Thursday, April 12, 2007

An Email from “Concerned Appraiser”

This was emailed to me the other day. It lends insight into the housing problems from the appraisal side (printed with permission of the writer).

I enjoyed your recent articles on sub prime loans. I thought you may be interested in another aspect of this lending picture. Many people are critical of the lack of requirements imposed to qualify someone for a loan. I surely agree that stated income, no down payment, low credit scores, etc. lead to potential loss. However there is another side to this problem that is not being discussed. That side is collateral.

The federal government created The Appraisal Foundation after the savings & Loan bailout of the 1980's. This resulted in the creation of the Appraisal Standards Board and ultimately the licensing and certification of real estate appraisers requiring the use of Uniform Standards of Professional Appraisal Practice (USPAP). These USPAP requirements are required when an appraiser prepares an appraisal of real property and appraisals are required for federally related transactions. However this requirement became a "burden" to the lenders and the federal government instituted a de minimus threshold of $250,000. Appraisals are not required for loans under $250,000. The banks and others used opinions of value given by real estate licensees, AVM's (automated valuation models), tax assessments or loan officer opinions to make those loans. While one or two of these of loans do not put the economy at risk I think there is a great potential of risk when this is multiplied many times over the entire banking industry for the 50 states.

I live in East Texas and the local appraisal districts do not have a single licensed or certified appraiser on their staff. The appraisal review boards have no licensed/certified appraisers on their board either. However real estate loans are being made based on the valuation assigned by these groups. Many banks make loans on real estate based on the opinion of a real estate broker or loan officer. Many real estate brokers have never taken an appraisal course in their life. Their opinions are used because they are cheaper and faster than a "real" appraisal. And, of course, everyone knows that real estate agents know everything about real estate. Then there is the AVM's. Just give the size and zip code of your home and a computer will spill out the value. The computer will not know about the foundation problems or leaky roof.

Sorry this is so long. But it only describes a small part of the valuation side of the problem. The lenders think they have problems now with the inability of borrower to pay. Just wait until they find out that their collateral is worth a whole lot less than they thought!

I wonder if they used Zillow.com for their appraisals (tongue in cheek)?

2 comments:

Adm Revwr said...

I currently work for an appraisal management company where I administratively review hundreds of appraisals per week.

Disclaimer - I'm not licensed - but mentored for 22 months under two general appraisers and completed my 90 hrs of course work.

While I agree with 'concerned' in a general sense, I must take him/her to task on the concept of 'real appraisals'.

The number of incomplete, inconsistent and illogical appraisals I see on a daily basis is astounding.

The industry is littered with economic hacks that perpetuate simplistic concepts that are passed down from their mentors. The coursework to gain an appraisal license is laughable (in most instances). The mentoring process (experience) is a joke as well; as bad habits and rudimentary data analysis is ingrained into the apprentices (in most cases).

Don't get me wrong ... there are intelligent appraisers in the field doing top notch work ... however, it appears that this may not be the norm.

The industry is stuck in the dark ages with the adherence to basic appraisal processes and analysis.

There is a strong aversion to complex statistical analysis that would make the appraisal process more 'science' than 'art' (appraisers like to talk about the process being a combination of art and science ?). Talk to an appraiser about even basic linear regression and r(squared) and your likely to receive a puzzled look.

I have not even touched on 'pushing' or 'finessing' value to 'make the deal fly'. That is a whole other topic entirely.

By the way ... I see huge numbers of appraisals for loans under $250k even $100k.

Not to rant to much ... but there are just as many (or more) incompetent (or corrupt) appraisers as there are intelligent (or upstanding) ones.

Also... As credit tightens and lending decisions gravitates from risk based to collateral based ... 'real' appraisals will no doubt become more predominate. I just hope appraisers are up for it.

I do wonder like 'concerned' why real estate collateral is not getting any attention. I must mean that it has become irrelevant (oh the horror). We shall see though ... as this debacle unfolds.

Jim in San Marcos said...

A hat tip to both "Concerned Appraiser" and "Adm Revwr."

You won't read any of that in your local newspaper. And it gives you a true frame of reference as to present conditions.