The Tyranny of Mark-to-Market Rules for Houses

Tim Cavanaugh | June 24, 2009

Just when you thought you'd heard everything, it turns out the real villain in the continuing death of the real estate market is...the appraiser who refuses to turn that frown upside down.

"Historically low mortgage interest rates clearly drew buyers into the market, and housing remains very affordable even with a recent uptick in rates," says Lawrence Yun, chief economist for the National Association of Realtors. "First-time buyers also are being drawn off the sidelines by the $8,000 tax credit, which is helping to absorb inventory. However, the increase in sales is less than expected because poor appraisals are stalling transactions. Pending home sales indicated much stronger activity, but some contracts are falling through from faulty valuations that keep buyers from getting a loan." [Italics and boldface mine.]

The near enemy in this case is said by Bloomberg to be New York Attorney General Andrew Cuomo. Cuomo's recent settlement with the government-sponsored-entities (GSEs) FANNIE MAE and FREDDIE MAC and the Office formerly known as Office of Federal Housing Enterprise Oversight (OFHEO), now Federal Housing Finance Agency (FHFA -- find them online at http://www.ofheo.gov/!), may have tightened slightly the spigots that dispense federal guarantees for house loans.

The Cuomo Agreement, whose effects have been called without braggadocio the "biggest changes to the real estate appraisal industry since the implementation of Title XI of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 [pdf] (FIRREA)," stands accused by the far enemies: The Federal Reserve, the the Mortgage Bankers Association, and the U.S. Office of Thrift Supervision.

I know the Cuomo's enemy-is-my-friend rule has served our tribe since the time of Abraham, but I agree with naked capitalism that Bloomberg picked the wrong enemy here. Disclosure: In 1998 I walked away from a starter home a block from the ocean in San Francisco in the surety that scientists had proven, as incontrovertibly as they had the sound barrier and the four-minute-mile, that nobody would ever pay more than $200,000 for a house, so there was no way the deal would ever pay for itself; more recently I caused the 2006 crash by becoming the last skeptic.

That having been said, anything that sends real estate appraisals down is a return to reality from deep, dangerous fantasy. Even with both hands I can't fully grasp the "two bottoms" principle of real estate decline. But what we have evidence for at this time is that real estate values may (or may not) have concluded their free-fall phase. We have no evidence that they have stopped or will stop declining.

Correct me if I'm wrong: Real estate goes through periods of slow and exquisitely painful decline more often than it goes through the kind of tremor we have experienced. (Whoever we am.) Why is there an assumption that nationwide house prices will not sink another 10% or 80%? We have barely unwound the G.W. Bush era in most housing markets, and I can tell you from memory: Americans woz not big savers neither when Bill Clinton was in office.

I understand Lawrence Yun's position on this matter. I understand the far enemies' position: they want to prove they can prop up housing markets around the country. But what of the neither-near-nor-far enemy, the Chicago-based Appraisal Institute (which gained substantial powers under the 1989 agreement, and which sells copies of its Uniform Standards of Professional Appraisal Practice at $50 per)? Why is it an appraiser's business whether Fannie money comes through after the honest appraisal? Why is it an appraiser's business that the deal gets done at all?

(I mean, factoring out who hired the appraiser -- and all the appraisers I've ever dealt with have been fee-only -- it's supposed to be an arm's-length transaction.)

(Also to all lovers of fannies and bottoms, I apologize for this post.)

Comments

|6.24.09 @ 6:25PM|#

These rose-colored goggles--they do nothing!

Fluffy|6.24.09 @ 6:47PM|#

Why is there an assumption that nationwide house prices will not sink another 10% or 80%?

Strictly speaking, this would be irrelevant to the production of a Fannie Mae 1004 appraisal. Appraisals give the value as of a given date, and do not attempt to determine the future value in any way, other than the generic statement by the appraiser that values are either stable or declining.

Unfortunately, this is an instance where Reason is jumping in on the side of statism, because a writer who does not understand the industry he's writing about is making the wrong assumptions.

