Appraisal Reform? Why do we really have so much attention focused on appraisers, appraisal fees, and turn times? Who decided that changes in the appraisal industry was the best way to improve mortgage loan quality? Big banks did. The same banks that were at the root of the problems that started the entire collapse of the national real estate market. Appraisal reform is nothing more than a smoke-screen to keep attention away from Wall Street and Big Banking. Zero-down loans, no-doc, 125% 2nd mortgages, subprime lending. The real estate market went out of control because there was easy money to be had, which naturally drove the prices up with the new demand. The rapid rate of growth was not sustainable and a crash was inevitable. However, the appraisal industry probably contributed about 5% (along with Realtors adding their 5%) to the housing crisis. The rest of that honor falls to big banks and Wall Street's creative mortgage investments. If anyone and everyone can get a home loan, there is a problem. That shouldn't be a surprise. Many in the appraisal industry were shouting "stop," long before the bottom fell out. But, the market did hit rock bottom and someone had to take the fall. Appraisers were the lucky winners of the blame game lottery.
The "reform" fallout ended up being even better than the big banks could have hoped for. This so-called reform is an all-out assault on every aspect of the appraisal industry, as though they single-handily caused the real estate crisis. The appraisal industry is still the focus of attention long after the Wall Street problems were brought to light. Most people know that Wall Street did a lot of things that were of questionable integrity, yet somehow we overlook the facts, because they are just too powerful to fight. Who's going to make them change? Now, the press talks about banking settlements in the millions (and even in the BILLIONS) to satisfy jilted investors; but, are they questioning bank fees or loan processing times? Many banks continue to make massive profits in the worst real estate market since the Great Depression. Hm… The HVCC led us to Dodd/Frank, and originally came about because of problems with one giant lender and horrible loan practices (mostly on subprime loans). The solution (at least according to one New York state official) was to change the appraisal industry. The appraisal industry did NOT create these problems and all the changes in the world aren’t going to fix this mess.
This is really not that complicated; follow the money. Go back and look at all the low and no money down loans that were plastered in every newspaper and magazine. Remember 125% loans? If you lived in America, you could not escape the bankers and mortgage brokers telling you to borrow money against the equity in your house, or to buy a better house for your family. Everybody wanted to get in on the lending bonanza. 95 - 99% of applications got approved. That's it, the heart of the real estate price escalation and eventual bursting of the bubble; easy money. It just had to happen and was only a matter of when. Many of those loan applications should have never been approved and should have never made it as far as ordering an appraisal. However, lending profits were soaring, agents were selling lots of houses, appraisers were busier than ever; and the mortgage cycle depended on getting each loan through the system. get it through so it can be sold on the secondary mortgage market. If lenders had to keep and service all the loans they wrote, this would be a very different discussion. Appraisers were often gently persuaded (forced) to cooperate, or, sit home with no work. Any problems started and ended with the source of the money and their ability to sell every loan in the secondary market. Risk was minimal and profits were enormous. Even with huge fines now, they still made enough money to make the whole process worthwhile (at least from a profit perspective).
Keep in mind, this has nothing to do with your local lender. The branch manager or loan officer that you see in church every Sunday did NOT do anything wrong. They were hired to do a job and they did it very well. They were given a set of guidelines to work within and that's what they did; follow the rules and worked very hard to help every borrower they could. They were under great pressure to get every through as well. Somebody's bosses wifes, second cousin, that knows my barber, who used to work with my sister, and that grew up near my uncle, just HAS TO GET THIS LOAN APPROVED. MAKE IT HAPPEN! Talk about pressure! They were on the hot seat and in turn shared that seat with appraisers. It's just the way the process was designed. Lenders, agents, and appraisers were puppets in the big banking marionette mortgage play.
