Let’s Get Rid of Appraisers. What Could Go Wrong?
Why would regulators fundamentally weaken bank underwriting standards?
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.
There’s a proposal from the FDIC, Federal Reserve, and Treasury Department not to require appraisals for some mortgages under $400,000. The Trump Administration wants to disrupt the role of appraisers, but that’s not a good idea.
This change can impact several groups in particular:
1) Consumers: Removing appraisers from transactions can mean a lot of loans get made that shouldn’t be made. Does that sound familiar? We don’t have to look back too far to remember what a market with loose standards looked like. We are still in the hangover phase of the financial crisis a decade later. If there is another financial crisis as a result of these recent actions, it will make credit more costly and less accessible to the consumer. The irony is this proposal is said to save consumers money by lowering appraisal fees and making the loan process faster. But the cost of an appraisal is minor compared to the consequences of doing away with appraisers. Also saving a few days on the turn-time for a 30-year loan is BS.
2) The housing market: Why are regulators diminishing the role of the appraiser, one of the systems of checks and balances for our financial markets? With the U.S. housing market softening now, why would regulators fundamentally weaken bank underwriting standards?
3) Appraisers: There are roughly 95,000 appraiser credentials in the United States. Let’s keep these folks in business. They are the only eyes and ears that financial institutions have for issuing mortgages.
There has been a concerted effort to do away with traditional appraisals and shift more and more valuation efforts to automated valuation models (AVMs) which are notoriously unreliable. Think of the consumer-facing AVM known as “Zestimate” whose results are not within 4.3% of the accurate value 50% of the time. There are now a laundry list of new valuation products including evaluations, hybrids, and AVMs under development that enable lenders to bypass an appraiser inspection the property and whose valuation results are either automated or done by someone who didn’t see the property.
Why are these “products” being pushed by banks and regulators? We assume that it is easier to tweak financial models than it is to pressure an appraiser to “hit” the number.
This proposed rule doesn’t necessarily mean appraisals won’t be required in all situations because loans geared toward Fannie Mae and Freddie Mac are exempt (that’s nearly 80% of all mortgages). Some say it’s not a big deal to raise the appraisal threshold from $250,000 to $400,000 because it won’t affect loans for Fannie Mae and HUD. But if it’s not a big deal and there is no effect, then why is this being proposed in the first place? What is not being disclosed to provide justification for this rule change?
Bank and GSE bailouts by the federal government a decade ago created a moral hazard enabling them to assume that the taxpayer will pay for risky behavior this time around.
What is an “evaluation”? As Ken Harney wrote in the Chicago Tribune on 11/26/2018, “Instead of a formal appraisal, these homes would receive an “evaluation” by individuals who have no appraisal licenses or certification and would not be subject to current state regulatory oversight requirements that govern appraisers. The evaluators could be an “independent bank employee” or unnamed “third part(ies).” They would, however, have to be “competent” and possess “knowledge of the market, location and type of real property being valued.””
THE BOTTOM LINE:
While the current administration clearly believes in deregulation, this doesn’t sound like a move to protect the American consumer and the United States housing market. As recent experience tells us, it’s going to cost us.
Please sign the petition to send a message to federal regulators that exposing the consumer and taxpayer to unnecessary mortgage risk is not supposed to be their role.
This petition was written by Jonathan Miller and Ryan Lundquist
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It’s obvious, the money movers know the next big economic down turn is around the corner, they are scrambling to suck up as much cash before the next crash shuts down this cash cow. Appraisers are a roadblock as well as underwriters, insanity is making the same mistakes over and over again expecting a different result,,,,,this time.
Rather than sign a petition why not actually do what the feds are asking for. This is out for comment. Comment. The feds and others have this out to COMMENT then will take these into consideration before they present to the committee and congress. If you haven’t met with or emailed your reps yet you should be. Have you looked up the committee members to see if one is in your area ? Have you scheduled an appointment ? Have you presented talking points ? They want comments and feedback
Excellent ideas. These great suggestions don’t preclude signing the petition though. The Remember the Bailout links above (graphics) http://appraisersblogs.com/open-letter-2-taxpayers includes an active link to Committee Members that you may not find simply by searching for your Congress Member. (Bottom of article item #3).
Except no one will see the petition
Excellent and timely post, Ryan. Good job! I will make sure to re-post often, so the general public can be enlightened.
This has 100% to do with the AMC REVAA lobby. They have had a difficult time trying to convince appraiser’s to accept below market rates for appraisal assignments. The majority of appraisers are not willing to play their game therefore they are doing everything to diminish the role of the appraiser. Members REVAA have been pushing hybrid products to gain a larger percentage of the appraisal fee. These AMCs have overstepped their role and have taken advantage of appraisers way to long. Time to push back…
I signed on behalf of the American Guild of Appraisers and reposted the petition to the 100%Appraisers Facebook page. I urge others to repost to the Women’s Appraiser Group and any others you folks can think of.
Great article Ryan. NOTE to others that want to sign the petition – it’s a clickfest toward the end as the Change.org petition facilitators try to get you to sign on to every other issue under the sun. It’s still worth taking the extra 15 seconds to click through the unrelated ‘stuff’ to sign this petition.
Thank you Ryan. Signed and shared!
