Let's Put the Praise Back In Appraiser

First they came for the real estate appraisers.

When we last checked in, the National Association of Realtors, the Federal Reserve, the Mortgage Bankers Association, and the U.S. Office of Thrift Supervision were all in agreement that the steady deflation of housing costs could be arrested if not for "faulty valuations that keep buyers from getting a loan." New York State Attorney General Andrew Cuomo had tried and failed to promote appraiser independence by strongarming various parties (most importantly the government-owned mortgage guarantors Fannie Mae and Freddie Mac) into accepting a new appraisal "code of conduct." Click here for a savage nightmare journey through the Chicago-based Appraisal Institute, the Uniform Standards of Professional Appraisal Practice, and other NSFW follies.

Now David Streitfeld in The New York Times devotes 1,800 words to explaining how the Cuomo Code has raised costs for home buyers, reduced pay for appraisers, and left mortgage lenders with a monopoly on appraiser hiring. I must warn you that the article contains the following paragraph:

Financial change is one of the most contentious issues in Washington, and efforts to fix even widely acknowledged problems seem stalled. The attempt to change the appraisal system is an example of how difficult it can be to adopt changes that are good in theory and also work in practice - while simultaneously winning support from warring interest groups.

But the article deftly explains the machinery of the disagreement, and Streitfeld does try to disentangle the two issues: that lenders now monopolize the process and that various rogues blame low appraisals for the continuing softness of the real estate market. 

I'm not sure why we need an institute in Chicago setting appraisal standards for all 50 states, and I'm sure we don't need a New York political scion enforcing de facto national standards. But if we must have a national standard for determining whether you need new shingles, why shouldn't lenders drive the process? They are the ones putting their money on the line and thus have an incentive to get an accurate value of the property. Certainly a bank has less incentive to let a bad loan go through than does a real estate agent or a loan broker, the two groups locked out by the Codex Cuomonibus.

The article highlights a U.S. Bancorp memo urging appraisers to "try and get the value we need the first time," but it doesn't go into why lenders could want to do something so foolish as attempting to nudge appraisals up. Could there be a big federal institution, even two federal institutions, guaranteeing their loans? Could banks think that their bad loans will end up getting subsidized by taxpayers and that there won't be any consequences attached to throwing money at deadbeats? Nah, that's too far-fetched.

Weirdly though, the failure of the Cuomo code is getting mixed up with the claim that appraisers are giving lowball estimates. Supposedly the lender monopoly now allows appraisal management companies to hire "inexperienced appraisers, often traveling many miles to a market they do not know well." This in turn is "scuttling legitimate deals," according to agents. But if an appraisal scuttles a legitimate deal, it's not because it was generally off target but specifically because it was too low. How does lack of experience make you more likely to err on the low side than the high side?

Comments

[hmm]

Appraising homes, especially homes, isn't rocket science. Even if you go as far as regression models to compare them it isn't fucking rocket science. The problem is everyone is in bed with each other and the rules or laws dictate you can't do without the fucking assholes. Realtors and appraisers are almost as evil as lawyers and politicians.

God Damn, chain this to a truck and drag it till it's dead*

*"A thing is worth exactly what someone is willing to pay".

[ksjhjd]

All roads lead to Rome.

[joshua Corning]

One note...the market for homes have obviously gone down and as such prices have as well. Appraiser essentially use comparable sales to come up with what they think the market value of a piece of real estate is.

Essentially there have been very little sales of property at the current market value for appraisers to compare to because of the aforementioned market decline.

also:

Certainly a bank has less incentive to let a bad loan go through than does a real estate agent or a loan broker, the two groups locked out by the Codex Cuomonibus.

Are you sure about that Tim?

Last I checked it was not the real estate agent who got bailed out by the federal government during this turn down.

Also real estate agents have a pretty good incentive to get sellers to lower their listing price....a big price tag on a property that does not sell pays zero in commissions while a bargain property that does sell will pay a commission.

[Episiarch]

"...and didn't waste one segment clucking like a goose about that damn ring--and I hope you know a good appraiser, because if that's not paste, I'll eat my hat. Now my last segment has fallen victim to 'Scion fever.'"

[joshua corning]

By the way banks want to keep appraisals high because ***GASP*** they my want to keep the prices of the homes they have given loans out on UP.

I think you got a little confused here Tim.

A drop in prices will help real estate agents a hell of a lot more then it will help the banks.

