Gaining Perspective On Our Profession
Pressure that used to be overt has now become covert…
I hold no particular pedigree or credential to speak for everyone in the real estate appraisal profession. All I can do is draw from nearly 26 years of being a part of it. In that time, I have heard almost every opinion on every issue that promises to be the next big challenge for our industry.
It’s true that like everything, change is inevitable. We adapt to new technologies and practices as well as learn new skill sets. From FIRREA to Dodd-Frank, appraisers have continued to evolve when swift moving currents require them to alter their course.
In the wake of the financial collapse, we had major impacts on what we do. A precipitous and prolonged drop in work volume resulted in a significant migration out of the industry and sped up retirements for others. For those of us that remained, we were left with a regulatory framework that now defined who our clients were supposed to be. The net result was the proliferation of appraisal management companies (AMCs). While the use of AMCs is not directly mandated, we now compete for the same space in the market.
In large part, this happened because we appraisers perpetuated the notion that we were being pressured for value from loan origination. In doing so, we may have been accepting guilt as a profession for mass mortgage fraud and the subsequent financial meltdown.
There is however a major problem I see with this. It assumes that a majority of our industry caved to pressure and produced erroneous reports to allow an artificial real estate bubble. I’m not sure we have any clear data to support this but if it were true, then the real indictment would be industry wide incompetency and absence of ethics; not pressure. I don’t think any appraiser could make a case that pressure did not exist but assuming that it automatically results in bad appraisals ignores several factors.
When I have this discussion with colleagues, I always ask if they think that pressure has been contained as a result of new regulation. The answer is almost always “no”. In many cases, pressure that used to be overt has now become covert. The convoluted process just veils the pressure but in no way eliminates it.
By nature of what we do, pressure can never be removed from appraisers. Almost everyone who engages our services has a goal or expected outcome. If it’s not value, then it’s pressure to ignore adverse conditions or provide extensive stipulations. Whether it is a lender, AMC, homeowner, seller, buyer, realtor, contractor, builder or attorney, all want to accomplish something.
If I complete a report for a third party AMC and the final value estimate is significantly short of the purchase price, it’s a pretty safe bet that the deal will die and several parties will be upset with me. In theory, I could lose that client even though no correspondence was ever had regarding value. That’s still pressure. It simply can’t be done away with. Some of the most heated appraisal disputes I have ever battled involved private parties who engaged me just to “have an idea” of what their property was worth. By not appeasing them, I jeopardize word of mouth business as well as my perceived reputation to new potential clients.
As a profession, we need to understand the nature of what we do. Unfortunately, we are in business where the goal is not always customer satisfaction. We provide products and services under the umbrella of unbiased outcome which does not always assure a happy end user. Just as a CPA cannot promise a low tax burden for a client, an appraiser cannot attain a predetermined value. In either case, both would have to misrepresent or commit fraud to comply which would then place them in violation of law, policy, and professional standards.
When an appraiser does produce erroneous reports either by a lack of competency or by intent, there is a system of checks and balances. This could be, but is not limited to lender approval, fines, license suspension, license revocation, civil lawsuits and even criminal charges. Each of these have consequences based on the severity of offense that can result in anything from a damaged reputation to limiting one’s ability to complete appraisals and even all the way to jail time. These safeguards comprise what we call liability.
It is our liability that serves as the most effective tool in maintaining quality, expertise and high standards and promoting the public trust. Liability is in fact, the appraiser’s best asset and very well may be what provides our longevity in the marketplace.
In the age of big data, the future of the profession is often discussed. Most appraisers can more than adequately argue the shortcomings of AVM products but we must ask ourselves why lenders still opt for appraisals when a valuation product is available instantly at a fraction of the full appraisal fee. The answer of course is risk exposure. A low loan-to-value ratio allows them more latitude. Let’s remember that before the financial crash, there was an ever increasing reliance on these products as well as no appraisals at all.
The first thing a potential new lender client wants is a copy of our E&O policy and license. They rarely inquire about our experience or competency within a given market. The primary reason they still utilize traditional appraisals is to mitigate risk on higher LTV loans. This also means they have the option to sue upon a takeback and can recoup some of their losses. From their perspective, both AVMs and appraisals offer estimates of value. What separates us is that we have liability and AVMs do not.
Liability not only serves as a deterrent for mass malpractice in our profession. It is also our best asset in preserving our livelihood. This is why we should embrace it.
By Mike Armentrout, certified residential appraiser serving the Central Ohio area. He is co-founder of AM Appraisals, Inc. and has been involved in real estate valuation for 26 years
Look at the bright side: You’ll all be diamonds some day thanks to AMCs.
There is no bright side. We’re damned if we do and damned if we don’t. Be a number hitter or else be blacklisted and lose business. The smart ones retired. I can’t wait to retire next year!
Thank you !!! I have been saying that for years !!!
Nicely written article Mike. Well done.
Two main thoughts arise for me on reading your article. (1) The liability is understated. It is the broad liability itself that is now used as semi overt pressure by lenders such as Wells Fargo, Chase and several others through their AMC agents. Come in low and decline to be persuaded to raise a value based on their hand picked comparable and you’ll will find your self answering to the state board for some unrelated technical issue in your report.
(2) At least 25% of states have already proven they don’t understand practical application of USPAP requirements.This was proven by Oregon’s admission that they were coercing settlements of purported USPAP violation for late appraisal delivery. This view was still held despite TAF/ASB publishing an Advisory Opinion that late delivery has nothing to do with USPAP. Did Oregon learn? Of course not! Their response is that the issue is not settled until it is decided by an Administrative Law Judge.
Think about that one. The people that write USPAP may not explain its intended legal application unless an Admin Law Judge (hired by the very agency that misrepresented USPAP in the first place) agrees with them!
With 1 in 4 to 1 in 5 states NOT understanding USPAP appraisers are like Sisyphus trying to push that boulder up the mountain side. No matter how hard they try to do their tasks, the risk of being crushed by the weight of special interests and incompetent, complicit regulators will always be there.
It’s really time to take another look at FIRREA. IF it is Congress intent to strip away virtually all systemic collateral protections then lets just admit it. Eliminate regulations, licences, uniform standards and let appraisers have the same freedom to guess at values that an AVM does. Just call the appraisers future uncontrolled wild west methods “Long Experience” vs the AVM “Big Data”. Clearly with the right euphemism any ‘new method’ must be ok!
Of course the results will be unreliable, but at least it will be a level playing field- absent the pretense
Well said !!!!
Could not agree more. Very well done. Thanks
Good article and comments