegate appraisal related responsibility - on the lenders. In these cases there is little doubt as to whom the lenders would turn towards to direct their concern over the issue at hand and little doubt that it would not matter if the directive to complete the assignment in the manner in question came from the lender itself or its hired agent (AMC). While those parties would certainly have concerns and potential liability, in these cases as in all cases the appraiser would own the ultimate responsibility to the intended users and those parties able to rely on the report (per Certification #23) as to how the report was completed.

Copyright KB Shure 2011

Guest Author:  Ken Shure, Certified Residential Appraiser in the Los Angeles, California area.  Contact: [email protected]

APB: Exposure Draft: Adjusting Comparable Sales for Seller Concessions - 10/3/2011

The Appraisal Practices Board (APB) is seeking public comment in response to this exposure draft and based on the comments received, may make revisions to the guidance and issue subsequent exposure drafts. Once the Board believes it has received all relevant comment on this topic, it may vote to adopt the material as official guidance from the APB.

Download Adjusting Comparable Sales for Seller Concessions Exposure Draft Final

The Draft includes comments and detailed examples on:

• Verifying Concessions
• When Does an Appraiser Adjust for Concessions
• Methodology
• Concessions and Non-residential Property (other than 1-4 unit properties)
• Impact and Application of Concessions in the Cost and Income Approach

All interested parties are encouraged to comment in writing to the APB before the deadline of December 2, 2011. Respondents should be assured that each member of the APB will thoroughly read and consider all comments. Comments are also invited at the APB public meeting on December 12, 2011, in Atlanta, Georgia.

Written comments on this exposure draft can be submitted by mail, email and facsimile.

When commenting on various aspects of this exposure draft, it is very helpful to reference the line numbers, fully explain the reasons for concern or support, provide examples or illustrations, and suggest any alternatives or additional issues that the APB should consider.

Mail: Appraisal Practices Board The Appraisal Foundation 1155 15th Street, NW, Suite 1111 Washington, DC 20005

Email: [email protected]  

Facsimile: (202) 347-7727

If you have any questions regarding the attached exposure draft, please contact Staci Steward, Practices Administrator at The Appraisal Foundation, via e-mail at [email protected]  or by calling (202) 624-3052.

 

Humor: Silly Underwriter Requests

Editor's Note: Every now and then I read some unusual "Underwriter Requests" in appraiser forums. Yesterday I read this post from Bob McGivern, SRA on the WinTOTAL Users Group:

So every morning, I power up the computer and think “what’s the new stupid for today”? And then the e-mail spins out notices and guidelines. Some result in a nod of approval, and most a chuckle. Today, I just decided the “thinkers” all went into the same basement and shared some illegal contraband. I have no other idea how to explain it.

It’s bad enough, they concluded appraisers should write the reports in “morse code”, but now this:

2. The appraiser must include the addresses for at least 5 comparable sales that were considered but not included in the grid. Please provide a brief explanation in the addendum section as to why you did not include those properties in the Sales Comparison Analysis grid

The real question is this – “Would any down to earth, knowledgeable appraiser take this “requirement” seriously”?   Maybe it’s time to join the “thinkers” in the basement….

 

Bob McGivern, SRA

www.marketvalue.com

Real Estate Valuation & Consulting

Runt Rants - The Appraisal Business Versus the Appraisal Professional - The AMC Discussion Continued

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. 

This series has generated much good comment and views from various readers.  Thanks to all for taking the time to add to the discussion!

We've tried to focus on several basic points in this series...points which not everyone agrees with, but which I believe are quite crucial to our understanding of where the Appraisal Profession is today, and what fundamental changes should be considered to ensure it's viability for the future. 

The Fundamentals

• The Appraisal Profession is a vital part of the Loan Origination Market - The existence of an Appraisal on each property adds confidence and security to the underlying asset which therefore extends to packages of loans sold in the market.
• The Professional Appraiser is the single unbiased supporter of the loan transaction and that position aides in the confidence created in the Collatorized Mortgage Obligations (CMO) that are offered to the global market.
• Appraisal Management Companies (AMCs) have been created to facilitate the interaction between the lender and the appraiser to achieve transactional efficiencies vital to current and future markets. 
• The AMC market is composed of a few large firms that control 80 percent of the appraisal demand in the USA, and many smaller firms that compete for the remaining business.
• The large AMCs that control 80 percent of the market function as an Oligopoly which results in inordinate power over the market.
• The Oligopoly has created a two tiered pricing structure for appraisal products services which serve their short term purposes, but which fundamentally damage the working of a competitive market.
• The resulting problem is not with the existence of Appraisal Management Companies, but with the business model of the top firms which are able to distort the market by virtue of their Oligopoly status.

Let's be very clear.  The result is the imposition of a two tiered pricing market for appraisal services; the 'one off' market, and the AMC market. We've described that stark contrast earlier parts of this series and the impact on the Appraisal Profession is very significant.   

