|
 |
Spotlight on the Appraisal Institute
Volume 5 | March 2008
The Communications and Marketing team is pleased to bring you Spotlight on the Appraisal Institute. Spotlight is intended to keep you up-to-date on the Appraisal Institute's presence in the news and key events taking place within the appraisal profession.
Your feedback and suggestions are always welcome. Send your comments to spotlight@appraisalinstitute.org.
HEADLINES IN THIS ISSUE:
Cuomo Near Deal On Home Appraisals
Cool Reception to Fannie Idea on Appraisals
Call for Action: Foreclosure Fiasco
Code Designed to Guarantee Realistic Real Estate Appraisals
New Standards for Home Hppraisers
In Praise of Firewalls: New Appraisal Rules Bring Homes In Step with Existing Commercial Safeguards
UCLA Holds Line on Forecast No Recession
The Price of Value
You Don't Have to Break Bank to Boost Home's Value
HEADLINE: Cuomo Near Deal On Home Appraisals
BYLINE: Carrie Johnson
SOURCE: Washington Post – Online
DATE: February 26, 2008
COPYRIGHT: Copyright 2008 The Washington Post Company
TEASER: Terry Dunkin, MAI, SRA, immediate past president of the Appraisal Institute, comments on the recent agreement between the New York Attorney General’s Office, the Office of Federal Housing Enterprise Oversight, and Fannie Mae and Freddie Mac, which contains provisions that are intended to increase appraiser independence.
BODY: New York Attorney General Andrew M. Cuomo is in advanced negotiations with housing finance giants Fannie Mae and Freddie Mac over a deal designed to stamp out conflicts of interest that have produced inflated mortgage appraisals, according to officials involved in the talks.
At its core, the deal would bar lending companies that sell loans to Fannie and Freddie from using preferred or internal appraisers who may be subject to pressure to overvalue properties. The deal would establish a “home valuation protection code” to set standards on compensation and independence issues, and it would create an institute with a separate board of directors to monitor complaints from consumers and appraisers, according to documents described to The Washington Post by a source not authorized to speak publicly about the issues.
If the agreement takes hold, Fannie and Freddie would no longer purchase mortgages from lenders who fail to abide by the standards, a powerful economic force that could influence the entire housing landscape.
A representative for Cuomo said yesterday that no agreement had been reached, raising the possibility that both sides could end up in court. Cuomo has clashed with federal authorities in recent months over the scope of his authority to investigate and prosecute malfeasance in the housing sector.
“At the end of the process, we will either have agreements or we will take other appropriate action,” spokesman Jeffrey Lerner said. “This office prefers to pursue cooperative resolutions before litigating, and that is what we are doing here.”
Cuomo has been investigating the causes of overvalued home appraisals for nearly a year, after issuing subpoenas to the Washington area home finance companies in an effort to discern how widespread the problem had become. An agreement with Fannie and Freddie could be viewed within the industry and among regulators as a gold standard that would drive other lenders to follow suit and clean up abuses in the sector.
The talks came to a head Monday, when officials from the companies met on the 25th floor of Cuomo's office in Manhattan. The companies' regulator raised concerns yesterday afternoon about whether other federal banking overseers had been consulted about how the process would work, giving the parties pause and producing a delay, according to people briefed on the talks who have not been authorized to speak publicly.
Cuomo, agreed to give the companies a short amount of time to consider their options before deciding whether to proceed with cases against Fannie, Freddie and at least one other mortgage lender that a source identified as Countrywide Financial. A spokeswoman for the Calabasas, Calif., company did not return calls yesterday.
Last year Cuomo sued eAppraiseIT, a unit of real estate conglomerate First American, which is fighting charges that it affixed overvalued price tags on properties under pressure from one of its largest clients, Washington Mutual. WaMu said it has conducted an investigation and found “no systematic effort to inflate appraisals.”
At a news conference last year involving that case, Cuomo called appraisals the “foundation of the entire housing system.” Inflating appraisal values can pollute the entire process, making it more difficult for buyers to resell their properties and causing investors to lose money when the mortgage loans based on shoddy appraisals prove riskier than anticipated.
“It's very important to stress that accurate appraisals are crucial to Freddie Mac's effective credit risk management as well as to the long-term health and success of home buyers,” said David Palombi, a spokesman for McLean-based Freddie Mac. “We continue to cooperate fully with the attorney general, and it's been a productive discussion.”
Amy Bonitatibus, a spokeswoman for District-based Fannie Mae, declined to comment on the negotiations or the presence of chief executive Daniel H. Mudd, who traveled to New York yesterday for the four-hour meeting.
Stefanie Mullin, a spokeswoman for OFHEO, said the agency is involved in the discussions and is working to “reach a constructive approach.”
The proposed agreement, which could take hold as early as September, is “an attempt to restore stability to one piece of the market that isn't working,” said Howard Glaser, a District-based housing consultant who has represented Fannie and Freddie and who worked alongside Cuomo at HUD.
“Anything that encourages an independent appraisal process I think is a good thing for the public,” said Terry Dunkin of the Appraisal Institute, the largest professional organization for home appraisers. “Continued diligence on this is the order of the day.”
Faulty appraisals have been the focus of legislative and administrative interest in recent months. The House of Representatives approved a subprime mortgage lending bill that includes proposals to prohibit coercion of appraisers. The entire Senate has not acted.
