Open Letter to Taxpayers

Michael Ford

Michael Ford

General Certified Real Estate Appraiser at Michael F. Ford Appraisal
Over 28 years appraising all property types and interests, in Southern California real estate. VP/Chairman National Appraiser Peer Review Committee, American Guild of Appraisers, #44OPEIU/AFL-CIO. - Michael Ford on e-AppraisersDirectory
Michael Ford

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Open Letter to Taxpayers... After All, Taxpayers Aren’t Stupid

An Open Letter to Taxpayers

Dear Ms; Mrs. & Mr. Taxpayer:

In a recent article published by Housing Wire; authored by Ben Lane (November 20, 2018) it was reported that our federal “regulators” are at it again.

“At what?” One might ask.

Facilitation of increased LOAN FRAUD & consumer deception with Taxpayers yet again left holding the bag. Click here for the article

Back in 1994 (actually it started in 1989-91 when FIRREA was being drafted) the Fed agreed that the loan threshold for banks when an appraisal of real estate would not be required was $250,000. That was roughly TEN TIMES the original exclusion amount proposed for FIRREA ($25,000). The argument then was that it made no real sense to charge a consumer-homeowner a full appraisal fee for simple secondary financing of comparatively very small amounts. For example; in a predominantly $300,000 neighborhood, a homeowner with a $100,000 first mortgage or deed of trust that only needed $25,000 for a child’s college expenses clearly had enough equity to collateralize both loans.

Reacting to either mortgage banker pressure; OR perhaps a simple typo adding a zero, Congress in its infinite wisdom raised the threshold to $250,000 vs the drafted language exemption of $25,000.

Look how well that worked out in 2008… a mere fourteen years later when the world economy was at risk of total collapse arising out of the American Real Estate Market collapse and its ripple effect.

For the past several years, Bankers have argued that rising appraisal costs posed an unfair burden on consumers… though due to bank price fixing, many appraiser fees [1] were as low or in some instances LOWER than they were in 1994. This was after first arguing 100% fabricated stories of nationwide appraisal shortages were causing consumers unreasonable delays in obtaining mortgages. The delays are actually caused by loan officers failing to order appraisals until after loan approvals were obtained subject only to favorable appraisals. The last step of most escrows aside from funding itself.

Now that the shortage myth has been debunked, bankers have adopted the consumer-cost-concerns fairy tale. When is the last time any reader ever heard of bankers being concerned about costs of their services to consumers?

concerns raised about the time and cost associated with completing residential real estate transactions.”

So I ask myself, what is the reason bankers are so concerned all of a sudden with eliminating real estate appraisals on the taxpayer-insured or at least backed security for the loans they make?

The answer is incredibly simple.

PROFIT.

With virtually all loans either insured by private mortgage insurance; or government guarantees the risk of loss to the bank and more importantly risk of compensation loss to the CEO’s and bank boards is almost zero. Too Big to Fail has become a fact of life in American Finance. If bad loan policies bury a bank, no worry…FDIC will step in!

The combined generosity of taxpayers coupled with the absolute knowledge that no big bank CEO or Board Member will ever go to jail for their future financial crimes eliminates all meaningful risk for making bad loans. As long as some illusory pretense of compliance with ‘prudent lending practices’ can be created and maintained.

After all, taxpayers aren’t stupid… just incredibly generous.

SO, what’s the problem? Why is anything else needed in this banking environment?

First off, rising home values and prices (generally a good thing) have gone up much faster than wages and income. Fewer people can qualify for home ownership. Fewer new home loans are being made.

The next item is the abnormally low (extremely low) interest rates over the past three to four years has spoiled existing homeowners. Only the most foolish are willing to refinance their 4% loans for higher 5 ½% to 6% loans for frivolous non-critical expenses. Fewer loans are being made.

The last item is the inherent checks and balances intended to protect taxpayers and consumers alike. Appraisals. Historically to assure buyers are not paying too much; sellers are getting fair prices, and lenders are not accepting under collateralized loans. If all property were worth what is being asked, there would never be any price reductions or need for negotiation. Fewer loans are being made when appraisers do their jobs properly.

In recent years, the finance process has virtually eliminated consumer/taxpayers concerns from consideration. Virtually ALL state laws that held a person paying for a service was entitled to at least fiduciary consideration (if not outright client status & rights) were over tuned by the simple expedient of redefining ‘client’ in federally regulated transactions to mean only the lender. A client with little or no risk of meaningful loss.

