Appraisal Practice
What We Do Matters
by Atom Levi, MAI, SRA, ASA
This article looks honestly at the appraisal professional: where we are, how we got here, and where we are likely headed. I believe that many appraisers have forgotten that as an appraiser their role is to be a disinterested third party. We need to have integrity in what we do. Many appraisers have acted as if what they do does not matter. I believe strongly that what we do matters!
USPAP is silent on the matter of profitability when performing an appraisal. USPAP requires the appraisal be performed in a competent manner. If what has been offered as compensation to perform an appraisal is inadequate to allow someone to perform in a competent manner, then the assignment should not be accepted. USPAP states one of its primary goals is public trust. What we do matters.
We all recognize that appraisal is not an exact science. I have concluded, after nearly 40 years as an appraiser, that appraising is a process of approximation. It is a process to help transform market information and one’s intuition about the activities of buyers and sellers into an opinion of value. As appraisers, we must apply the appraisal process rationally (measuring those influences that can be measured), honestly (not favoring anyone) and without bias (performing diligent research and reporting our observations as they are found). What we do matters.
There will always be disagreements regarding an appraiser’s conclusions when they fail to match someone else’s idea of value or someone else’s needs. That’s life. Disagreement comes with the license. No matter what the intended use of the appraisal (sale, purchase, divorce, estate, condemnation, etc.) the appraisal process must be performed appropriately and with integrity. Remember: an appraisal helps bring closure to an economic activity and provides the rational basis for that transaction. What we do matters.
BACKGROUND
The United States housing market is not a free market place, as we like to think. Without government funding or backing for loans, the number of transactions would be greatly reduced. Without governmental involvement there would be a much smaller need for appraisals. Our national housing market has very large dollops of "socialism" based on the concept that supporting social good is (at least in part) one job of government. Consider the following:
In 1934 (at the time of the Great Depression) the Federal Housing Administration (FHA) was established by Congress to advance homeownership opportunities for all Americans; assist homebuyers by providing mortgage insurance to lenders to cover most losses that may occur when a borrower defaults; and thus encouraging lenders to make loans to borrowers who might not qualify for conventional mortgages.
In 1938 (also during the Great Depression) the FHA Administrator chartered the Federal National Mortgage Association (FNMA), commonly known as Fannie Mae, as a federal agency. The impetus for creation of FNMA was twofold: the national commitment to housing and the inability or unwillingness of private lenders to ensure a reliable supply of mortgage credit throughout the country. FNMA’s primary purpose was to purchase, hold, or sell FHA-insured mortgage loans that had been originated by private lenders. After World War II, FNMA’s authority was expanded to include VA-guaranteed home mortgages. Congress chartered it in 1968 as a private shareholder-owned company and as a government-sponsored enterprise (GSE). Its mission is to provide liquidity, stability and affordability to the U.S. housing and mortgage market and expand opportunities for homeownership.
In 1968, the Government National Mortgage Association (GNMA), commonly known as Ginnie Mae, was created by Congress as a government-owned corporation (not a government-sponsored enterprise entity) within the Department of Housing and Urban Development (HUD). GNMA sells mortgage-backed securities (MBS) to raise capital. Ginnie Mae securities are the only MBS to carry the full faith and credit guarantee of the United States government. GNMA guarantees investors the timely payment of principal and interest on MBS backed by federally insured or guaranteed loans — mainly loans insured by the (FHA) or guaranteed by the Veteran’s Administration (VA). Other guarantors or issuers of loans eligible as collateral for Ginnie Mae MBS include the Department of Agriculture's Rural Housing Service (RHS) and the Department of Housing and Urban Development's Office of Public and Indian Housing (PIH).
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In 1970, the Federal Home Loan Mortgage Corporation (FHLMC) aka Freddie Mac was created by Congress as a government-sponsored enterprise (GSE) in The Emergency Home Finance Act of 1970. It was authorized to create a secondary market for conventional mortgages.