[joshua corning]

Supposedly the lender monopoly now allows appraisal management companies to hire "inexperienced appraisers, often traveling many miles to a market they do not know well." This in turn is "scuttling legitimate deals," according to agents. But if an appraisal scuttles a legitimate deal, it's not because it was generally off target but specifically because it was too low. How does lack of experience make you more likely to err on the low side than the high side?

The underlining assumption here is that an outside appraiser selected by the bank and not by the buyer or seller will be a hired gun trying to get the price that the bank wants....not the market price. Real estate agents want an appraisal of what the market will bear high or low so they can use the appraisal to convince the buyer and seller that the price is right for both of them so the agent can get their commission on a sale that goes through.

[Douglas Fletcher]

I think we should make all real estate appraisals be done by 4 year olds. At least then we'd probably know when they're lying through their teeth.

[MJ]

Doesn't a state government, particularly a government in financial trouble like New York, have an interest in appraisals staying high? That it would give a justification to keep property tax assessments high? I'm not sure I trust government strongarming a result when they hav definite interest in the desired result.

[Abdul]

I worked for a judge who had to rule on motions about whether certain real-estate appraisers were qualified to serve as expert witnesses in a trial. We finally came to the conclusion that appraising is half science, half art, and 100% bullshit.

[robc]

Appraisals are SOLELY* for the bank/lender. No one else even needs to know the result of the appraisal (unless necessary for negotiations, if too low). Its purpose is so the bank knows that it has a lien on something of real value if things go bad and it has to foreclose. Thus, its up to the bank to hire an appraiser than they trust.

*The fact that pseudo-governmental agencies need appraisal information at all is a problem. Fannie and Freddie dont work without the same appraisal trust the banks use and that is where the abuse comes in, because market forces make the banks choose wisely (or go under).

[FrBunny]

Appraising homes ... isn't rocket science.

(And Abdul +1) It isn't science of any sort. When three professionals look at the same commodity and appraise it at $130K, $116K, and $143K, it's called "guessing".

The numbers are even more hilarious in expensive markets.

[robc]

FrBunny,

That looks like the kind of price variation I would expect for any non commodity good.

[Mango Punch]

"This in turn is "scuttling legitimate deals," according to agents. But if an appraisal scuttles a legitimate deal, it's not because it was generally off target but specifically because it was too low. How does lack of experience make you more likely to err on the low side than the high side?"

If the deal is contingent on a mortgage, then only a miss appraisal on the low end matters; a miss high doesn't "scuttle the deal" nor make the deal more likely than an accurate appraisal would. The statement doesn't imply that an inexperienced appraiser errs on the low side.

[Nick]

I'll take it at $116k then. If anyone wants to pay $143k, it's theirs. I'm out.

[Nick]

There are a lot of townhouses in my neighborhood for sale right now and they keep selling at near peak value. My theory is that the people who have been in them a while and bought them when the price was half it's current value 10 years ago are swapping with the house owners nearby who are now in over their heads and have to sell low. So there is a demand from the house owners to downgrade to the townhouses at half the price of their house and get above water and that keeps the townhouse price high and allows the townhouse sellers to upgrade to the houses whose prices have dropped by almost 1/3. I could be wrong but if my theory is correct, it's an interesting situation and a good time to own a townhouse.

Unfortunately, my salary dictates I stay put.

[Rich]

Appraisals are SOLELY* for the bank/lender.

Right on, robc.

When three professionals look at the same commodity and appraise it at $130K, $116K, and $143K, it's called "guessing".

This'll get interesting when applied to QALY ...

[Pro Libertate]

Appraising is and has been a pretty corrupt practice. Trying to make it more dishonest isn't going to help. It's not low appraisals that are keeping home prices down, it's the market.

I had to go into an abandoned house on my street to rescue our cat. The condition of the home was terrible, with stuff everywhere, maggots and bugs also ubiquitous, and a smell. . .well, a really bad smell. These abandoned houses, which banks have seen fit to ignore, are going to help keep the market down even when it starts to rebound.

[fishbane]

Certainly a bank has less incentive to let a bad loan go through than does a real estate agent or a loan broker

You know, you'd think that, but those whose memory stretches over the last year would understand differently.

On this planet, in this country, banks don't have to risk their own money to make loans.

[brotherben]

here is a story of a gun wielding, Ron Paul supporting, appraisal photographer in Meridian Idaho you may enjoy. Or maybe you won't.

[brotherben]

Although I am not sure what the signifigance of his political affiliations is.

[skr]

@ #

"A thing is worth exactly what someone is willing to pay".

Normally, I would agree with you. However, after my experience trying to buy a house in L.A., I have to say that government induced shortages distort bid values greatly. Also, what one person will pay because of desperation or love of the property, doesn't necessarily equate to a fair market value that a lender can recoup in the event of default.

