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September 20th, 2011

I comment on your comments: ‘Appraisals impact mortgage rates’

by Peter Miller


Portrait of a relaxed young couple using a laptopTwo weeks ago we discussed the issue of whether and how new appraisal standards would impact mortgage rates. There were a number of interesting comments, so let’s take a look at them:

Joel says the new standards from Fannie Mae, Freddie Mac and the FHA will have one sure impact: “Only thing this will do is increase the costs of appraisal.”

After a long time in Washington, my conclusion is that no matter what rules or legislation are being proposed, the first response is always to say that changes will result in higher consumer costs.

ATMs are a good example:

They were originally designed to lower the number of transactions handled by tellers, then they started to generate small charges, then larger charges, then….well, you get it.

Troy says with regard to illegal flipping, I was wrong to say that “The key to the process is the faked appraisal.” Instead, he says, “The key to the process is your innocent’ straw buyer that walked into the home and offered to buy it at whatever price they could negotiate.”

I agree that there is surely some element of buyer responsibility. That said, illegal flippers often operate in groups that include a broker, appraiser, lender and settlement provider. The innocent buyer thinks they are using professionals to protect their interests. When all the professionals say the deal is good the innocent buyer thinks the deal is right.

Chri points out that “A market analysis complete with a sales approach to value is almost always the best opinion of FMV or OLV”–”fair market value” or “orderly liquidation value.”

Chri also says that “…Anyone who doesn’t make their deal with limitations to said property appraising for at least the purchase price is lacking common sense or a good agent.”

My view of this is a little different: In practice lenders only make loans on the basis of the appraisal or sale price, whichever is less, therefore a proper appraisal is actually a consumer protection.

Julia says she does not think the new standards “will resolve the issue of simple negligence. Bad appraisals can be bad because of poorly selected sales comparables. This could be intentional or just a result of an ‘out-of-area’ appraiser who bid the lowest from a panel. The result would be the same – overvalued property, despite use of proper UAD terms.”

Chri argues that appraisals are actually localized.

I agree with both Julia and Chri–here’s why:

I have never seen an appraisal that does not rely on localized comps. That said, I do hear from brokers with some frequency who complain about appraisers who are not really local and therefore base values on properties that are not truly comparable.

An appraisal is an independent estimate of value so disagreements can be plausible whatever the valuation. With fraud, the appraisal is based on a figure set in advance and paid for with secret compensation to the appraiser. That’s more than a simple disagreement.

Appraiser says that “It is foolish to pretend that the flipping scenario is the cause of the meltdown and just as foolish to believe that UAD is solely for the purpose of catching ‘bad appraisers’.”

I certainly would not argue that illegal flipping is the sole cause of the mortgage meltdown–and did not. In the case of illegal flipping, however, a faked appraisal is central to the process of higher prices and steeper mortgage rates.

Appraiser explains that “the purpose of this initiative is for Fannie and Freddie to automate the appraisal review process.”

Brian likely agrees with my analysis saying, “Don’t you get it? UAD was made only to get rid of the appraiser…duh. It’s so ‘they’ can collect data from our reports that a computer can read, for later loan evaluations.”

I agree. The automation process has been going on for years and in some cases allows for the use of automated appraisals. That said, I think automated appraisals are an inherently flawed idea, as are number-driven valuations.

As I have explained elsewhere, automated appraisals can work for lenders who are financing a thousand houses–if one appraisal is off, so what.

However, for homebuyers and borrowers–the folks paying for appraisal services–it’s very important to get the appraisal process right because they don’t have a thousand properties which can be used to average out errors.

Steve says, “It is easy to see you have no clue about appraisals or who the bad guys in the housing crash were (and still are).”

I think I have a very clear idea who is responsible, and that brings us to Doug.

Doug writes, “If it were not for appraisers reigning in greedy banks, mortgage loan officers and a stampeding public interest in doubling money in real estate, property prices would have skyrocketed 50-100% per year over at least a 3-5 year period. The resulting and inevitable crash would have been far more severe than it has been. We can credit Alan Geenspan and Christopher Dodd for all of this, maybe they should stand trial?”

I don’t know about Dodd, but I do think what Alan Greenspan did was terrible.

Here’s why:

The Home Ownership Equity Protection Act (HOEPA) gives the Federal Reserve the right to stop “unfair and deceptive acts or practices.” Under Greenspan–a follower of Ayn Rand who believes in as little government regulation as possible–the Fed never used this regulatory authority and the result was that lenders were allowed to originate option ARMs, interest only loans and to make mortgages on the basis of no-doc mortgage applications. The result was inevitable

A big thanks to all who commented.

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One Response to “I comment on your comments: ‘Appraisals impact mortgage rates’”

  1. Tom Molinari Says: September 21st, 2011 at 9:06 am

    1. Appraisers are not chosen on the basis of their experience level or qualifications. They are chosen based upon low fees and fast turn times.

    2. Underwriters are unduly attempting to influence property values by imposing guidelines that make it difficult for an appraiser to do his/her job. That job is to provide an unbiased opinion of market value. It is extremely frustrating when an out of state underwriter second guesses my comparable sales selection on a difficult assignment by using Zillow or an AVM. Many appraisers are more focused on satisfying underwriters than actually providing the most accurate value estimate. Underwriters are not appraisers and they have no business reviewing appraisals. Under the guise of lowering costs, local cursory reviews by licensed review appraisers, are not being performed. Underwriters are attempting to review appraisals and they don’t know what they are doing.

    3. UAD is adding much more time to completing appraisal reports and no one wants to compensate appraisers for the added time and work. Ultimately, this will result in appraisers spending less time doing the required analyses in order to meet turn time requirements and also to make an adequate living. “Scope creep” is a term that refers to the additional amount of workload that has been imposed upon appraisers without offering compensation. UAD is the latest scope creep issue. Other scope creep items include requirements for extra maps, requiring a minimum of six comps, providing a list of sales that were not presented as comparables, the 1004 MC form, providing aerial photos, and ridiculous conditions being imposed by UW.

    4. UAD has one purpose. That is to strip appraiser supplied data out of reports for later use in AVMs. The human appraiser’s role is being reduced to a data gatherer. If you think that it is difficult to contest an appraisal today, just wait until you have to argue with a bureaucrat about the inaccuracies of a computer algorithm.

    5. Finally, bad appraisals are a problem. The problem is fixable but this is a lender problem not an appraiser problem. If appraiser selections were done on a local basis, by people who know who the most qualified and experienced appraisers are, then the bad appraisal problem would go away. But when an appraiser in Reno is chosen by a minimum wage appraisal coordinator in Minneapolis, or worse yet in India, the problem will persist. If you pay reasonable compensation for the most qualified appraiser, you will obtain the best value estimate possible.

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