Banks slanting appraisals

Naked Capitalism responds...
http://www.nakedcapitalism.com/2009/06/low-appraisals-blamed-for-keeping.html

When home values come in below the sales price, that’s not the appraiser’s fault, it’s a reflection of the market, the Appraisal Institute, a Chicago-based professional group that represents more than 25,000 appraisers, said in a statement yesterday.

Riversider, yes, you are so on top of the issues. I've experienced them first-hand, before they made the news. In my quest-for re-fi debacle, the appraiser miraculously reduced the square footage of our apartment. The offering plan from 25 years ago shows the gross and net square footage, and all the apartments in this building have been marketed with the net square footage over the years. The appraiser decided to "measure" with her laser, and reported our apartment approximately 7% smaller than the net square footage in the offering plan. I wouldn't have any problem with that, assuming she also personally measured every other apartment in the market that she's comparing to mine. Then, she used comparables from a different neighborhood, as far as a half mile away, and didn't use any of the sold or listed properties on my block. Yes, that's a great appraisal and a "reflection of the market."

To add insult to injury, I now have four copies of the same crappy appraisal sitting on my counter; every time I mentioned the problems with the appraisal to the banker, he apparently clicked on the button to generate another copy to be mailed to me! I'm just waiting now for the shredder to arrive. ;-)

The offering plan from 25 years ago shows the gross and net square footage, and all the apartments in this building have been marketed with the net square footage over the years.

Every builder calculates net square footage differently. Some more aggressively than others.

isnt it amazing. We look the other way, subsidize housing, make exotic loans to allow anyone to afford more and get what they want, appraisals come in to make the deal work so everybody earns their fees, so many players involved, and then it destroys all of us.

Now, they blame appraisals for realistically portraying the state of the market. Absolutely amazing.

The realtors have nothing to gain from good underwriting.

First, I need to point out that I am not one of the people with an exotic loan, or who lied in an application, or who takes big financial risks, or who is over-leveraged. I'm one of your fairly boring, financially conservative, responsible citizens. And people like me are being shut out of the mortgage market.

So, what will happen? Banks are trying to reduce the leverage on their balance sheets, so they implement stronger rules. However, the stronger rules will make people like me just pay off their existing loans faster, so, in fact, the banks do reduce the leverage on their balance sheets. And what loans do they have left in their portfolios? The crappy, high-risk loans that are most likely to go into foreclosure. This doesn't sound like a winning strategy for the banks either.

Now, back to the appraiser issue:
I don't agree that appraisers are realistically portraying the state of the market. In my sample of one (and somehow I don't think my situation is unique), the appraiser clearly underestimated the value by reducing the square footage and using comps from a different neighborhood. (By the way, even with the underestimation, on that point, we qualified for a re-fi because we have enough equity in our property. We got shot down on the commercial space rule in our mixed-use building.)

Sure, everyone measures square footage differently. I'm fine if someone wants to use the net square footage to be a little more conservative. But if the appraiser uses the "comparables" method to determine the value of the home, then she needs to adjust the square footage of all the comparable properties too, which the current appraiser did not do. (She used the square footage reported in city records or marketing materials for comparables, but not for our property.) Thus, she underestimated the value of our property vis-à-vis others. My guess is that if on two points where I have access to information, I see that she underestimated, she probably did that in other, less transparent, areas of the appraisal as well.

So she had at least two basic flaws in her analysis. I am not sure that systematically underestimating values is any better than overestimating values, especially when it's not so difficult to come up with a realistic value.

Thanks everyone, for an interesting discussion.

WASHINGTON, June 23 /PRNewswire/ -- The following statement may be attributed to the Appraisal Institute's Bill Garber, Director, Government and External Relations. It is in response to today's comment by Lawrence Yun, National Association of Realtors chief economist, that the increase in existing home sales in May 'is less than expected because poor appraisals are stalling transactions. Some contracts are falling through from faulty valuations that keep buyers from getting a loan.'

"We take offense with the notion that an appraisal is only good if it happens to come in at the sales price. 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.

