April 22, 2009

Loan Officers Forced To Play The Field Rather Than Pick Their Horse

A long awaited "appraisal overhaul" for agency backed mortgages goes into effect May first. Some color from Julian Hebron at RPM Mortgage:

As of May 1, the Federal Housing Finance Agency has mandated that loan officers can’t select or pay appraisers. The Home Value Code of Conduct (HVCC), as it’s called, is intended to remove conflicts of interest some feel are inherent in the loan officer/appraiser relationship.
In the coming months, industry-wide HVCC implementation means appraisals and perhaps escrow periods may take longer. Instead of the current practice of a loan officer ordering directly from appraiser, the basic HVCC model is that a bank has a stable of appraisers, a loan officer submits an appraisal order, and any appraiser in the stable will be randomly assigned to the order. Banks can choose their own appraisers and set standards for things like experience level and turn-times, but FHFA (using Fannie & Freddie) has to approve each bank’s entire appraisal process.
Banks will either have internal appraisal divisions or be contracted with appraisal management companies.

No word on how our local banks’ stables currently stack up.

Fannie And Freddie Forced Aim To Help Fix Appraisal Fraud [SocketSite]

First Published: April 22, 2009 11:15 AM

Comments from "Plugged In" Readers

Good time to be an appraiser...maybe in a few years we'll see college kids coming out wanting to do appraisals for fat ibanker-like paychecks

Posted by: Rincon Hill Billy at April 22, 2009 12:49 PM

I believe this is how commercial banks (the Big 4) are already doing it. This was how it (the appraisal) worked during my home purchase... still closed in 30 days.

Posted by: Poor in PacHeights at April 22, 2009 1:30 PM

NOT a good time to be an appraiser. For the most part, banks will be contracting with appraisal management companies (AMC) who hire the fastest and cheapest who often do not have local market knowledge. Often the AMC is owned by the bank and takes half of the fee. Many experienced appraisers refuse to work for churn and burn AMCs and are considering leaving the business.

Posted by: LocalAppraiser at April 22, 2009 5:30 PM

Too little, too late. I am an appraiser of both residential and commercial properties and have been for quite a while. This used to be a decent profession, but it's been decimated by years of laissez faire free market deregulation. With the most recent mortgage industry and banking model of originate the loan, get paid the fees up front, and sell the risk downstream, the appraisal industry has been a complete casualty of this recent boom/bust cycle. Removing the direct connection between the appraiser and the loan officer who only gets paid if the loan funds is a step in the right direction, but ultimately the only thing that is going to get banks back making sound funding decisions is if they shoulder the risk if these loans go bad. I've heard a pretty good suggestion that banks should be required to keep 50% of each loan on their books to keep them honest - we'll see if the American Banking Association/banking lobby ever lets that see the light of day. Anyway, banks will easily find a way around the HVCC and continue to marginalize the appraisal process as much as possible - an easy way would be to keep only appraisers that are "friendly" to their policy of making as many loans as possible in their "stable" to be picked at random. Again - if the risk is being shipped off - such as being sold to FNMA/FHA - there is no incentive to underwrite quality loans and have quality due diligence in the form of a decent appraisal. In fact, it's just the opposite - the crappier their underwriting standards and appraisals, then they will have more of a competitive advantage over legitimate lenders and make more loan fees/short term profits. And yeah - Rincon Hill Billy - give it a try if you want to be an appraiser - spend a couple thousand of hours for all the classes and the training for this and shell out a couple of thousand bucks on licensing and education costs to make a marginal paycheck with no benefits while working 10 hour days - it's really great!

Posted by: Appraiser at April 22, 2009 5:44 PM

Interesting insights, Appraiser. However, I have to ask, do you really think a system that (as you describe) shifts risk from ostensibly private banks to government (FHA, GSEs), with interest rates set by government in conjunction with their monopoly provider of dollars (the Fed), can really be considered "laissez faire" capitalism? It looks like the exact opposite to me.

Posted by: LMRiM at April 22, 2009 5:53 PM

OK LMRiM, I'll bite. Let's call it modified laissez faire - maximize private short term profits with no regard for losses which will be picked up by the public/taxpayer. The complete lack of any meaningful bank and financial industry oversight in the Bush years, especially in the due diligence process which an appraisal is part of, was basically the belief that the invisible hand of the market would take care of itself in the end. Didn't quite work out that way now did it? If the government is guaranteeing the health of a bank with it's FDIC $250K guarantee or FNMA or FHA backstop, then it has an obligation to make sure that the bank operation is being run soundly so their money is not at risk. Financial deregulation did just the opposite. The financial institutions that were playing with their own money when they were lending in the recent years (namely credit unions) have come out of this in far better shape than the originate and sell model used by banks. And by the way - what does LMRiM stand for - we're all on the edge of our seats.

