"Appraiser Independence"

[George Hatch]

To all,

No, we aren't talking about militancy, revolution or anarchy. We are talking about appraisers operating independently from improper client pressures to bring in a desired value. I have always found this to be an interesting topic. Let's discuss this:

TITLE 12 -- BANKS AND BANKING

CHAPTER II -- FEDERAL RESERVE SYSTEM

SUBCHAPTER A -- BOARD OF GOVERNORS

OF THE FEDERAL RESERVE SYSTEM


PART 225 -- BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL (REGULATION Y)


SUBPART G -- APPRAISALS



225.65 Appraiser independence.


(a) Staff appraisers. If an appraisal is prepared by a staff appraiser, that appraiser must be independent of the lending, investment, and collection functions and not involved, except as an appraiser, in the federally related transaction, and have no direct or indirect interest, financial or otherwise, in the property. If the only qualified persons available to perform an appraisal are involved in the lending, investment, or collection functions of the regulated institution, the regulated institution shall take appropriate steps to ensure that the appraisers exercise independent judgment and that the appraisal is adequate. Such steps include, but are not limited to, prohibiting an individual from performing appraisals in connection with federally related transactions in which the appraiser is otherwise involved and prohibiting directors and officers from participating in any vote or approval involving assets on which they performed an appraisal.


(B) Fee appraisers

(1) If an appraisal is prepared by a fee appraiser, the appraiser shall be engaged directly by the regulated institution or its agent, and have no direct or indirect interest, financial or otherwise, in the property or the transaction.


(2) A regulated institution also may accept an appraisal that was prepared by an appraiser engaged directly by another financial services institution, if:


(i) The appraiser has no direct or indirect interest, financial or otherwise, in the property or the transaction; and


(ii) The regulated institution determines that the appraisal conforms to the requirements of this subpart and is otherwise acceptable.

The italics in the quote above were added by me to identify the main element of this discussion.


As you can see, the federal government clearly wants those loan decisions that require appraisals to be use appraisals prepared by unbiased appraisers. That is, by appraisers who are as free from improper pressure from their clients or employers as possible. This regulation is one of a couple that effectively prohibit a lender from accepting an appraisal that was engaged by a homeowner or other third party to the appraiser/lender relationship. It is also the source cited when lenders set up appraisal department staffs that, in theory, are not supposed to answer to the loan origination side of the business.

I remember when I was working for a commercial bank back in the early 1990s. That appraisal staff setup was great for appraisers. Their organization was set up so that the chief appraiser was a VP and had equal stature to the head of the business development department. The loan originators were not allowed to step foot on our floor, not could they even call into the appraisal department to speak to an appraiser or loan processor. All commuication between the appraisers and loan originators had to go through their respective channels. If an appraiser needed a phone number or some piece of information for the property, the appraisal secretaries (admin asst?) requested it from the loan processors. If an LO had a problem with a value or an appraiser, they had to send their gripe up through their department head, who contacted our chief appraiser. The chief appraiser would call the appraiser in and we would hash it out over a speakerphone. Our department had a policy; the chief appraiser would back his staff up no matter what, but you had better be right. The penalty for failure was pretty severe. Ahh, those were the days....

Anyways, back to the subject at hand. This regulation is, in part, the source of our current version of the "Lender Pressure" conflict. While prohibiting the lenders from accepting appraisals engaged by private parties, it still allowed lenders to accept appraisals engaged by "or it agents", also known as mortgage brokerages. It also failed to go far enough in insulating the appraisal staff from the loan origination side of the business. Anytime a fee appraiser's main contact with a lender is through either the LO or their processor (who works for the LO) there will be at least some pressure brought to bear on the appraiser to bring in the desired results. The reason being that the LO's compensation is tied to the amount of loans they can fund. The same goes for staff appraisers whose employers fail to maintain a rigid barrier between the two sides of the business. In a commission-driven organization, success is defined only by the bottom line.

There are a number of appraisers who have suggested that state or federally administered boards be set up to assign out the appraisal engagements. This is problematic for several reasons. It would require large new beauracracies to be set up, kind of like an oversized AMC, which in turn would collect at least some of the appraisal fees that could otherwise go to the appraiser. It would also completely remove the incentive for appraisers to perform as their workload would be guaranteed. And lastly, it would let the lenders off the hook because it would force them to accept everyone's work as equal, without regard for education, experience, etchics or even due diligence. Other than the insulation of the appraiser from outside pressure, there are no other benefits for those who endeavor to do the right thing.