Now we are hearing debates over appraisal fees. Why do so many people care about appraisal fees? I must have missed the consumer revolt on that one. Now we get the reasonable and customary fee discussion? Which great power gets to decide that? This is America and the free market should dictate what value appraisers have in the marketplace (just like it should decide on the use of AMC’s). Do you really think a newly licensed appraiser with no experience is worth the same as a twenty-year veteran? And, did you know appraisal fees have not raised in over ten years, or at least until AMC’s came into the picture. Appraisal fees are now going up, but appraisers are making less than they did ten years ago; and doing twice the amount of work. I’m sure there’s logic in there somewhere. Maybe appraisers don’t have to buy gas and groceries, or pay insurance and taxes. Would you be happy in your profession with no pay raise in ten years; then being forced to work for a new boss that controls your total business model (a boss that you don’t need or want); and to add insult to injury, take a pay cut while being forced to do more work... Oh yea, and you have to explain your every move to an underwriter/reviewer who probably doesn't have an appraisal license. This unlicensed person will determine if your reports meet "quality" standards and often influences the amount of work you will receive in the future. You could call that, the tail wagging the dog... Welcome to the appraisal industry, 2011.
So, what is a turn time? Who came up with that anyway? What other business do you know that is obsessed with turn time? Why do we really need faster “turn-times” only from appraisers? Are appraisers the only ones holding up the real estate and loan process, and causing slow loan service, and a slow real estate market? So, how could we fix this problem? Easy...
If the lenders would simply order the appraisals around the time the home inspections are ordered, there would be at least three weeks to get the appraisal finished. But, many lenders still choose to order appraisals the week before they are ready to close the loan. Doesn't the borrower pay an appraisal fee up front most of the time? Is the lender out any money if they order the appraisal early? No. But, it gives them a possible reason for a delay if they need any extra time to do their job (which doesn’t have turn time problems I guess). Why do you think lenders care so much about the appraisal industry? Two reasons:
First, some of the largest banks would like to get rid of 90% of independent fee appraisers. Why? So they can write loans any way they see fit, do whatever they want to consumers, all without anybody watching over them. Also, so they can select an AVM product that fits their needs, without having to worry about an appraiser (who my come in with a low value or say the property is in need of repairs, etc. It really does sound bad (for one industry to want to get rid of another) and seems hard to believe, but it's hard to dispute the facts. Banks continue to sing the praises of automated valuation models. But, no one outside the banking or AVM industry is tracking this data. For eight years, we have seen first hand the errors in AVM's and public records. Based on the data AVM's use and the mathematical calculations they utilize; with values often based on inaccurate data, can only leave them with the option of providing over or understated home values. Call appraisers in your area and ask them about AVM's, public records, and square footage. In any county, in any state, the errors can be found within a short period of time (if anyone cares to look at the data).
Second, some banks see this as the perfect way to keep a chunk of the appraisal fee. It’s as old as time, they want more profit. No big secret here. Lenders handle thousands and thousands of appraisals all across the country. Add part of an appraisal fee to every loan package and we are talking some adult money here. The kind of money that motivates people. Almost like easy money loans created a motivation that was hard to stop. AVM's and lenders (all wanting a piece of the appraisal pie) are trying to sell the public on the "quality" of computerized valuation products. It's a sales job, one of the best I've ever seen; but it is still based on inaccurate information and can only create more troubles for an already troubled real estate market. Lenders need to concentrate on giving loans and let appraisers concentrate on providing appraisals (not having to play politics to keep from starving). Do we really see any improvement in the appraisal industry due to the requirement for mortgage lenders to use Appraisal management Companies? My vote would have to say: not enough to warrant the destruction of the appraisal industry caused by the HVCC.
Let's be clear about AMC's too. They are like every other business. Some are of the utmost moral fiber and stand out in the marketplace. With or without the forced use of appraisal management companies, these businesses will survive. Simply because they provide a true service for their clients. One example is Kirchmeyer & Associates National Appraisers and Consultants. Companies like this are appraisers working with appraisers. When they ask a question, there's a better than average chance they understand the answer coming from the original appraiser. You won't find appraisal reviewers that "used to be Realtors and took a USPAP class so they are qualified to oversee the work of licensed appraisers." While a few management companies shine, there are also many who are working from the bottom of the barrell. Trying to get business the only way they know how; by low prices. Give your work away for free and the client will get exactly what they pay for. There's no magic balancing act here. It is NOT possible to get high quality appraisals, in the fastest turn times in the business,and for the lowest price anywhere. When something sounds too good to be true, guess what...