On September 6, 2008, the Director of the Federal Housing Finance Agency (FHFA) was appointed as conservator of Fannie Mae and Freddie Mac – after they went broke following the housing crash of 2005-2007. The U.S. Department of the Treasury has agreed to provide up to $200 billion in capital to FNMA as needed to ensure the company continues to provide liquidity to the housing and mortgage markets.
Consider that 97% to over 100% financing (because of concessions) is available from the FHA. The government (both state and federal) encourages house ownership (usually with tax credits). House ownership is thought to generate a more stable society and just as importantly, taxes. For the record, I am for governmental assistance towards house ownership. I believe it is an OK way to spend tax dollars. But we must be aware of the potential for problems and decide as a society that we are indeed willing to fund this activity.
Together, these various governmental and quasi-governmental entities provide nearly 100% of the financing available for today's housing markets.
WHY APPRAISERS, WHY APPRAISALS?
The American Institute of Real Estate Appraisers, the predecessor to today’s Appraisal Institute, began in 1932 (at the time of the Great Depression) with the goal of creating a group of specially trained individuals — other than real estate brokers — who could act as disinterested third parties in the valuation of real estate. [There were trust issues even then.] As appraisers, we must remember that in a broad sense, because of the financing structure for house purchases in the US, we work for our government and for millions of people in our country. What we do matters.
House appraisers are viewed by most participants in the housing market as contributing little to the process of a house purchase. Many in the process do not want an appraisal at all. Is an appraisal necessary for a house loan? Why? Regulatory lending laws mandate an appraisal. It is not a service that is sought out by the participants, eager to learn that they may not have made such a good deal. It is rather a process that is thrust upon them. The appraisal requirement is generally viewed as a speed bump in the loan process. This is why BPO’s (broker's price opinions) and AVM’s (automated valuation models) have come into favor. In the past many banks, especially the bigger banks, had in-house appraisal departments. This was where many appraisers, both residential and commercial, gained their training. Then, banks outsourced the appraisal process because they did not view appraising as a profit center and they wanted it outside, just like they wanted loan brokers originating loans outside the bank. These are the uncomfortable realities.
Real estate brokers have said that for purchases, the agreed upon contract price should be used as "market value". After all, it was negotiated between the seller and buyer wasn’t it? Why bother with an appraisal? The answer is that pesky little thing known as fraud. The FBI has repeatedly stated that all real estate mortgage fraud they have investigated starts with an appraisal. What we do matters.
With reduced house financing activity has come reduced demand for appraisers. The supply and demand curve for single-family appraisers is presently out of balance and very heavily weighted towards supply. The same is true for commercial appraisers, but to a lesser degree. This is a fact. It is a fact that is, so far, correcting only slowly. How was this imbalance created? It was created by the following confluence of events and thinking: (1) licensing of appraisers in 1991 (after the savings and loan crisis); (2) the recent housing bubble and its now infamous aftermath; (3) the perception that appraising, single-family appraising in particular, was an easy way to make money without too much effort or education; (4) the low standards set when licensing began; (5) the perception that appraising was a new industry because it had never before been licensed; and (6) banks outsourcing the majority of the loan origination process to mortgage brokers.
Residential appraisers who were/are accommodating the real estate brokers and mortgage brokers and were/are doing sloppy work fit the perception that appraising is about easy money and that the ethics and professional responsibility they agreed to, that came as part of their license, (mainly via USPAP), really are just something they needed to know to pass a test. Not honoring client privilege by telling the broker the value conclusion — no problem! Determining value as the sale price when it is not justified —no problem. Not reporting issues with the property — no problem. After all, appraisers are here to help make the deal, aren’t they? Isn’t the appraiser’s role to be a facilitator? Large numbers of "form fillers" — accommodating appraisers who fail to recognize their responsibilities — don't get it: what we do matters.