I believe a better solution would be to tweak the existing system. Modify and clarify this regulation to specify the appraiser's chain of command does not include anyone from the LO side of the business; and remove the "or its' agent" clause from the fee appraiser side. In other words, place the responsibility for the engagement of the appraiser with the underwriting department rather than the commission or bonus-driven LO. When the appraiser's boss is an underwriter whose primary concern is safety and security, there will be a lot less pressure to hit a desired number and more pressure to disclose and analyze the property value fairly. Let the LOs bring in and package the deals without the appraisal. If they want to get an idea of whether it will fly value-wise, they can run an AVM or BPO, or get an appraisal of some type from an appraiser before they burn up their processing resources. This shouldn't increase anyone's financial burden; it merely shifts the appraisal fee's origin from the LO to the Lender. Which is as it should be, as far as I'm concerned. Once modified, this regulation should be properly enforced.

Of course, this would only address part of the problem. We appraisers still have to do the right thing and the feds still have to follow through on enforcement. But if we could plug this one loophole, I'm sure that the results would more than pay for themselves.

What do you think?

George Hatch

 

[George Hatch]

Arrrrgh,

My quote got messed up. Sorry 'bout that.

 

[Frederick R. Ruffell]

George I think you have nailed it. I agree that it is the "agent's" and those that stand to profit from the deal are the ones that bring the pressure and it is always the underwriters that want the truth. I have learned to go around the "agents and LO's" ang go directly to the underwriter to get answers to my assignment questions. They know the ropes the processors and originators only know how to read what the FNMA computer spits out at them.

 

[BenLuby]

George,
When I grow up as an appraiser, I hope I am half as analytical as you. That is an excellent idea. I guess that is why I read your posts. Lots of good insight. But I do still think that a review appraiser should be required to be a specialist. I know a lot of the good appraisers on here scream about review work, but be realistic. A number roller would do a review on one of the good appraisers in a heartbeat. Why? Eliminate the competition. Make it only a certain license can do review work. Also, change the rule about 2,000 hours to 2,000 hours and two years as an apprentice, with a minimum number of appraisals signed off on!
Terrell was talking about an assistant he had who could not make appointments, did sloppy work, and simply went home when ready. I hate to say this about a fellow registered, but I hope he let that person go. That is the kind of person who will make value, regardless. Even mentoring can actually prevent a future bad appraiser from getting into the business. I have seen that the good appraisers view this as a legitimate profession. The crooks view it as another racket. How do you view it?

 

[BenLuby]

Sorry about that. Didn't know Mr. Ruffel had posted. But, realistically, as good as that idea sounds, then the problem will start coming from the underwriter. Next thing you know, Ms. LO will be calling the UW and putting the screws to him. Then he will turn around and put it to the appraiser, and we have the same situation, just more monkeys playing in the zoo. Government regulation? I agree, sounds nice, but those idiots can't even figure out how to balance a budget (If you ain't got it, you shouldn't spend it, DUH!). How do you think they would do being put in this task? It is a scary topic to discuss. And no, I really have no other ideas on the subject, but I think the proposition would work for at least a few years, if the underwriter was not given a telephone and the LO could not find him/her through the bank connections. Just let them do their job, which is to protect the banks money. The LO is really just out for their own butts. Of course, since they are the ones that see the applicants loan app... they want a scapegoat? Let th LO carry default insurance against every loan they drop in the bucket. Odds are you'd see a lot of C-D credit applications get the Charmin treatment. They are the ones who really know the applicants qualifications. All us appraisers do is simply say yes, it is a very nice two story outhouse, unfortunately, it is only worth $zzz, not $zzz.5. Anybody agreee with putting the ball in their court? Blame the people approving the loan, not the people appraising the property.

 

[Ben Vukicevich SRA]

George,

It's all nice wording by the FED. Too bad that most of the appraisals in the US aren't covered by it and it's good intentions.

Lets see, the Deminimus is 250000/1000000 so any loans under that aren't really noteworthy according to Congress. Then FNMA/FHLMC/FHA and VA appraisals aren't considered federally-related transactions so they aren't covered by the nice FED wording at all.

Wow. I wonder how many appraisals are covered by that serious statement that supposedly protects America's depository institutions from failure.

