Securitized derivatives and interest-only loans notwithstanding, there’s plenty of evidence that the collapse of the national and local housing market can be traced back to the foundation upon which all other assumptions relied – the actual value of the homes that were being bought and sold at a breakneck pace around Bend and other real estate hotbeds throughout the boom years of the last decade.
A quick glance at the most recent Multiple Listing Service (MLS) statistics confirms just how grossly inflated local real estate prices became before the fall. The median sale price for a Bend home was $347,750 in 2006, according to the Central Oregon Association of Realtors. By the first quarter of this year, the price had fallen to $190,000, a roughly 44-percent decrease – good enough to put Bend among the fastest-falling housing markets in the entire country. Florida condos and Central Valley spec homes got nothing on us.
Not surprisingly, the collapse has brought a significant degree of scrutiny onto appraisers and the lenders with whom they worked on the billions of dollars worth of loans that were issued during the housing boom, many of which continue to go bad at record pace. (Foreclosures reached a new high in Deschutes County in the first quarter of this year even as the national economy was beginning to show signs of recovery.) The revelation that some mortgage brokers and lenders were pressuring appraisers into artificially inflating values to facilitate transactions brought down some strong regulatory medicine. Under new guidelines that were adopted by the government-sponsored home mortgage behemoths Fannie Mae and Freddie Mac – and by extension, the entire home-lending industry – mortgage brokers and lenders are no longer permitted to communicate with appraisers. No phone calls, no letters, no e-mails.
Instead of picking up the phone and dialing up an appraisal from someone who may or may not have been a golf buddy, mortgage brokers and banks now rely on a third party to act as a go-between to ensure that they are complying with the new rules known as the Home Valuation Code of Conduct. Into this vacuum has stepped a previously obscure entity known as the appraisal management company, or AMC, which is essentially a brokerage connecting lenders and appraisers. While not technically required by the new rules, AMCs have proliferated because of the political cover they provide for lenders and brokers who have found themselves under the regulatory microscope. While the AMCs have helped to form a necessary wall between mortgage brokers and appraisers, questions are emerging as to whether the AMCs contribute to an overall decline in the quality of home appraisals, something that ought to be a concern to borrowers and lenders.
Redmond mortgage broker Angela Boothroyd said she has seen an influx of new appraisers from outside of the area who don’t seem to have a solid grasp of the local market. She recently had an appraisal for a custom home come back through an AMC that used an Adair manufactured home as a comparable property.
But because lenders are no longer able to choose their appraiser, they have no way of avoiding those responsible for that kind of questionable work. Appraisers, in turn, say they have no way of distinguishing themselves from their peers other than by fees. The result is that some of the more-experienced appraisers are faced with the choice of working for less or not working at all.
“The appraisers that I stand up for are getting pushed out of the business,” Boothroyd said.
Meanwhile, the rapid growth of the emerging AMC industry is posing challenges for regulators who are scrambling to keep up with the exploding market. So far, 20 states, including Oregon, have adopted new rules for AMCs that are designed to provide oversight in this growing industry. Veteran appraisers say the regulation is badly needed and welcome a thorough review of the AMCs’ business practices, which they say are undermining the integrity of the appraisal process.
“We’re seeing the very same habits that we saw with mortgage brokers inside the AMCs,” said Richard Hagar, a Washington state appraiser who has taught seminars around the Northwest on real estate fraud and helped write Washington’s law regulating AMCs.
Hagar said the AMCs, of which he estimates there are now 800 working nationwide, are just as willing to pressure an appraiser into producing a predetermined value that’s been set by a broker. One of the biggest problems that Hagar and other appraisers see with the AMCs is a lack of transparency. Right now, a home appraiser has no idea of how much the consumer is paying for an appraisal and the consumer has no idea of how much the appraiser is charging. That information lies with the AMCs that are brokering the deals, and they guard it carefully. And for good reason. The difference between the two numbers is their profit, which can be hefty – as much as 40 percent by some estimates.
Ironically, some of the biggest offenders in the housing crisis, the banks who carelessly lent to overextended consumers, are profiting on the new rules. Bank of America (formerly Countrywide), Wells Fargo and Chase have all gotten into the AMC market. Rather than being stymied by reform, banks simply found a way to get a cut of the transaction, Hagar said.
More concerning, say appraisers, is the impact that AMCs are having on the overall accuracy of home appraisals, which some veteran appraisers say is suffering because of the low fees that AMCs are essentially requiring appraisers to accept. Local broker Brian Albrich said reports come back with more errors, forcing lenders to request revisions – a sometimes lengthy process that has to be channeled through the AMC to comply with the new rules.
In one recent case, Albrich said an appraisal report ordered through an AMC came back citing roughly $15,000 in improvements that would be required to obtain financing. After a series of e-mails and phone calls, the issue was ultimately resolved when the buyer (with the seller’s blessing) installed a missing closet door.
