As Of Effective Date: Meaning

[J Grant]

The insurance industry exists to mitigate risk. Homeowners insurance, flood insurance, PMI insurance , condo insurance, govt backed programs for lenders etc.

Insurance companies are in the risk business, appraisers are in the valuation business.

That said, a competent appraisal that is not agenda driven can redue risk in the sense that it provides disclosures and information to allow users to make well informed decisions, rather than decisions based on misleading or insufficeint information. If parties want to dismiss an appraisal and pay above a MVO or finance a questionable property, we can't stop them

 

[Ken B]

No. I think you and Ken B knows the answer to that. But my question is what good is a single snapshot of value (basically good for one day since we don't know what might happen tomorrow) in terms of the 10 to 30 year life of a loan? Its sole purpose is to pass underwriting but does it really reduce risk? Was the old system where the loan officer actually LOOKED at the property and set their own value any worse? So we argue over how many angels can fit on the head of a pin but the question was "We see your wings, but can you fly?" Why do we worry about the nuances of the MV definition, make adjustments of $1,000 on $300,000 homes, ignore the impact of concessions, machinations with lending, and RE commissions and "opine" some totally contrived number no one believes in, including ourselves if we have half a brain. It's just a number and the more obtuse the property, the less accurate the number, no matter how precisely we opine it.

The questions you raise are related to the difference between market value and investment value. The market is stupid. Investors can be wise. You want market value? Happy to provide. If the value is stupid, well, that's the market for you.. You want investment value? Also happy to provide. What's your risk tolerance? I'll do some sensitivity analysis and you can decide what move you want to make.

 

[J Grant]

I agree with Ken on the above (finally)

 

[Terrel L. Shields]

An appraisal is developed to disclose facts as well as provide opinions and analysis about a subject property and relevant market,

The LO could care less, don't read the report and someone in India isn't going to approve the loan anyway... The appraisal in lending today is a ritual performed to meet a check box on a form saying they "complied" and if they had their druthers, it would be to dispense with the appraisal in favor of an evaluation. The appraisal is an instrument of regulatory compliance. Nothing more.

We do not make the loan more secure
We do not predict the market
We do not tamp down overheated markets

Yes, we have "information" about the property. So what? That does not tell the lender if the borrower will default, which is the whole intend of vetting a borrower in the first place. My point is that if the BANK had to vet their own risk instead of trying to claim "the debil appraiser made me do it" - then the bankers would be more conservative provided the law was actually enforced where the FDIC, et al demanded "safe and sound" banking and when they screwed up, it was mandatory that a banker go to jail. Real punishment would make lending safer for the people who back them - the taxpayer. And the prospect of lending to a marginal borrower at an inflated price with EZ credit costing you your freedom would go a long way towards not only reducing the need or pretend need for an appraisal and a long way towards tamping down rapidly escalating prices that are utterly unsustainable.

 

[J Grant]

Make a case to congress banks should loan their own money, good luck!

Borrower qualification vets the borrower, appraisal vets the property, insurance covers risk.

As far as the future changes in market; I can provide a master appraisal with value projections out for the thirty year life of a loan, including models of how prices might change when interest rates rise or fall, natural disasters hit, and so on . What would such a product cost? How long will it take to develop? Those two questions answers why we are not asked to provide it.

Lenders and investors can order periodic reviews of loan portfolios to keep track of market changes, which might take the form of internal analysis/AVM's etc. Overall the default rate is relatively low or at least acceptable to those who make decisions about lending. Of course things could always be better and things could certainly be better on the appraisal ordering side.

 

[Terrel L. Shields]

Make a case to congress banks should loan their own money, good luck!

I made no such argument. The GSEs can still function. But there needs to be punishment for those whose loans go bad. That means an entirely different emphasis. Appraisals are spot checks of value. But the emphasis should be on the borrower's ability to pay it back. If that means 80/20 loans fine, but if you do that then stop the charade of "concessions" and ending up with a 83.5/17.5 loan that was inflated to allow money down to the borrower.

Lenders and investors can order periodic reviews of loan portfolios to keep track of market changes

In reality an appraisal is a spot check of value. Good for one day (liability wise) and useful for a few weeks/months depending upon market conditions. A better value of the appraisal would be to track the value of the property periodically. But typically, the appraisal is used to "lock" the value then the bank uses a BPO or evaluation to "monitor" value. Those products are wholly unreliable and frequently do little more than rubber stamp the mortgage or appraisal values.

 

[J Grant]

I agree with first part, the second not so much.

Consider that a number of loans are not made because the appraisal points out adverse conditions in the property, condo building or site. Other loans see the properties repaired for health/safety conditions due to appraisal disclosure of conditions. Interest rates would be higher without the anchor of collateral and its accompanying appraisal. Compare mortgage interest rates and payment terms with other loan products. Your dismissal of appraisals as some near worthless "compliance" document , or good for 24 hours is odd considering your choice of profession. An effective date appraisal is relied on for months after it is made for decisions and then accompanies the file for years with loan package and may be looked at if loan is sold to another investor.

As far as lenders using appraisals to monitor portfolios, that would be a good source of revenue if an appraisal had to be ordered every X period of time. Too bad they choose other methods, perhaps some use a short form such as desktop or review or new appraisal on problem properties.

 

[residentialguy]

JG,
Can an appraiser support and opine a higher MV then the identical closed sales? (aka increasing trend)

Sure, if they can do so credibly and within the MV definition. I've done it on occasion!

HMMMMmmmmm....I'm thinking that you're fibbing a bit on that one.

Your post below shows your true colors of how you think increasing trends happen.

Market prices increase by cash buyers payign more, or in a financed sale, by buyer putting down more cash above a market value opinion when it is below sale price.

 

[J Grant]

Do you advocate pushing prices up to the next future level in an appraisal?
The market value definition states most probable price, not highest price. It was changed from the former "highest probable price". Not my idea, blame those who changed it. If they change verbiage in the MV definition back to highest probable price maybe I can opine to the highest listing or bid war win rather than the support of closed sale indicators and other value indicators.

I have on occasion appraised to higher price without a recent closed sale to support but in those cases the property itself had very strong features relative to value ( great view, amenities etc). There is usually a sale to relate it to even if in past as narrative if not on grid

I do appraise to high end when supported; if prices are rising there should be a similar property high price recent sale found as a comp. If not, then my OMV will be below a SC price or target refi a borrower wants. I've reviewed appraisals where the high end sale should not be there as a comp, (and needed large downward adjustments) because it's a very superior property in features or location, dragged in to create a high end of adjusted value.

It is not my purpose as an appraiser to break the sound barrier with the highest price ever. I opine a OMV for my client. I don't tell a buyer what to pay. If they want to pay over an OMV they are free to do so with cash /other method they can manage.

 

[residentialguy]

I don't know what you mean by "So you're an advocate of pushing prices up to the next future level in an appraisal?" I opine the most probable price (MV) of the subject as of the effective date. I don't go by high listing prices.

You sound like Trump when cornered. He speaks for 5 minutes and never addresses the problem.

The problem you tried to dodge is you saying "Market prices increase by cash buyers paying more, or in a financed sale, by buyer putting down more cash above a market value opinion when it is below sale price."

Again, that was a very definitive statement.