Last month I mentioned that I attended the Appraisal Institute’s national conference in San Diego on Aug. 1-3. This month I will cover some interesting highlights from the panel discussion on Effective Collateral Risk Management. The panel moderator was Leland Trice, Principal, The Trice Group. The panel consisted of Danny Wiley, VP, Staff Appraiser Manager, LSI; Rick Foos, President, Foos & Associates; Ernie Durbin, Director of Valuation Technologies, Valuation Vision; Mark Liley, Chief Appraiser, Flagstar Bank; and Robert Murphy, Director, Property Valuation & Eligibility, Single-Family Credit Policy, Fannie Mae. In addition to the panel, there was a great deal of participation and comment from appraisers in the audience.
The main focus was to examine how and why the appraisal industry is experiencing “Scope Creep” (a continued layering of additional requirements imposed on appraisers that are put in place to help mitigate historic losses in the mortgage market) and then to discuss ideas to help correct this issue. The panel operated from the premise that these requirements are being bundled with expanded service level requirements that call for compressed delivery times, which can make it difficult for appraisers to work efficiently.
A good deal of time was spent covering how and why the lending industry now has so many new stringent requirements. Trice opened the discussion by explaining that lending was once local and the risk was retained by the original lender. Borrowers were vetted and known and not as much securitization of the loan was needed. As lenders grew in size, their lending practices were no longer local. The lenders began selling their mortgages to Fannie Mae, Freddie Mac, and investors on Wall Street; the benefit of local knowledge was lost. This changed the game and worked well for many years until the practice was abused.
Trice further explained how lending was based on the three Cs of character, credit, and collateral. With the advent of the FICO score, the character element became part of the credit score. Eventually “No Doc” loans became common, relying too much on the FICO score and failing to document income and assets. Additionally, the lenders didn’t add in enough fees and increase their interest rates enough to help offset the risk. Appraisals, in many cases, were just a rubber stamp because “house values never declined.”
The stage was set for the banking/mortgage industry collapse of 2008. The result of the collapse is that many new regulations have been passed in the banking and lending sector. The biggest impact to appraisers came from the implementation of the Home Valuation Code of Conduct (HVCC). The HVCC was eventually retired by the Dodd-Frank Act but most of the provisions spelled out in the HVCC remain today as part of Dodd-Frank or the appraiser independence requirements issued by Fannie Mae and Freddie Mac. Parts of the new regulations were designed to promote appraiser independence, but have also caused a proliferation of appraisal management companies (AMCs) as lenders found them a convenient way to comply with the various regulations.
The panel then discussed how this explosion of AMCs has totally changed the landscape for many appraisers. Everyone agreed that many AMCs do a good job for both their client and the appraiser performing the assignment, but they also agreed that there have been many problems concerning how some AMCs operate. States have been trying to regulate AMCs over the past few years to try to alleviate some of the issues. A major problem with this state-by-state approach was identified by the panel: many AMCs operate across many states or even nationally, while an appraiser is normally licensed or certified in an individual state (or close group of states). Having appraisers tied to a state agency generally works fine, but trying to regulate multi-state AMCs is much more complicated. Having to apply, pay fees, and comply with different sets of rules for each state can be a very expensive endeavor and logistical nightmare for a multi-state AMC. In addition, many states charge the AMC a fee for each appraiser on the panel. This can lead to heavy fees passed on to the appraiser or even a reluctance of the AMC to add new appraisers to their panel in order to avoid additional charges.
The panel suggested having AMCs regulated by a federal agency. Doing so would:
Give AMCs one set of rules to follow and uniform fees to pay
Designate one agency to which they would all answer and from which would be imposed an equal level of enforcement nationwide
Make it easier to measure AMCs’ quality and service
The panel then focused on some of the specific problems appraisers face. The new regulations require anyone involved in the lending process, within certain circumstances, to report potential problems with the appraisal to the proper authorities. Members of the panel have seen the level of reporting grow measurably. Of course, that raises the questions: What kinds of issues should be reported? And what are honest mistakes that can be corrected by the appraiser? It was mentioned that USPAP violations can be difficult to determine and there are many gray areas to consider. For instance, it may not be easy to prove that an appraiser was not geographically competent to do the work, while on the other hand, it may be easier to see if many good sales were missed as comps. The panelists also mentioned that seemingly extraneous complaints from borrowers about appraisers are also on the rise such as “the appraiser’s car was dirty,” especially when the value doesn’t come in as expected. The lenders and AMCs are examining all the complaints to determine which are legitimate and which are not.
Liley mentioned that Flagstar is now reporting all major errors to the states. “Major” may not be as significant as you think. Mark said they will report the appraiser for something such as the wrong zoning. This seems like a small error, but it could cause the bank a big loss on the property if the loan fails. Liley said appraisers should not load these types of fields into their appraisal software templates. Most of these types of errors can be traced to property details loaded into a template that don’t apply to the property currently being appraised.
In conclusion, the panel discussed how the industry still operates in an environment with historic levels of defaults and record levels of repurchase demands. They wondered if the whole system is broken. All agreed that it may be time to update the way appraising is done as it hasn’t changed much in the past 40-plus years. Simply looking at three to six comparable properties and drawing conclusions from that data may no longer be the best method in many situations. Now, much more data is available to the appraiser than a couple of decades ago, so the future will most likely involve appraisers pulling in a larger volume of data (maybe hundreds of possible comps) and running some kind of regression analysis. In this case, the inspection of each comp will no longer be necessary. The panel also suggested that appraisers need to work in a more “real time” environment with the lenders and AMCs. Appraisers should have immediate feedback if there is a problem with the report, so any changes can be made quickly and the report resubmitted.
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