The Federal Reserve Board, meanwhile, proposed new rules in December to protect consumers against inflated appraisals and improve mortgage lending practices.
back to top
HEADLINE:Cool Reception to Fannie Idea on Appraisals
BYLINE: Kate Berry and Marc Hochstein
SOURCE: American Banker
DATE: February 27, 2008
COPYRIGHT: Copyright 2008 American Banker and SourceMedia, Inc
TEASER: Bill Garber, director of government and external relations for the Appraisal Institute, discusses Fannie Mae’s agreement with the New York Attorney General’s Office and raises concerns regarding the possibility of additional appraiser regulation.
BODY: Fannie Mae's new appraisal policies, part of a deal being hammered out with the New York Attorney General's Office, could face resistance from lenders, many of whom consider the use of in-house appraisers and appraisal management units a way of ensuring, not undermining, the quality of valuations.
Industry observers also raised questions about how the government-sponsored enterprise's ban on letting brokers choose appraisers would work in practice. Even advocates for appraisers, which have long complained about pressure from lenders and brokers to inflate valuations, expressed reservations about Fannie's plan to create a clearing house of appraisal information.
Fannie has been telling lenders that on Sept. 1 it plans to stop letting those that "have any wholly owned subsidiary or other subordinate entity that performs appraisals" do business with the GSE. Observers have interpreted that to mean lenders like Countrywide Financial Corp., whose LandSafe Inc. provides appraisals, would no longer be able to sell loans to Fannie unless they outsourced the appraisal work.
Jeff Schurman, the executive director of the Title/Appraisal Vendor Management Association, said the change is likely to encounter "a firestorm of opposition."
Though his trade group, whose members include lender subsidiaries, favors an "arm's length relationship" with appraisers, many captive appraisal management companies outsource the task of performing appraisals instead of doing it themselves, he said.
"What Fannie is saying in this context is you can't use independent appraisers that are engaged by a captive or affiliate, but you can use that same independent appraiser if they are engaged by some other appraisal management company," he said.
Neither Fannie nor Countrywide would discuss the new policies for this story.
Jeff Naimon, a partner at Buckley Kolar LLP, a law firm that represents mortgage lenders, said that setting up a vendor management subsidiary that handles appraisals can be part of "a process that shields actual appraisers from pressure."
In terms of "appraisal quality," the benefits of forbidding the use of such subsidiaries "are not obvious, as economists would say," Mr. Naimon said.
Also on Sept. 1, Fannie plans to stop buying loans in which a broker ordered the appraisal. Mr. Naimon said that change, though understandable, raises questions about how brokers can "play their role" of trying to negotiate the best rate and terms for the consumer.
"Without an appraisal, how can the broker shop the loan?" he asked. "How do they figure out what loan product" to request from a lender "without knowing the loan-to-value?"
Terry Couto, a former chief financial officer at several mortgage companies, including GE Capital Mortgage Services Inc., said most major lenders have formed "an appraisal unit to do part of their work," though the industry could move fully to using independent appraisers fairly easily.
"A lot of the appraisal work is already going outside," said Mr. Couto, now a partner with Newbold Advisors LLC, a Bethesda, Md., consulting company. "They would just have to shift it all outside."
Details of the agreement between Fannie and the Attorney General's Office have not been finalized and could change.
The talks stemmed from an investigation New York Attorney General Andrew Cuomo began in November into appraisal practices at First American Corp. of Santa Ana., Calif., and its eAppraiseIT LLC, which he accused of inflating the value of home loans under pressure from Washington Mutual Inc. All three companies have denied the accusations.
As part of the investigation, Mr. Cuomo subpoenaed Fannie and Freddie Mac and asked them to supply details about Wamu's loans and their due diligence practices related to appraisals.
Not surprisingly, third-party vendor management companies that stand to benefit from any mandated outsourcing said they welcomed the new policies.
Peter Sadowski, an executive vice president and general counsel at Fidelity National Financial Inc. of Jacksonville, Fla., said separating the appraisal function would promote transparency.
"Standards that are reasonable and can be enforced are always a good thing," he said.
Bob Murphy, the chairman and chief executive of ValuAmerica Inc., a Pittsburgh vendor management company, said Fannie is trying to implement changes that the industry tried unsuccessfully to adopt 20 years ago, before the savings and loan crisis.
"The separation between appraisers and lenders has not occurred," he said. "The industry found itself in a situation where brokers and loan originators influenced appraisers to get higher property values."
Most vendor management companies do not conduct appraisals themselves, but there may still be an inherent conflict, Mr. Murphy said. "The nuance is that if you're a wholly owned vendor management company, then you owe allegiance to your owners."
Bill Garber, the director of government affairs at the Appraisal Institute, a trade group of appraisers, raised concerns about Fannie's expanded role in creating a clearing house of appraiser information.
"This would appear to place Fannie Mae in an appraiser regulatory role, and appraisers are already regulated," he said. "The clearing house concept seems to add a layer of bureaucracy and could subvert the current structure."
Mr. Garber said the Fannie deal would not solve the issue of "appraisal coercion," which he blamed largely on mortgage brokers for pressuring appraisers to inflate property values.
But he also chastised lenders and vendor managers for not hiring qualified appraisers and choosing "those that hit the numbers to get a deal done" instead. "Whenever you can insert protection for appraisal independence, we think that's a good thing," Mr. Garber said, and he would like to see more details of the proposed changes.
