Who’s to Blame?
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Looking at who and what MISMO Directors are, is it a surprise that FNMA included language in basic appraisal forms resulting in appraisers having infinite liability and no ownership over their own work product IF they do work for FNMA?…
European Union General Data Privacy Regulations (EU GDPR) may seem like a stretch for an Appraisers Blog topic, but please bear with me.
For some time now, The Appraisal Foundation has been focusing on major international valuation issues other than real estate appraisals.
IVSC is one of the bigger and most detrimental misdirection’s they’ve taken as far as impact on American real estate appraisers; and perhaps real estate appraisers all over the world.
This may well be where the concept of so called “value added” originates. It’s certainly tied to WHY the TAF decided circa 2010-2011 to rename all real estate appraisers “valuators” and why a simple concept like real estate appraisal had to be relabeled as “valuation.”
On the surface, there is nothing wrong about valuation being a simile for appraisal. “I did an appraisal of such and such. The results of my valuation were ‘x’.” If limited simply to alternative verbiage to avoid repetition, there is no problem. An appraisal may be like a valuation generally.
When it is used as a metaphor (an appraisal IS a valuation) is when the problems arise.
For decades the accounting profession and business valuation professions were seen by the public and most government agencies as “valuators” who performed “valuations” of a specific type. At their core (to simplify) they are accounting oriented analysts. Their scope covered anything and everything that was likely to hit Wall Street; or to be analyzed for tax purposes that was an ‘entity’ interest in complex business assets as opposed to fee or leased fee (or leaseholds, etc.) interest in specific individual ‘pieces’ of real estate.
The real estate appraiser looked to a single specific property (real property) as the primary subject of our profession.
Both disciplines use approaches to value that share the same names, but which as applied within each discipline are as different as day is from night.
Income Approach: By Valuator, determines class of asset and what the required return rate is for that asset class in its normal market (Wall Street may be international; national or regional). Starting off with a return rate tells the valuator what the income (or rent if real properties) must be. The published studies of sales involving similar asset classes are compared to reconcile already published return rates. These rates may be from REITS that transferred one, five or even twenty years ago. They are the ‘comparable sales’.
I’m not criticizing the technique as used by certified accountants or business valuators at all. It is simply greatly different than the same named approach when used by real estate appraisers.
Income Approach: R.E. Appraiser identifies economic and physical character of the specific single real property. The appraiser doesn’t start out with a preconceived return rate expectation. Nor does the preconceived return rate dictate what the market rents are. The appraiser goes out into the physical market for physically and economically similar properties and ASKS what the rents are (either existing or asking). He then adjusts them for differences between the properties they are derived from and the subject reconciling the result into a market rent. Vacancy and collection losses are deducted; and operating expenses (which are also different categorically between RE and BV) are calculated and deducted to arrive at Net Operating Income (NOI). ONLY THEN is the sale comparable compared with the subject and a market derived return rate identified.
Simplified, BV and RE Income Approach analysis is performed in reverse order.
Again, nothing wrong with the differences aside from the fact that they must be recognized as being different.
TAF declaring by fiat “Henceforth let all in the realm practicing the sorcery known as business valuation or real estate appraisal hither be known as valuators” does not recognize the core differences.
So, “who cares?” More importantly, why should anyone care?
We must recognize the goal of TAF which contrary to the mandate they were given by The United States Congress is preservation of self rather than preservation of public trust in the appraisal process. To achieve that they must be or become self-supporting or convince the government purse holders that they are engaged in necessary, beneficial pursuits ‘pretty close to’ what Congress mandated. Even if it means renaming everyone’s professions for the charade to work.
After all, it’s not like they can remain relevant by changing USPAP every other year or increasing and then decreasing educational requirements for licensing requirements whenever they want to generate educational revenue, can they?
Besides, real estate appraiser rule making, and linguistic gymnastics isn’t where the real money is anyway.
The ‘BIG BUCKS’ are in pursuit of an intentionally obfuscated and misused international accounting concept called “value added.” Under this concept, arguments can be proffered that real estate appraisal must also ‘add value’ to the investor (somehow).
