Appraisals: The Latest Housing Battlefield Heats Up

The National Association of Home Builders has joined the National Association of Realtors in the fight to roll back the Home Valuation Code of Conduct. Actually, I’m not sure they want to roll back the HVCC so much as they want to dictate the methodology that appraisers currently use to arrive at a value for a house. I’ll get back to that in a moment.

First, let’s take a look at what some of the influential parties have had to say over the past couple of days.

The NAHB offered these comments:

“Any home buyer can recognize the difference between a well-kept home and a distressed property that is damaged or not properly maintained,” said NAHB chairman Joe Robson. “So it only makes sense that an appraiser should be required to consider the overall condition of a property and the specific factors related to a foreclosure or distressed property sale when selecting and adjusting the value of comparables.”

The Federal Housing Finance Agency, Fannie and Freddie’s regulator, weighed in with a statement of support for the HVCC:

“The Enterprises have a strong interest in ensuring the soundness of the appraisal practices that lead to appraisal reports supporting the mortgage loans they purchase from lenders,” said FHFA director James Lockhart at the time the code was announced.

“The Code,” he added, “strikes a balance of assuring enhanced protections for appraisers while maintaining lender ability to address unprofessional appraisal practices and to perform quality controls on appraisals received.”

In response to the charge leveled earlier this week by the NAR’s Lawrence Yun that appraisals improperly using distressed sales as comps were causing contracts to fall out due to faulty valuations, the Director of the Appraisal Institute said:

“We take offense with the notion that an appraisal is only good if it happens to come in at the sales price,” Garber said. “That mentality helped cause the mortgage meltdown to begin with. The fact that the value reflected in the appraisal does not match the sales price is not the fault of the appraisal but a result of the market today.”

The NAR and NAHB are pulling out all of the stops on this one in order to influence Congress to intervene. A reasonable case can be made that the HVCC needs some tweaking. It’s a new protocol and like any new program isn’t perfect. However, the core of its reform — insulating the appraiser from the influence of interested parties in the real estate transaction — is a giant step forward and should not be diluted in any manner whatsoever.

Let’s not be misled with regard to the intent of the real estate industry. They want the appraisal process changed in a manner that will lessen or eliminate the use of foreclosure sales in determining the valuation of a property. The industry is attempting to write procedures that a supposedly independent third party would be required to follow in order to reach a conclusion as to value. An outcome that would be clearly unreasonable.

If you look past all of the industry huffing and puffing and the vested interests on both sides of the issue, you realize that at its heart this is really an issue that affects the consumer. Ensuring that consumer receives an estimate of what they are about to buy that is free from bias should be the goal. The only way to meet that goal is to eliminate the ability of parties who stand to profit from the transaction to influence the process. As it now stands, the NAHB and NAR are attempting to do the opposite.

Comments

[A home buyer:]

A typical appraiser spends two hours in an assignment, including 1 hour on the road to find the property and 40 minutes on paper works, collects the fee and gets the property off the head. A typical home buyer has spent the past 6 months driving up and down the surrounding communities, checked out 60 listings, probably failed on a few previous offers, and finally agreed on one that he is willing to pay on hard-earned cashes and ready to live in for years…It is completely out my comprehension why anyone in his right mind would think an appraiser’s opinion can be more correct than a price agreed by a willing buyer and willing seller.

Today is not 2006 anymore. Anyone who buys a home today must have gone through thorough thinking and careful calculations. I bought my house recently. The decision is simple - my job is safe, the house is cheap, mortgage rate is fabulous, the sense of settling-down is important to my family, and life goes on. Could the prices go down another 5-10%? Absolutely. Do I care? Not really! Even if I know the exact timing of the market bottom, I am not sure I would be better off by waiting, because I don’t know at that point of time there will be a property available for me in the location I like.

Wake up, Tom! Don’t fool yourself into believing that being able to read a few spreadsheets and charts makes you knowing everything about human beings.

Jun 26 03:50 PM

[Radardoc:]

Well gentlemen, the fix is in.

