New Appraisal Requirements for REOs

Bryan says:

You have misinterpreted the Mortgagee Letter. It does not state “Foreclosure sales can not be used in comparables”. As always the Appraiser MUST consider their affect.

Virginia Appraiser says:

Even a decade later, this rule change remains beneficial. Because when dealing with hud reo appraisal requests through the current mm awardee, the appraiser no longer is badgered by unrelated amc and lender companies representing a new buyer, at a later date to provide final inspection forms for discounted rates. They just order a new full service appraisal for the new loan origination instead, and order that from their own network of appraisers. The hud reo appraisal is for market value purposes, and insurability analysis, cost to cure, identifying deficiency, etc. So the marketing manager company can make informed decisions for disposition of the asset. The hud reo appraisal is not for origination purposes except per rules above, for quick turn sales where no repairs are needed. Even then, the shift away from dual use is nearly complete, dual use appraisal for reo and origination appears very rare or even non existent at this time. Although who knows, once the units move on the hud homestore, that’s the last you hear about them.

The problem with allowing lenders to utilize the hud reo appraisal for origination was that the appraiser would get stipulation, revision, clarification requests from entities whom were not identified as clients, and do not fall within the realm of the client and it’s assignees. Amc companies severely complicated the issue, when they would do things like demand the appraiser sign up for their systems, claiming it was the appraisers responsibility to provide final inspections for the hud reo homestore sales, so a new lender could issue an origination. They would try to charge appraisers for the signup and record check services too, like forcing appraisers to work for free. That would happen many months later when market conditions may have changed, and in the case of investor repairs, or even vandalism after the hud reo appraisals effective date, the character and condition of the home may have changed substantially as well. The lender and/or amc involved in origination later is a separate company and separate client entity. So no more getting a free or extreme discount appraisal service by demanding the hud reo appraiser provide a 1004d with updated market conditions (which is basically a new full appraisal request) for a hundred dollars after some investor spent a hundred thousand dollars remodeling the property. Situations like that.

HUD was seriously in the arrears for standard appraisal fees, but did finally adjust those upward after about a ten year delay just recently. So now they’re back in market alignment, roughly double what predatory amc companies pay appraisers. Still, would be nice if the mm awardee’s were more consistent with something like more than five year contracts. For a while a few of them tried to game the system and outsource appraisal ordering to amc companies which was against the rules, and thankfully that no longer happens anymore either.

The hud mm awardee is similar to a direct assignment lending client, except without the origination and underwriting similarities, and with additional specialty required such as a thorough understanding of construction and condition principals, cost of materials, cost of labor, and how to identify if a home is insurable, insurable with repairs, or outright not insurable and may deserve an array of discounted or liquidation valuation assignments. And the appraiser although in a more team spirit type of relationship with the various hud sales agents, may often find themselves dealing with agents whom do not understand the type of valuation hud wants, as they discount everything even if the unit may be in pristine condition and could move at fair market value in short order.

HUD made a very smart move in requiring agents to list at the appraised value, which put an end to a rather standard industry practice of reo focused agents selling units at extreme discounts to their regular investor clients whom then flipped them back for easy profits later. So even a decade later this rule provides important illustration as to why full service appraisals are necessary to protect investment losses.

Also the contrast for traditionally managed smart disposition like HUD still utilizes, set against amc companies, really illustrates why the ridiculous notion of using property data collectors or fluid limited new appraisal forms, and even the use of appraisal management companies in general is flawed practice. Instead of having dedicated professional appraisers on a limited panel whom are not forced to share compensation with the amc, these industry wide ‘modernization’ and third party management changes have simply been irresponsible engagement methodology. When ‘managers’ are not qualified, adequately educated, nor licensed to complete the tasks they supposedly manage. Who’s still buying this notion the appraiser is no longer vital to the process?

Regarding the dual use of the appraisal prior to this rule, the situation for appraisers was that even if they’ve fired an amc company for their regular predictable incompetence and predatory engagement behaviors, the amc would have some virtual permission to badger the hud appraiser again later. The hud dual use appraisal approach caused me to land on a hundred amc companies approval lists and I spent the next five to seven years dealing with hundreds of quote and bid request emails daily, phone ringing off the hook, etc. Once you’re on the amc list the amc companies bother appraisers to no end, reasons why many hud appraisers spent more time demanding the amc’s remove the appraiser from their lists then ever working with those unnecessary middle management companies. They were never my client but had to deal with a relentless stream of harassment and discount bid requests from amc’s prior to this rule change. Thankfully hud mm awardees no longer use amc’s, or by round about process, cause appraisers to become approved with amc’s whenever a hud home sold. What a relief.

Now, when is the larger lending community going to get a clue and start channeling their reo dispositions back through in house process and ditch the amc companies? Amc’s dominate the reo assignment market and it’s quite frankly, ridiculous and incredibly irresponsible to lenders, investors, and indebted parties whom get swindled if their former properties are disposed of through those amc management avenues. What lenders and investors may not be aware of is how amc companies seek to eliminate full service appraisals entirely, and will rely on unlicensed inexperienced property data collectors and extreme discount if not free bpo’s, or even wholly inadequate valuation such as automatic valuation utilities. That’s when the units no longer sell for market value and the insider extreme discount to flip back game happens.

A decade later after amc’s injection into the reo disposition process, institutional lending investors may have lost billions of dollars. They could have just ordered appraisals directly at traditional full appraisal fees from qualified licensed appraisers and not allowed amc companies to slash appraisers fees in half if not remove the appraiser from the process entirely. And that’s where the kickbacks happen, which is often how amc companies sell the clients. Amc companies are one of the most destructive forces in real estate, and it all happens in the background, not many people really understand how the game is played. The clients are just sold by amc’s on the convenience of one stop shopping and outsourcing the management task, then wonder why their investments take such substantial losses whenever default happens. Enter write downs, creative loan restructuring, passing costs back to taxpayers, bail ins, bail outs, austerity, departing from the obligations of private contracts, government interference. None of that needed to happen.

‘Appraisal modernization’. See how this works yet? Lenders, investors, do yourself a favor; Demand that appraisers not be subjected to the amc industry and amc companies interference and fee ‘sharing’. The traditional process of ordering origination appraisals and reo appraisals from a limited set of licensed appraisers was not all that complicated, and provided much more robust asset protection.

To close, some rough appraiser headcount estimates for your consideration. Might not be entirely accurate but close enough to illustrate the severity of the situation and how much harm the amc industry has caused. In 2014 when this rule change occurred with hud, there were approximately 220,000 appraisers. Now a decade later there is 80,000 or less appraisers, and due to the amc companies presence, over 120,000 appraisers quit the industry entirely. A hundred thousand more appraisers never materialized in the first place because nobody could afford to train as amc’s stole the majority of our fee and workload. Of the remaining 80,000 appraisers today, only 40,000 are available to service the gse’s needs for mortgage origination and default management for this entire country. Over half of all remaining appraisers refuse mortgage lending engagement on all fronts because of how disruptive and damaging the amc companies influence has been. Of those 40,000 appraisers still willing to work with lenders, only 20,000 of them are willing to work with amc’s, and the vast majority do so begrudgingly just to stay in business. If given the option, 99% of all appraisers would gladly shed the amc’s influence and never work with those companies again, guaranteed.

The HUD REO disposition process which does not use amc’s, is among the very rare few last places which professional appraisers can still be treated as, and compensated, as professionals. Just wait, reo is on the way back and they’ll all get to know more about these issues soon.