Down the Rabbit Hole with the Form 1004MC

Brian L. Trotrier

Brian L. Trotrier

Executive Vice President and Chief Operating Officer at FREA
A former practicing attorney with more than 30 years experience in real estate and risk management. The Foundation of Real Estate Associates (FREA) has specialized in providing Errors & Omissions Insurance to appraisers and home inspectors since 1993. As a membership organization with over 6,000 members, FREA is one of the largest and most well respected professional associations in the country, providing E&O Insurance for appraisers and inspectors as well as educational opportunities, member benefits, and legal support.
Brian L. Trotrier

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Down the Rabbit Hole with the Form 1004MCOK, I admit it. I am old school. I still think you need to understand how to do something manually before you throw caution to the wind and buy into new technology to replace a good, old-fashioned, hands-on process that has worked fine for years. I honestly believe the use of technology without a complete understanding of how to do the basic process manually just lets us make more frequent and more complicated mistakes faster. In other words, if you can’t drive a Chevy Nova very well, don’t buy a Maserati Ghibli and expect it to fix your driving problems. All that will happen is that you will be going faster when you hit the wall.

What does this have to do with the Form 1004MC? In the old days when television was black and white and when reporters reported the news instead of making it up, the officers of banks and savings and loans had to decide what their home loan lending policies would be. First, they had to decide if they would offer home loans at all. Next, they had to decide what cities they would make loans in (typically they would only loan in markets where they had deposits so they had firsthand knowledge of those markets).

Then they had to decide how to price each loan based on the credit of the borrower (FICO), the LTV, and the amortization schedule. Finally, they serviced the loan in-house so they could watch both the local market conditions and the borrower to stay ahead of changes that might increase the probability of a default and a loss of principal or interest. In other words, the banks and savings and loans had to do real, hands-on market research and not just rely on some computer model to make lending decisions.

Today, banks and savings and loans have loan origination offices or mortgage brokers spread all over the U.S. making as many home loans as possible with no intention of holding and servicing the loans they fund. The mortgage loan department funds or buys loans in cities nobody at the bank has ever even visited, let alone actually knows and understands. Borrowers aren’t real people the banker knows from Little League or Rotary or church; borrowers are just FICO scores on a form. The collateral isn’t the home of the banker’s old girlfriend or boyfriend; it’s just a pile of bricks and sticks sitting on a lot on a street the banker has never heard of. In other words, home lending has gone from a business done by people for people to a numbers game where the lender doesn’t know anything about the borrower or the collateral. No wonder the bank wants the appraiser to fill out a 1004MC for every loan.

The problem with the 1004MC is that lenders use it instead of local market knowledge and not in addition to it. Banks are in the business of loaning money and if they elect to make home loans in cities they have never visited, to people they do not know, they are taking on risks that bankers just 20 years ago never would have touched. Asking an appraiser to conduct even a limited market analysis for the paltry fees lenders pay to appraisers today is not only unfair, it’s borderline insane. Lenders should be the party responsible for knowing which markets to lend in and which borrowers to lend to and the appraiser’s role should simply be to determine market value and not to predict market stability.

Even the best appraiser with the most experience could not have predicted the collapse of subprime lending would result in residential real estate prices dropping so quickly and so severely. Appraisers may know the local markets better than lenders, but lenders doing business throughout the U.S. could see the big picture better than any local appraiser, and the big picture foretold doom and gloom much earlier than a 10 square block area of suburban Modesto could. Now, the same lenders want appraisers to look at local markets and then tell the lender whether it’s a sound business decision to make loans in Boise versus Orlando.

When I worked in the investment business in the 80’s and 90’s, my customers used to ask me whether interest rates would be going up, going down, or staying the same. My primary response was that “it depends”. If the customer could tell me what, when, or where the next global crisis (economic, political, or environmental) would occur, then I could predict where interest rates were headed. Most replied they could not possibly answer my questions so I then turned to my secondary predictor, the large dart board on the back of my office door where I had marked three areas as UP, DOWN, and NO CHANGE. Yes, I really threw darts to predict interest rates. Trust me – between 1983 and 1996 it worked as well as any other system.

Maybe every appraiser should attach this graphic to the back of every 1004MC they are asked to complete and tell the readers to throw their own darts to figure out if the market conditions are trending up, trending down, or stable.

Adding insult to injury, the GSEs asking for the 1004MC to be completed by appraisers actually possess a new database called the Uniform Appraisal Dataset (UAD), which is populated by appraisal data provided by appraisers. This is part of the Uniform Mortgage Data Program (UMDP) and is NOT ACCESSIBLE TO APPRAISERS. In other words, perhaps the best recent data about current market conditions is already in the possession of the parties demanding appraisers fill out the 1004MC, and the appraisers are not even allowed to look into this database to determine market conditions and valuation trends. Maybe using the old dart board will get a better result than trying to predict market conditions without access to data.