Mr. Schurman said even though brokers have received plenty of criticism for pressuring appraisers, there still is no clear definition of what constitutes illegal pressure. His trade group defines inappropriate client pressure as "bribery, coercion, and extortion."
back to top
HEADLINE: Call for Action: Foreclosure Fiasco
BYLINE: Reported by Jenn Strathman
SOURCE: NBC Action News (KSHB-TV Kansas City, MO)
DATE: February 27, 2008
COPYRIGHT: Copyright 2008 The E.W. Scripps Co.
TEASER: Donald Gossman, SRA, past president of the Kansas City Chapter, discusses how mortgage fraud is perpetrated.
BODY: The foreclosure crisis is hitting one small town very hard, but the sheer number of foreclosures is raising questions over how so many homes could go belly up in such a short period of time.
For four months, NBC Action News has been pouring through a trail of papers that reveals insight into the foreclosure fiasco.
Homeownership is the American dream, but the dream did not last long for two families.
"I thought it would be a great place to raise my kids," Ruth Odum-Jackson said.
Brent Lewis commented, "We were led to believe we were going to own the house… We don't know when that knock is going to come on the door to tell us to move out."
In May 2006, Lewis moved his family to Willow Park, a neighborhood tucked away in Greenwood, Mo.
"It was a rent to own," he said.
Lewis says it came with the offer to buy it after a year, and adds he paid his rent and even made improvements to the home.
"We tried to put in new flooring," he said. "We're in the middle of that when we got the foreclosure letter... It was a disappointment, but it was happening to everybody else, so you kind of had to expect it."
NBC Action News talked with many renters who all thought they were walking the path to homeownership, only to have the home they rented foreclosed.
So we wanted to know who was behind this. We reviewed appraisals, mortgages and foreclosures for two neighboring subdivisions dating back to 2000. That trail led us to 73 foreclosures in just the last two years.
It isn't what Odum-Jackson expected when she moved her family in April 2007. She thought she was close to fulfilling her dream.
"It's so unfair for people to come out here not knowing they are going to get ripped off," Odum-Jackson said. "At the end of 12 months, I'd be owning a house for the first time in my life. I was really, really excited."
Odum-Jackson paid her deposit and first month's rent, only to get a knock at the door weeks later.
"He has a write-up where our house is to be sold on the courthouse steps of the Jackson County courthouse," she said.
Donald Gossman, a veteran appraiser with 28 years of experience, and former president of the Kansas City chapter of the Appraisal Institute, recently worked with the FBI to uncover local mortgage fraud.
We showed him our data and took him to the neighborhoods.
"They're not planning on renting them," Gossman said. "That's quite a few foreclosures... especially concentrated in a small area."
Our expert appraiser says homes in the subdivisions should sell between $160,000 and $180,000, but we found 50 percent of the homes have mortgages above that price range.
"They're just getting inflated loans and values to start with and walking away with the cash," Gossman said.
We found one home on Spruce had a mortgage for $242,000; another home on Grant with a $218,000 mortgage; and another on Cypress with a $215,000 mortgage.
"One person can't commit mortgage fraud by themselves," Gossman said. "It takes a group of people."
The renters blame their investor, but they don't seem to be giving many answers.
"He never responded, never called us back," Odum-Jackson said.
Lewis added, "[I] tried e-mailing him, called him at his office, with no success."
So NBC Action News tracked the responsible investors and found there's a long list. Our path to find the biggest investors led us to vacant home after vacant home, to a luxurious downtown condo, and even a mailbox at a UPS Store.
"People are disappearing," Lewis said. "Investors are disappearing. Nobody has a clue."
So we tracked down the common link – the builder, Penrod Homes. Penrod built all 73 homes; 57 went into foreclosure after they were sold to the investor.
Owner Brian Penrod would not speak on camera, but says he is not responsible. He says he no longer owns the property and has no contact with the investors, but blames the renters for not paying their rent.
But none of this adds up for the renters.
"I think people are trying to get rich off the house and then let them go," Lewis said.
Odum-Jackson commented, "I just pray that whatever is going on here gets stopped."
One of those renters was evicted from what he thought would be his home. The other is waiting on the bank.
NBC Action News spoke with some of the investors involved, who all deny any wrong doing.
They say they got caught in the sour real estate mortgage, but say they took care of their renters.
back to top
HEADLINE: Code Designed to Guarantee Realistic Real Estate Appraisals
BYLINE: Greg Farrell
SOURCE: USA Today - Online
DATE: March 3, 2008
COPYRIGHT: Copyright 2008 USA Today, a division of Gannett Co. Inc.
TEASER: Bill Garber, the Appraisal Institute’s director of government and external relations, praises the new Fannie/Freddie agreement, but also cautions against an immediate ban on bank-controlled appraisers.
BODY: In an attempt to fix a fundamental flaw that led to inflated and fraudulent mortgages in recent years, New York's top legal officer announced an agreement Monday that aims to bolster the credibility and independence of home appraisals.
New York Attorney General Andrew Cuomo said Monday that his "New Home Value Protection Code," scheduled to go into effect in 2009, would transform the mortgage industry.