The issue added another two weeks to the closing time, Albrich said. In the meantime, interest rates inched up, inflating the buyer’s total purchase price.
Because almost all home lenders are funneling their business through AMCs to ensure compliance with the new rules, appraisers are faced with a take-it-or-leave-it scenario. The system essentially works like this: appraisers sign up with an AMC, or several AMCs, as is usually the case. When a lender or broker orders an appraisal, he or she dials the AMC. The AMC then contacts its list of appraisers, offering the job on a first-come-first-served basis for a predetermined fee, which in some cases is significantly less than the going rate. Veteran appraisers like David Skelton, who has been doing home and estate appraisal work in Central Oregon for more than a decade, often pass these jobs over, as a matter of economics and principle.
But Skelton and other appraisers say those jobs aren’t coming back for re-bid, which means somebody is taking the work at a cut rate. There is no evidence, however, that those savings are being passed back to the consumer. To the contrary, the rate that AMCs are charging borrowers seems to be holding steady or rising, Hagar said. At the same time, both brokers and appraisers agree that the low-cost model is resulting in low quality appraisals that are creating problems for lenders and buyers.
“What you have is inferior work being completed… people like myself who have 11 years of doing appraising are not going to take a job for $250,” Skelton said.
Still, Skelton said he’s somewhat divided on the reforms. Like other appraisers, Skelton said AMCs aren’t the answer, but some type of measure was required to stem the pressure that appraisers were under from lenders. The issue of “meeting value,” whereby lenders told appraisers the minimum value necessary to seal a deal and appraisers obliged in order to keep the business flowing, was a national problem – and one that vexed ethical appraisers who refused to work under those terms. Skelton said that rarely a week passed when he wasn’t pressured or propositioned by a broker to come in with a pre-determined number. Equally frustrating, though, was the fact that regulators seemed uninterested in cracking down on the practice.
Skelton said he turned in one broker who had repeatedly pressured him to the state division of finance and corporate securities for investigation. The state however, was less than enthusiastic.
“They could care less. They were not really interested in disciplining anyone,” he said. “They didn’t want to hear about it. They didn’t even open a file.”
This article appears in May 6-12, 2010.
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You mean they “couldn’t” care less. When you say that they “could care less” it means that they care some amount. If they “couldn’t care less” it means that they care so little about the issue that it’s impossible to be any less caring. We know what you mean though – and you are correct in your opinion:-)
Mr. Flowers has accurately defined the problem. So now, what is the remedy?
After 40+ years I gave up. Before the forgoing was a problem, banks, S&Ls credit unions,& insurance companies put loans on their books for investment purposes. THEY WANTED TO KNOW THE REAL VALUE. Enter the brokers paid by the deal. Goodbye integrety. The remedy? Make it a rrequirement that the funding institution(s) retain 10 to 20% of each closed transaction on their own books. They will then insist on a REAL appraisal from A COMPETENT APPRAISER. Consequently there’ll be no need for the do-nothing AMCs.
Mr. Flowers,
I enjoyed reading The Devil You Know: Are Appraisal Brokerages the New Real Estate Villain. I came away with some valuable insight into appraisal industry changes. But, I have to say, your lead in paragraph caught my attention the most and is the reason for this response. Here is your lead in parapgraph: [“Securitized derivatives and interest-only loans notwithstanding, there's plenty of evidence that the collapse of the national and local housing market can be traced back to the foundation upon which all other assumptions relied – the actual value of the homes that were being bought and sold at a breakneck pace around Bend and other real estate hotbeds throughout the boom years of the last decade.”]
I've mulled over what I think are some of the major causes of the rapid rise and even more rapid decline in housing values, and in my opinion, there's no evidence that the collapse of the national and local housing markets can be traced back to the appraisal. It's doubtful that the appraisal even makes the list as one of the top three culprits.
I believe that extremely poor mortgage lending standards – particularly from non bank lenders – produced crappy mortgages. Government Sponsored Enterprises (Fannie, Freddie etc) helped enable poor lending standards by purchasing crappy mortgages resulting in more crappy mortgage originations. In addition, investment banks securitized many of the crappy mortgages providing the lenders further money to lend. Rating agencies – designed to protect bond investors – slapped high ratings (which indicate lower risk) on the securities created by the investment banks from the crappy mortgages causing bond buyers to view these securities as lower risk thereby gobbling them up. The investment banks gamed the system in some instances to gain the high ratings. And certainly the neutered regulatory agencies resulting from years of financial deregulation and lack of political support (the SEC as one example) resulted in little oversight of the securitization process. These would be my top causes, and not the appraisal or even the derivatives industry (which is also in bad need of regulation or at least an exchange to monitor counterparty risk, but don't get me started… )
In any population of humans there are risk takers. Risk takers willing to lever up and purchase two, three, four or more homes as speculative investments. Especially when interest rates are low, and mortgages are easy to get. I personally know a personal athletic trainer, two realtors, one mortgage lender, and a few others that purchased several homes in order to bet on a quick increase in value. Speculative purchases fuelled much of the marginal demand causing a sharp rise (due to a limited supply) in valuations through 2006. If reasonable lending standards had existed, speculative purchases would have been held to a minimum and supply and demand would have been more in balance. To be sure, much of the demand was fuelled by population growth, and Bend would most certainly have seen an increase in property values. But, without easy money, I venture a guess that the valuation increase would have been much closer to the normal trend line.