Andrew Cuomo decided, in his infinite wisdom, that real estate appraisers were having their judgment clouded by the fact that they were paid either by the lender [or broker] or by the borrower, and since these parties have an interest in seeing the appraisal come in at a level that allows the loan transaction to close, they would tend to steer business to appraisers who returned higher values. While this is a valid criticism, the problem would be properly addressed by allowing the market to punish lenders and borrowers who sought out inflated appraisals - a punishment the market has been handing out in spades. But Andrew Cuomo decided that a better solution would be to turn real estate appraisers into the equivalent of Platonic bureaucrat-kings: all appraisal ordering was to be turned over to intermediary "appraisal management companies", who would stand between lenders and appraisers [or borrowers and appraisers] and hand out orders in a "fair", "non-competitive" way. And as might be expected, since appraisers are now getting their orders in a non-competitive manner, they're now performing their work in a non-competitive way.

Would Reason defend a government plan based on the idea that forcing car companies to compete for business was having negative social effects, and that set up "car purchase management companies" that would take money from consumers and randomly assign them cars? I don't think that you would, for some reason.

LarryA|6.24.09 @ 7:08PM|#

the U.S. Office of Thrift Supervision.

Really? What do they supervise? I sure haven't seen any indication of government "thrift" in a loooong time.

perilisk|6.24.09 @ 7:22PM|#

"Would Reason defend a government plan based on the idea that forcing car companies to compete for business was having negative social effects, and that set up "car purchase management companies" that would take money from consumers and randomly assign them cars? I don't think that you would, for some reason."

I'm pretty sure a car analogy for home appraisal should involve the Kelley Blue Book somewhere.

|6.24.09 @ 7:36PM|#

As a former employee of Washington Mutual, a former thrift, I can answer your question, LarryA. A thrift is another name for a "savings and loan association."

Tim Cavanaugh|6.24.09 @ 7:39PM|#

Fluffy, how does the introduction of another middleman into the appraisal process produce a lower appraisal? By it's nature and purpose, the agreement introduces inefficiencies into the market, but it does not produce the thing Bloomberg is blaming it for. Nor did Cuomo set up the Appraisal Institute as the de facto national determiner of appraisal practices. That was done as long ago as 1989.

|6.24.09 @ 7:54PM|#

In a related story, the National Association of Realtors, Mortgage Bankers, Snake Oil Salesmen, Keynesian "economists", Politicians, Fannie and Freddie Bureaucrats, and the Federal Reserve, all joined today in urging the congress to pass the "Wishful Thinking Enforcement Act of 2009", under which any asset can be declared to be worth whatever that pack of assholes say it is. Prospective buyers who disagree will be tagged as selfish, unpatriotic and anti-American.

-jcr

|6.24.09 @ 7:56PM|#

My house is worth ten gazillion dollars. Except for tax purposes--then it's worth ten bucks.

Ever hear the term, "drive-by appraisal?"

|6.24.09 @ 8:01PM|#

"This house will NEVER be worth less than what you are paying for it, today. I should know, because I'm a Realtor."




[I hate to say it, but I'm kind of out in the weeds, here- are these "faulty appraisals" too high, or too low?]

|6.24.09 @ 8:03PM|#

I was house-hunting off and on during the boom--in Tampa, so that's really saying something--and I heard some positively satanic stuff coming out of the mouths of realtors.

|6.24.09 @ 8:10PM|#

Kelley Blue Book

KBB valuations come from a bunch of guys in Missouri sniffing nitrous as they read old issues of Car Craft magazine.

Trust me on this one.

|6.24.09 @ 8:11PM|#

Pro Lib -

Do tell!

|6.24.09 @ 8:13PM|#

JCR

Just as long as they stop taking my money, I don't care what they think of me.

Fluffy|6.24.09 @ 8:38PM|#

Fluffy, how does the introduction of another middleman into the appraisal process produce a lower appraisal? By it's nature and purpose, the agreement introduces inefficiencies into the market, but it does not produce the thing Bloomberg is blaming it for.