By becoming (via self-declared proclamation) America’s foremost experts on International Valuation Standards (IVS); renaming R.E. appraisers and refocusing USPAP to be more in line with accounting principles and its purported math-based data absolutes TAF can tap into international revenue streams and interests so that they aren’t pauper’s dependent on unnecessary bi annual book sales.
Is that enough motive though? Is it personal or corporate greed? Not likely. They are a not for profit corporation. They can pay their salaried directors and leadership high salaries and travel all over the U.S. and stay in some pretty nice hotels but is that enough to undermine the American real estate profession? Doubtful.
Since its start TAF and its original promoters have seen the future lies in data. “Big Data”. When TAF was formed and for many years after, few had ever heard of MISMO or it’s not yet born ugly stepchild” UCDP.” This is where the drive to convert who and what appraisers are and HOW we perform our duties arises. The ‘art’ of appraising is now scoffed at and the profession of appraising seems to think it can’t tie its own shoes based on ‘experience’ unless that procedure can be scientifically documented…or at least supported via spurious data dog and pony shows.
WHY is all this happening? Go back to MISMO ®
MISMO stands for Mortgage Industry Standards Maintenance Organization. MISMO ® is the standards development body for the mortgage industry.
Read more – check who Pete Carroll is among the listed MISMO Board of Directors (hint; he IS CoreLogic affiliated)
Hopefully you read who All the directors are. I encourage readers to explore the entire site. MISMO ® is now far more relevant that it once was.
It is what gave us (foisted on us) the expanded obligations under UAD, UCDP, XML and my guess is ENV too.
Now, there is absolutely nothing wrong with corporate America and International Finance seeking faster ways to communicate or conduct business. On the surface it was and is commendable… if it didn’t run roughshod over the one segment of the entire traditional loan process intended to be gate keepers; or to provide a trusted checks and balance within the system. Originally, we provided appraisals that both buyers and sellers could rely upon as well as lenders, with confidence. Investors had confidence.
Then the standards and definitions of who or what our clients are was modified. Only the lender is a client. The consumer was eliminated from necessary consideration – even when they paid for the service!
Then FNMA (check the MISMO directors again folks) fabricated the story about UAD being required because it is less confusing to consumers, appraisers and users alike. Phrases like C3 or Q2 that must be checked by consumers via a two-page translation sheet were so much less confusing than phrases like average, or good, or average to good were. Seeking computer readability even at the loss of appraisal integrity and quality was only a reluctantly disclosed after thought.
Looking at who and what MISMO Directors are, is it a surprise that FNMA included language in basic appraisal forms resulting in appraisers having infinite liability and no ownership over their own work product IF they do work for FNMA?
More MISMO FAQs here.
So, where exactly does IVSC fit in all this? Who normally BUYS the bundled securities packaged by FNMA? Largely international investor would be my bet. Especially when we look to who taxpayers had to bail out last time around.
What ALL of this adds up to is data mining and or scraping of information about people that were never told all their personal financing data, or professional work product was being cut, massaged, manipulated and possibly repackaged for subsequent resale in other markets. Maybe they are related and necessary to the specific mortgage transaction, and maybe they are not. We also create a system where phenomenal behind the scenes data manipulation can take place.
IVS / IVSC may be a truly beneficial thing for international investing and accounting purposes. It does nothing however, for American Real Estate Appraisers (as real estate appraisers only). Those with dual qualifications in BV or accounting may find it applicable. To the rest of us, the question asked is “Why do we have to finance it?”
We are the only ones required by law to follow USPAP. We are the only ones under FIRREA that can lose our livelihood (licenses) for purported violations of USPAP as determined by regulators who in many cases know nothing about real estate appraising or USPAP.
Long term solutions won’t happen overnight. In the meantime, American Senators and Congress Members may want to look to another ‘international standard’. One that deals with privacy rights violations and deception.
If trust in the American financial system and appraisals had ever been “preserved” or promoted we would not be seeing such a call for AVMs, hybrids and other fraud facilitators.
Too bad no one cares, aside from a few (80-90k?) appraisers, and perhaps the American Taxpayer.