Appraisers are complaining that their 5, 10, 15 or nearly 20 year career has hit a brick wall and they no longer receive calls from their favorite mortgage brokers because of the HVCC. Licensing took place nearly 20 years ago. These appraisers know no other way of doing business nor are they qualified for anything other than being the handmaidens of real estate brokers and mortgage brokers. These "appraisers" view appraising as an avocation, not a profession or even a vocation. It is something to do until the next moneymaking scheme comes along. They do not invest in data sources for the area in which the subject is located nor historically have they had the higher education that is required by current licensing. They sell themselves and the appraisal process cheap, most often being the lowest bidder for an AMC (appraisal management company). They are in a race to the bottom with each other regarding fees. They fail to recognize that what we do matters.
THE HVCC: BROKEN PROMISES
In one way HVCC can be viewed as an admission that universal licensing and enforcement of appraisal standards has failed. I personally think this is partially true, but the HVCC plays a bigger role: I believe it to be a Trojan horse. As a residential appraiser you need to get your mind around this fact: the HVCC is not about appraisers. In fact, the so-called Independent Valuation Protection Institute required in the HVCC is not, as of September 2009, operational. The HVCC is about banks and mortgage brokers. That is, it is about banks eradicating the role of the mortgage broker. The HVCC is the delivery mechanism for this result. Why? Because of the new lending landscape (fewer loans) and the fact that the banks now want the commissions for arranging loans to remain in-house as a profit center. Appraisers are merely collateral damage in this process of change, because these same lenders do not believe what we do matters.
Both real estate brokers and mortgage brokers are complaining that appraisers are killing their transactions because the sale price is not being reported as value. Both are complaining that the cost of an appraisal has increased. Both say they no longer have input into the appraisal process or "influence over the appraiser" (that is, they cannot withhold payment or threaten no more assignments, or trash talk the appraiser if the sale price is not reported as value). Mortgage brokers are complaining that they no longer can call up their favorite appraiser and “get comparables” to find out what the value is before they order the appraisal (a direct violation of USPAP, but accommodating appraisers have done it for years). They say the purpose of these requests is to "save the borrowers time and money" and if the value isn’t there they would not order the appraisal. In practice, they kept hitting the speed dial, shopping around until they found an accommodating appraiser who would "make the deal". Real estate and mortgage brokers are claiming that they are turning in “unqualified” appraisers now to the state licensing boards. I, for one, would like to know why they were not doing this before. Oh yeah, I remember now: they were getting the value they wanted!
Although important, the previous items are all secondary issues. If I am correct, and the banks want to be the dominant source of single-family mortgage lending, then this change most likely will include the appraisal component. I still believe what we do matters.
KEEPING TABS ON YOU IN THE FUTURE
The Secure and Fair Enforcement Mortgage Licensing Act (S.A.F.E. Act) requires that all states implement a system to license and register mortgage loan originators. It was signed into law on July 30, 2008 by President Bush and must be implemented in all states by July 30, 2010. Along with the HVCC, this act is aimed directly at eliminating or greatly reducing the role of the mortgage loan broker in residential real estate transactions. There will be a few loan brokers left, but the numbers will be dramatically reduced.
HVCC is scheduled to end on April 30, 2011. Per Fannie Mae’s announcement number 09-11 dated May 1, 2009 and Freddie Mac’s announcement number 2009-18 dated July 10, 2009, mortgage loan applications dated on or after January 1, 2010, in order to be in compliance with FHFA requirements, must include the “loan origination identifiers and appraiser data elements”. In other words, the loan broker's license number and the appraiser's license or certification number must be on all loan applications. This way there will be a simple system in place, whenever HCVV ceases, that will allow Fannie and Freddie to easily track offenders, by the subsequent foreclosures that occur, and bar inadequate appraisers and brokers from doing business with either organization. No doubt the compiled lists of offenders will be shared with FHA and other agencies and organizations.