To understand the specific issue involved, you have to understand that there is no exact mathematical formula for performing an appraisal. A Fannie Mae-compliant appraisal contains a grid of comparable sales, but the selection process for which comparable sales to utilize, and how to make adjustments to those comparable sales, is largely subjective. As a practical matter, if a property is under contract for, say, $310,000, it's absurd to appraise it for $305,000 - the appraisal is too blunt an instrument to make that sort of fine determination, and if the comparable sale grid supports $305 and someone has signed a contract for $310, then the value is $310. For this reason, prior to the introduction of the HVCC procedures, it would be practically unheard of to have a situation where a home purchase was derailed by an appraisal coming in at $305 when the purchase contact was at $310. But it's happening quite frequently now. And the only conclusion I can draw is that we're either seeing shoddy work done by people who no longer have to give a shit whether their work product makes sense [since the HVCC ordering procedures resemble nothing as much as they do the labor procedures put in place in the latter stages of Atlas Shrugged] or we're seeing deliberate malice from appraisers who feel "liberated" from their previous oppression of actually having to find clients, and who are enjoying themselves abusing their former "oppressors".

Fluffy|6.24.09 @ 9:03PM|#

I'd also point out that humoring Cuomo by supporting the procedures he extorted out of Fannie and Freddie while they were flat on their back helps to feed the left-wing mythology of the real estate bubble - that multi-trillion dollar movements of asset prices were somehow the result of "speculators" and evil industry figures, and not the result of fiscal, monetary and regulatory policy. So you manage in one article to endorse Cuomo's impersonation of Wesley Mouch, and to support the Leninist theory of asset price bubbles that has been circulated by apologists for the Fed for the last three years. Congratulations.

Shannon Love|6.24.09 @ 9:26PM|#

Appraisals are just wild ass guesses in turbulent economic times.

More importantly, the entire concept of real estate "value" stands without any strong foundation. The only real value a property has is the price that a person with checkbook in hand is willing to pay for it right at that moment. The price that someone will pay in the future is mere guess work especially in these times.

The shifting estimations of value is what makes accounting a dark art, not a science.

Rich|6.24.09 @ 9:40PM|#

Shannon, well said. The first time I witnessed an appraiser in action I was shocked (silly, naive me) about just how, um, "blunt" (to quote Fluffy) the process was. "Uh, huh, bathroom, bedroom, ...." Good thing some nifty features (having *nothing* to do w/ the appraised value) goosed up "saleability"!

z|6.24.09 @ 10:21PM|#

You know, Lawrence Yun's organization represents TWO sets of people: sellers, and BUYERS. Yun consistently says fuck you to the buyers, prop up those house prices at any cost.

alan|6.24.09 @ 10:32PM|#

But what of the neither-near-nor-far enemy?


Intermediate?

monkey on juice|6.24.09 @ 11:08PM|#

"As a practical matter, if a property is under contract for, say, $310,000, it's absurd to appraise it for $305,000 - the appraisal is too blunt an instrument to make that sort of fine determination"



So Fluffy, exactly how much difference is not absurd? And who makes that determination; the appraiser? Or should they ask the buyer, the seller, or the lender whats an acceptable number to come in at?

On a $310,000 property, you say a $5,000 difference is absurd. Is a $15,000 difference absurd? Or $30,000? Or $100,000? Where, exactly, does an appraiser draw that line?

The appraiser's job is to give the most accurate approximation of the fair value of the property they can. It isn't to come close, and then add or subtract a random number just to get the deal done. Faulty appraisals distort the true market. If the appraisal comes in too low, either the buyer should have to kick in more a downpayment, ask the lender to approve a loan with a slightly greater LTV, or the seller should pull back on the sale price to make the deal work. If the appraisal is off by so much that those three parties (buyer, seller, lender) can't come together to make the deal work, then I'd say the difference is too great for the appraiser to just be fudging it.

robc|6.24.09 @ 11:57PM|#

Fluffy,

A Fannie Mae-compliant appraisal

Lets get to the root of the statism here. It isnt the HVCC, it is that Fannie Mae even exists.

Eliminate Fannie and Freddie and etc and the what monkey said makes sense. At that point, the purpose of the appraiser is for the lender to verify that the property is worth enough to justify the loan. What standard they want to apply to the appraiser's value is up to them. Bad lenders who hire bad appraisers wont be doing loans for long.

|6.25.09 @ 12:34AM|#

Tim,
"Fluffy, how does the introduction of another middleman into the appraisal process produce a lower appraisal? "

Now there is no reason for the appraiser to find the fair value of a home - there is no gain for an appraiser to do the footwork to bring the appraisal in at the high value range and every incentive to spend less time on the appraisal and bring the value in at the low end of the value range.

This is why today we are seeing "low ball" appraisals that are killing good loans.