"It should be pointed out that neither the buyer, the seller, the Realtor nor the builder is the client of an appraiser in a typical real estate transaction. In transactions where buyers are seeking loans, our clients are the lenders. Appraisers provide lenders with objective information and value opinions that help protect them from making questionable loans and investments and help them minimize risk. However, that should not suggest a bias toward lower valuation. Appraisers reflect the market, and sometimes, the markets don't act like we want them to or hope they will. Nonetheless, competent and professional appraisers understand this and develop credible estimates of value that ultimately help ensure that lenders loan the proper amount, buyers don't pay too much and sellers get a fair price.

"In these complex markets, it is particularly important that lenders use only the highest caliber of appraisers. Members of the Appraisal Institute holding the MAI, SPRA or SRA designation have met extensive experience and education requirements and must comply with a strict Code of Professional Ethics and Standards of Professional Appraisal Practice."

The Appraisal Institute is a global membership association of professional real estate appraisers, with over 25,000 members and 91 chapters throughout the world. Organized in 1932, its mission is to support and advance its members as the choice for real estate solutions and uphold professional credentials, standards of professional practice and ethics consistent with the public good. The Appraisal Institute advocates equal opportunity and nondiscrimination in the appraisal profession and conducts its activities in accordance with applicable federal, state and local laws. Members of the Appraisal Institute benefit from an array of professional education and advocacy programs, and may hold the prestigious MAI, SPRA and SRA designations.

http://www.appraisalinstitute.org/membership/downloads/cpe/2003_C_of_P_E.pdf

considering that appraisers inflated vlause during the boom and some flat out committed fraud, I don't believe that low appraisals are always a reflection of the market. My guess is that they are doing low appraislas to cover their ass.

not sure if it's true, but I've even heard of stories of appraisers valuing properties based on their Zillow Zestimate!

My guess is that they are doing low appraislas to cover their ass.

If you wont' be keeping the loan, you have a big incentive to steer appraisals to those who are most lenient. It makes the LTV look conservative as well. It is not fair to charge the appraisers with intentionally low balling the opinion. It sounds like you are shooting from the hip.

http://www.legalnewsline.com/news/203559-cuomo-appraisal-legislation-needed
Cuomo filed suit last week against eAppraiseIT, one of the nation's largest real estate appraisal management companies. He claims the company, a subsidiary of First American Corp., joined in a scheme with Washington Mutual to use a list of preferred "Proven Appraisers" who intentionally inflated appraisals.

Kanjorski's bill will prohibit the coercion or intimidation of appraisers, create strong penalties against violators ($10,000 per day for a first violation and up to $20,000 for following violations) and provide borrowers the right to obtain a free copy of the appraisal of their property fi they are taking a high-cost mortgage.

"(A)s an industry-wide problem, the foreclosure crisis demands an industry-wide solution," Cuomo said. "That's why this new legislation is such an important first step toward ending the abuses in the housing market nationwide."

What we had before was criminal..
http://seattletimes.nwsource.com/html/businesstechnology/2003987769_webwamu01.html

New York Attorney General Andrew Cuomo said Thursday a major real estate appraisal company colluded with the nation's largest savings and loan companies to inflate the values of homes nationwide, contributing to the subprime mortgage crisis

He also released e-mails that he said show executives were aware they were violating federal regulations. The lawsuit filed in state Supreme Court in Manhattan seeks to stop the practice, recover profits and assess penalties.

I hate to burst anyone's bubble, but a large percentage of appraisals have been total bullshit fir a very long time. I know from first hand experience that I can make an appraisal come out to pretty much nay number I want to +/- 30% most of the time. One "proof" that appraisals have been bullshit for a long time: appraisers are given the sales price - there was a time (a long time ago) where they were specifically kept away from this info in order to get a unbiased opinion. But this is also why all the cash-out refi's got so out of control: the "control" of a purchase price wasn't there to reign in grossly inflated valuations. So, it's funny that the concept of appraisals is to protect the bank and borrower from a purchase transaction which has no equity, it got flipped on it's head and the purchase price was the only thing reigning in too high appraisals where there was no purchase to 'top out' the number.

oncept of appraisals is to protect the bank and borrower from...

Disagree. they are only meant to protect the lender. Excluding conduct dictated by law or code of ethics (appraisal institute) appraiser is hired by the lender and for the lender. Of course this is an art not a science(I.E. this is an opinion!)