A good follow-up to your appraisal article would include research on which banks/non bank lenders currently use an 'arms length' system to order appraisal. I know that two of the large national banks in Bend have used this system for years. The national banks that I'm referring to order appraisals via an intranet system and utilizing a real estate group located in some back office far far away. The appraisal order comes back to the mortgage lender via email with a cost and a completion date. That's it. No appraiser name. The mortgage lender selects one appraiser without knowing who the appraiser is. I would imagine that back in 2004-2007 the larger banks – WAMU comes to mind – originated a whole lot of mortgages in Bend without the ability to strong arm an appraiser. Would be interesting to see some stats on this if anybodies got them.
I'm not sure that the appraisal was designed to indicate when a particular market is above it's normal trend line of value. That's probably better left to the buyer and maybe the bank's management. A lender (especially a bank lender) just wants to know the value of real estate at the time of the loan so that it has a idea of it's loan to value (collateral position). Good lending standards would ensure that the buyer and soon to be mortgagor would have considerable skin in the game, maybe 20% or more. That way the lender knows that it has some cushion, and this cushion will increase in normal markets as the mortgagor pays principal on the mortgage.
Interestingly, I recently learned that banks used to have appraisers on staff. Maybe some still do.
Anyway thanks for the good article. Keep them coming.
Thank you for writing this article. My husband and I are in with hundreds of others, here in Central OR. We were trying to refinance in early 2008. Our credit is perfect. The potential lender first looked at comps, in our neighborhood, before getting to far in the process with us and was confident about our pending appraisal. The appraisal came in shockingly lower than the comps on our street and one street over in either direction. Literally, the comps that the appraisal company selected were lower than other comps (that truly matched our home’s build, age, size, etc.). The LENDER protested the appraisal and the appraisal company would not budge. So, despite having perfect credit, despite having comps in our neighborhood that did indicate the value of the house was worth the lender refinancing with us; we could not re-finance solely because of the appraisal.
This should be a major concern of our state AND federal representation, for this region (eh hem). This industry is going way over board.
My husband and I are each unemployed, now, and struggling. We weren’t asking for special treatment. We were asking the appraisal firm to be reasonable, to be fair. Apparently, that was too much to expect.
The public is under the assumption that when they are charged $400 for the “Appraisal Fee.” that the Appraiser is receiving this compensation for their work. Is this not “misleading” the public? Is that not fraudulent in it’s representation? Whether it is the lender who is skimming our fees/and/or the Appraisal Management Companies who are giving work to the lowest Bidders, in an attempt to maximize their own profits, this should be made PUBLIC. I mean, put it on the front page of the newspaper. I think that $400 is fair compensation for a quality report. Let the PUBLIC know what is going on. They are in the dark. There would be outrage. They are being purposely MISLED.
Very well written article. One way for this to get national attention would be this: At any public appearance by Cuomo running for Ny governor, there should be heckling and large placards “Home Valuation Code of Crap”. If this gets on the nightly news, it might stir some action.
I am a retired appraiser who lived in a different world! The things I read about are to put it lightly just incredulous and astonishing. I sure glad I did not have to start in the industry today. The residential appraiser has become a moving target to use as anyone wishes. The definition of FAIR MARKET VALUE today means anything anyone wants it to mean.
Nate McLaughlin
THIS IS A RECENT REBUTTLE I WROTE TO THE LOCAL NEWSPAPER AFTER A DISGRUNTLED SELLER BLAMED HIS SALE FALLING THROUGHT BECAUSE “THE APPRAISER DIDN’T DO HIS JOB. WE’RE DAMNED IF WE DO AND DAMNED IF WE DON’T.
TO: OPINIONS @ CONNECTICUT POST
Having been an appraiser for 40 years, it was with both amusement and anger that I read an opinion by Bob Bociek of Bridgeport, published on Thursday January 14th, 2010 concerning the sale of his home. Mr. Bociek blames the loss of his sale on the appraiser who supposedly valued the home $100,000 under the contract price.
I checked both New Haven and Bridgeport/Fairfield MLS and it appears the property was being sold privately so I have no way of knowing what the asking price or final agreed upon price was.