There is one last fundamental part of the AMC business model that affects the Appraisal Profession adversely and should be addressed whenever the opportunity for change presents itself.  That fundamental is recognition of the role of the Appraisal Business as a separate reality, apart and distinct from the Appraiser.  That's the subject of today's post.

The Appraisal Business Versus the Appraisal Professional

 We've discussed previously the changing market...moving from local to regional to national to global.  As the market for securitized loans has evolved, the lenders have moved from being the holder of those loans to the originator and seller role.  The lenders are now selling the loans to investors who ultimately buy the loan packages as a simple investment...much like a bond. 

The lender/originator is now more of a retailer; using their retail outlets to originate loans, packaging them into like groups, then offering those packages to the market.  When the package is sold the lender then uses the proceeds to originate more loans which are in turn sold. 

As that market evolved new businesses evolved to serve that changing  market: the AMCs, Mortgage Servicing Companies, Automated Valuation Companies, the Wall Street "Bankers" who sold the packaged loans, even Appraisal Businesses that employ a number of appraisers.  Each of these business models evolved to serve the needs of a changing market.

It is a long standing tradition that users of appraisal services engage the appraiser directly for the appraisal.  That arrangement was quite efficient when local lenders made local loans to local borrowers and a local, lone appraiser was engaged to provide the appraisal.  For some appraisers, that model still best characterizes the way they do business: they are sole entrepreneurs working alone, perhaps with an clerical assistant.

However, as the market has evolved and grown the efficiencies required that spawned the specialization of efforts such as AMCs has also required response by appraisers who wish to serve the mortgage loan origination market. The Appraisal Business Model employing several appraisers has evolved to meet that need.

The majority of appraisal businesses now are multi appraiser firms.  I did a survey of 174 appraisal businesses last year.  Sixty percent of those firms employed multiple appraisers, with the average employing three full time appraisers.  Generally, the more appraisers employed the more efficiency the appraisal business achieved.

The efficiencies that result  are significant.  In the survey I conducted, the Appraisal Business that employed five appraisers was on average four times more productive than the single appraiser business as measured by the average monthly output per appraiser. 

The typical multi appraiser business is owned by one or more appraisers.  They invest in offices, hardware, software, and data bases that are needed to produce appraisal products.  They employ administrative staff to provide clerical and administrative support services to an appraiser staff who are W2 employees, not independent contractors.  The appraisal business provides marketing, training, customer service and quality control to the lender/clients. The appraisal business guarantees quality, service times, and regulatory standards for each assignment they accept.

If my survey is representative of the market today (and I believe that it is) sixty percent of the appraisal firms employ multiple appraisers, and because they are much more productive, they produce the vast majority of loan origination appraisals completed by appraisers each year.  In my survey, over eighty percent of the appraisals delivered were completed by multi appraiser firms. 

That should not be a surprise.  The evolving mortgage origination market requires shorter response times, more efficient participants, all while maintaining quality standards.  The multi appraiser business model is a response to those demands, just as is the Appraisal Management Company. 

Yet the process of ordering appraisals is often according to the old standard, when sole proprietors were the dominant appraiser business model.  That is, some lender/clients insist on specifying the appraiser to assign the order to, rather than assigning it to the appraisal firm.

That old standard works for the sole proprietor, but it doesn't work as well for the multi appraiser firm.  The multi appraiser firm guarantees the quality and performance of their employees.  The advantages they provide to their clients are dependable service, consistent turn times, consistent service.  They achieve that by taking advantage of the efficiencies that the larger business model provides.

One of those advantages is the ability to deploy the firm's resources in the most efficient way possible.  Assigning appraisal orders to the staff as appropriate results in significant efficiencies.  Studies we've done in our own firm suggest that we achieve a 30 percent increase in field efficiency by assigning each appraisal to the employee who can best meet the performance required.

Many, even most, clients recognize that reality.  They assign the appraisal to the Appraisal Business and allow the firm to deploy their resources in the most efficient way to meet the client's needs. 

The Oligopoly does not. The top AMCs require that they assign appraisals directly to the employees of the appraisal firm, bypassing the ability of the multi appraiser business to control and allocate their resources in the most efficient manner.

The result is that the Oligopoly creates a market in which they force the appraisers to accept a 30-40 percent lower fee for the appraisals they order, and they refuse to allow the appraisal business to deploy their resources in the most efficient and profitable way, reducing field research efficiency by 30 percent in multi appraiser firms operating in large metropolitan markets.

Since the vast majority of The Ologoply's appraisals are delivered by multi appraiser businesses, the effect is to threaten the long run health of the entire Appraisal Profession. 

What industry or profession could remain healthy when their market is dominated by an unregulated Oligopoly that forces the market to accept price discounts in the form of kickbacks equal to 30-40 percent of the competitive one off price for the product, and in addition bypasses the major efficiencies created by those businesses to deliver service to their clients?

If we all can accept that a healthy local, regional, national and global market place for mortgage originations depends in part on a healthy Appraisal Profession, isn't it reasonable to demand that the Oligopoly make simple changes to their business model which cause that health to be threatened?