>>isnt it amazing. We look the other way, subsidize housing, make exotic loans to allow anyone to afford more and get what they want, appraisals come in to make the deal work so everybody earns their fees, so many players involved, and then it destroys all of us.
Now, they blame appraisals for realistically portraying the state of the market. Absolutely amazing.<<

Urbandigs, you are truly a complete idiot or a clueless broker. Anyone who truly knows anything about real estate knows appraisals are a bunch of crap. You can take the same property and get 10 different appraisals and you'll see 10 different valuations, some with huge variances. Appraisals are the biggest fraud in the industry. And tell me,if a property gets 5-7 offers at around the same price but yet an appraisal comes in low, how the heck does that make sense?? Isn't the market value of a property defined as the value a reasonable and informed consumer will pay for it? How is 5-7 people's willingness to pay for a property not its market value? Yet some appraiser who uses comparables from other homes he's never seen, is deemed more competent to determine this?

And by using past sales as comparables, you are always looking backwards at past values and not at the present time. With that logic, prices would never rise in theory.

First off this looks and smells like a lobbying effort by The Realtors; And part of that is getting the public on their side. Yes your broker lobbies just like the Tobacco guys..
http://chartingtheeconomy.com/?p=839
http://www.realtor.org/realtororg.nsf/pages/AboutUsLobbying?OpenDocument

Truth is NAR has been against appraisal reform

Daily Real Estate News | April 30, 2009 | Share
NAR Seeks Moratorium on Appraisal Rules
The National Association REALTORS® and the National Association of Mortgage Brokers are pushing hard to delay implementation of the new Fannie Mae and Freddie Mac rules governing real estate appraisals.

The new rules are supposed to take effect May 1, but the REALTORS®, in a letter to the Federal Housing Finance Agency, argued that there hasn’t been enough time to properly implement the changes and the result would be higher costs for borrowers. They seek a one-year moratorium.

The goal of the change is to eliminate alleged collusion between mortgage lenders and appraisers to pump up home values. Among other things, the rule change prevents mortgage brokers from ordering appraisals directly, requiring them to go through lenders. Mortgage brokers say this will make it hard for them to compete with lenders.

Borrowers shopping for the best rate could be asked to pay for multiple appraisals, says Michael Carrier, an associate with the Mortgage Bankers Association.

Read the NAR's letters to Fannie Mae and Freddie Mac on the issue.

Source: The Wall Street Journal, Jessica Holzer (04/29/2009)

The National Association of Realtors spells out the plan..

O: State Association Executive Officers
State Association Presidents
FROM: NAR Government Affairs
DATE: 19 June 2009
RE: Fly-In Head’s Up

Please note this notice is going to all state executive officers and state presidents. We will be sending Fly-In details on Monday June 22, 2009 to the states who have Members of Congress and/or United States Senators on the House Financial Services Committee or Senate Banking Committee. (list of states at end of memo)

There is growing concern in the real estate industry over the implementation of the Home Valuation Code of Conduct (HVCC) and its effect on the use of appraisal management companies (AMCs) by lenders.

NAR is taking the following actions: (Target dates in bold)

1. NAR is scheduling meetings with the Director of Federal Housing Finance Agency, Jim Lockhart to raise concerns about implementation of the HVCC and problems with AMCs and ask for an immediate 18 month moratorium. Director Lockhart is the conservator over Fannie and Freddie who entered the consent order with the NY Attorney General. ( June 22, 23, 24, or 25th)

2. Government Affairs will conduct a fly in the week of June 22. Two members from each Association (State AE/State President or FPC as appropriate) to meet with members/staff of the House and Senate Banking/Financial Services Committee. The ask will be to cosponsor the bill (item 3) and to support an 18 month moratorium.

3. Our legislative team will work on getting a bill introduced in Congress asking for a 18 month moratorium. (week of June 22)

4. We will ask the Chair and Ranking Members of the House and Senate Banking [ Reps Frank and Bachus/ Senators Dodd and Shelby] Committees to write Director Lockhart asking him to grant a 18 month moratorium (week of June 22)

5. We will try and get an 18 month moratorium attached to an immediate pending appropriation bill or other similar fast track bill. (June)

6. Staff will talk to the American Bankers Association who heretofore is fine with the AMC system to see if we can negotiate support.(June 19)

NAR will engage a coalition of Appraisal Institute, MBA, Home Builders and other appropriate trade groups.