In exchange for terminating his investigation of Fannie Mae and Freddie Mac, the two mortgage purchasers pledged to enforce Cuomo's new code, which is designed to guarantee fair valuations by real estate appraisers. The code stipulates that:
- Lenders shouldn't use "in-house" appraisers, who might feel pressured to agree with valuations suggested by their bosses.
- Lenders shouldn't rely on appraisal management companies they own, as was the case with Countrywide Financial, which used its subsidiary, LandSafe, for appraisals and other closing services.
- Mortgage brokers, who earn a commission based on the size of a mortgage, shouldn't be allowed to choose appraisers.
- Fannie and Freddie will fund an institute that will enforce the code and establish a national hotline for appraisers to call when they feel unduly pressured.
While Cuomo, a state official, has no power to implement new rules, the decision by Fannie and Freddie to sign on to the code of conduct could force all lenders to play ball. The two government-sponsored entities purchase about 60 percent of all U.S. home loans.
"This is a really positive step," says Richard Bitner, a former mortgage lender and author of Greed, Fraud & Ignorance, a book about the subprime lending collapse. "The whole process is screwy. What Cuomo's doing is great."
Bill Garber, spokesman for the Appraisal Institute, which represents the industry, praised the agreement, but said his group wanted to take a closer look at the ban on bank-controlled appraisers.
"We've seen instances where those operations, in a controlled and adequately examined and enforced environment, can operate successfully," he says. "I'm not sure it's fair to ban all in-house appraisers just because of a few bad actors."
Industry experts see the agreement as shaking up the real estate appraisal business.
"It's going to create massive change," said Brian Chappelle, a partner at Potomac Partners in Washington, D.C., a consulting firm to the mortgage industry.
He said mortgage lenders that own appraisal companies — such asWells Fargo and Countrywide Financial — may have to spin off those divisions because they would be prohibited from selling mortgages to Fannie and Freddie unless the appraisal work was being done independently.
Cuomo has been investigating billions of dollars of home loans that Fannie and Freddie bought from banks, including the largest U.S. savings and loan, Washington Mutual.
"I believe consumer confidence should be restored," Cuomo said. "With these reforms we will have a safer, better evaluation process."
back to top
HEADLINE: New Standards for Home Appraisers
BYLINE: Roger Showley
SOURCE: San Diego Union-Tribune - Online
DATE: March 4, 2008
COPYRIGHT: Copyright 2008 Union-Tribune Publishing Co.
TEASER: Bill Garber, director of government and external relations for the Appraisal Institute, Jim Park, SRA, and David Eshelman, SRA, comment on the state of appraisals and what reforms could mean for the profession.
BODY: Fannie Mae and Freddie Mac agreed yesterday to require greater independence for real estate appraisers, whose practices during the real estate boom have been criticized for leading to bad loans and the current subprime mortgage meltdown and credit crunch.
The two government-chartered agencies, which purchase nearly 80 percent of all home loans originated in the country, made the agreement to settle an investigation by New York Attorney General Andrew Cuomo. He had subpoenaed the agencies in November over questionable loans purchased from banks, including Washington Mutual, the nation's largest savings and loan.
Mortgage bankers and brokers were divided on whether the changes, effective Jan. 1 2009, will eliminate conflicts of interest among lenders, appraisers, real estate agents, and title and insurance companies that operate appraisal subsidiaries. They also disagreed on whether the changes will increase costs to home buyers and sellers.
Cuomo had challenged banks to clean up appraisal fraud.
Today's agreement with Fannie Mae and Freddie Mac begins to set right what had gone so horribly wrong in the mortgage industry rampant appraisal fraud, Cuomo said in a statement. The integrity of our mortgage system depends on independent appraisals.
Overview
Background: Critics say lenders have pressured appraisers to bump up the listed value of homes, contributing to a national mortgage crisis that is forcing families into foreclosure.
What's changing: Fannie Mae and Freddie Mac, which purchase nearly 80 percent of home loans originated in the United States, will bar lenders from using in-house staff for initial appraisals and from using appraisal management companies that they own or control.
Industry leaders expect the changes to apply nationally. The agreement will:
- Ban mortgage brokers from selecting appraisers.
- Prohibit lenders from using staff appraisers or appraisers working for appraisal companies they own or control. Wells Fargo and Countrywide Financial, two of the nation's largest mortgage lenders, operate appraisal units. They declined to comment on the effect of the agreement.
- Institute an 11-part Home Valuation Code of Conduct, which all lenders dealing with Fannie Mae and Freddie Mac will have to follow, to eliminate coercion, extortion, collusion and other means for influencing appraisals.
- Establish the Independent Valuation Protection Institute, funded from $24 million from Fannie Mae and Freddie Mac, to monitor appraisal practices.
- Set up a consumer hotline to handle complaints about questionable appraisals. The federal Office of Federal Housing Enterprise Oversight will host the institute and maintain the hotline.
David Berenbaum, an executive with the National Community Reinvestment Coalition, praised the agreement, as did Sheila Bair, chairwoman of the Federal Deposit Insurance Corp.
Bill Garber, government relations director for the 23,000-member Appraisal Institute in Washington, D.C., said his organization supports the reforms as a way to reduce the pressures exerted on appraisers to come up with values that justify a home loan.
There are times when that type of pressure boils over into and could be considered acts of coercion, Garber said. The good appraisers will say no to those pressures and hang up the phone.