In conclusion, the 1004MC is yet another tool being used by lenders to shift responsibility and blame for bad lending decisions from them to appraisers. Lenders are in the business of lending, and deciding to whom and where to lend is part of their business model, not part of an appraiser’s. If the market collapses because lenders make stupid credit decisions, the same lenders should not be able to say the losses they suffered resulted from an appraiser reporting a market as stable 5 or 6 years ago. After all, I’ve never heard of an appraiser telling a small bank in Iowa it would be a good idea to write or buy subprime loans in California, but that’s exactly what happened and the rest, as they say, is history.

Image credit flickr - emilydickinsonridesabmx
Brian L. Trotrier

Brian L. Trotrier

A former practicing attorney with more than 30 years experience in real estate and risk management. The Foundation of Real Estate Associates (FREA) has specialized in providing Errors & Omissions Insurance to appraisers and home inspectors since 1993. As a membership organization with over 6,000 members, FREA is one of the largest and most well respected professional associations in the country, providing E&O Insurance for appraisers and inspectors as well as educational opportunities, member benefits, and legal support.

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5 Responses

  1. Tom says:

    Amen to that brother! I can’t wait to see what happens when the banks themselves determine value ($250k or less) for a property with just a computer program. Who will they blame/sue then for that catastrophe!

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  2. Jack Connor says:

    I knew it was coming in 2004 or before. I predicted to the local paper in Orlando in a series of articles with Mike Thomas. He thought I was nuts and bet me a steak dinner it would not crater. Frankly I do not understand how any appraiser could miss it. But I am an old dinosaur on top of it all. Leverage like speed kills. Everytime.

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  3. Mike Ford Mike Ford says:

    Great article Brian.

    In addition to all the very good points you have made, there is still the underlying fact that 1004MC was so poorly designed to begin with!

    Rather than recognize that, FNMA and GSEs are now telling us to dump our traditional “neighborhood” analyses and criteria in favor of reporting data for only those sales deemed to be ‘comparable’ to the subject!

    the neighborhood information has and should have, very little to do with the subject property. Yes we all know we discuss how the subject fits within that data, but the subject itself should not direct the nature of the data collected in this section of the report.

    In the late 1960’s to early 1970’s developers built very few two bedroom tract houses. More than 90% of the housing in a given tract was NOT two bedroom. It was 3; 4 or even 5 bedrooms.

    Yet if my assignment were to appraise a 2 bedroom house in that same tract today, I would be providing “neighborhood” data of comparable property, or less than 10% of the total.

    Rather than rewriting (and micro-managing) the appraisers neighborhood, or more appropriately , ‘competitive market area’ data GSEs and the ‘powers that be’ would be far better off dumping UAD AND the entire UMDP/MISMO process.

    I creates far more confusion and uncertainty in the marketplace than existed before it / they were implemented.

    I’m not an anti technology luddite. I simply recognize the limitations of science and art.

    So far the ONLY computer capable of reliably (usually) applying both properly in the appraisal of real estate, is the one located between a trained professionals ears.

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  4. Jack Connor says:

    the irony of this whole exercise is the appraiser’s are being driven nuts by drivel and the lenders are opening the flood gates again. Get ready to really run the gauntlet as we are descending now. Wait till all those forced stats point down. I will bet a months pay they do away with the data altogether. They want facts but they don’ want anti lending facts. When the market here in Fl was being driven by the hedge funds I reported the market was flat at best as the market was being driven by outside forces. When the Hedgies dump all that inventory we will see a plummet in prices, growing inventory and stagnation as the market will be looking for a bottom. Deflation guys. The nightmare of all. I relish the realtors explanation for it.

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  5. Jack Schlenk says:

    FYI, Public Act 098-1109

    Addition to the Illinois Law Governing Real Estate Licenses
    “Broker Price Opinion / Comparative Market Analysis
    A statement in substantially to the follow form must be noted in the Broker Price Opinion and or Comparative Market Analysis form.

    “This is a Broker Price Opinion and or Comparative Market Analysis”. THIS IS NOT AN APPRAISAL OF THE VALUE OF THE REAL ESTATE, and was prepared by Licensed Real Estate Broker”.

    NOTE ALL REAL ESTATE VALUE(S) MUST BE SUBMITTED BY A LICENSE ILLINOIS STATE CERTIFIED REAL ESTATE APPRAISER.

    Any and all Broker Price opinions or Comparative market analysis must be in writing and a brief description of the methodology used to develop the Broker Price Opinion, or Comparative Market Analysis.

    My question is there any liability for the Real Estate Broker for Price Opinion and or Comparative Market Analysis that was not supported by the methodology?

    Smart Realtors should recommend pre-listing Appraisal report to their clients.

    Please review the many articles on Jack Schlenk’s Blog

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