7. NAR Research is conducting a survey so we have concrete data information to bring to the regulators and the NY Attorney General’s office . The survey will also be run through the State Association. EHS will be released next week and the appraisal issue will be mentioned front and center in NAR’s release. Survey release June 22

8. NAR is scheduling a meeting with NYS Attorney General Andrew Cuomo and representatives of NYSAR. (June 29. 30)

9. NAR will conduct a Call For Action if we do not get a moratorium in the next week to 10 days

NAR is aware of multiple petitions calling for an end to the HVCC. NAR is taking a more tempered and thoughtful approach of asking for a moratorium during this trouble housing economy.

Oh here's a good one

Let's use broker price opinions instead of appraisals?

http://www.ncua.gov/Resources/RegulationsOpinionsLaws/proposed_regs/1-16-09-CharlesMcMillian.pdf

NAR arguing for subprime loans...
http://www.house.gov/apps/list/hearing/financialsvcs_dem/charles_mcmillan_(nar)_mcmillan_testimony.pdf

3. Flexibility for Life Circumstances. NAR believes that a standard for determining a borrower’s ability to repay must be flexible to accommodate borrowers with unique circumstances, such as:
 Borrowers who have demonstrated the ability to make monthly payments, over a long term, that are higher than underwriting standards would otherwise allow. Lenders should consider, for example, the borrower’s history of making rent and student loan payments.
 Borrowers with high assets but low income who, for cash management or other financial planning reasons, elect a mortgage with a monthly payment that their current income is not sufficient to cover.
 Borrowers who anticipate a jump in income or assets due to life events such as graduation, completion of professional training, completion of payment obligations for student or car loans, another member of the household entering the work force when young children start school, or an inheritance.

NAR attempting to tar all appraisers with the subprime brush...

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Subprime Lender Becomes AMC

Here is a fascinating article from Business Week, revealing how a former Subprime Lender went bust and then transformed itself into an AMC:

Take NovaStar Financial (NFI) in Kansas City, Mo. A large subprime lender during the housing boom, NovaStar was disciplined by three states—Massachusetts, Nevada, and Washington—for such infractions as employing unlicensed brokers and charging unlawful fees. Without admitting wrongdoing, the company paid $5.1 million in 2007 to settle similar allegations in a class action brought on behalf of borrowers. After its mortgage business collapsed, NovaStar morphed into an AMC last year by acquiring another company and renaming it StreetLinks National Appraisal Services.

Steve Haslam, NovaStar's former chief of retail lending, is now CEO of StreetLinks. He defends NovaStar's past lending as legitimate, noting that the company avoided bankruptcy proceedings, unlike many of its rivals. "We have gone through the fire and come out better for it," he says. His 100-employee AMC will contract with independent appraisers, Haslam says, paying them generous fees, and will issue a "Certificate of Noninfluence" with every appraisal. "This assures Wall Street and lenders that this appraisal was conducted in an independent fashion," Haslam says.

Fair pay and no pressure; seems almost too good to be true?

Floyd Norris weighs in in the fault argument of the NAR

http://norris.blogs.nytimes.com/2009/06/23/realtors-blame-the-appraisers/

Given that a significant part of the housing problem was caused by appraisers who signed off on exaggerated home values, it takes a lot of nerve for the realtors to demand that appraisers now ignore market prices in order to let them sell houses. “Distressed and discounted” sales are real, even if they are inconvenient.

And Floyd may have identified part of the agenda, which is excluding foreclosures from affecting the valuations used in appraisals..

http://www.opensecrets.org/lobby/clientlbs.php?lname=National+Assn+of+Realtors&year=2009

http://www.opensecrets.org/orgs/toprecips.php?id=D000000062

considering that appraisers inflated vlause during the boom and some flat out committed fraud, I don't believe that low appraisals are always a reflection of the market. My guess is that they are doing low appraislas to cover their ass.

-UM no. They are including foreclosure data which is ticking off the brokers. In addition to limiting buyer financing it probably scares off some buyers who now question their bid. The brokers are losing out on commissioned sales..