Luca Pacioli 1446|6.25.09 @ 3:49AM|#

ccounting principle nº1: Prudence
Asset valuation? lowest of: 1 Historic cost/2 Current market value
----> CONSERVATION OF CAPITAL

IFRS 2003|6.25.09 @ 3:50AM|#

But it seems that now we do the exact opposite, we choose the highest of those 2 values

---> CAPITAL CONSUMPTION

flix|6.25.09 @ 3:51AM|#

ACCOUNTING's purpose is NOT assessing market value, that's what SECONDARY MKTS are for. Bookkeeping's sole objective is CAPITAL CONSERVATION

Some Guy|6.25.09 @ 7:13AM|#

As long as taxpayers are going to be on the hook for every bad financial decision that banks and individuals make, I want those losses minimized. I will be perfectly fine with saying the state should not have anything to do with appraisals only when I will not pay more in taxes & inflation later due to them over-appraising.

roy|6.25.09 @ 7:27AM|#

"I will be perfectly fine with saying the state should not have anything to do with appraisals only when I will not pay more in taxes & inflation later due to them over-appraising."

please reexamine incentives implicit in that statement....

|6.25.09 @ 7:59AM|#

monkey on juice, I'm sure Fluffy can defend himself, but when he stated that a if a house is under contract for $310 it is absurd to appraise it for $305, he meant that the market value in that case was obviously $310. A willing buyer and a willing seller agreed to $310, therefore that is the fair market value, period.

To opine that the fair market value is $305 when the facts reflect $310, is absurd, in his words.

Unless I'm reading it wrong, of course.

Fluffy|6.25.09 @ 8:10AM|#

The appraiser's job is to give the most accurate approximation of the fair value of the property they can.

On a $310,000 property, you say a $5,000 difference is absurd. Is a $15,000 difference absurd? Or $30,000? Or $100,000? Where, exactly, does an appraiser draw that line?

The comparable sales grid establishes a value range.

Since the appraiser is obligated to review the purchase contract on a purchase appraisal, if the price in the contact can be plausibly placed in the comparable sale range [and there aren't excessive seller concessions in the contract or other red flags] the contract price should carry extraordinary weight.

As far as the question of where to draw the line goes, the comparable sales grid answers that question: if you can't find recent adjusted sale prices that support, and preferably bracket, the contract price, then it's over the line.

It's important to note that value isn't the only issue that has arisen in conjunction with HVCC. Since there is no longer any competition by appraisers for assignments, the "customer service" level provided by appraisers has radically declined, in non-value prosaic areas like delivering completed work on time, responding to inquiries, requests for clarification, typographical corrections, etc. Since real estate transactions are often chained together and date performance is critical, changing the system so that one participant in the process no longer has to give a shit if he ever makes a deadline will inevitably lead to many people getting fucked. And for refinances, borrowers are facing interest rate lock deadlines that appraisers also do their best to miss now as often as possible.

There can be no argument that there were potential conflicts of interest involved in having appraisers directly hired by lenders. But there's already a market penalty in place for lenders who rely extensively on faulty appraisals: failure. The graveyards are now full of lenders who failed in the last three years. It was not necessary to remove appraisers from the world of competitive economics to solve this problem.

I can think of potential conflicts of interest in all sorts of professions. When you visit a lawyer to ask if you have a plausible cause of action, the lawyer who says "Yes you do," gets the work and the lawyer who says "No you don't," gets no work. Should we change the system, to "protect consumers", to make it so no one can hire a lawyer directly any more, but has to call up a "lawyer association" that will assign them a lawyer randomly? Would you be satisfied with such an arrangement? How about setting that up for doctors, or plumbers, or auto mechanics?

monkey on juice|6.25.09 @ 8:12AM|#

"A willing buyer and a willing seller agreed to $310, therefore that is the fair market value, period."


Not necessarily so. People engage in transactions all the time that aren't at FMV for a variety of reasons. A skewed perception of valuation may be one. If I tell you I'd sell my home to you for $1M, it may well be worth that much. Or it could be that its only really worth $500k, like every other home in my cookie-cutter neighborhood, but I want a premium because it has a certain sentimental value to ME for which I'll only part with it for that much. If the buyer is relying on the seller's appraisal of value, they may think they're getting a fair deal, when in fact they're not. Duress or some sort of hardship may be another. If I get an honest-to-goodness appraisal for my 20 acre farm that says its worth $1M, I may just settle for $750k because I'm a month away from foreclosure.

|6.25.09 @ 8:42AM|#

If I inflate my home price to 1 mil due to sentimental reasons, and a buyer buys it, the market value was 1 mil, regardless of the reason. And your last example doesn't really involve a willing seller. "I'm willing to sell because I have to right this second" isn't really willing.