Posted by: Appraiser at April 22, 2009 6:38 PM

Hey Appraiser,

I'm wondering if you were ever pressured to "up an estimate" -- or how exactly that was communicated to you.

As for Satchel's new moniker, I'm thinking: "Larger Mortgage Recasts in May"

Posted by: Robert at April 22, 2009 6:57 PM

LOL, Appraiser. "Modified" laissez faire the way you are using it is precisely the opposite of laissez faire capitalism. It's a system closer to fascism, in which corporates and the government partner, each for its own purposes.

In the case of the lending fiasco (the latest iteration of which began in the early 1980s and spanned both parties - remember which Treas Secretary and Administration presided over the final breakdwon of Glass Steagall, for instance), the government wanted asset bubbles for taxation and "growth" purposes while the corporates wanted the abillity to inflate profits without bearing the risk of loss.

A marriage made in heaven. The taxpayer is the bagholder, because he was too dumb or distracted to understand what was going on. Even when he did understand, he was too far into the fraud (as a homeowner or debtor) to question the credit inflation, fearing a loss of "wealth".

You're right about the well-run banks that were smart and retained risk (and properly evaluated the risk and didn't make crazy loans). It's a real tragedy (the opposite of laissez faire capitalism, again) that these smart players can't clean up now and are instead are being forced to compete with all the resources of the Fed and the government, which are hellbent on propping up the bad actors and kissing all their boo-boos away.

I hope you contribute more often on appraising questions. I tend to dismiss the appraisal function as being totally captured by the "system", but I'm sure I have a lot to learn about the field and I would benefit from your insights.

Posted by: LMRiM at April 22, 2009 6:57 PM

Robert
The pressure to make a number is so commonplace that it doesn't even faze an appraiser these days. It can be as blunt as an inexperienced loan officer or mortgage broker (same thing these days actually) telling you they need such and such a number, or if you want to be more sly, the bigger banks (e.g. Wells, BofA, etc.) put down the borrower's loan request on the appraisal order. If it's a first loan, it doesn't take a rocket scientist to do the math and see what kind of value they need for an 80% LTV loan. Ultimately, they are trying to offload the originating risk on a bunch of self employed contractors as they can always falll back on the "independent" appraisal.

LMRiM
My turn for an LOL - the term fascism popped into my head but I skipped it - didn't want to sound like a conspiracy nut. I'll chime in on appraisal related stuff when it comes up - but truthfully, I'm planning on getting out of this thankless and low paying profession whenever that is possible.

Posted by: Appraiser at April 22, 2009 7:47 PM

Thanks Appraiser,

It would seem to me that especially now, someone who is good at assessing the "true" value of a property should be in great demand, particularly as banks are dumping properties, and there are many auctions. If you are able to do this, then I hope you can connect with the right people and have your skills be appropriately rewarded.


Posted by: Robert at April 22, 2009 10:26 PM

I can tell you as an appraiser I got pressure to make numbers. We all did. I got my fair share of cold call brokers asking for comp checks and offering to give me an appraisal if I could make the value (can't tell you how much income I turned down as $400 is not worth my license). I can also tell you that I still get this pressure - from the AMCs who blatantly request an extra $5-50K after I've delivered an appraisal with no real reason other than trying to make the deal work for the lender. So the AMC model is going to do nothing to solve the problem and will hurt good appraisers and cost the consumer more money.

Not only that, appraisers are actually pressured to under-appraise these days especially for the really nice properties that would sell at the top of the range. Underwriting requirements are so strict that appraisers are scared to give an accurate valuation as it doesn't fit the pretty picture that the underwriters would like to see which usually means comparing to the lowest common denominator even if the property deserves more.

I agree that the banks need to hold some if not all of their debt. And the brokers should suffer if their borrowers walk away from a loan. There was no real accountability with brokers as once the deal was done, they got their money no matter how fragile the loan.