Bankers Solutions to reduced loan demand:

  1. Bring back the exact same creative financing that helped create the borrowing frenzy of the early 2000’s. Low teaser rates; stated income loans and new rules & services to allow poor credit to be treated as good credit.
  2. Outright deception – get those folks with seasoned FHA or other insured loans to refinance to ‘escape’ their mortgage insurance… even to their own long-term detriment. Hustle deferred payment no closing cost loans as an inducement. Particularly during holidays. Develop aggressive marketing strategies.
  3. Eliminate the deal killers! ‘Low’ or actual market value appraisals are inconvenient when more than market value is required to make a deal work. The very last hurdle to overcome for the next round of consumer/taxpayer fraud to be perpetrated is the appraiser. Whether a sale or a refinance, clearly defined market value simply cannot be permitted to keep killing deals in the contracting mortgage bankers market.

Since 2009 several steps were undertaken by the banking world (bankers, title companies and their affiliates).

First effective appraisal price fixing by banks was achieved by HVCC & later solidified by TRID. Hyped as a safety measure or firewall between weak willed appraisers and dishonest commissioned loan brokers, HVCC was the first nail in the coffin of professional appraisal services in banking.

Control outside of the banks themselves over the appraisal process was turned over to third parties who collected fees direct from consumers OR entered into billing arrangements with banks, that allowed the banks to participate in profiteering from so called ‘appraisal fees’ that AMCs had already discovered. While fees paid for or to appraisers remained stagnant and suppressed for nearly a decade; the ‘appraisal costs’ charged to consumers at least doubled to around $650+/-. The ‘excess’ that was often more than the appraisal cost itself was added profit to the bank or AMC. So much for the myth of bankers concerns about fees.

As appraisers fought back against price fixing, low fees and unneeded scope of work creep both the AMCs and bankers resisted. They tried to foster a misguided trust in the infallibility of Big Data computerization solutions (AVMs); automated appraisal scoring systems misused for appraisal reviews, litigated against Dodd Frank mandated reasonable and customary fee payment requirements and lied about purported appraisal shortages.

All the time trying to circumvent consumer protection rules and taxpayers safety financial reform legislation.

The Federal Housing Finance Agency (FHFA) first created a White Paper of automated appraisal (AVMs) techniques using hedonic regression. Ostensibly it was for purposes of opening dialogue on AVMs, but in less than half a year virtually all federal agencies including the Treasury Department appear to have hopped on board in support of the thoroughly refuted and proven inadequate hedonic linear regression form of valuation as a credible alternative.

A process designed as no more than a limited benefit tool of professionally trained appraisers has been mischaracterized and misused as a purported replacement for appraisals. Despite the phenomenal record of credible result failure.

Why is that important?

Evaluations are to be used in lieu of appraisals with banks self-attesting to ‘values’. AVMs will be used for this.

In 1989 America realized greater uniformity and standards of professional appraisal practice were required to prevent the next S&L crisis. Now, banks are being given carte blanche to self-certify values with virtually NO CHECKS AND BALANCES or uniformity of process. None.

Literally any file clerk can type in an address and develop and AVM for any property. If the value is not ‘acceptable’ it’s easily fixed. By making a very few tweaks to the comparability characteristics so that lower indicators are excluded or higher indicators are included, the desired value can be easily reached.

Any trainee appraiser that has ever attempted to search for the most relevant potential comparable sales is aware of this. It takes conscious, informed effort coupled with integrity to identify proper comparables. Requirements that don’t exist in interested party commissioned lenders self-certifying of value.

So, what can the nonpartisan taxpayers and consumers do about this to protect themselves?

  1. IF acting as a buyer, insist on an appraisal. Do NOT allow yourself to be hustled into a no appraisal contingency loan. It is your absolute right. Do NOT let the agents involved pick your appraiser. You do it. Select from the Appraisal Sub Committee (ASC) National Registry of Appraisers. Just type in your county and see who’s close. CALL and interview them!
  2. Write your own Congress Member and Senator and ask them to intervene in this process and prohibit raising the de minimus limit when evaluations may be performed instead of appraisals.
  3. Contact Congress Member Waters at https://democrats-financialservices.house.gov/ Phone number is at bottom of site if email system excludes you due to district bounds. As the Ranking Member, Member Waters will most likely become the new Committee Head when new House Members are sworn in January.