I do know however, that in the 2007 Bridgeport revaluation Mr. Bociek's home was appraised
at $173,857.
I also know that since August there were seven sales of similar cape style homes in the immediate neighborhood ranging from $150,000 to $228,000 the average sales price was $180,000, with average square footage of 1,238 SF, Mr. Bocieks home contains 1,152 square feet. None of these sales were bank owned properties or short sales.
There are currently seven comparable homes listed for sale in his neighborhood from a low of $119,900 to a high of $239,900, in fact, one is on the same street, slightly larger, and listed at $164,900.
Appraisers are responsible to one entity that is the lender, it is the appraiser's job to make sure the value of the property will secure loan if the borrower defaults, Secondary to the lender is the buyer, the appraisal makes sure the buyer is not overpaying for a property.
There are guidelines that an appraiser must follow, comparable sales within the last six months and within one mile of the subject. Adjustments must be within a certain percentage, and in today's' market, if the appraisal is for a mortgage, the appraiser should not use any short sales or bank owned property unless they dominate the neighborhood. In the writer's case, the Treeland section of Bridgeport appears relatively stable.
Now that I've educated the Seller, let me further refute his statement that it is “an appraisers market”, it never has been and never will be, The surge and crash in the 1980's was caused by the Savings and Loans who were willing to lend money to everyone, qualified or not, sound familiar? And the greed of the sellers and homeowners fueled the fire, sound familiar?
This time around it was the Wall Street Mortgage Companies who had every program imaginable to refinance or buy property with no money down. Like Johnny Carson said “Have no money, we don't care, Have no job, we don't care,” “Can't pay the mortgage, now we care.”
Contrary to your statement that “homeowners were being preyed upon” Shame on you, these “meek” homeowners were refinancing every year and pulling every penny of equity out of their homes, for what, to buy a 60'' TV, and SUV, go to Disney World, pay off $60,000 in credit card
debt only to have that much and more the following year.
The appraisers were not responsible for that.
Thanks to Wall Street, the banks, the mortgage companies and the public, appraisers are now faced to work with Appraisal Management Companies, if you think the appraiser cut the value, wait until you see what an AMC does to it.
They were created to protect the lenders and supposedly the public to prevent appraisers from being pressured to bring in a property at value. Any ethical appraiser never succumbed in the 1980's or in the last go around. True, there were, and still are, some that bowed to pressure, it is their livelihood at stake, and it was made known to them that they could easily be replaced. The rest of just worked by the book.
All appraisers are now suffering because of greed, if they want to work, they have to work with an AMC who charges the client more than the appraiser would have and pays the appraiser fees that were typical 30 years ago.
The appraiser is required to obtain more information, submit a larger report; they have more liability, and are required to carry an expensive Errors and Omissions Policy. In addition, we are required to complete continuing education of 34 hours every two years, and renew our State Certifications every year. This in addition to various Board fees, the overhead of maintaining an office, or even if the appraiser works from home, they still have to pay a mortgage, utilities and car expenses.
And the AMC's are willing to pay the appraiser between $175.00 and $250.00 for the report.
Maybe you should rethink who really “holds the cards” looks more like the AMC's and the Lenders it certainly isn't the appraiser.
Diana G. Nytko,
Connecticut Property Appraisers
Milford, Connecticut
I’m an appraiser in California. For a recap of what happened, and a good isolation of who was responsible for the property meltdown in the country, I think Diana Nytko has provided a good framing of what went wrong, including the time line. I would also add as a clear culprit in this mess the Federal Reserve, including former chairman Alan Greenspan who during all his tenure, championed the free-wheeling ways and creative offerings from Wall Street. He, of course, conveniently failed to heed the greed, avarice and outright moral turpitude and thievery which have been the calling cards for the denizens of that money center over the past 25 years.
To-date, nothing substantive has been changed by the Congress. The pending financial reform promises to bring forth a mountain of positive change, but with amendments and revisions being tagged on at every turn, the promised reform likely will result in another drunken mouse as the final product.
As Diana points out, however, inept and inadequate appraisals are now being churned out, as one collateral result of this mess. This is one very significant trend in the lending industry, it has come about and blame should be laid directly at the feet of the AMC’s. These now have effective control of the appraisal function. The bigger AMC’s are owned or controlled by the major lenders, and are looked at strictly as profit centers, with superficial lip service as ‘firewalls’ between the lending and risk departments.
With the passage of time, people will forget. And Congress and Wall Street will return to their tried and true and fundamental goals: Get re-elected, get campaign contributions from Wall Street, and let Wall Street do as they wish.
Until the next debacle. Then call another hearing, tsk tsk tsk for the cameras, shake, rattle and rail. Then repeat.
Not holding my breath waiting for positive changes.
Lou Munoz
Los Angeles, CA