I understand there are non-arm's length transactions in which a sale may not reflect true market value. I guess I figured that when a person purposely puts qualifiers in a sentence such as "willing" buyer and "willing" seller, that would be implied.

Xeones|6.25.09 @ 8:54AM|#

KBB valuations come from a bunch of guys in Missouri sniffing nitrous as they read old issues of Car Craft magazine.

Trust me on this one.

Are they hiring?

monkey on juice|6.25.09 @ 8:55AM|#

Ok Cab, so in researching comparables, how does an appraiser know if both parties were "willing" and there were no externalities that otherwise affected the sale price?

|6.25.09 @ 9:12AM|#

A willing buyer and a willing seller agreed to $310, therefore that is the fair market value, period.

But we're usually talking about banks researching the security of the mortgage. Just because two people are willing to exchange a property for $1M does not make it worth $1M to the bank in terms of collateral.

Fluffy|6.25.09 @ 9:27AM|#

Ok Cab, so in researching comparables, how does an appraiser know if both parties were "willing" and there were no externalities that otherwise affected the sale price?

They can't. Not perfectly. A good appraiser will be intimately acquainted with a given market, and will possess the kind of narrative knowledge of recent sales that a decent real estate agent would: "Oh, that sale was the guy selling to his son in law," and so forth. And there's a lot of useful information available to appraisers in this regard. But it's not perfect because nothing is ever perfect.

But it's important to note a few additional things:

1. The Cuomo settlement was demanded because Cuomo argued that consumers who purchased real estate overpaid because they relied on the appraiser's work to validate the sales price they had offered. This is absurd for a couple of reasons: appraisals performed to secure mortgage financing say right on them that they're for the lender's use in the financing process and should not be relied upon for any other reason. So basically Cuomo was saying that consumers had been harmed because they used appraisals for a purpose that the appraisal itself says isn't warranted. Also, the appraisal is only performed after the purchase contract is signed, because you can't properly deliver a Fannie Mae appraisal without reviewing the purchase contract; so the consumers involved were making their purchase price offers without any misleading input from any appraiser. In many ways the entire Cuomo enterprise here was the same kind of AG bootstrapping we see in cases pursued against insurers who won't cover flood damage on your home when the policy specifically says it's not for floods. That's why I'm surprised to see Reason support it.

2. It's laughable to try to claim that inflated appraisals were the cause of the real estate bubble when in most markets it was not necessary to inflate appraised values once the bubble was under way. There has always been a certain amount of appraisal fraud - where there would be collusion between agents, brokers, and straw buyers to defraud lenders - but this typically occurs in extremely inexpensive markets, where somone can pick up a bunch of properties dirt cheap and then set up flips between straw buyers to fake higher prices prior to going for a big score. To argue that this is what drove the California or Las Vegas markets is just silly. The buyers were there. Real sales were taking place. Properties had bidding wars between buyers. The appraisers were reporting escalating values because market values actually were escalating. Basically what we have here is the government punishing independent appraisers, and the entire real estate and real estate finance communities, because the government caused a real estate bubble and appraisers reported it in their appraisals. And again, I'm surprised that Reason is supporting that.

I think what's happening is that the writers here recognize that real estate values were inflated by previous state action, so they are enjoying a little schadenfreude that prices are declining now - but they aren't bothering to examine the specifics of the complaints about the new government policies warping real estate practices - policies that are garden variety collectivism that Reason would never support in any other context. Not knowingly, at least.

New World Dan|6.25.09 @ 9:53AM|#

Fluffy:
the contract price should carry extraordinary weight.

Given that the purpose of the appraisal is to determine what the bank could sell the property for in the event of a foreclosure, I would put very little weight in the current contract price. If the property had been bought and sold several times in recent years, that would be much more informative, although that rarely happens.