No bank that is FDIC insured should be allowed to waive appraisals. Not even at the $250,000 limit.

Consumers have a right to not overpay. Taxpayers have a right to expect Congress and Federal Regulators to learn from the mistakes of the past.


Footnote:

  • [1] Fees actually charged by the appraiser for their professional services – excluding add on fees charged by banks and their agent Appraisal Management Companies (AMCs) and mandatory portal uploading fees.
Image credit flickr - James Willamor
Michael Ford

Michael Ford

Over 28 years appraising all property types and interests, in Southern California real estate. VP/Chairman National Appraiser Peer Review Committee, American Guild of Appraisers, #44OPEIU/AFL-CIO. - Michael Ford on e-AppraisersDirectory

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32 Responses

  1. Nathan Tschappler on Facebook Nathan Tschappler on Facebook says:

    The proposed changes do not apply to FHA, VA, or Fannie Mae/Freddie loans.

    So they apply to fewer than 5% of loans made in this country.

    And i know a lot of the smaller bankers and 1,000% they will still order an appraisal LOL

    Why don’t you write articles about appraisals and I’ll write articles about loan environment today?

    Pick a lane and stay in it.

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    • Taunya Richards on Facebook Taunya Richards on Facebook says:

      Really? You don’t think Mike knows what he is talking about? I will grant you that a lot of appraisers don’t know a lot about the mortgage business, but Mike is not one of those appraisers. And I don’t usually agree with him.

      Have you read the treasury report? This IS proposed for FHA. They ARE proposing elimination of GSES (which I’m not opposed to). There IS pressure to eliminate the appraisal process to make it so consumers can buy a house like buying a car or ordering an appraisal.

      There isn’t a thing that isn’t true that he wrote. Now I can argue with him that the fees have doubled because if Mike spent 2 days working in an AMC he would be shocked by the work and “professional” behavior of some appraisers.

      Both sides need to come to the table and modernize the system (starting with ordering the appraisal within a week of the loan application).

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      • Nathan Tschappler on Facebook Nathan Tschappler on Facebook says:

        Taunya I never said Mike doesn’t know what he’s talking about.

        Im sure he’s very excellent and good appraiser.

        Obviously I did read the report because my comment was based on facts inside the report

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        • Taunya Richards on Facebook Taunya Richards on Facebook says:

          If it was 5 percent we wouldn’t be sounding the alarm.

          And he’s right about regression analytics. I’m still learning to use regression but it’s held very very loose. Often it makes no freaking sense.

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          • Claire Ryder on Facebook Claire Ryder on Facebook says:

            I don’t use it.

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            • Baggins Baggins says:

              It’s a test move Nathan. Get a clue. It will quickly be extended to federally related transactions, like practically every other regulation before it. Go sell a home or make another nifty website, hook a few more unsuspecting customers or something.

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              • Rich Michaels says:

                While as much as I disagree about what Nathan said.

                What exactly about it is a test move? Are you spreading rumors and myths?

                When was the existing $250k limit enacted? (1994?)

                And has it spread to all mortgages?

                NOPE- so the last 25 years it’s never happened – maybe by 2050?

                Get your head out of the sand and back to reality

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                • Baggins Baggins says:

                  Reality is the system is changing swiftly at exponential speed compared to then. Murphys law. If it’s of no effect, why is it needed? I digress to the article writers end statements. Thank you.

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      • Claire Ryder on Facebook Claire Ryder on Facebook says:

        Taunya Richards you are very correct. It applies to 40% of the loans in the country. I don’t agree with Mike often at all but if you read the actual articles not written by appraisers, it gives the stats.

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        • Nathan Tschappler on Facebook Nathan Tschappler on Facebook says:

          Claire the 40% is the possible number of loans on properties below $400k that this COULD apply to – I just pointed out that in reality it is nowhere close to 40%.

          Based on real life facts.

          A lot of banks won’t lend without significant downpayment (20%) if it isn’t an agency loan – and from friends who are bankers – very few will be able to get UW committee to be okay without an appraisal.

          Let’s all use common sense

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          • Baggins Baggins says:

            Between waivers, hybrids, evals, amc’s, fictitious feelgood deminimus ‘safeguards’…

            Tell me Nate, what amc does Prolending Mortgage out of TX use?

