The Public Trust – A Failed Goal?
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- Opinion, Estimate, or Prediction? - September 8, 2021
Presumably, "public trust" is the foundational test. Have our institutions, rules, regulations, standards, and social expectations failed us?
The purpose of the Uniform Standards of Professional Appraisal Practice (USPAP) is to promote and maintain a high level of public trust in appraisal practice by establishing requirements for appraisers. Preamble 2018-2019
Our mission is to foster the public trust of our members and the appraisal profession through compliance with the highest levels of ethical and professional standards. The American Society of Appraisers
Its mission is to advance professionalism and ethics, global standards, methodologies, and practices through the professional development of property economics worldwide. The Appraisal Institute
Some ten years ago, financial capitalism suffered a large embarrassment. “The Great Recession.” Most people were harmed, some were ruined, losing homes, families, retirement, and opportunity for offspring. The fickle finger of cause pointed many ways. One of them was the “overexuberance” of residential lending, and the manner in which collateral was “assured.”
When things go wrong, it’s time to look at the basics: the nitty-gritty assumptions and the unanimously “acceptable” actions. Recall that the USPAP tests of appraisal acceptability only require (in short): 1) believability (credibility); 2) peers’ actions similarity, and; 3) clients’ expectations.
Valuation, in the U.S., called “appraisal” is generally subject to the Uniform Standards of Professional Appraisal Practice. Government agencies and “sponsored enterprises,” such as Fannie Mae, Freddie Mac, HUD (FHA), the VA and State regulators generally follow a specific definition of Market Value. Appraisers doing work for “federally-related purposes” are required by USPAP to “identify the type and definition of value.” If this is “market value” it must reflect “the most probable price.”
The nitty-gritty goal of appraisal is “market value.” It is exampled in USPAP Advisory Opinion AO-22. For this discussion, we can summarize into seven bullet points:
- Buyer and seller are each acting prudently and knowledgeably;
- Price is not affected by undue stimulus;
- Buyer and seller are typically motivated;
- Both parties are well informed or well advised, and acting in their own best interests;
- A reasonable time is allowed for exposure in the open market;
- Payment is in terms of cash or comparable arrangements;
- Price is normal, unaffected by special or creative financing or sales concessions.
So… prior to our “great recession,” what was the reality? Is it possible we were ignoring one or more of the above seven parts of “market value”?
The truth, during this time period:
- Buyer and seller are each acting speculatively with exuberance;
- Price is affected by universal euphoria;
- Buyer and seller are avariciously motivated and biased;
- Both parties are uninformed and advised by commissioned salespeople;
- Market exposure was limited or non-existent;
- Payment is in terms of cash or comparable arrangements;
- Price is enabled by unrestricted special and creative financing provided by loan “experts.”
We may consider looking further at each of these truths, and how the role of appraisers and our institutions can prevent such events in the future.
If we cannot attend to this core purpose, all else is like rearranging the deckchairs on the Titanic.
Number 4 is the one I always come back to “Both parties are well informed or well advised, and acting in their own best interests;”
If listing agents aren’t pulling building records, nor it seems asking the owners to document what they’ve done, who did it, and when it was done, measuring the property, filling out the MLS in its entirety (what do you mean its Unknown if you have central AC), and basically choosing to be uninformed, how can they inform others? If in a hot market, one only has days to write an offer, how are buyers agents informing their clients when no home inspection is done prior to offer, there’s no time for an independent appraisal, and local zone history documents can take a few weeks to obtain?
Some months back, this lack of being well informed came to a head when an advertised home (5 Br, 3 Ba, 2,500 sf), turned out to be a 1 Br, 1 Ba, 1,250 sf with a 1,250 sf basement complete with 4 Br, and 2 Ba. Being in CA, basements are like ghosts, and neither the investor (all cash purchase $600,000 / no appraisal), the listing agent, the buyers agent, nor the buyer new how to identity a basement. After some $100,00 in improvements, after being in contract for $800,000, the market value was $550,000.
Seek the truth.
Excellent points George. What do you propose as the solution when The Appraisal Foundation (TAF) itself is the driving force behind subversion of long held standards of performance; and facilitation for special interests like those you cite?
“The purpose of the Uniform Standards of Professional Appraisal Practice (USPAP) is to promote and maintain a high level of public trust in appraisal practice by establishing requirements for appraisers.”
TAF is revising their USPAP dictionary. Apparently there are terms unique to appraisal that cannot be defined in the English language by anyone other than themselves.
Glaringly missing is any proposal to define exactly what TAF means by “Promote and maintain a high level of public trust…” Many if not most of their actions with all the unnecessary USPAP revisions since the mid 1990’s have served only to undermine that trust.
Found this sort of randomly today while looking into assignable contracts. I think a straw borrower came across my desk, declined the order. They’ll have to push that one through with a hybrid I guess.
Do You Know the Red Flags of Mortgage Fraud?
more of…’The players are the problem’. Well, sure, that’s easy. And not the problem. The problem is the Arena where the games are played. The problem is with the Administrators who run the arena, and that’s for the voters to solve. Returning to the appraiser and the appraisal: got a question for all: ‘who’s more important? The Inspector or the Analyst? and please no mention of Inspector Cluzo and no talk about ‘added value’, esp. that last nonsense.
As I’ve stated before, this is all about promoting a high level of “public trust”. If Appraisers want to do anything about it, it’s up to us to get the word out to the public! Post articles like this and related articles as often as you can using social media. Personally, I frequently re-post articles like this including a post I wrote that suggests that it be a requirement of homes to be sold, be appraised first, for complete consumer transparency.
If you want to promote the public trust in appraisal services, remind them there is no such thing as a safe mortgage loan.
“You don’t own it, until you make the final payment and the title is in your personal vault.” Plant the seed.
George, may i ask you a question? i definitely see 1-4 for a while now. i love your wording, but is that the wording you would put in, or are you more sublime with the truth. yelling the words ‘STOP IT’ might cause your work flow to come to an abrupt halt. thanks for some additional thought on this.
I spent more time asking amc’s to stop calling me than I ever spent soliciting them.
And I told off everyone unethical whom came across my desk.
Sometimes I think I should have been nicer to those people, when the email is empty and the phone is no longer ringing.
However, sanity has returned to my little office, and when I need an order, I pick up my old 1985 made in USA Bell phone with curly cord and make one or two outbound calls. Follow with an email. Then get back to doing what I like to do, providing credible appraisal services. Bidding everyday suburbia orders is for the birds.
It’s so easy a caveman with an appraisers license, a phone line and internet connection could do it.