BANKS COMING FULL CIRCLE
The gross fee for an appraisal had not increased since the 1990’s. What industry can survive when it cannot keep up with inflation? Excess competition is what has kept the gross fee for a residential appraisal from rising. Now it is what keeps the AMCs from paying a fair fee to the appraiser.
What was the first thing to happened when the HVCC went into effect on May 1, 2009? Answer: the fee for an appraisal increased. The second was that real estate brokers and mortgage brokers started complaining about the increase. Banks own the large AMCs, usually in cross-ownership situations. The banks realized that the gross fee (not that split off to the appraiser) for an appraisal needed to increase in order for the appraisal component of the loan process to be a profit center. This has been accomplished.
In the future, it is my belief, when the banks are successful in bringing the majority of home loan origination back in-house , the AMCs they own will have a greatly reduced role. I believe the AMCs, if they do not disappear, will shift and become, for the most part, in-house appraisal departments for the banks once again. After all, once mortgage brokers are extinct, what purpose does an AMC serve? There is a good chance the banks, having conditioned the public to a higher, and dare I say it, more appropriate appraisal fee, will employ more in-house appraisers. The banks are viewing appraisal fees as a profitable income stream once again. They may even try to have the threshold or de minimus lowered from its current level. After all, it was the Mortgage Brokers Association that lobbied heavily to have the de minimus raised from $50,000 to the current $250,000 limit.
WHAT WILL THE FUTURE LOOK LIKE?
I believe it will be somewhat different from the current conditions. In the future (my guess is somewhere during the next 5 years) there will be vastly fewer practicing appraisers. However, I am unsure if the supply and demand curve will be in balance. If there is a shortage of appraisers, the banks may have the rules changed so the shortage is either irrelevant or short lived. Perhaps then they might realize that what we do matters.
The current qualifying educational and experiential requirements (increased beginning on January 1, 2008) for an appraisal license are acting as a barrier to entry for future competition. This will help ensure that the numbers will not balloon in the rapid manner they did in the early years of appraiser licensing. Also, getting the required 2,000 + hours of supervised work as a trainee is becoming ever more difficult. Current USPAP requirements restrict a supervisor to only three trainees.
No longer can a supervisor have an unlimited number of trainees. In addition, a licensed appraiser, the least qualified license level, cannot act as a supervisor and train others. And why, as a supervisor, in the current and foreseeable economic environment, would I want to train my competition anyway? There are no reasonable incentives in the system for appraisers to take on trainees. If you call yourself an appraiser then you must understand that your professionalism and ethical practice can have enormous positive effects on society and the economy. This is hard to realize when you are doing one appraisal at a time. The real question is why would anyone want to join an economic activity where the liability is so high, the work requirements so detailed and demanding, the cost of doing business ever increasing, more entities have their hand in your wallet (AMCs, Appraisal Port, etc.) and the remuneration is so low?
THE BOTTOM LINE
Despite my insistence throughout this article that appraising is a necessary and useful profession, in reality I feel that not until the effort involved in producing a competent appraisal is compensated in a fair and realistic manner will what we do really matter.
I hope that appraisers will help move our industry forward with this goal in mind, and fight the forces that are trying to eradicate our future.
Mr. Levi began his appraisal career in 1971. He holds AA degree with an emphasis in real estate and a BA degree with an emphasis in business. He earned the RM (now the SRA) designation in 1978 and the MAI designation in 1983 from the Appraisal Institute. In 1980, he also earned the ASA designation, with a specialty in urban properties, from the American Society of Appraisers. He has been licensed as a real estate broker since 1976. He was an early adaptor of computers in the appraisal practice and published extensively regarding their use. He designed and licensed (to MCS) the first forms for commercial appraisal software. In 1997, he sold to a Fortune 500 company an AVM he had designed. He is a California Certified General appraiser. He still practices and serves as the president of A.L Appraisal Co. in Sacramento, CA. He can be reached at: atom@alappraisal.com
