The Collective Rot
The Collective Rot Growing Within the Shadows of the Great Real Estate Depression
We are just 11 years past the beginning of the Great Recession. Some estimate the US suffered a $14 trillion loss in wealth. Others estimated the loss as high as $21 trillion. This event is more commonly referred to as The Great Real Estate Depression by those of us who are or were in the real estate industry back then. About 8.7 million jobs were lost, GDP contracted 4.2% and nine million families lost their homes due to foreclosure. Millions of families are still trying to recover from their losses. That is the damage caused just within the real estate industry. For many, it has been a decade of lost opportunity, a decade of survival instead of economic growth. Many have still not clawed their way back to their pre-recession level of financial stability. Most Americans still aren’t as rich as they were before. The pain still lingers and it appears that the Bankers and Regulators are at it again.
Our bankers and regulators (more accurately described as facilitators) have declared war on the Appraisal Industry on four fronts:
- Appraisal Waivers – Fannie Mae instituted a program to waive the requirement for an appraisal thru their Desktop Underwriter. Freddie Mac followed with a similar program. Is it prudent for Fannie and Freddie, both still in a conservatorship, to be waiving any appraisals on loans? I think not!
- Raising the De Minimis – The FDIC, Federal Reserve, and the Comptroller of the Currency raised the loan “de minimis” (definition: too trivial or minor to merit consideration) on some commercial real estate transactions from $250,000 to $400,000. Then, the NCUA Board of Directors quadrupled – from $250,000 to $1 million – the appraisal threshold for nonresidential real estate loans. Later in August of 2019, FDIC raised the de minimis loan value from $250,000 to $400,000, to loans wholly or partially insured or guaranteed by, or eligible for sale to, a government agency or government-sponsored agency. Appraisers fear that “some loans” would soon become “all loans” under $400,000 and that some commercial transactions would soon become all real estate transactions. Read what Ken Harney had to say about all of this. btw: approximately 38% of the active residential listings in our MLS are priced at $400,000 or less.
- New Valuation Products – They’re fast and cheap and many of them can be manipulated by the lender to produce acceptable underwriting results. These alternative valuation products are being pushed on to the consumer as a replacement for the time tested, standard URAR 1004 appraisal. These new valuation products include AVM’s (Automatic Valuation Models like a Zestimate), Desktop appraisals, Hybrid appraisals, Drive By appraisals, BPO’s, and Evaluations. These products are designed and intended to minimize the role of the appraiser in the lending transaction, remove the appraiser entirely from the lending transaction, and/or reduce the time and cost of loan processing. None of these products are considered to be as accurate as the standard appraisal and none of them are intended to protect the public trust.
- Disinformation – A disinformation program intended to discredit the appraisal and appraisers. The banking industry has proclaimed that the new alternative valuation products built with big data and algorithms, can be just as accurate as and can replace the standard appraisal. The banking industry has asserted that there is a shortage of appraisers in this country and that this shortage has caused the time and cost of an appraisal to escalate and slow loan processing. This “shortage of appraisers” myth has been proven to be false and time and cost savings can best be found within the AMC model.
The banking industry is looking for ways to extend revenue streams and increase profits. Anything they can do to take control of the appraisal industry will work to their benefit. So, the doors are being opened once again by the Regulators to allow lenders to abuse the system, make risky loans and make imprudent lending decisions all in the name of greater profits. The stage is being set. And if their aggressive moves result in another meltdown in the real estate industry, so what! The government will be forced once again to bail them out on the backs of the US taxpayer.
Appraisers Warned The World In The Late 1990s And No One Listened.
It Is Now Time To Listen Again as History is About to Repeat Itself.
Prior to The Great Real Estate Depression, appraisers across the country became so alarmed about the unfair, fraudulent, and imprudent lending practices within the appraisal industry that they created and signed the Appraisers Petition urging the US Congress to stop the nonsense. Over 11,000 appraisers signed that petition and presented it to the Congress. The US Congress completely ignored it and, as a result, The Great Real Estate Depression followed.
Déjà vu: Or is it Déjà Poo (I’ve heard this crap before)?
I am proud to say, I was one of those appraisers who signed that petition. I was alarmed back then and today, I am alarmed again. Not long ago, I signed another similar appraiser petition. You can sign it too. Just click on: Take the next step! It is addressed to the FDIC, Federal Reserve, United Sates Department of the Treasury, and President Donald Trump.
Learning from past mistakes:
“We pulled back from the brink of depression only through a massive and unprecedented infusion of public dollars in the banking system, and in other systemically important firms, to prevent collapse. In other words, the public was forced into a position where it had to put a lot on the line to save the financial system from its own follies and from total ruin. And many were bitter about having to do so.
Now, it is time to pay back the American citizenry in full, and not just in the literal sense, but in the sense that there must be reciprocity and mutuality in our structuring of economic policy so that we do not travel this low road again. Bluntly stated, the government reluctantly provided the taxpayer funds necessary to unfreeze the financial markets and get our financial institutions on their feet again, with the expectation that the benefits would be directly meaningful to those taxpayers in their households and communities.
The financial institutions that have been bolstered directly and indirectly by government subsidy and aid must now seek to support those who have been buffeted and injured by the housing crisis.
This must go beyond the corrective actions that need to be taken to rectify current deficiencies. It means that financial institutions need to understand the effects their actions will have on consumers and the country as a whole, and factor those considerations in to their business decisions. This is the high road–a moral and economic imperative that must be the driving purpose that unifies and animates our efforts. Indeed, the high road demands that we become effective institutional innovators for positive changes in our communities and for housing practices that promote community well-being. When we traveled the low road, the only question was: Will this practice make me rich? Taking the high road means we continually ask: Do our financial and legal arrangements contribute to the public welfare and the common good?”
Remarks by Fed Governor Sarah Bloom Raskin – February 11, 2011
The next recession has already started.