Regardless, appraisals are pretty much bunk. If appraisers were any good, they would be out buying underpriced homes and selling them for a profit. Recently, for refinancing purposes, I had my house appraised twice. The two appriasals came in $70k apart on a $300k home. The difference? The high came from an appraiser working for a mortgage broker and the low came from an actual bank. My own estimate was about $25k north of the low.

In summary, I got my loan through the mortgage broker, but the bank he selected only used my recent purchase price to support the value of the home. But I got my 4.75% and I'm happy. Also, with the tightened appraisal and lending standards, every independant mortgage broker I know is now out of business.

|6.25.09 @ 10:08AM|#

Given that the purpose of the appraisal is to determine what the bank could sell the property for in the event of a foreclosure, I would put very little weight in the current contract price.

The appraisal isn't intended, and can't, have any predictive value ("what the bank could sell the property for in the event of a foreclosure" two, five, or ten years later), so I don't think this is really correct. Appraisals are there to guard against (a) fraudulent transactions and (b) stupid transanctions where the buyer pays more than is reasonable.

FMV is a range, determined by comparable transactions, as close as possible in time, space, and subject matter. If the transaction at hand falls within that range, then there is no reason not to give it more weight than the comparables, as it is, indeed, the most comparable, being identical in time, space, and subject matter. All real estate is unique, after all.

|6.25.09 @ 10:11AM|#

monkey on juice - hopefully there are enough comparables to be able to weed out the fringe amounts.

All I am arguing is that if I put my house on the market for 1 mil, and it sells in a reasonable amount of time for 1 mil, the market value of my house at the time of sale was 1 mil. For an appraiser to opine that the market value is something different, on the day of sale, would be "absurd."

robc|6.25.09 @ 10:14AM|#

If Im a bank, I dont want the appraiser knowing anything about the contract, I want him to bring me back a number that is his best professionally determined number and then I will compare to the contract and decide whether I want to continue to make the loan or not.

|6.25.09 @ 10:48AM|#

I was a real estate appraiser from 2001 until 2006. It paid well, and fit my experience and skills. When my son was born I imagined him asking me in the future "did you have any part in what happened" I quit soon after.

Real estate appraisal practice has no basis in reality and is nothing more than bureaucratic BS. The supposed "scientific methods" are nothing of the sort.

USPAP, the Universal Standards for Professional Appraisal Practice is a one-size fits all approach that doesn't really attempt to determine the actual value of a home. All it does is attempt to make the valuation of real estate conform to a nationwide standard. The only reason for this is so that the government can secure the lenders money with taxpayer dollars.

Why aren't the people who loan the money responsible for deciding what a home is worth?

I couldn't count the times that I wrote "Although the total adjustments of the comparables sales exceed FNMA standards they were the only sales for some distance and in the appraiser's opinion they are the closest and best available and are indicative of the market value of the subject property."

"Rural" is one of the biggest discrepancies in the "industry". Even after doing or supervising over 3000 appraisals I still could not give a concrete definition of this incredibly flexible but important term.

The idea that adding a second layer of supposed objective human beings into the appraisal process is absurd. If you can make human beings into objective robots, why would a second set of objective robots improve upon their supposed objectivity?

|6.25.09 @ 10:52AM|#

If Im a bank, I dont want the appraiser knowing anything about the contract, I want him to bring me back a number that is his best professionally determined number and then I will compare to the contract and decide whether I want to continue to make the loan or not.

But if you plan on selling the loan after you originate it, you want the highest value that you can push through. Most home mortgages are not serviced by the people who originate them and it doesn't take long for an appraiser to learn that if you don't get the value desired they will find someone who will.

monkey on juice|6.25.09 @ 10:53AM|#

"If Im a bank, I dont want the appraiser knowing anything about the contract..."


That's true if you a bank thats going to hold onto that loan in your own portfolio. If you're a bank thats planning to securitize it (as most did) and sell it off piecemeal to unsuspecting parties, then you really don't care abuot the quality of the loan - you just want to get the deal done.