Posted by: LocalAppraiser at April 22, 2009 10:28 PM

Local appraiser: good insight from the appraiser's pt of view. One anectodal point about the pt of appraisers come from a "stable". There was a client who in connection with their purchase had to refi a current property to use the equity for the purchase. The client went directly to the retail lender. The appraiser came back with an approx $800k value, to low to refi and draw the requisite amount. Fortunately, the lender (mort broker) on the purchase side was smart enough to know of a potential problem and had already started a loan application for the refi....with the wholesale side of the same retail lender. Ordered an appraisal, came back just over $1mil, difference of $200k. Now this lender will not touch the loan because it can't trust itself. Agent also submitted comparables which confirmed the 2nd appraisal. The 1st only used foreclosed/short sale properties as comparables.

this is a BAD sign.

Posted by: localagent at April 23, 2009 7:33 AM

Agreed that it's not an easy profession. My friend also does residential and commercial, and is slowly exiting the residential market entirely. He tells me the subtle pressures to "make" numbers for a measly $400 are unrelenting even now, and the work requires long days. He is actually being threatened with a lawsuit by a buyer who believes he didn't provide an accurate estimate -- and, again, it was for a measly $400 paycheck.

On my own purchase Countrywide drew an appraiser from their "approved stable" and the document is worthless. He disallowed significant (legal) square footage because of some bizarre rule interpretation, and then clearly had to fudge every other number on the document in order to make the total balance out. But, since the total was where the bank wanted it, they completely ignored how the appraiser arrived at the number.

As far as fixing this by forcing banks to retain some of the loan value, how do smaller banks and credit unions that already DO retain loans handle the appraisals? Anyone here with experience as to whether those institutions show more integrity and due diligence?

Posted by: Average Joe at April 23, 2009 9:16 AM

I don't see why we would even need appraisers if we adopted a simple approach: 30% cash down for all purchases, no exceptions. No cash out refis (only refis of existing mortgages). If someone can accumulate that much cash and is willing to risk it in the "first loss" position, I don't see why banks (or buyers) would need any more assurance as to value.

See how easy that would be? The results? Lower priced housing that is sized more appropriately for the income/prospects of the country as a whole, less misallocation of resources, and a more sensible approach to houses as homes to be enjoyed, not as investments designed to "beat" the banksters at their own inflation game.

Oh, and less money for the banksters and less taxes for the local governments, who have for the most part acting as parasites on the real productive economy for too long. What's not to like?

Posted by: LMRiM at April 23, 2009 9:26 AM

No cash out re-fi's if significant new value is added to the property? You're essentially calling for an end to the residential construction loan --by its nature a shorter term loan. I don't like it, and it makes no sense for this market.

Posted by: anonn at April 23, 2009 10:01 AM

Sorry, but your suggestions are ridiculous! There is a financial benefit to those loans, for both bank and borrower, when done in a reasonable fashion. What's wrong with profiting from real estate Lmrim? Alot of the gov and bank distortions you complain about also exist in stock trading. They exist, in one form or another in all business endevours. Just look at the tax codes for starters, which impacts all profitmaking endeavours.

My point is, an intelligent investor/business operator learns to profit within the system. Ok, maybe it's fun to blog/complain about it, but to what end (other than psychological fulfillment?)

As specific to real estate, you answered your own question above WRT future RE appreciation. I.e. Given the gov, bank and psychological 'distortions' that exist in the system, why will RE not continue to appreciate? A sustained deflation of American housing would be a disaster to the entire economy. Not only would homeowners loose out on their most expensive purchase, but banks would make alot less money, state and local gov's would collect alot less property taxes and on and on. And given that 70% of Americans own, and countless small investors own income/commercial property, RE is perhaps the single biggest asset class that is so pervasive and far reaching to the average person.

Now, just because saavy RE investors can magnify and capitalize on this collective benefit, is really just another business opportunity isn't it? Why fight/complain about the rules when you can focus on anticipating changes correctly and positioning yourself to benefit from them? Ain't that the American way? Or the Chinese way? Or Indian way? Or global capitalist (with requisit gov intervention way)?

Posted by: 45yo hipster at April 23, 2009 10:33 AM

when I did my refi with BofA they put the loan request amount on the appraisal. The loan officer told me explicitly this is done so the appraiser knows what number they need to hit. He was a BofA appraiser (at least wore a BofA shirt) and hit the number we needed in a clearly juiced appraisal.

Recently, a friend of mine who's trying to refi with Wells said the Wells loan officer told them to get their application in and appraised before May 1 or forget it. They must be anticipating no more juiced appraisals?

Posted by: anono at April 23, 2009 3:42 PM

Quite a discussion. I am strictly a commercial appraiser who works for clients other than lenders.