Tony Majewski, acting director of the California Office of Real Estate Appraisers, said a state law effective in October prohibited some of the tactics banned in the Cuomo agreement. The law prohibits anyone with an interest in an appraisal from exerting or attempting to exert influence on an appraisal to affect a value, he said.
Mortgage bankers and brokers differed on what the agreement will mean to them and their clients.
Mike Dillon of TCS Mortgage, a San Diego mortgage banker and brokerage that closed about 25 loans last month, said banks might become overly conservative if they alone select appraisers.
I don't think it solves anybody's problems, he said.
Steve Hops, a mortgage banker at Guild Mortgage, called the agreement a nonevent for bankers, because they will still control who does the appraising, but a headache for brokers, who will have no role in the selection process.
But Hops added, It's the integrity of the individual appraiser that's at stake, whether he works for an in-house company or an independent company.
Jim Park, a Denver appraiser working with Joseph Caffaro in Coronado to launch the Valuation Works network of independent appraisers, said, This is going to be a good thing for borrowers, very good for consumers, because they can presumably rely on appraisals to be accurate.
Park and other appraisers predicted that costs of an appraisal, typically $350 to $450 for a home, would not change. On the other hand, Roy DeLoach, executive director of the National Association of Mortgage Brokers, said the agreement will remove thousands of small-business competitors from the marketplace and thereby increase consumer costs.
Some observers thought the time it takes to obtain an appraisal might increase, especially if an appraisal sought from one lender is not accepted as valid by a second lender.
But David Eshelman, who operates an appraisal company in Carlsbad, said lenders are already being more prudent in how they review loan applications and appraisals.
The real estate industry goes thorough these cycles of fattening up and skinnying down it's bingeing and purging, Eshelman said. And right now, we're in a purge.
back to top
HEADLINE: In Praise of Firewalls: New Appraisal Rules Bring Homes In Step with Existing Commercial Safeguards
BYLINE: Randyl Drummer
SOURCE: CoStar Advisor
DATE: March 5, 2008
COPYRIGHT: Copyright 2008 CoStar Realty Information, Inc.
TEASER: Jim Amorin, MAI, SRA, president elect of the Appraisal Institute, Gregory Jones, MAI, and Dan Paulus, MAI, discuss the differences in safeguards between business practices on the commercial and residential sides of appraisal work.
BODY: Commercial property appraisers for the most part cheered the agreement announced this week by Fannie Mae and Freddie Mac to curb overblown residential appraisals, characterizing the deal as healthy for the integrity of the property appraisal process.
But if there also were a few bitter comments at seeing the former high-flying kingpins of home mortgage “find religion” and agree to accept a series of appraisal reforms brought in the wake of the financial crisis triggered by the meltdown in subprime mortgages, well that's okay, too. After all, the commercial lenders and appraisers took their lumps following the savings and loan crisis and bailout of the late 1980s and have been tightly regulated ever since, which some point to as a factor in limiting the fallout on the commercial side.
Government-sponsored enterprises Fannie Mae and Freddie Mac, which hold or guarantee some $1.5 trillion in mortgages, this week agreed to purchase only loans by residential lenders who verify the independence of those that appraise the property. The agreements are in response to pressure by New York Attorney General Andrew Cuomo as part of a yearlong investigation of alleged fraudulent home appraisals ordered by lenders, brokers and their sellers. Some housing experts blame inflated or false residential appraisals, among other excesses, for causing or worsening the housing and mortgage industry crisis.
Jim Amorin, MAI, SRA, 2008 president-elect of the Chicago-based Appraisal Institute, the best-known professional organization of real estate appraisers in the U.S. with nearly 23,000 members in 92 chapters around the world, noted that those safeguards have been in place on the commercial side since the early 1990s. Commercial valuation estimates are typically ordered by the appraisal department of the lender or an appraisal management company hired by the lender, rather than by a mortgage broker with a commission riding on the deal.
"There’s a firewall between the people who are making the lending decisions and the actual appraisal process," Amorin told CoStar Advisor. "As a commercial appraiser, I've rarely if ever seen an order that says we must have X value on the property. Whereas in the residential field, that has more often than not been the case. The pressure to make these residential deals happen was immense."
With broker and lender fees so tied to mortgage approvals in a booming market, greed prevailed and residential appraisers were pressured to inflate values by as much as one-third above fair market. As the housing market has tanked, many homeowners find themselves upside down and unable to refinance out of problem mortgages because of the difference between the appraised and fair-market values.
Cuomo’s office subpoenaed Fannie Mae and Freddie Mac on Nov. 7 seeking information on their due diligence practices, along with data on appraisal valuations and mortgage loans they had purchased from banks, including Washington Mutual, the nation's largest savings and loan. A week earlier, the NY attorney general’s office filed a civil lawsuit against First American Corp. of Santa Ana, CA and its subsidiary, eAppraiseIt, charging they bowed to pressure from WaMu to use appraisers that provided inflated home appraisals. The suit is pending and both WaMu and First American have denied wrongdoing.
Under an agreement with Fannie and Freddie announced Monday that takes effect Jan. 1, lenders doing business with the GSAs will no longer be able to use in-house staff for initial appraisals or use appraisers from management companies they own or control.