I was just watching CSPAN (please no commentarry on my lack of a life...)

In the latest ammendment to the "Energy Bill" now on the floor of the House, It brings house appraisals under the control of the Federal government. It provides for "training" of appraisers under the auspices of making sure the know "how" to value a home.

If this passes and survives the Senate, the free market will no longer have any place in the housing market.

God help us.

Jun 26 06:53 PM

[Cold Reality:]

This is a very goo, pointed article.

"...they (the real estate agents) want to dictate the methodology that appraisers currently use to arrive at a value for a house..."

They have always wanted to dictate the methodology and control the appraisals, and this has led to millions and millions of over-appraisals over the last several decades. Were it not for the real estate agents' interference with what intuitively should be a completely autonomous and independent process, then the mess we are now in wouldn't have occurred.

And the statement by the Appraisal Institute takes proper umbrage:

“We take offense with the notion that an appraisal is only good if it happens to come in at the sales price,” Garber said. “That mentality helped cause the mortgage meltdown to begin with. The fact that the value reflected in the appraisal does not match the sales price is not the fault of the appraisal but a result of the market today.”

Well put.

Jun 26 08:38 PM

[Francois1:]

As a "typical" appraiser, I agree that buyers invest quite a bit of time in the examination of listings and selection of their home. However, even with over 32 years experience in residential real estate appraisal, there's no way I can produce an appraisal report in two hours.

Part of the process in the development of the appraiser's opinions and conclusions about the property involve an examination and analysis of the purchase and sale agreement. Also considered is the listing and sales history of the property appraised and several comparable sales; usually many more than are included in the appraisal report. The fact the sales price is negotiated by the buyer and seller is considered by an appraiser. We understand that the buyer may be comfortable with the price. However, the appraisal is not completed for the buyer's benefit; the appraiser's client in most mortgage appraisal assignments is the lender. The appraisal is part of the process to provide the mortgagee with an opinion of the value of the collateral for the loan. Along with the qualifications of the borrower, the value of the collateral is considered in underwriting the loan.

The goals of the HVCC is to correct a very real problem. The solution imposed by the HVCC, however, causes another set of problems that may be even more detrimental to the lender and the borrower. Specifically, the huge number of appraisal assignments placed by Appraisal Management Companies. Due to their fee structure, it's much more likely the appraiser will have less experience and spend closer to two hours preparing the appraisal report to the detriment of accuracy, credibility and the safety of the investment made by both the lender and the homebuyer.

Frank

On Jun 26 03:50 PM A home buyer wrote:

> A typical appraiser spends two hours in an assignment, including
> 1 hour on the road to find the property and 40 minutes on paper works,
> collects the fee and gets the property off the head. A typical home
> buyer has spent the past 6 months driving up and down the surrounding
> communities, checked out 60 listings, probably failed on a few previous
> offers, and finally agreed on one that he is willing to pay on hard-earned
> cashes and ready to live in for years…It is completely out my comprehension
> why anyone in his right mind would think an appraiser’s opinion can
> be more correct than a price agreed by a willing buyer and willing
> seller.
>
> Today is not 2006 anymore. Anyone who buys a home today must have
> gone through thorough thinking and careful calculations. I bought
> my house recently. The decision is simple - my job is safe, the house
> is cheap, mortgage rate is fabulous, the sense of settling-down is
> important to my family, and life goes on. Could the prices go down
> another 5-10%? Absolutely. Do I care? Not really! Even if I know
> the exact timing of the market bottom, I am not sure I would be better
> off by waiting, because I don’t know at that point of time there
> will be a property available for me in the location I like.
>
> Wake up, Tom! Don’t fool yourself into believing that being able
> to read a few spreadsheets and charts makes you knowing everything
> about human beings.

Jun 26 11:58 PM

[Tom Lindmark:]

Thank you for your comment. The point about the intended user of the appraisal report is quite important. I agree that the law needs to be tweeked or compensation adjusted to ensure that professional appraisals are being delivered but do you really think that the present situation is worse than where we came from? I have my doubts on that one.