[Tim Cavanaugh]

Real estate agents want an appraisal of what the market will bear high or low so they can use the appraisal to convince the buyer and seller that the price is right for both of them so the agent can get their commission on a sale that goes through.

Thanks, Joshua. While it's true these days that many agents would like to see list prices come down so they can make a deal, the National Association of Realtors continues to thump the tub for a strengthening market, doubling-in-value-every-ten-years and a bunch of other fictions. In my experience a lot of real estate pros are angry at the NAR for being so out of touch. In a market with strong demand agents have a direct incentive to up the closing cost (not that they always try to do that), in a way that banks, all other things being equal, do not.

As you note, all other things are not equal, and banks are getting bailed out as nobody else in the real estate chain is. I described that in the original post, but as is often the case, the point may have gotten buried under my syntax.

[joshua corning]

the National Association of Realtors continues to thump the tub for a strengthening market, doubling-in-value-every-ten-years and a bunch of other fictions.

I guess I need a better quote then "faulty valuations that keep buyers from getting a loan." to convince me of that fact. My desk at work sits across from President of the Washington State Realtors association and I may be giving him to much credit but his stance has appeared to me to protect "the sale" so that prices can stabilize.

[Victoria Gill]

I see many people out here beating the day lights out of the appr. It is not rocket science, it can be done by a 4 year old, blah, blah. Well guess what you folks should put your money where your mouth is, go to school and give it a try. I am a banker turned appr over 10 years ago I did my 2 year apprenticeship. I remember before appr licensing the appraisals were completed by our bank pres and vp arguing in a back room to knock down value due to too many front steps. I come from a back ground of "it is what it is!!" You try facing your day with lot line disputes, a house with no kitchen, chased out of a entirely religious Village in NYS by women, goats living in the bsmt, sewage leak pumping in the bsmt, life estates, home that was to be appr but the neighbor burnt it down last night!! Yeah these are all real problems we face. Don't forget we need to determine what these problems are going to cost to fix well the lender/Mgmt co. cries we ordered this 4 days ago it is late!! We are asked to be environmental experts, home inspectors, pest experts and the list goes on. Anything goes wrong who's E&O insurance will the tested? Not the rocket scientist, but good old appraiser.

Now a days our fees are in 1/2 and what once took 3-4 hrs to complete now takes an entire day!! What were once 3 comps are now 6 sometimes up to 9. So instead of throwing tomatoes at the appraiser why don't you give him or her a pat on the back from your comfy office chair. Take the time to say thank god I am not the one having tomatoes throw at me around every corner!

Regards,
Victoria L. Gill SCRREA, RAA.
NJ & NY State Certified FHA approved Appraiser

[MITZI K]

Sale price, will buyer, seller etc
A buyer can pay more than market value
A seller can get more than it is worth
Appraier must come in at market value
If it is less buyer brings in cash for the difference,
It was that way in 1978 and is same in 2009.
We appraise for the secondary market, GSE
FANNIE MAE/FREEDIE MAC, That who makes the appraiser rules. Their name is on the appraisal form.

Blame the lower numbers and extreme numbers going downward on the agents whose BPO are done by a $13.50 per hour person at a desk while the agent is out showing homes.....

[dave]

IF EVERYONE GOT A SET FEE, REALTORS AND LOAN OFFICES SAY $1000- PER DEAL CLOSED THE VALUE WOULD NOT MATTER TO THEM. SEE IF YOUR ON COMISSION IT'S ALL ABOUT THE PRICE SOMETHINGS SELL FOR. SUPPLY AND DEMAND WILL THEN COULD TAKE OVER. NOTHING WILL EVER REALLY CHANGE UNTILL THIS HAPPENS. IN 2020 WE WILL GO THROUGHT THIS AGAIN.. GREED GREED GREED. FROM THE BEGINNING OF TIME TILL THE END OF TIME, PEOPLE WILL DO OR SAY ANYTHING TO GET MONEY..

[D Loeper]

One thing to keep in mind when you say something along the line of "*"A thing is worth exactly what someone is willing to pay"." - or anything with the same general intent. This is true, however in the world of economics and supply and demand it's a willing and able buyer, not just willing. The able part is where the banks come in. Most buyers cannot buy a property without a bank's assistance and now you have an additional party involved in the transaction who has to be okay with facets of the deal, which includes among other things, the value. Spin it how you like but the typical buyer views the difference between a $210k and a $200k home as being $50/month where as a bank sees $10,000 in cash up front.