Isn't that in part what HUD/FHA recognized when they attempted to adopt rules which would force AMCs to unbundle their pricing, pay appraisers for their services equal to the "one off" standard fee which prevails in each market? 

Simple Changes For the Betterment Of All

I don't consider AMCs to be evil. I consider them to be a positive development in the evolution of the global market for first and second loan originations.  My firm's personal, in depth, and long term experience with AMCs is that they are generally well run, efficient, even pleasant to deal with.  I recognize that they provide a very needed service to the large national lenders and mortgage originators and I welcome them in the industry. 

The two simple changes to the business model of the Ologopoly members that I propose would change the market for the betterment of all, including the lenders and orginators they serve. 

• First, unbundle fees they charge for their services; bill the lender for the outsourcing services, and the appraiser for the efficiencies they provide to appraisal firms who work with them. Pay the true market rate for the appraisals they order, without requiring the haircut, the kick back, that is deemed illegal in other markets.
• Second, contract appraisal services with Appraisal Firms, and allow the Appraisal Firm to assign the appraisal to appraisers in their employ who are best qualified to deliver that particular service at that particular moment.

Those two changes would correct the injustices perpetuated over the last two decades, restore the health of the Appraisal Profession, and improve the overall business of the first and second mortgage loan origination markets, markets which have grown to be a significant engine of prosperity for local, regional, national and global economies.

Isn't that in everyone's best interests?

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 - 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 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.

Press Release: Title/Appraisal Vendor Management Association Publishes Standards of Good Practice in Appraisal Management

TAVMA Outlines Business Practices to Help Ensure Quality, Objective Appraisals -

PITTSBURGH, Jan. 13 /PRNewswire/ -- The Title/Appraisal Vendor Management Association (TAVMA) announced today that its membership has developed "Standards of Good Practices in Appraisal Management," a set of guidelines for the industry. The Standards outline best practices to help ensure that appraisal management companies (AMCs) and appraisers deliver quality, objective valuations to their common customers – financial intuitions.

The Standards take into consideration the needs of all stakeholders as well as federal interagency guidance, the new Home Valuation Code of Conduct (HVCC) and other federal and state statutes. The Standards attempt to codify long-time industry practices on a variety of issues, including local market knowledge and competency, distance appraisers travel, appraiser selection and communications, and dispute resolution.

"There has been a great deal of distortion in the press and on the Internet about the role of AMCs, the qualifications of the appraisers they work with, appraiser travel policies and the value that AMCs bring to the lending process," said Jeff Schurman, Executive Director of TAVMA. "Many of these stories are based on anecdotal complaints by third parties who don't regularly work with AMCs. In fact, AMCs are currently involved in over 60 percent of all residential transactions; over two-thirds of all licensed and certified residential appraisers work with AMCs; and preliminary results of a member survey suggest that the average AMC appraiser has 13-16 years experience."

"The Standards were drawn from the best practices of reputable AMCs and reinforce the benefits AMCs bring to the market: appraiser independence; quality control and transparency that increase lender and consumer confidence; and efficiency and logistics that support national lending," Schurman explained.

"Our new standards provide a roadmap that reputable AMCs can follow to deliver quality appraisals and to attract highly qualified appraisers. As the real estate and mortgage industries emerge from its current downturn it is vital that AMCs continue to focus on processes, systems and controls to ensure that they continue to deliver high quality, objective valuations."

Developed over the past year with input from TAVMA members, lending institutions and appraisers, the standards address nine key areas including:

• Supplier Recruitment and Coordination
• Appraisal Order Assignment
• Order Tracking and Workflow Management
• Pre- and Post-Delivery Quality Control
• Appraisal Delivery
• Customer Service, Dispute Resolution, Client Pressure
• Product and Technology Development and Utilization
• Sales, Marketing and Administration
• Training and Development

Other highlights of the standards focus on issues such as recruitment and qualifying appraisers; negotiating and setting service levels; quality reviews of completed appraisals reports and, expectations and developing a technology that permits auto assigning, tracking, reviewing and electronic delivery of reports.

Schurman said, "Like any industry, AMCs must continually update their standards to be responsive to the needs of customers and suppliers. These standards allow the industry to put some parameters around what it means to be a professional, objective, and successful AMC."

About TAVMA

TAVMA, the Title/Appraisal Vendor Management Association, is a non-profit professional organization that represents more than 75 companies including more than 40 of the largest Appraisal Management Companies (AMCs) with combined market share of 85 percent of the AMC market. TAVMA promotes the vendor management industry and presents its members' positions to government and media, protects its members' rights to do business without unfair and anticompetitive legislation and regulations and provides useful information about issues impacting the real estate settlement services industry. For more information about the organization, visit the website at www.tavma.org.

SOURCE Title/Appraisal Vendor Management Association (TAVMA)

RELATED LINKS http://www.tavma.org