On Jun 26 11:58 PM User 437377 wrote:

> As a "typical" appraiser, I agree that buyers invest quite a bit
> of time in the examination of listings and selection of their home.
> However, even with over 32 years experience in residential real estate
> appraisal, there's no way I can produce an appraisal report in two
> hours.
>
> Part of the process in the development of the appraiser's opinions
> and conclusions about the property involve an examination and analysis
> of the purchase and sale agreement. Also considered is the listing
> and sales history of the property appraised and several comparable
> sales; usually many more than are included in the appraisal report.
> The fact the sales price is negotiated by the buyer and seller is
> considered by an appraiser. We understand that the buyer may be comfortable
> with the price. However, the appraisal is not completed for the buyer's
> benefit; the appraiser's client in most mortgage appraisal assignments
> is the lender. The appraisal is part of the process to provide the
> mortgagee with an opinion of the value of the collateral for the
> loan. Along with the qualifications of the borrower, the value of
> the collateral is considered in underwriting the loan.
>
> The goals of the HVCC is to correct a very real problem. The solution
> imposed by the HVCC, however, causes another set of problems that
> may be even more detrimental to the lender and the borrower. Specifically,
> the huge number of appraisal assignments placed by Appraisal Management
> Companies. Due to their fee structure, it's much more likely the
> appraiser will have less experience and spend closer to two hours
> preparing the appraisal report to the detriment of accuracy, credibility
> and the safety of the investment made by both the lender and the
> homebuyer.
>
> Frank
>
> On Jun 26 03:50 PM A home buyer wrote:

Jun 27 12:08 AM

[mlonz:]

All this ads up to fewer mortgages and ultimately fewer sales and a less liquid market. Some may view this as more "rational" which is fine, but in general macroeconomic terms it is highly negative.

And I have to say RE have a bad reputation, many deservedly so, but nobody is forced use one. If you don't like them, don't do business with them. Its that simple.

Jun 27 01:42 AM

[Loan Survivor:]

There is no question that the previous appraisal model was broke.

The public was duped into buying into inflated housing prices. History has shown though, that there is always another bubble around the corner in something. Look back at the Dutch Tulip debacle. The Great Depression was in part fueled by frenzied public speculation using margin buying.

There will be no perfect system.

Unfortunately, the government needs to once again set up some guidelines to protect us from ourselves.

The problem is our government, ignorant and out of touch with reality, listens to special interests rather than common sense when crafting these guidelines.

Why wouldn't they gather the best experts in the industry and put them in a room together to come up with the best system possible?

Instead they have the best paying special interests tell them what they should do and they follow this advice with little investigation or logic.

Many of the issues with HVCC can be understood by logically thinking your way through the appraisal process and asking a lot of questions.

Few appear to be doing that.

If you'd like to read more about the issues with HVCC that no one's bothered to bring up in these posts of Tom's, check out my blog:

drewsmortgagenews.blog...

Jun 27 09:31 AM

[mrlucky2day:]

The author of this article and the design of the rules of the HVCC completely ignore the basic principle of Real Estate Appraisal. The basis of valuing real estate is "fair market value" that is "The price at which a buyer is willing to buy and a seller is willing to sell, UNDER NORMAL circumstances and after the property has been exposed to the market for a reasonable time" The HVCC process avoids this basic fact by counting "foreclosures" in the analysis. This goes completely against the basic rule as stated above as these sales are all "distressed" sales and not derived through normal due process of consideration as stated above in "fair market value". This distortion of the market, will deprive a real estate and thus the broad economy recovery. The banks, fanny and freddy and other interested parties can protect themselves by simply requiring a reasonable down payment, requiring the applicant have a job and reasonable credit history, it's really that simple whereas, before, the banks completely closed their eyes to these basic requirements. While it is true that mortgage loan reps did pressure appraisers to meet the sales price and of course this is wrong, that does not mean that you change the basis of the traditional meaning of "fair market value" used in the valuation of real estate for over 100 years! Instead, fire the offending loan officers, appraisers and real estate agents that would dishonor the practice of real estate. If the government over kills the industry, it will kill what they are trying to preserve.