Not very many, I'm afraid

Ben

 

[Residential Appraisal Ser]

Ben: Congress did not set the 250,000/1M diminimus. This was set by the group. Fannie/who says they are exempt/Comp of the Currency, and a number of others that sit on the board. It has been out of Congress hands for the past 8 or 10 years. We are trying to put it into congress hands again.
As you may know the powers to be are raising the deminimus to 307,000

Bill Sentner
AGA
RESASINC@aol.com

 

[Ben Vukicevich SRA]

Bill,

Congress enacted FIRREA which set the first threshold/Deminimis, then enpowered the regulatory agencies to mess with/raise the Deminimus when then see fit. That's why I stated that loans under the 250K/1M Deminimis aren't really noteworthy to Congress. So whatever the Deminimis is, Congress really doesn't care. They delegated the Deminimis responsibility to someone else supposedly "in the know." Maybe we need a new law to examine the problem, say Title 11A for Congress to do their job over again---ha--not likely.

FNMA/FHLMC can basically do what they want as their loans are not considered federally-related transactions. So they can use the AVM's and the new "we don't need no stinkin appraisal but give us some money anyway (funding fee)" for loans under the Deminimis. I believe the proper terminology for their loans is real estate related financial transactions.

When you really sit down and figure it out, there are very few loans that are "protected" by the efforts of Congress via FIRREA.

Say hi to Ernie D for me. I haven't seen him in awhile-which was an IFA USPAP class several years ago in Cherry Hill at Playa Del Sol.

Ben

 

[David C. Johnson]

<span style='color:darkblue'>George,

I have a large commercial client whereby I NEVER speak with any of their loan officers. In fact, my contact, who assigns the appraisal work, is located in a different city from me and also all the loan officers who generate the deals. She is not paid on commission at all, she is an employee of this lender. She is an appraiser and reviews the work. This has worked remarkably well. I have never had the slightest degree of pressure on me at all. Not once. It is very similar to the arrangement you described at the bank you worked with. I can see how this might be a problem for smaller companies, but perhaps they could pool resources (i.e., be required to pool resources if necessary) for supporting such a "community employee" to handle this function?

Thanks, Ben. It had not occurred to me until your post that since the Maes are Government Sponsored Enterprises (GSE), that the "free enterprise component" of this hybrid entity probably would translated to exemption from "federally related" language. Interesting.

You are also saying that FHA and VA are not subject to any federal requirements for appraisals either? I might have thought that they were. What is the rationale for their exclusion on homes above the deminimis?

Bill, you wrote: "As you may know the powers to be are raising the deminimis to $307,000."

Based on Ben's comments, what lending entities would this affect? Who is currently left subject to any deminimis?

If the Maes are again subject to Congressional Control, that sounds promising, but in light of the above, I'm not seeing a big chance for change or improvement. Any thoughts here?

Just to be repeating the concern for those on the forum who may not have thought it all through:

What is disturbing is the realization that it would be an asinine business decision for the management of either of the Maes to be "adequately" concerned about "system failure" (i.e., "loss") with the implied guarantee of the US Treasury in force. So there is not sufficient concern. It would be an asinine contention that there is no such guarantee, or at least a degree of guarantee, or likelihood of a guarantee (anyway one wants to put it) with the knowledge that the Treasury did in fact bail out even Chrysler and others when there was ZERO implied guarantee in anyone's mind.

The fact of the matter is that the anticipation itself translates directly into ("unearned") cold hard cash on the bottom line whether it is a very slight hope of a guarantee or an absolute chipped in stone enforceable contract guarantee (where it would simply mean greater amounts of cold hard cash).

Quite literally what this means -- any way you look at it -- is that management and policy decisions are necessarily being skewed to a lesser or greater degree -- and it is just a matter of degree -- where there should be no such skewing at all.

dcj</span>

 

[Residential Appraisal Ser]

Dave,Ben & Forum: You are right that the deminimus really doesn't mean anything to most other then the lenders. This is the guise of being concerned about values for them. It is also important to them in the context of the various state laws that the lenders and NAR are getting passed. Ill, Mich, now CA.

The increase in the deminimus from 250,000 to 307,000 is under the guise of appreation adjustment. What is little know is the deminimus is on the mortgage amount not the sale amount and the the various state law changes makes anything that is a federal related tranaction over the purposed $307,000 requring an appraisal by a licensed appraiser.

Anything that is not a federally related transaction under 307,000 doesn't need a licensed apprasier. End result a BPO is considered an apprasial. Guess who benefits.
We are fighting this and are making some progress. Again it is a lonely battle as AI and I guess now that AI & ASA are lobbying together have joined NAR in pushing the above state laws. They have done this in ILL and now CA.

Ben I will say hello to Ernie for you. I think he is down on the ocean in his boat about now. He is doing fine.

Bill Sentner
President
American Guild of Appraisers OPEIU AFL-CIO
RESASINC@aol.com