The two GSAs, in cooperation with federal housing regulator the Office of Federal Housing Enterprise Oversight (OFHEO), also agreed to pay $24 million to launch a new oversight body, including a toll-free hotline to report suspected abuses.
Reforms in the residential lending are long overdue, but a complex and tightly regulated due diligence process has helped insulate commercial transactions from abuse and conflicts of interest, several appraisers contacted by CoStar Group pointed out.
"Commercial real estate got badly burned in the late 1980s and learned its lesson," said Gregory D. Jones, MAI, vice president, principal and senior appraiser with the Valuation Group in Colliers Pinkard’s Baltimore, MD office. "Very strong controls were set in place in the early 1990s to separate the loan-ordering process from the appraisal process. The loan originator is not even permitted to talk to the appraiser."
As CRE industry professionals have done repeatedly throughout the housing crisis, commercial appraisers took pains to separate their appraisal standards and practices from those of their home loan counterparts.
"I’ve been hearing complaints for years from residential appraisers who say they get a lot of pressure, especially from the third-party mortgage brokers and management companies: 'If you don’t hit my number, I’ll never call you again,'" Jones said. "The old days when S&Ls would keep and service all their residential loans in-house are gone. Now, it's all bought and sold and packaged for Wall Street.
"On the residential side, there's far less due diligence. The more volume they do, the more money they make, and they don’t care what happens to the loan once it’s out of their hands -- it’s Wall Street’s problem."
Commercial appraisers say that although the specifics still need to be hammered out, the Fannie/Freddie agreement will help the credibility of the overall appraisal industry.
"This is nothing but positive news because it confirms the independence of the appraiser, whether they be single-family residential or commercial," said Dan A. Paulus, MAI, president of CRES Appraisal Services in Phoenix and Scottsdale, AZ, launched in November by Prudential CRES Commercial Real Estate. "Clients are hiring us to perform an independent, audit-like function, much like a CPA might perform for their clients, and that’s what they expect to get."
Commercial appraisers also occasionally face pressures from clients on numbers, but the problem is nowhere near as acute as residential, said Paulus, a former managing director at Colliers International who served as president of its North American appraisal operations and has also worked for the appraisal units of CB Richard Ellis and Cushman & Wakefield.
"In a nutshell, I am not going to put my MAI designation in jeopardy for a $5,000 appraisal fee -- I look my clients square in the eyes and say that," Paulus said. "I’ve been in the business 25 years, and when they hear the intensity and certainty of my voice, they understand. Your word is gold."
Along with a host of other third parties such as surveyors and environmental engineers, appraisers are the spokes in the wheel that drives any transaction, be it a refinancing or a sale. Commercial and residential appraisers are certified by the Appraisal Institute, which awards the MAI and SRPA designation to commercial appraisers and the SRA designation to residential appraisers.
"On the bank side, our clients are often represented by in-house MAIs, so they understand our business and have an empathy for the independence of the auditor," Paulus said.
For instance, Paulus said his hard-money lender clients are calling him in the current shaky market on particular pieces of land they have collateralized, "just to make sure they’re not missing the boat.”
"If there’s a red flag, they want me to find it for them."
Paulus said the "Chinese wall" between the appraisal and the deal-making sides at Prudential CRES, with separate offices, networks and files, is necessary to protect the integrity of the appraisal process.
"Nobody in the brokerage or property management side has any access to our digital or hard files, which are under lock and key in separate parts of the building, and we scrupulously maintain that. I operate like any other fee shop out there. I’m sure there is work that I do not get internally as a result, but that’s a small part of my business," he said.
Market veterans still remember the tough years after an estimated 1,000 S&Ls failed in the 1980s as a painful history lesson.
The 1983 deregulation of the banking industry allowed S&Ls to compete with commercial banks for loans, resulting in a tidal wave of capital that fueled a massive commercial building boom. But the thrifts operated under a less stringent set of guidelines than banks, and many made imprudent loans and risky investments in a rapidly overbuilding real estate market.
By 1989, with many S&Ls already going into default, Congress finally passed the Financial Institutions Reform Recovery and Enforcement Act (FIRREA), a bailout bill that ultimately cost taxpayers an estimated $125 billion. FIRREA also created the Resolution Trust Corp., which closed insolvent banks and thrifts and sold off real estate at fire-sale prices -- a twin punch to financial and property markets which many experts say helped trigger the 1991-92 recession.
As part of FIRREA, Congress imposed tough regulations, requiring states to set up systems to certify, license and regulate appraisers, who now undergo hundreds of hours of training and continued education. But critics claim lawmakers failed to regulate residential lenders and brokers.
"Real estate appraisers were made the scapegoats for what happened in the crash of the late ‘80s and early '90s," said the Appraisal Institute’s Amorin. "As a result, appraisers were regulated, but the reforms didn’t put any penalties or requirements on the mortgage brokers. The commercial market learned its lesson, and the residential market is headed into that learning process right now."
Added another MAI-certified appraiser: "The residential lenders learned over the years they need the appraisal in the file to match the price the home is selling for, and they put pressure on appraisers to hit that number, even though it wasn’t the true value. Now, the appraisers that are committing those abuses have really put themselves in a very vulnerable position in the state where they are licensed. But the problem is, very often you’ll find that those appraisers used by mortgage brokers weren’t licensed. As the old saying goes, you can’t legislate morality."
back to top
HEADLINE: UCLA holds line on forecast No recession
BYLINE: Dale Kasler
SOURCE: Sacramento Bee - Online
DATE: March 11, 2008
COPYRIGHT: Copyright 2008 The Sacramento Bee
TEASER: The issue of a national recession is discussed at a recent meeting of the Sacramento Sierra Chapter of the Appraisal Institute.