Jun 27 11:48 AM

[Tom Lindmark:]

A number of others have opined like you as to the definition of fair market value in the various posts I've had on this subject. So let's set the record straight. Here is the definition of market value from the Uninform Standards of Professional Appraisal Practice:

"the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus."

It is not what the buyer and seller agree to. Also please keep in mind that appraisals in most single family real estate transactions are done for the benefit of the lender not the buyer or seller. It is intended to provide a guide to the lender in evaluating its collateral.


On Jun 27 11:48 AM mrlucky2day wrote:

> The author of this article and the design of the rules of the HVCC
> completely ignore the basic principle of Real Estate Appraisal.
> The basis of valuing real estate is "fair market value" that is
> "The price at which a buyer is willing to buy and a seller is willing
> to sell, UNDER NORMAL circumstances and after the property has been
> exposed to the market for a reasonable time" The HVCC process avoids
> this basic fact by counting "foreclosures" in the analysis. This
> goes completely against the basic rule as stated above as these sales
> are all "distressed" sales and not derived through normal due process
> of consideration as stated above in "fair market value". This distortion
> of the market, will deprive a real estate and thus the broad economy
> recovery. The banks, fanny and freddy and other interested parties
> can protect themselves by simply requiring a reasonable down payment,
> requiring the applicant have a job and reasonable credit history,
> it's really that simple whereas, before, the banks completely closed
> their eyes to these basic requirements. While it is true that mortgage
> loan reps did pressure appraisers to meet the sales price and of
> course this is wrong, that does not mean that you change the basis
> of the traditional meaning of "fair market value" used in the valuation
> of real estate for over 100 years! Instead, fire the offending
> loan officers, appraisers and real estate agents that would dishonor
> the practice of real estate. If the government over kills the industry,
> it will kill what they are trying to preserve.

Jun 27 01:15 PM

[Francois1:]

Tom,

Is the situation now worse? I'll give you my best appraiser answer - "It depends".

In many ways it is worse. Lenders, including Fannie and Freddie, may end up with a less reliable and credible real property appraisal. This, due to the fact that a higher percentage of the assignments are being directed by AMCs to less experienced appraisers working a wider geographic area. The appraisal report may be less reliable and credible because the AMC pressures the appraiser to complete the report in 24 - 48 hours, allowing insufficient time to properly research data, confirm circumstances of the transactions used as comparable sales, and collect and analyse data used to report general market condition and trends in the subject property's neighborhood and market area.

The situation may be about the same if anecdotes provided to me by appraisers from across my state (Florida) and the country prove to be true. These anecdotes allege the value pressure has shifted from the loan originator (mortgage broker, etc.) to the AMC. Because one of the easiest ways to comply with the HVCC is to utilize the services of an AMC, hundreds of new AMCs have been created; some good, some not so good. Appraisers have reported value pressure, encouragement to ignore detrimental physical condition of the subject property, and pleas to remove negative comments about market conditions from their reports. Dozens of appraisers have relayed to me instances of AMCs suggesting "comparable sales" that allegedly support a higher value opinion. To whom does an appraiser seek justice in such a situation? The only enforcement mechanism provided for in the HVCC is the Independent Valuation Protection Institute (IVPI). Fannie and Freddie agreed to provide funding to create it as part of their agreement with Cuomo. It's not here and few expect to see it ever. Fannie and Freddie don't have the dough.

There are also documented instances of AMCs and lenders encouraging appraisers to lower their opinion of value. Some AMCs "guarantee" their clients will not suffer loss as a result of appraisals ordered through their system. AMC reviewers, often unlicensed in the state where the appraisal was completed, exert pressure on appraisers to be conservative, exclude legitimate comparable sales or include comparable sales that do not meet the test for an arm's length transaction (short sales and foreclosures). The consumer and the lending industry are shortchanged when the appraiser's independence and objectivity is compromised and their opinions and conclusions have questionable reliability and credibility, regardless of the direction of the pressure.