Riversider: Yes, the NRA has their own self-serving agendas and can be blamed as much as any party for the recent downturn.

But let us not cloud our assessment on the issue at hand here. Appraisals are not objective, they are subjective. And what they are doing now is hurting the market. What I said above "If a property gets 5-7 offers at around the same price but yet an appraisal comes in low, how the heck does that make sense?? Isn't the market value of a property defined as the value a reasonable and informed consumer will pay for it? How is 5-7 people's willingness to pay for a property not its market value? Yet some appraiser who uses comparables from other homes he's never seen, is deemed more competent to determine this?

And by using past sales as comparables, you are always looking backwards at past values and not at the present time. With that logic, prices would never rise in theory."

And multiple offers are happening all over the country especially in hard hit areas. Banks are trying to unload all these foreclosured properties on their books by pricing them at below market value prices. Obviously, this is going to attract a significant number of bids, often times above the listing price. But they being hamstrung by the appraisal companies who are covering their butts with lower valuations.

Appraisals have always been and continue to be a joke.

"Riversider: Yes, the NRA has their own self-serving agendas and can be blamed as much as any party for the recent downturn."

Come on. You can balme the National Rifle Association on a lot of things, but the reale state market downtunrn? Aren't you stretnching it a bit? (Just joking, I know you meant NAR).

But let us not cloud our assessment on the issue at hand here. Appraisals are not objective, they are subjective. And what they are doing now is hurting the market. What I said above "If a property gets 5-7 offers at around the same price but yet an appraisal comes in low, how the heck does that make sens

An appraisal is an opinion of value or the act or process of estimating value. This opinion or estimate is derived by using three common approaches, all derived from the market.

1. The cost approach to determining value is to estimate what it would cost to replace or reproduce the improvements as of the date of the appraisal, less the physical deterioration, the functional obsolescence and the economic obsolescence. The remainder is added to the land value.
2. The comparison approach to determining value makes use of other benchmark properties of similar size quality and location that have been recently sold. A comparison is made to the subject property.
3. The income approach to determining value is of primary importance in ascertaining the value of income producing properties and has little weight in residential properties. This approach provides an objective estimate of what a prudent investor would pay based upon the net income the property produces.

I assume #2 is at issue here. It does not sound like the appraiser goes out an calls the other six offers you did not accept to base his/her findings. Appraisals use historic data. It sounds like what's being argued here is that there is a systemic bias on the methodology of appraisers, or perhaps the parties of a real estate transaction are embarrased to admit they are doing an above market transaction. Lastly everyone thinks there house or apartment is tons better than the one down the street.

Quoting from Floyd Norris...
Existing home sales for May, announced this morning, were weaker than optimists had expected. Lawrence Yun, the chief economist of the National Association of Realtors, promptly identified the culprit:

Quoting from Naked Capitalism...
Yves here. Look at the second sentence. "Low appraisals join a list of suspected obstacles standing in the way of a rebound." That suggests that the rebound would be happening NOW were it not for all these pesky problems. But if you look at the rather daunting list of fundamental problems (note that rising rates were not reflected in the transactions included in housing report issued yesterday), the more accurate phrasing would be something like "lower appraised values reflect factors that suggest a housing recovery is some way off, including...." The "low appraisals" as opposed to "low appraised values" is also a masterful bit of Orwellianism, since it again says the appraisers are coming up with results that are "low", meaning systematically biased, while "low appraised values" would be more descriptive.

“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.” (emphasis added)

And how does Mr. Yun know the appraisals are faulty?

Since borrowers are provided with appraisal reports, it should be fairly easy for the industry to do a study and dispute the appraisal methods.(http://www.freddiemac.com/singlefamily/pdf/hvcc_746.pdf)
•
Requires lenders to ensure that borrowers are provided a copy of the appraisal report no less than three business days prior to closing, unless the borrower waives the requirement. The lender may require the borrower to reimburse it for the cost of the appraisal, but the lender must provide a copy of the appraisal report to the borrower at no additional cost.

But I guess that's too difficult, better to do a media blitz and compare appraisers to subprime lenders with an agenda. Now which group is the one with the lobby?

