Terrascope Blog

So here it is merely one and one half months since the Home Valuation Code of Conduct (HVCC) was implemented and many Appraisers, Mortgage Brokers, and Mortgage Consumers are feeling the impact of the agreement. That’s right: “agreement”. The HVCC is not a law; is is simply an agreement between FannieMae, FreddieMac, and the Attorney General of New York, Andrew Cuomo.  The “pro-AMC” (appraisal management company) language co-written by Cuomo is the root of the problems in the agreement that I believe will eventually lead to a larger mortgage debacle. Here are a few reasons: Appraisal Management Companies are not regulated; Real Estate Agents, Mortgage Brokers, Appraisers are all regulated and have specific rules to follow - the AMCs have none. The AMC business model typically relies on revenue “shaved” from established appraisal costs and often places unrealistic demands on the appraisers (like extremely short time frames for completing reports and low “fee caps”). Is it fair (or sound) that the appraisers should fund the AMC’s? Reducing established appraisal fees and placing restrictive demands on the appraisal process only hinders the goal of the agreement, which is appraiser independence (I am for appraiser independence, but also recognize that due diligence takes time and “time is money”). AMCs undermine the appraisal process when artificial fee caps and unrealistic assignment parameters are forced on the appraiser; this ultimately leads to lower quality appraisal products for the consumer / lender’s portfolio. How is it that the HVCC was written for the mortgage industry but the result of the agreement guarantees that the appraisers must bear the cost by funding a third party (AMC)? Who would ever believe that paying less for a service would result in better service? Speaking of fees: the consumer still pays the typical appraisal fee, but is rarely (if ever) told that they were also charged AMC’s fee (what was “shaved-off” from the appraisal fee). Like most things in life, you get what you pay for - especially when it is a service. If I was the consumer, I would be bothered that I paid full fee for an appraisal, but only received 2/3 of the quality/product. One of the original drafts of the HVCC was to place limitations on the amount of ownership that a bank could have in an AMC; this was removed prior to the final draft, making it a double profit situation for the large banks that own an AMC. For instance, large banks that own (their own) AMCs now funnel the Mortgage Brokers through their AMCs, where they “shave off” the appraisal fees and still charge the consumer a full appraisal fee. “The fox is (STILL) watching the hen house.” Many local appraisers refuse to work for the AMCs for a variety of reasons; some reasons are: appraisal fee, unrealistic turn times, and USPAP compliance. USPAP (The Uniform Standards of Professional Appraisal Practice) defines the appraiser’s client as “the party or parties who engage the appraiser (by employment or contract) in a specific assignment” and yet, many of the AMCs require the appraiser to sign an acknowledgement that the AMC is NOT the client - if not the client, then why should they be allowed to shave money off the appraisers’ backs?

     The fact that this agreement went forward after the Federal Government take-over of Fannie and Freddy is commentary that the “take-over” has done nothing at all to help fix this flawed system; after all you would think that a larger entity (Fed Gov) taking control of the two major (if not the primary) mortgage giants of the world would have looked at this agreement, identified some issues and non-intended consequences, and made some changes or simply not allow it it to move forward. Instead, the agreement was implemented, setting established small business owners all around the nation into a state of panic, driving mortgage costs up for the consumer, and creating a more time consuming mortgage lending process through its pro-AMC language.

   For the Mortgage Brokers, this is a nightmare. Before the agreement went into place, the Mortgage Broker could rely on locally trusted appraisers to provide real estate appraisal services. Once the appraisal was completed, the broker could then place the mortgage process with the lender that had the best pricing / rate available to the their client (the ultimate consumer). Mortgage Brokers could then compete and, thus, high quality mortgage services were available to the consumer. Now, the brokers are required to use the appraisal system that the lender approves, making “portability” of the appraisal impossible because the broker is now required to choose a lender prior to having the appraisal completed, removing opportunity to better serve the consumer by “shopping” for the best loan product and, instead, ”trapping” the consumer with that lender. The consumer is forced to go through all the steps again, including obtaining a new appraisal, if a better loan product is discovered through another lender.

 The HVCC does nothing to prevent or reduce fraud; instead, it is driving honest, hard-working appraisers and mortgage brokers (many that are small businesses) out of business, it reduces state revenues, and eliminates competition. I agree the system needs to be fixed, but I also believe that encouraging the AMC model through this mandated agreement will only result in more economic woes across our nation and ultimately hurt the consumer.

  Whenever any consumer “short-cut” is created in a specific field of work, those who have been working in that field must act to educate the consumer. Otherwise, the lay-person will never know the difference and accept a “fast food” solution as credible or factual. I really believe that there is no replacement for the human element in business; without a “hands-on” perspective, there is too much room for the unknown / error. I would never buy a musical instrument, car, or home online without seeing / playing / driving / viewing it first. Zillow can’t possibly know if a home stinks like cats urine, is falling apart, or has no sewer hook-up; nor would that site know that it is the worst location on the block (next to the neighbor with ten junked trucks) – so, why would anyone trust it?  “FREE” is the reason. Well, the old adage “you get what you pay for” still holds true today….

   I recently checked some sales in my own neighborhood versus Zillow, filling out all of the info as accurately as the site allows. The inaccuracies, in some cases, show a near 25% disparity.  This kind of value discrepancy could “make or break” a deal for many, including a home owner looking to refinance, real estate investor, seller, or buyer.

  I always trust a local professional over any website located who-knows-where. The bottom line: You really do get what you pay for and fast food is cheap for a reason. If you really want to know what your piece of real estate is worth, hire a local appraiser. If you like Roulette - there are plenty of gambles to take out there, including trusting websites that claim to know your home’s value.