There are ways to alleviate these problems. Forcing the HVCC down our throats is not one of them, particularly when one of legs of the HVCC agreement, the IVPI, does not exist.


On Jun 27 12:08 AM Tom Lindmark wrote:

> Thank you for your comment. The point about the intended user of
> the appraisal report is quite important. I agree that the law needs
> to be tweeked or compensation adjusted to ensure that professional
> appraisals are being delivered but do you really think that the present
> situation is worse than where we came from? I have my doubts on that
> one.

Jun 27 01:21 PM

[CLH:]

The best appraisal is the price agreed on by seller and buyer. The worst is a govt. appraisal for tax purposes.

Jun 27 01:55 PM

[TAS:]

I was alrerted by e-mail of this development by the NAR, and assume the author was as well.

Yes, indeed, the fix is in. Outside of the NEA and the Trial Lawyers, no lobby has more clout inside the beltway than the NAR.

And don't forgret Barney Frank's plea to have banks loosen up loan standards for condominiums - another landmark day in statesmanship/hypocrisy for our Democratic friends.

Jun 27 03:08 PM

[cameroni:]

Ha Ha Ha!

You are making me laugh now. Are you suggesting the consumer needs protection suddenly? The same consumer who while building a new home pressured the appraiser to inflate the valuation so that he could get financing for "course of construction" lending?

Are you talking about the same consumer who bought a home with the intention to flip. That guy (or gal) who pressured the appraiser to inflate the price to improve their subsequent flip sale?

Maybe you are talking about the family who after purchasing their first home sought an appraisal after the fact (which had to come in higher) to support the line-of credit conditions the bank was imposing on them for their other borrowing needs? I could go on all day.

Appraisers work both sides of the wicket, get paid at various times by buyers, sellers and banks and effectively are prostitutes in the real estate business with no loyalty to anyone but the commissions.

I apologize if the laughter was deafening but the appraisal business itself is so rife with issues, especially in a confused, crashing and ambivalent economy that their work has no real value whatsoever.

How can you assess value when markets can crash 10, 20 and 30% in a single year anyway. I won't even bother looking at one of their reports when I buy a distressed property. I just don't care what they have to say because it is almost all BS anyway. Based on blither, fur and feathers. Utter garbage.

And I will still get my offer price despite them. The price is what the seller accepts.


If you look past all of the industry huffing and puffing and the vested interests on both sides of the issue, you realize that at its heart this is really an issue that affects the consumer. Ensuring that consumer receives an estimate of what they are about to buy that is free from bias should be the goal. The only way to meet that goal is to eliminate the ability of parties who stand to profit from the transaction to influence the process. As it now stands, the NAHB and NAR are attempting to do the opposite.

Jun 28 02:08 AM

[A home buyer:]

Frank,

I had no intention to discredit the appraisal industry, and like any other industry, there are professional practitioners and also people with questionable skills and dedications.

I don’t think appraised property values should come in exactly same as the agreed transaction prices. Different opinions make the market. However, when we reached the point that a substantial number of agreed deals have fell apart due to appraisers’ assessed values significantly below the agreed prices, the errors are more likely to be on the side of appraisers, and this has created a systemic risk to our economic recovery.

I think your comment explained it all – “the appraiser's client in most mortgage appraisal assignments is the lender.” During the heydays, appraisers assigned values higher than the market values so that greedy lenders could maximize their loan growth. Now as cash hoarding has become the first priority for leaders, there is no better excuse to reject a client than an appraiser’s low-ball appraisal. Instructions for appraisers to under-value properties are against the laws, but a simple warning on the litigation risks of overvaluations can do all the tricks, particularly when assigning a low value is the easiest thing in this world given the abundance of distressed properties. And, by turning this deal done, another appraisal opportunity is created as the same buyer will probably make another offer in the near future. It is a win-win situation for appraisers and lenders at the costs of legitimate home buyers and the fragile US economy that is desperately looking for stabilization in the property market.