And thats why I take some issue with Fluffy's point #2 above ("It's laughable to try to claim that inflated appraisals were the cause of the real estate bubble when in most markets it was not necessary to inflate appraised values once the bubble was under way.") They may not have been the sole cause of the bubble, but there are some serious allegations of inflated appraisals and interference with appraisers by mortgage lenders just to get the deal done. I can't really say more (especially from a computer at work), but look to a certain US District Court in California for a case involving a very well known, and extremely tanned, mortgage lender.

skr|6.25.09 @ 11:08AM|#

Out here in L.A., I know that low appraisals are killing some loans. But it is because the house is being listed for the existing mortgage amount which is higher than the appraisal. So in reality the sale is a short sale of which about 98% fail. But it doesn't come up in the listing as a short sale because the asking price is above the existing mortgage.

The other thing that is happening right now is that since we have a foreclosure moratorium, the sub-500k market is incredible tight. So what happens is that a house might be listed for 400k. It might only appraise for 350k. There are 30 offers on the house, so in order to win the bid, a buyer will offer 500k cash hoping for a low appraisal. When the appraisal comes in at 350k, the buyer decides that they are going to get financing and will only pay 350k. Since the seller has so much time invested with that buyer, the buyer gets the deal as long as the owner doesn't owe more than 350k.

As to all those saying FMV is whatever someone is willing to pay, that is true if you have cash, but a bank won't give you a million dollar loan for a 500k house.

Russ 2000|6.25.09 @ 11:53AM|#

The only real value a property has is the price that a person with checkbook in hand is willing to pay for it right at that moment.

The party with the checkbook in almost every case is the lender, not the buyer. The buyer has already made his appraisal in the form of his offer but he generally doesn't even have half the money to cover his offer.

Where the difficulty comes in is when the lender lends the funds for only a month or so and then packages his loans to sell to someone else. The buyer of the package was less than diligent before so the lender had little incentive to do other than inflate. The lender is the buyer of the appraiser's services and will generally purchase what they want. What the lenders want now is extreme ass-covering and that is what they are buying.

I honestly can't see any value in what Cuomo did other than make things more confusing by the arrogance of thinking government knows better than anyone else what they ought to be buying when in fact they always have less information than anyone else in the transaction.

robc|6.25.09 @ 12:45PM|#

Marshall, monkey,

Good points about securitizing the loan. However, a bank wants to maximize the sale price when they sell the loan and a track record of making bad loans would seem to hurt that.

So, I think my point still stands.

At least if you plan on being in business for more than about 2 years.

|6.25.09 @ 12:57PM|#

However, a bank wants to maximize the sale price when they sell the loan and a track record of making bad loans would seem to hurt that.

You would be correct except for one thing. The government has protected crappy lenders by allowing them to dump loans on Fannie and Freddie, effectively shielding them from bad loans. You are certainly correct that if the bank plans on actually holding the loan and servicing it they are more careful.

TARP was largely a result of lenders, and those who invested in mortgages through securities, being protected from those bad loans. Instead of being punished with bankruptcy they have been rewarded with billions.

Countrywide is a shining example of this. They were notorious for attempting to cram unconventional loans into conventional ones. Those that were less than a good investment were unloaded onto FNMA and ultimately, the taxpayer.

robc|6.25.09 @ 1:05PM|#

Marshall,

Refer back to my much earlier post...I already blamed all the problems on Fannie and Freddie.

I realize how this works in the F&F world. My original point, which I have drifted off of, was that Fluffy was blaming the appraisal system for being statist, but that isnt the primary issue, the existence of F&F make it statist regardless of the appraisal rules.

Tim Cavanaugh|6.26.09 @ 4:36PM|#

Sorry I was away for a few days, folks. Good discussion; I want to make clear that I was not supporting the new regs by Andrew Cuomo, or anything done by any Cuomo. (I was always more partial to The Homo anyway.)

But the regs are not to blame for lower-than-wished-for appraisals. Those are caused by our common enemy: Reality. The arguments above -- that a) appraisers are engaged in class warfare against loan officers and b) that lazy appraisal work will lead to a lower appraisal -- don't seem supportable to me, but I'd welcome info either way.

One other point, on the very-off chance that anybody's still around: When you say appraisals can not and are not supposed to have any predictive value, isn't that the same as saying past performance is no guarantee of future results? I mean if the comps indicate prices in the area are rising, won't that tend to make the appraisal higher? (It should, right? No matter which party I am in the transaction, my interest is for the appraisal to be at least that smart.)

If that's not the case, then it would seem the appraisal should only address the matter mentioned above: How much the bank can sell the property for in the event of a foreclosure.