BODY: The forecasters at UCLA are sticking to their “no recession” predictions. Despite worries on Wall Street and troubling unemployment numbers, the quarterly UCLA Anderson Forecast, to be released today, says the U.S. and California economies will continue to weaken but not to the point of recession.
UCLA's reasoning, in a nutshell: The housing market and mortgage lending industry, as weak as they are, are simply too small in relation to the overall economy to cause a recession.
But the forecasters acknowledge that circumstances could change, especially if tumultuous financial markets dry up credit or the decline in “the wealth effect,” caused by falling home values, contributes to a dive in consumer spending.
“There are rumblings in the retail trade sector that are of concern to me,” economist Ryan Ratcliff, one of the authors of the forecast, said in an interview Monday.
His colleague Edward Leamer, the forecast's director, wrote that his “no-recession forecast remains nervously intact.” Though the economy is obviously slowing, he said a recession traditionally occurs within a year of the start of a slowdown in housing. This time, though, housing has been slumping for two years and there's still no recession - a sign the nation could squeak by, he said.
Other public and private economists disagree. The fact that the U.S. recession hasn't begun yet means nothing, said former Anderson forecaster Chris Thornberg, now a private consultant. It takes time for the housing market to cause a recession, he told an audience in Sacramento last week.
“A housing bubble is like a slow-moving train wreck,” Thornberg said at a meeting of the Appraisal Institute’s Sacramento Sierra Chapter.
Among the signs of a possible recession: a drop in national payroll jobs of 63,000 last month and continuing declines in the stock market. Sacramento-area unemployment, at 6.4 percent, is the highest it's been in 11 years. Statewide unemployment is 5.9 percent, or nearly one percentage point higher than a year ago.
In a report released Monday, Chapman University in Orange County said its quarterly index of California consumer confidence fell to its lowest level since the index was launched in 2002.
back to top
HEADLINE: The Price of Value
SOURCE: San Antonio Express-News
DATE: March 14, 2008
COPYRIGHT: Copyright 2008 San Antonio Express-News
TEASER: Leslie Sellers, MAI, SRA, vice president of the Appraisal Institute, details the role – and importance – of an appraiser in the lending process.
BODY: What's the added value of a house that backs up to a green, plush, open field? Well, it depends.
“A drainage area behind the home might be viewed as a greenbelt or it might be seen as an insect haven,” said Wes Galloway, owner of Galloway Appraisal Services. “For some, chattering children around a school doesn't bother them. But if you're retired or work at home, you might not want that.”
And so goes the life of an appraiser. Some home buyers want one thing and others might want the opposite. Appraisers are charged with trying to arrive at a value for homes, despite the fact that no two homes or homeowners are alike.
“It's a lot of math, and a lot of just gut feeling,” said Peggy Jones, owner of Homefront Appraisals. “It's not an exact science, and a lot of it is very subjective.”
Appraisers are just one piece of the home buying process. They typically work for the lender to help come up with a home's value, which then can determine the size of the loan a buyer can get.
“It has the power to make or break a deal,” Jones said.
Investors are eyeing this house in Shavano Park and have sent Peggy Jones to determine its worth.
If a home is valued too high, a person might not be able to qualify for a loan that's big enough to buy the home, Jones said.
As if coming up with an exact monetary value isn't hard enough, Jones said some real estate agents are trying to get a home's value before they go to the lender, so that when a lender hires an appraiser, there won't be any surprises.
“I'm finding that what's happening is a lot of real estate agents are calling me and asking, 'Can you kind of give a preliminary idea of what this home's worth?’” Jones said. “Rather than being the last step, I'm finding they want to get a better idea before so they won't lose any time going back and forth. They give me an address and expect me to look into my crystal ball, I guess.”
Jones said this has created some pressure for appraisers to undervalue homes.
“Appraisers provide a check and balance to the lending process that is vitally needed,” said Leslie Sellers, vice president of the Appraisal Institute. “A competent and ethical appraiser would be able to assess the true value of a property. Otherwise, the lenders would just say 'OK, your credit's good and I'll give you a loan.’”
Although the appraisal process is somewhat of an educated guess, appraisers are trained to notice things that homeowners might not otherwise notice.
“If I had to sum up their importance, it would be having someone look at the details,” Sellers said. “The appraisers are disinterested, trained professionals that can turn over the stones that a normal person can't turn over.”
First, an appraiser will check out the house that's being bought or sold.
“If there's an MLS listing, I can look at photos, but you can stage a photo to look any way you want,” Jones said. “A lot of that is fiction and you have to wade between the lines.”
For example, Jones recently checked out a house in Shavano Park. The 41-year-old home was listed at $490,000. The home had been foreclosed, so investors were looking at buying what they thought actually could be a $950,000 house.
The MLS listing said the home was 4,776 square feet with a three-car garage and an in-ground pool.
But when she got to the home, Jones found a guesthouse, which shouldn't count toward the square footage, a two-car garage and a pool that took up nearly the entire backyard.