   Currently, the appraisal industry is experiencing some of the biggest potential changes in the past fifteen to twenty years. The HVCC (still in the works) as well as Senate Bills, Congress Proposals, and changes to State laws are shaping the way this industry will move forward. It is obvious that the current system is flawed (evident by the sub-prime fallout and nation-wide lending debacle and rise in foreclosures); in the next few months, we will see how this unfolds. I am concerned that, in Cuomo and Fannie Mae’s concerted efforts to “fix” the industry, they appear to be giving too much power to AMC’s (appraisal management companies) and encourage AVM’s (automated valuation models); is this sane? I think it would only further the debacle. I stand behind their efforts to “fix” the problem, but I see that a short-sided approach could end up hurting the appraisal industry. It is very interesting to me that appraisers have been required to follow a strict guide of rules and ethics (Uniform Standard of Professional Appraisal Practice  “USPAP”) for many years while most states throughout the country only recently began a licensing program for Loan Originators (up until then, just about anyone could sell mortgage loans / originate - even those without any college experience). So – why does Fannie and Cuomo want to “crack down” harder on the appraisers? One reason might be the fact that Fannie Mae (eAppraiseit) was recognized as a corrupt organization after findings showed some number manipulation and one way to save face may be to shift blame. Another reason may be that Cuomo and those in charge of Fannie Mae are not familiar enough with USPAP; these rules and ethics are already in place for appraisers - and should be enforced. But, this time, it was those on the mortgage side of the industry who were caught “fudging” the numbers.  

  In any case, the bottom line is that the mortgage industry obviously needs a rehab. How this is to be accomplished is debatable. Whatever the course, we will certainly see a bumpy ride for the appraisal and mortgage industries over the next year (or more). My main concerns, of course, are for my survival in the industry (in order to feed my family) and nurturing my career as a professional independent appraiser.

   For years, appraiser’s have been told how to perform the reporting process, in large part, by Fannie Mae. Fannie Mae’s lending guidelines have shaped the appraisal process and this is also part of the greater problem. Appraisers were told (by processors, loan officers, and even underwriters) things like: “never check the ‘declining market’ box” (because the Fannie Mae approach to a declining market was to penalize a borrower with a 5% less loan to value ratio, forcing many borrowers to bring more money to the table for loan and/or further limiting the caliber of obtainable housing) – this approach placed more emphasis on the need to close a loan rather than factual reporting. This is just one example, but the point is that appraisers would often find themselves “black-listed” from lender’s approved appraiser lists as a result of factual reporting instead of being praised for accurate reporting that could save a lender from a potential mortgage disaster. Admittedly, this is in dual part, the fault of the appraisers as well as lenders because it is really the appraiser’s responsibility to be the lender’s accurate reporter of all findings (even if it something the lender does not want to hear). But, when faced with the choice of giving in to a lender’s request or face the possibility of being “black-listed”, many appraisers succumbed to that sort of pressure. This, I believe, is one (of many) roots of the problem.

   Is the answer to place more restrictions on the appraiser? If we are talking about the development and reporting of an appraisal - I don’t believe so. USPAP has always been clear about the duties of the appraiser to provide a report that is not misleading and to report all findings in truth, not to be influenced by any outside influence. I believe there is some re-training to be done throughout the industry (appraisers, brokers, lenders, etc), but the current rules of USPAP cover the appropriate and reliable means of appraising and already addresses these (among other) issues. If we, as appraisers, adhere to USPAP, many of the current problems in the industry would dissolve. If we are talking about putting an end to lender (or any outside) pressure on an appraiser, then I would say yes. I embrace the efforts of Mario Cuomo and Fannie Mae to find solutions to the problems that are currently plaguing our nation’s mortgage industry, especially when it comes to lender pressure. I just hope that wisdom prevails in the decisions that will define the future path and that appraisers who have been doing honest work with their clients’ best interests in mind will not be unfairly burdened or, worse, forced out of a career.

I was recently asked - “Why does it seem that many recently appraised home values appear less than what the home owner had thought?”

First, this is why the mortgage industry needs appraisers. If every lender went by the word of the property owner, the result would certainly be a much larger lending debacle than the recent sub-prime mortgage crisis. It is not uncommon these days to come across home owners who are overly optimistic about their home’s worth. The typical reaction when an appraised value appears less than what a home owner was expecting is, “ the market must be declining”; then, comes the question: “have property values gone down”?

  Each and every local market area is different, so I  would not feel comfortable making a blanket statement about local housing values. In my experience, the majority of Seattle markets do not appear to be on decline. Instead, what I see, is that most  market areas have shown trends toward stability, rather than the highly aggressive market we had all gotten so used to over the past two and half years. Is it less aggressive than the two years prior to the last six months? – absolutely. So, what I think is happening is that property owners have become jaded by the very rapid appreciation that we saw during that time and are now a bit surprised when local sales support slower appreciation than in the past. Does this translate into a local housing market decline? I don’t think so. Of course, it would be nice to have a crystal ball, but since none of us can really see the future, all we can do is pay close attention to the current trends and do our best to adapt.

Michael Eachus is proud to announce the grand opening of his new premier residential appraisal service, Terrascope Appraisal, Inc.. Thanks to the help and hard work of the very talented designer (and her wonderful team) Karen Chappell at RedFyve, I now have a professional identity, logo, website, and blog. This is very exciting for me and my family and a great transition for me from being a staff appraiser at a repuatable firm in the area since 1998. I am looking forward to working with the many fine people who have helped shape my career over the past ten years as well as the many more I am sure to meet. Thanks for visiting my site and blog. Look for many more future posts to come.

- Michael J. Eachus

President, Terrascope Appraisal, Inc