Regarding the comment about the appraiser who used only REOs and short sales as comps... I have done several appraisals recently where the ENTIRE local market consisted of NOTHING but REOs and short sales. What's an appraiser to do if that's what the local market consists of? I certainly don't know the composition of the market referred to above, but it does present something of a quandry for an appraiser.

Personally, I haven't actually done a loan appraisal since 2006, and that involved a bankruptcy and subsequent loan default on a small SOMA warehouse. To chip in my 2 cents worth though, the only time I have ever really been leaned on hard for a value, it was a lender who did it.

As a commercial appraiser I have always found it curious that whenever I have bought a property the appraisal has always come in at the contract price.

On another note, contrary to popular belief, except for a small segment of the appraisal industry, for most appraisers the business is a low margin endeavor that requires lots of hours of work. The past few years may have been something of a gravy train for residential appraisers, but lots of new people also entered the business, many of whom are dropping out now. The number of appraiser licensees increased from 18,800 in 2005 to 20,100 at the beginning of 2007. Since then it has dropped to 17,300.

Consider what you get for the $400. To you, it's just required paperwork to get your loan funded. However, the volume of paperwork is pretty substantial, even when software is used to do the heavy lifting. The overhead for an appraisal shop can be horrendous. Many of the costs are not obvious to the general public. For example, as a commercial appraiser, I maintain subscriptions in three MLS services just to cover the Bay Area. Other commercial date services are much more expensive than the MLS, which is pretty much useless for many types of property. Many, if not most, clients require insurance coverage for (1) auto, (2) general liability, and (3) professional liability. Each requires a separate policy. For an example, my total insurance cost is well over $3K per year. It is admittedly a bit higher since I do only commercial. Finally, as a licensed broker too, it has never ceased to amaze me how much more it costs me to maintain my appraisal license with the state, than it does to maintain my broker's license. For a general appraisal license (the top tier) the licensing fee is now $435 every two years, whereas the current cost to renew a broker license is just $165 and it's good for five years. These costs are pretty significant when you consider that the upper limit of potential income is much, much lower for a residential appraiser than it is for a real estate agent or broker.

I've been in the business a long time. The appraisal industry took much of the blame for the S&L mess at the end of the 1980s. It's a convenient scapegoat, with a much smaller lobby than the other players - realtors, mortgage bankers, banks, etc. Whenever the Appraisal Institute or any other appraisal organization proposes more stringent rules, they are usually opposed by these other players, and so usually come to naught.

Just a few thoughts.

Posted by: Johnny Boy at April 24, 2009 10:41 AM

Well, the always predictable NAR is throwing all its weight into a huge lobbying campaign against honest appraisals:

http://www.huffingtonpost.com/2009/06/24/real-estate-associations_n_220418.html

Don't you love those guys?

Posted by: San FronziScheme at June 25, 2009 11:46 PM

More details of the war on US home buyers by the NAR:

http://www.ritholtz.com/blog/2009/06/nar-anti-appraisal-reform-lobbying-effort/

Posted by: San FronziScheme at June 25, 2009 11:50 PM

The NAR shows its true colors. The Huffingtonpost link should make any realtor ashamed to be called a "professional". They were one of the major players in helping to destroy the economy, and they seem to want to continue the destruction further.

Posted by: just angry at June 26, 2009 3:53 AM

>The Huffingtonpost link should make any realtor ashamed to be called a "professional".

No, it should just make any member of the NAR ashamed to be part of that organization. From my understanding the NAR doesn't actually speak for all realtors.

Posted by: Rillion at June 26, 2009 9:04 AM

From my understanding the NAR doesn't actually speak for all realtors.

But Realtors still all pay their dues, right? That's the mother ship, no denying that. What they do affects the opinion of everyone in the profession.

Posted by: San FronziScheme at June 26, 2009 9:17 AM

Didn't realize that every real estate agent had to join, I thought it was just those that wanted to be a REALTOR(R). Funny to see how it looks like they capitilized it all so they could register it.

Posted by: Rillion at June 26, 2009 9:41 AM

$400 sounds like a lot for an hour of work.

Posted by: jd at July 15, 2009 11:25 AM

Anyone here with experience as to whether those institutions show more integrity and due diligence?

They recognize how worthless appraisals/appraisers are with repsect to determining value and have real underwriters on staff, not compensated by deal closing, who understand real estate risk and model it accordingly, with documented income or rent rolls, and decent down payments etc...

It really is not rocket science.

Posted by: Geo at July 15, 2009 1:21 PM

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