On Jun 26 11:58 PM Francois1 wrote:

> As a "typical" appraiser, I agree that buyers invest quite a bit
> of time in the examination of listings and selection of their home.
> However, even with over 32 years experience in residential real estate
> appraisal, there's no way I can produce an appraisal report in two
> hours.
>
> Part of the process in the development of the appraiser's opinions
> and conclusions about the property involve an examination and analysis
> of the purchase and sale agreement. Also considered is the listing
> and sales history of the property appraised and several comparable
> sales; usually many more than are included in the appraisal report.
> The fact the sales price is negotiated by the buyer and seller is
> considered by an appraiser. We understand that the buyer may be comfortable
> with the price. However, the appraisal is not completed for the buyer's
> benefit; the appraiser's client in most mortgage appraisal assignments
> is the lender. The appraisal is part of the process to provide the
> mortgagee with an opinion of the value of the collateral for the
> loan. Along with the qualifications of the borrower, the value of
> the collateral is considered in underwriting the loan.
>
> The goals of the HVCC is to correct a very real problem. The solution
> imposed by the HVCC, however, causes another set of problems that
> may be even more detrimental to the lender and the borrower. Specifically,
> the huge number of appraisal assignments placed by Appraisal Management
> Companies. Due to their fee structure, it's much more likely the
> appraiser will have less experience and spend closer to two hours
> preparing the appraisal report to the detriment of accuracy, credibility
> and the safety of the investment made by both the lender and the
> homebuyer.
>
> Frank
>
> On Jun 26 03:50 PM A home buyer wrote:

Jun 29 10:50 AM

[Cold Reality:]

Appraisals are so rife with issues that there is o point in them. They obviously do not establish or verify what a property should bring in a free and open sale, as is their stated purpose. So, as they are, they are just another expensive, time-consuming ruse, unduly influenced by real estate agents.


On Jun 28 02:08 AM cameroni wrote:

>
> Ha Ha Ha!
>
> You are making me laugh now. Are you suggesting the consumer needs
> protection suddenly? The same consumer who while building a new home
> pressured the appraiser to inflate the valuation so that he could
> get financing for "course of construction" lending?
>
> Are you talking about the same consumer who bought a home with the
> intention to flip. That guy (or gal) who pressured the appraiser
> to inflate the price to improve their subsequent flip sale?
>
> Maybe you are talking about the family who after purchasing their
> first home sought an appraisal after the fact (which had to come
> in higher) to support the line-of credit conditions the bank was
> imposing on them for their other borrowing needs? I could go on all
> day.
>
> Appraisers work both sides of the wicket, get paid at various times
> by buyers, sellers and banks and effectively are prostitutes in the
> real estate business with no loyalty to anyone but the commissions.
>
>
> I apologize if the laughter was deafening but the appraisal business
> itself is so rife with issues, especially in a confused, crashing
> and ambivalent economy that their work has no real value whatsoever.
>
>
> How can you assess value when markets can crash 10, 20 and 30% in
> a single year anyway. I won't even bother looking at one of their
> reports when I buy a distressed property. I just don't care what
> they have to say because it is almost all BS anyway. Based on blither,
> fur and feathers. Utter garbage.
>
> And I will still get my offer price despite them. The price is what
> the seller accepts.
>
>
> If you look past all of the industry huffing and puffing and the
> vested interests on both sides of the issue, you realize that at
> its heart this is really an issue that affects the consumer. Ensuring
> that consumer receives an estimate of what they are about to buy
> that is free from bias should be the goal. The only way to meet that
> goal is to eliminate the ability of parties who stand to profit from
> the transaction to influence the process. As it now stands, the NAHB
> and NAR are attempting to do the opposite.

Jun 30 08:23 PM