“There's a reason why one needs to look at a home in person,” Jones said. “All that glitters is not gold.”
A home's surrounding community factors into the appraisal process.
Of course, that varies with different buyers, who might prefer to be near a school, or as far as possible from a school.
At a site, the appraiser will measure the interior and the exterior of a home. This could be a simple process or could take several hours.
“A lot of the custom houses are nightmares, but some of the production houses are like measuring a cracker box,” Jones said.
Once the house has been measured, the exam begins.
“You have to sketch the house, list all the amenities, flooring, heat, air conditioning and just a million little details,” Jones said.
Depending on the house, some characteristics might be more important than others.
“In a $120,000 price level, you might present things like rain gutters,” Galloway said. “In a $400,000 house, you might look at other qualities.”
The appraiser also will look at current home building trends.
“We should be aware of those influences and adopting the new traits in the market,” Galloway said. “Which new fads matter? Apparently, this whole office-in-the-house idea is relevant. Keeping abreast of what buyers want is the challenge.”
Once all of the home's characteristics have been marked, it's time to compare it to nearby homes that have sold within the past year.
“What the lender wants to see are six perfect comparables that you pick off a tree, which isn't a reality,” Jones said.
But the appraisers find the closest houses they can and make financial adjustments to make all the homes even.
If the subject has a deck and the comparable house doesn't, an appraiser will take what her or she thinks the market value of a deck is and add it to the comparable.
“Typically, they work within a small market area, and they know what's going on, what's anticipated to go on and what has gone on in the past,” Sellers said. “They can anticipate properties and how they fit into the market.”
The comparing process involves looking at past sales and the history of the house and neighborhood.
“As an appraiser, we're sort of known for being conservative,” Galloway said. “Our whole premise is based on history. We're sort of limited into looking at known things, which doesn't leave a lot of room for creativity.”
Although the bulk of the job is researching past sales and history, a home's appraisal is still just one perception of value.
“It's an opinion, but it's a trained opinion,” Sellers said.
back to top
HEADLINE: You Don't Gave to Break Bank to Boost Home's Value
BYLINE: Purva Patel
SOURCE: Houston Chronicle
DATE: March 20, 2008
COPYRIGHT: Copyright 2008 Houston Chronicle
TEASER: Jim Amorin, MAI, SRA, president elect of the Appraisal Institute, advises homeowners on what they can do to improve their home’s value.
BODY: Has your home been sitting on the market longer than you thought it would?
Have you had to lower the price more than you wanted?
If so, you might want to consider working on some low-cost ways to improve its value.
Even if you aren't trying to sell, it can't hurt — especially considering the median value for single-family homes in the Houston area barely rose at all in 2007 and was up 3.1 percent to $151,430 in February, after falling 2.8 percent in January, according to the Houston Association of Realtors.
On average, a home in the Houston area in February took 92 days to sell, matching the days-to-sell number in January and the longest period since February 2004, the association reported.
You can maintain the value in your home without breaking the bank.
Bebe Stegent, for example, had her garage organized and updated with new cabinets, shelves and baskets.
While she and her husband planned the change to create more storage space, she says she hopes it also will keep her Upper Kirby home's value up.
“They say we've bucked the trend so far, but I don't know for how long,” Stegent said. “I'm concerned about it.”
Here are some tips from the experts:
Don't overdo it: Focus on the basics first, advises Jim Amorin, president-elect of the Appraisal Institute. If shingles are falling off, paint is chipping or siding is rotting, focus on that.
Once those are out of the way, you can think about improvements. But even improvements should be tempered to keep in line with the neighbors.
If every house in the neighborhood is two-bedroom, three-bath, you don't want to add another bedroom, a sauna and a swimming pool.
“You have to make sure the home is appealing to the broader market out there,” Amorin said.
Go green: Updating old appliances with energy-efficient ones will not only save you money in the long run, it will make the house more appealing to potential buyers.
“Across the country you're seeing home builders and homeowners interested in features that are saving energy or are friendly to the environment,” Armorin said.
Clean house: Buyers are smarter and savvier than ever, said Troy Gateley, an agent with ZipRealty in Houston.
They're better educated and doing more tours, so they'll notice if you've just slapped fresh paint on the walls but failed to pay attention to the details.
Mismatched switchplates and loose floorboards are relatively inexpensive things to fix and can give the home a fresh look.
“It gives the impression that it's been maintained,” Gately said.
Hire experts: Unless you're skilled at do-it-yourself projects, hire experts for major repairs and remodeling work.
Future buyers will recognize shoddy craftsmanship, and then question the integrity of other parts of the house.
Consulting with a home inspector could help you find problems before they get too big, Gately said.
“If you decide to sell, you can show it to prospective buyers and say, ‘These were the problems but we took care of them and here are the receipts to prove it.’”
Curb appeal: First impressions count. And exterior changes bring the most bang for your buck, according to the National Association of Realtors.
The most profitable remodeling projects include upscale siding replacement, which recovered 88 percent of costs, according to the Remodeling magazine's 2007 Cost vs. Value Report.
But a less expensive way to bolster value is to keep your lawn well manicured. Flowers and mulch can also help those on a budget.
“Color grabs your eye,” said Dean Carpenter, president of Houston Landscapes Unlimited. “Fresh mulch with its dark color against yellows or whites will really grab people's attention.”
back to top
|
|