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    • Bill Johnson says:

      Pick a lane? Nathan, you say “they apply to fewer than 5% of loans”, however this is on top of a 10 to 15% reduction in oversight due to government started, and supported property inspection waivers (PIWs). This has nothing to do with money to the APPRAISER, but is all about money to the BANKS.

      Seek the truth.

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      • Nathan Tschappler on Facebook Nathan Tschappler on Facebook says:

        so when I point out a mistake you’ve made you then move your goalpost to include PIW?

        PIW only apply to properties that have a very high number of comps in area or sold recently (address MUST meet certain criteria in a computer algorithm)

        AND must be at least a 20-50% downpayment.

        Isn’t this a common sense guideline to a reasonable person? Thanks

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        • Advocate says:

          You are very much out of touch on the purpose of an appraisal and the safety it provides to the consumer, housing industry and the economy as a whole. These actions, regardless of how minute you may think they are, are the same actions that causes the S& L crisis in the late 1980’s and the very same practices that caused the world wide financial crisis in 2008-2009. Another crisis is in the works because of these practices.

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        • Bill Johnson says:

          The big picture Nathan is that perhaps now 20 to 25% of residential loans (PIW, increased threshold, etc.) will be now backed by the American public (You and me), without proper and thorough checking of collateral (real property). Please tell me how taxpayers are less financially liable, and better protected when up to 1 in 4 now have no independent checks and balances (appraisal)?

          As it relates to “properties that have a very high number of comps”, as an appraiser who works in San Diego County (population 3.1 million), having 10 or 50 sales that may or may not be comparable, is no shortcut when INDIVIDUAL properties are looked at/valued.

          Concerning “must be at least a 20-50% down payment”, come look at my appraiser files where I have thousands of assignments that reflect a 20-50% decline in value all within a few years (financial crisis).

          “Isn’t this a common-sense guideline to a reasonable person”? With properties at or near all-time highs, and the loans to buy them following suit, common sense tells me to increase the checks and balances, and not reduce them. It should be a time to slow down the buying process, but instead the powers that be want to add gas to the fire.

          Seek the truth.

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      • Nathan Tschappler on Facebook Nathan Tschappler on Facebook says:

        I found your goalpost

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        • bill johnson says:

          Was it next to the no doc loans, the negative amortization loan, the FHA 3% down loan, or the 100%+ VA loan?

          It makes no difference, the appraiser will be to blame.

          Seek the truth.

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          • Baggins Baggins says:

            A boutique lender mortgage banker dude, here to tell appraisers how it is. Someone upset someone. The mb’s are going to really love it when these automated systems replace them next. We’re standing up for consumers but he said don’t worry about it, everything will be fine. Ha. Which amc does the Prolending group use? How many waivers has the Prolending group utilized lately? Does Prolending group utilize hybrid appraisal services and evals in lieu of full appraisals for any sales or refinance scenarios of real property? These are harmless questions about supposedly benign regulatory points so there should be no problem answering them honestly.

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            • Mike says:

              Bagging – no need to pick up the pitchforks.

              OP is not wrong about his points

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              • Baggins Baggins says:

                Until I know if this guys brokerage uses amc’s or not, the pitchforks stay out and ready. And someone went and mentioned raising demins again, I’ve already turned green it’s entirely too late to take it back. Lose 10% of orders here, 5% of orders there, 2% of orders here, take a 90% haircut on hybrid work, 50% amc fee cut, 2% payment check fee, miss a few on waivers now and then, lose a few investment orders to raised demins now and then, what’s the difference, it’s just income numbers don’t let it bother you. Let’s turn to commission based bankers, they ought to be able to pull this industry out of the fire.

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    • chris says:

      So what you are really saying is it’s o.k. that a 250,000 loans COULD put the homeowners under water?

      Typical loan officer attitude ! No regard ! Keep trying to get the homeowner to refi to save $150/month and throw away 7 years of interest payments.

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    • Bob says:

      You’re right.

      But you didn’t have to add the “pick a lane” did you?

      Just seems a little agressive.

      Thanks- Bob

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    • Hello Nathan,

      Unfortunately, the ‘lane’ that includes real estate appraisal also includes aspects of the mortgage banking industry. Read MISMO’s collaborative talking points (published on their site, as well as linked by me in numerous articles, including here in AB).