Just my 2 cents to a problem that will never be solved because appraiser's give an opinion of value that everyone else, especially the bank, takes as being THE VALUE.

[Frank]

To: hmmm and FrBunny and everyone else;
This bit of economics is somewhat complicated.
All of this negative verbal assualt towards Appraisers due to people not wanting to hear the lost value in thier homes/real estate. Sorry it happens, check history. When unemployment gets high, loan defaults and a market decline are sure to follow. When no one will loan money because of the Thieves on wall street (thank Congress, Senator Phil Gramm and the big investment banks of wall street for blocking goverment oversight CDO's and the virtual elimination of the Glass Steagall Act), or in the oil sector or by Privatizing the Federal Reserve and unfairly raising interest rates through the roof (stealing from the people, the 70's)or by flipping property back and forth across a table, (Failed S&L thieves of the 80s, ask John McCain and the Keating 5); value will decline because no one will loan money in order to limit risk/exposure. When people are either con ned into taking a 5/1 ARM when rates are at all time low or they take on more home than they can afford by lying on thier loan application, (punishable by law), in a scheme to make enough capital to pay off a smaller home when the market goes for a slight dip, there goes the value snowballing downward. It may not be rocket science but, neither are many other professions. It is still a specialized set of skills aquired through some schooling and a minimum two years experience. Futhermore a regression model is NOT an Appraisal nor is a R.E. Brokers BPO or the CMA, they are only rough estimates that sometimes are completely off. An Appraisal is a professional opinion of value. It is a necessary tool to creating mortgage, so that a lender can loan money on something that has value which is to be used as the collateral to secure a loan. One of the problems is that everyone involved in a Real Estate transaction has a vested interest. The Appraiser is suppose to be independent but often Loan Officers, AMC's, Realtors and the you the public as a buyer or seller, will lean on Appraisers for a predetermined outcome. The only time an appraisal is considered Bad by most is when it does not come in with the value to make the deal work; to low. Sometimes Realtors are told by the sellers that they will not sell unless thier home gets a certain amount; often more than the market will support. The Agent, in order to get the business, has to succomb to the seller in order to get the listing. From that point on the pressure is on to get that predetermined, often over inflated value of the property. Next up is the loan officer who wants to see the deal through to get a commission also.
Here are some solutions: First, Sellers should be forced to get an Appraisal in order to do the listing the value could be within a range of about 5%. (No one can pin the absolute value to a property because the buyers are people, who are irrational with feelings and emotions. Ever have an agent tell you to paint a certain color because its what everyone likes? To bake cookies or bread just before the showing of the property?) The Brokers should have to have a rotational list for the appraisal. Come on people, its only probably your largest investment. Do you not want to make sure the Realtor is not under selling you, yes it happens, or have a buyer overpay? A few hundred dollars versus perhaps $10,000 or maybe more?
Second: If anyone puts pressure on the Appraiser to get a predetermined value then a complaint hotline at the State Level or better still to the E & O insures of Appraisers and if the Lender does not allow them to investigate the Insurer could refuse to honor any future E & O insurance first by notifing all Appraiser to stear clear of that Lender. No E & O Appraisal insurance = no loans, this may elminate lenders trying to influence value conclusion. Both Realtors and Loan Officers hold a lic. in the state they do business so through a True state investigation, they could lose thier lic.
Also the lender should continue to get their own Appraiser seperate from the Realtor/Broker. If the two vary by more than 5%, then a third should be ordered from an Appraiser who has been in the business for over 15 years or has some distinction; SRA, MAI etc.. Prepare to pay a higher fee and use this appraisal for the loan. If they do not vary by more than 5% then the Lender's appraisal should be used for the loan.

Third: make lenders responsible for the fist 5% escolating by total dollar volume to 10% of the loans, should they default. When the lenders have at least some vested monetary interest rather than just the taxpayers money, things will change for the better.

As for the person who got three appraisals varying from 116k to 130k to 143k, I doubt that they were less than a couple of months apart, probably 6 months or more and the market can and does vary. Perhaps those numbers were based on an as repaired value rather than an "as is" value. Each time a different appraiser came to inspect the property perhaps different discusions on the amount of and quality of repairs to take place; or repairs were ongoing so the value increased accordingly. If the property was always in the same condition and those values were within a month or two then perhaps the quality of the Multiple Listing Service is low, it doesn't have pictures of the interior of the comparable properties. Or you got some crappy appraisers and a weak state board that does not enforce appraisal rules. Did you attempt to sway thier value?
Fact is, everyone is to blame to a degree.

Utilize the suggestions given above then real change will follow.