Department of Justice
Office of Public Affairs
FOR IMMEDIATE RELEASE
Thursday, February 9, 2012
Federal Government and State Attorneys General Reach $25 Billion Agreement with Five Largest Mortgage Servicers to Address Mortgage Loan Servicing and Foreclosure Abuses
$25 Billion Agreement Provides Homeowner Relief & New Protections, Stops Abuses
… includes a $1 billion resolution of a separate investigation into fraudulent and wrongful conduct by Bank of America and various Countrywide entities related to the origination and underwriting of Federal Housing Administration (FHA)-insured mortgage loans, and systematic inflation of appraisal values concerning these loans, from Jan. 1, 2003 through April 30, 2009. Payment of $500 million of this $1 billion will be deferred to partially fund a loan modification program for Countrywide borrowers throughout the nation who are underwater on their mortgages.This investigation was conducted by the U.S. Attorney’s Office for the Eastern District of New York, with the Civil Division’s Commercial Litigation Branch of the Department of Justice, HUD and HUD-OIG.The settlement also resolves an investigation by the Eastern District of New York, the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) and the Federal Housing Finance Agency-Office of the Inspector General (FHFA-OIG)into allegations that Bank of America defrauded the Home Affordable Modification Program.
https://www.justice.gov/opa/pr/federal-government-and-state-attorneys-general-reach-25-billion-agreement-five-largest
They had “underwriting” standards and rules and regulations and laws back then too. Didn’t stop the abuse.
15 years later…. Zinger! “This historic settlement will provide immediate relief to…” A day late, a dollar short. Nobody goes to jail. Not coincidentally, MERS skates away again. Search ‘mers service fraud’ for details.
This is absurd. Here we go again. But I think in order to get homeowners/consumers to understand this then we need to appeal them specifically.
No one wants their tax dollars going to bail out the banks AGAIN.
Also, if homeowners could understand that a computer is not going to be able to take all their “improvements” into account and their house is going to end up having the same value as the hoarder next door then we might be able to get homeowners/buyers/consumers on our side.
Homebuilders should be worried as well, we have a lot of new construction projects happening in much older neighborhoods…..these new and improved homes will not appraise by an AVM that only takes the immediate older neighborhood into account.
The list goes on with this, AMC’s, REVAA….. I was so disappointed to read this, why can’t we get our voices heard?!
If consumers are concerned about the relationship between large lenders and the us government treasury funds, they are well advised to stop swimming neck deep in debt full time.
‘Home ownership’ is a misnomer so long as the homeowner does not have the title to their property in their personal safe, and also has hired a title attorney to assure there are no clouded title issues.
I just completed an appraisal today where the purchase contract was $1,130,000, but yet the market value (my appraisal), came it at $1,000,000 (4 Br, 2 Ba, 2,016 sf, 11,00 sf lot, pool, a strong C4 condition / 12 DOM). There were 7 offers to buy the property ($990,000 to $1,130,000), and the winning bid was regardless of the appraised value (appraisal contingency removed / loan of $800,000). The offer was before the physical inspection (was there at the time of appraisal), and the listing agent lived directly next door (he offered me civil use work, no thanks).
The individual consumer often needs to be protected from themselves, from others offering help (uninformed agents), and the general public needs to be protected from those bad individual decisions. All of this for a San Diego high dollar property, and a 48 day rush assignment ($450) done in less than 24 hours.
But it’s those pesky appraisers who are the problem.
Seek the truth.
Broker friend – GOOD friend – was pushed into bid deal for a condo on Wilshire in L.A. LP $1,000,000. ‘Had’ to bid $1,100,000 to get it. His wife really wanted it. Walking distance to her families property on same street when they visit from France. Had a new baby as well. OK 3 yr old but you get the idea – need to be near Grandma when she visits. He also waived the appraisal contingency which is unfortunate because MAX value was $1,000,000 and could have been only $950+-. In this case, he knowingly overbid but still…I bet he’s been kicking himself ever since.
I don’t like markets where this kind of bidding goes on. It’s not always real bidding that’s happening.
Not only was the home inspector there at the time of inspection, but so were the borrowers and agents (fun times). I overhead the story of how they met (newly married), which included the husband going to his wife’s patents home in New York for the first time. The home was said to be over 20,000 sf, and her dad (immigrant rags to riches / good story), was internationally involved with Xerox from the 1960’s to the 1990’s.
Overbid if you want (28 sales in 12 months / 1 current active listing), waive the appraisal contingency, and let daddy overpay if he wants, but don’t blame the appraiser for not hitting value nor burden them with reconsideration of value requests.
The idea of reducing over site (appraisals), is crazy.
Seek the truth.
That would be a value in use reconsideration. If that unit is still in the mls data record without clarification, the listing agent can and should be compelled to disclose the overpayment amount in the now older listing data.
However, if they paid cash over value, they have subsequently set a new benchmark for market comparisons. If that holds up towards other buyers, only time will tell.
Reasons the 80/20 ltv ratio is an important limitation. Skin in the game and all…
Mike, on one of the graphs I provide with reports I compare the number of competing listings with competing median sales prices over the same period. The margins concur that this is a “thing” in L.A.
L.A. is awfully big. Basically its 125 separate ‘cities’ or what should be separate cities all crammed together in prices ranging from mid 200ks to 40 or 50 million. I’d love to see those charts and graphs. Several houses for sale in my neighborhood – no one rushing to overbid…though admittedly I live in what some refer to as the barrio.