      There is no equivocation about it. MISMO intends that ALL appraisals become fully automated. That includes residential and commercial.

      You may (from your pictures only) be too young to remember the S&L crisis that triggered regulation of appraisers. You may even be too young to have been working (anywhere?) during the events that lead up to the Great Recession and collapse of real estate values nationwide circa 2007-2008.

      There were a lot of reasons for the last collapse but certainly one of them was that too many people looked at the lending process through the narrow focus of a straw (staying in their lane if you prefer) and failed to see the bigger picture until it was too late.

      I don’t know if you’ve read Hyman Minsky or not he was a 20th Century economist and scholar who was largely ignored until after his death. The crash or recession of 07-10 (depending on sources the crash lasted from 07 through 08 causatively and later effectively) (Financial Instability Hypothesis http://www.levyinstitute.org/pubs/wp74.pdf and https://en.wikipedia.org/wiki/Hyman_Minsky). You may have to cut and paste links they may not work in this medium as direct links.

      The wiki article is the easiest to follow, but in a nutshell, he suggests the period of greatest financial risk is when everyone is seeing great profits, rather than when investors and regulators finally become concerned about financial markets instability. If you read the longer hypothesis note the comments about “bankers innovation”.

      It’s as if he had a crystal ball that allowed him to see the banking and regulatory system of today.

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  2. Cotton Cornell says:

    Its time for appraisers to refuse to work for these azz clown amcs.

    Have a blessed day!

    ***This comment was edited by AppraisersBlogs Team. Profanity is edited out because it’s inappropriate within the context of this blog.***

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  3. Mike says:

    I just don’t get it. If this passes, Federal Regulators are contributing to another housing crisis of which the appraisers will be blamed.  As you know, there is a perception that appraisals are an inconvenience, especially when the appraised value does not meet the contract price. Home buying is undoubtedly the largest financial investment a person will make in their lifetime. The parties involved are getting hung up paying an appraiser anywhere from $400-$600 when the loan originator is making well above that and the Realtor is making over $10,000. I would gladly pay for an appraisal to have peace of mind, hell, it could potentially save a person thousands of dollars if the home was overpriced. For the record I am not bashing other industry professionals, I am an appraiser and a newly licensed Realtor. I think we all play a crucial part in a vibrant & healthy economy. Welcome to 2008 again.

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  4. Appraiser says:

    Nathan is right about the loans — you can be as salty as you want to but the reality is this article is misleading – this proposed change is NOT applicable to more than 95% of home loans in the USA– probably closer to 99%.

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    • Nothing misleading about it at all. Links are also provided to assist readers that are interested in original sourced articles. Affected loan transactions are approximately 965,000 a year per source article, derived from FDIC stats.

      That just under a MILLION houses with loans from banks insured by FDIC. If all were maxed limit loans, that’s $386 BILLION in loans secured by unverified collateral. Risk should always be considered in light of worst-case scenarios initially.

      To put it in a perspective that is NOT misleading, that’s the equivalent of building costs for 29.69 Nimitz Class Aircraft Carriers (they only run around 13 billion a piece).

      Imagine Congress saying to the Defense Contractors…”$13 billion each? Sure, we’ll TRUST you for all 29 !” Why does the mortgage industry think it is more deserving or trustworthy than our national defense contractors?

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  5. Nathan, I’m in my taxpayer lane. It’s a coincidence that I also happen to be an appraiser. I have no problem if de minimis is raised for anyone at all.

    Just remove FDIC savings and depositor insurance from the banks that choose to make these types of inherently risky loans. As a taxpayer, I see zero reasons for me to have to underwrite protections for depositors and other investors in spec investment organizations.

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    • don says:

      Before the popularity of FDIC, most loans were made with RECOURSE loans very popular among S&Ls and small Mortgage houses. These lenders would accumulate a portfolio and resell the loans. When n loan in the portfolio didn’t perform as Guaranteed the makers swapped it for another and took back the bad performing. Lenders worked hard to keep their reputations, so they could make more loans, as they may have to foreclose on that origination.

      Most of those loans were made thru in-house agent-appraisers and good or bad reputations were established at the S&L or Mortgage Company level.

      This happens today but on a much larger scale. Poor lenders failed over time.

      Do we or don’t we want failures on a national basis?

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Open Letter to Taxpayers

by Michael Ford time to read: 7 min