America has been sold a lie; several in fact. Changing laws about appraisals is NOT going to fix any real estate or mortgage problems. The real estate market is controlled by the flow of money. When the money flowed freely, the market skyrocketed. When the money supply was cut off, the real estate market took a dive. Lenders control the money and they control any growth (or decline) in the real estate market. Big banks went from credit criteria where they knew the information was not all true (in the everybody gets a loan heyday); to now treating most people like the Third Reich is interviewing them for a loan. Honest, hardworking, credit worthy consumers are being denied loans, often because of strict lending guidelines and unrealistic appraisal restrictions. Bottom line: 90% of any problems with appraisals went away with the unrealistic loan programs. Funny how that worked out. But, after the bad loan programs were gone, we still had a full blown “crisis” on our hands and somebody had to make changes. With problems this big, somebody had to play the bad-guy role and take a fall. It seems no one had enough power to do battle with big banking and all their financial clout, so appraisers made the perfect target; a scapegoat for the lending industry.
So, where do we go from here?
The appraisal industry needs to be turned back over to the appraisers. Let AMC's earn their market share just like appraisers. If the lawmakers really want to change anything for the better, let's talk about Wall Street; bonuses and bailouts. They were, are, and always will be the root of any appraisal, mortgage lending, and mortgage investment problems. The Golden Rule is alive and well in mortgage lending. A handful of big banks control most of the gold and they will continue to dominate the rules; which consumers, agents and appraisers have to follow. Their way or no way, that’s just the way this system works. Big banking controls the national real estate market’s future. And, now they are even talking about turning Fannie Mae and Freddie Mac over to these big banks - just brilliant! Give the foxes the key to the hen-house.
Changing the way appraisals are ordered and reviewed is NOT the answer. And, does absolutely nothing to improve the security of mortgage loans. Is that still the goal of all this reform? If this whole process has been about improving loan security, how much progress have we made (over two years post-HVCC) after turning the appraisal industry inside out?
Banks control every aspect of mortgage lending and Wall Street came up with all those wonderful mortgage investment schemes. They were a great idea, at least for those who got the new houses and jets and super vacations. Those perks that you and I are still paying for in every monthly payment. Surely people invested their money in other products before Wall Street came up with all these clever mortgage loan packages. They created them for one reason; profits. Check out the bonuses still being paid in many of these companies. Bonuses that come out of the pockets of working class Americans.
The industry is in turmoil, now more than ever before. And, quality appraisers are fleeing the business at a staggering pace. America needs to take a step back; and then move forward to realistic loan programs and appraisal underwriting guidelines. Houses should be appraised by qualified professionals. Appraisers are still the very best option to determine the current market value of any property. If these computerized valuation products keep growing, the inaccurate information they use to calculate home values will kill many loans and give others money far above their home’s true value. A computer valuation service is an equal opportunity offender. No matter how fancy the program, if they use a price-per-square-foot formula (based on the information square footage data in public records), the values are going to be grossly over or understated. In five years this will all become crystal clear. But, by then, it will be too late and many of the best appraisers will have left the industry. The bankers will have won another round and consumers will lose, once again.
Maybe if every home loan had to be serviced by the lender who writes the loan (investing at least 10-25%), all these problems would disappear. Local banks making local loans, where the customers actually make the payments where they got the loan. What a concept! Bigger is NOT always better. Getting and paying home loans at the local bank was a system that worked. After all this “reform” in the appraisal industry, buying a home is more difficult and complicated than ever. It’s time to go “Back to Better!” Give the appraisal industry back to the appraisers. Consumers should demand it.