Urbandigs, you are truly a complete idiot or a clueless broker. Anyone who truly knows anything about real estate knows appraisals are a bunch of crap. You can take the same property and get 10 different appraisals and you'll see 10 different valuations, some with huge variances. Appraisals are the biggest fraud in the industry. And tell me,if a property gets 5-7 offers at around the same price but yet an appraisal comes in low, how the heck does that make sense?? Isn't the market value of a property defined as the value a reasonable and informed consumer will pay for it? How is 5-7 people's willingness to pay for a property not its market value? Yet some appraiser who uses comparables from other homes he's never seen, is deemed more competent to determine this?

Anon10...you're a real piece of work.

Sounds odd that a buyer who happened to be the highest bid gets ticked off that the bank doesn't believe that's a useful benchmark in case they need to sell the property in the event of default. Sounds even more odd to blame appraisers for using valuations resulting from foreclosure sales calling them below market.

http://online.wsj.com/article/BT-CO-20090612-712456.html

For months, builders have complained that foreclosures and short-sales - where the borrower unloads the house for less than what is owed - pose stiff competition because they can sell for steep discounts. The sector even finds itself competing with nearly-new product it built, which is pushing several builders, including KB Home (KBH), to alter product.

But, once a property sold, it may be used by appraisers to determine value. Most lenders now require that appraisals be based on sales closed within three months - instead of six-to-nine months, said Bill Garber, director of government and external relations with the Appraisal Institute. With distressed deal counts spiking, the comparative sales pool could more likely include a foreclosure, especially in boom-to-bust markets including Las Vegas, Phoenix and California's Inland Empire.

Garber countered that appraisers, who are certified, "don't make the market, they simply point out what is transpiring."

The Appraisal Institute's Garber said the appraiser simply asks what the property would sell for tomorrow in its current condition. When possible, sales within an existing neighborhood are used first. Adjustments downward are made for sales concessions such as free vacations or cash for upgrades. There are items, such as pools, that may not be worth as much as they cost to put in.

but Riversider. We all know that there are not enough forelcosure sales in Manhattan to affect appraisals.

Seems even more odd that properties are sitting on the market for long periods of time , Case Schiller points to declining market prices and we know rents which can affect appraisals are declining, but yet appraisers are a joke??

How is 5-7 people's willingness to pay for a property not its market value?

Simple. Appraisers don't consider this, They look at recorded transactions. And again this is an art not a science.

I don't see why rents should affect appraisals. Shouldn't appraisers just be concentrating on comps?

1. The cost approach to determining value is to estimate what it would cost to replace or reproduce the improvements as of the date of the appraisal, less the physical deterioration, the functional obsolescence and the economic obsolescence. The remainder is added to the land value.
2. The comparison approach to determining value makes use of other benchmark properties of similar size quality and location that have been recently sold. A comparison is made to the subject property.
3. The income approach to determining value is of primary importance in ascertaining the value of income producing properties and has little weight in residential properties. This approach provides an objective estimate of what a prudent investor would pay based upon the net income the property produces.

fess up Riversider. Who are you? Your an appraiser, right?

and if your going to copy and paste from mortgage101, then post a link.

The Appraisal Institute's Garber said the appraiser simply asks what the property would sell for tomorrow in its current condition

This could also point to a disconnect. Buyers & Sellers expecting a transaction that took months to be reflected in an appraisal meant to communicate the price a property would clear for the next day.. And again the appraisal is an opinion, based on comps. Why are no studies challenging that, and why didn't anyone challenge the fake appraisals during the housing boom.

Side note, when I purchased my apt preconstruction, appraisal came in lower than adjustments to offering plan. No apartments had closed yet except mine. I understood that a dozen units went for different prices. Does the highest last price reflect the market? I'm not so sure...

Up to 1998, the Federal Reserve Bank would accept proposals that had the lowest discount rates (higher prices) over all those received. The proposals accepted had a rank of yields from the lowest to the highest. The highest yield (the lowest price) accepted for the new treasury securities issued in a treasury auction is known as the stop-out yield

So using the old treasury auction method, what's the price? the highest, lowest median?
Clearly all the bonds would not have cleared at the highest price.

I wonder why the NAR doesn't present a study challenging the methodology of appraisals instead of jawboning the process. No wait! I don't wonder....

Riversider, you really know your stuff:)