Bias lies on both sides of the fence!

[rijman]

Experienced appraisers know all to well the hazards of appraising for lender purposes and having the value appear to be overstated by an Underwriter or reviewer. Good appraisers, I contend, are conditioned to submit reports for loans that do not appear to be overstated. In this forum I have previously stated that bias is bias whether an appraisal value is intentionally high or low. My perception from lenders, reviewers and Underwriters is high is out of the question (or the percetion) while low is okay or even preferable.

I had an experience with a reviewer lately that demonstrates the pervasive bias toward undervaluing by the lending industry that tends to go unnoticed or reported. In a market of rapidly appreciating values, San Diego, CA, a reviewer questioned minor $2,500 upward time of sale adjustments to 2 comparables, good thing hadn't seen my typical report! This is not a reviewer ===== session just a demonstration of the common reviewers mentality. The reviewer wanted absolute proof that values were still increasing up to the appraisal date. They were not satisfied with my quote from 3 published reports and gridded paired sales data analysis. Turns out the reviewer was just hired from out of state and didn't really know our market. Anyway, the reviewer and lender want absolute proof of the rising market to support the appraisal value on a property that just sold in one day with multiple offers.

What if we quote reliable data sources that show property values in the subject's zip code have increased each of the past 3 years by 12.1 to 18.4% per year and median price increase of 14.6% from one year ago to the same month, one month prior to the appraisal (follow me here) and there is still an undersupply of housing in the neighborhood with properly priced properties selling in under 2 weeks with multiple offers and mortgage interest rates are at an all time low. To cap it all off there has been no negative change in the subject's economy or market.

If we are all truly unbiased, reviewers and appraisers, if the appraiser doesn't make time of sale adjustments shouldn't the appraiser be required to prove values are NOT still increasing under the actual scenario described above? It would be impossible for me to prove and therefore assume values are not still rising and in fact they are still rising. The reviewer has a biased view in an attempt to protect the lender from over valuations, which is biased and in violation of USPAP. The reviewer is required to review and appraise to market value the same as the appraiser although I know a good percentage of reviewers have lost touch with this reality. Reviewers are not the police power for the lenders yet that is exactly the role many assume.

A Chief Appraiser of one of the largest lenders in our great nation responded to a value discrepancy between their in-house reviewer and my report (I submitted an MAI/SRA review of the lenders review and my report which concluded my value was accurate) by stating in writing we are satisfied with our in-house valuation for "loan purposes" although we will continue to work with you and you will remain an approved appraiser, after threatening to boot me from thieir list.

How does "loan purposes" change anything? I use the same Limiting Condition that detail my objective of reaching market value whether or not I appraise for an estate or a loan. The reviewer is supposed to do the same thing. This lender mentality that it is okay to appraise low while the threat of being removed from their list if they think you appraised high is infuriating. This is real lender bias, which I believe is very very wrong. The goal is market value, that's it. Anything other market value intentiomally high or low is wrong, I don't care about lender risk, that's not my problem.

The reality is that I appraise differently with different values depending on the purpose. I will complete an appraisal with only two closed sales and maybe two pending sales for an estate, if this is really the best data, where I always include at least 3 closed sales for a loan per FNMA/FHLMC guidelines.

We should be able to appraise to market value without influences that mandate at least 3 closed sales or the latest one where we have to include at least one pending sale and one active listing in addition to 3 closed sales. What is there isn't a relevant pending sale? They want an irrelevant pending sale.

My experience includes review and managing reviewers, so I am not just another disgruntled appraiser lashing out at the industry and those who question me. However, I do see a bias that is going un reported that I am tired of. Do you really have to have 3 closed sales to support market value, especially in a rising market? The answer of course is no. Do you need to include a pending and active if relevant ones aren't available? Of course not. Should you have to include an outside sale when appraising in a 20 year old condo development? Of course not.

I despise BS rules that detract from the appraisal report and try to hinder me from reaching market value. Some of these rules can be construed as a violation of USPAP.

THE END OF MY RANT FOLLOWS:
My answer is simple, FNMA and FHLMC need to alter their standard limiting conditions, they don't allow the appraiser to alter them, to re state the value we are concluding. The lending industry isn't really asking us to hit market value. They ask us to hit market value using their forms and guidelines. There is a difference. I want my Limiting Conditions for loan purposes to explain I am appraising to a value for lenders purposes using their form following their guidelines. Otherwise we are misleading homeowners who view the report and believe the value represents true market value because that is exactly what the Limiting Conditions falsely state. This situation is most evident in a market of rapid appreciation.

Now that I got that off my chest I will get back to those 10 appraisals on my desk.

Have a great day.

 

[Don Clark]

8)

David,

What you have outlined is correct, up to a point, and one of the reasons the ASB is placing so much emphasis on "Scope of work" and will place even more emphasis on it in the future, even to the eventual elimination of the Departure Rule. Your scope of work is necessarily going to be different for each client you serve, based on the intended use and intended users. I agree that we have for too long allowed the dog to wag the tail. USPAP says nothing about how many comps you have to use, or how old they are, or use of a pending sale, or a current listing, or considering recent contract offerings(except for recent contract offerings & listings of a subject property. Sometimes a bad 3rd comparable skews the appraisal and report away from market value, either higher or lower. However, a value does not always have to be market value or even a certain value. It can be a range, not more than or not less than a stated amount. A lender does however, through their underwriters, have an obligation to protect their interest even if that interest causes a lowering of the amount they are willing to loan that is below your opinion of market value. I had a recent excample where I appraised a property that is a town house with the largest lot in the neighborhood. The property also borders on a lake with ownership by riparian rights to the center of the lake. The lake is stocked with fish, and the townhouse3 is in better condition than most townhouses in the neighborhood. I supported a value slightly higher than the sales price. The underwriter lowered the value $5,000. below the sales price. Agent wants a reconsideration of value. I will be glad to do so but..........my opinion of value is not the problem. The problem is the underwriters inability to see the added value of the site and the lake amenity. This underwriter believes that all sales should be bracketed with the highs and lows of the closed sales. hell, it that was the case property values could never rise. however, that is no longer my problem. I stand by my appraisal report. What the agent and lender do is up to them.

Don Clark, IFA
Virginia Beach, VA

 

[jtrotta]

Both of your are correct and hterein lies the probem; everybody has their "own rules" and/or guidelines and therefore consistency cannot be obtained.

I've had easily attainable figures (using your example of 2 up & 1 down) and all within FNMA guidelines and the "Reviewer" wacked off 40% of the value - needless to say I went balistic on the creep (like an old silver fox) till I got the reviewers License number and then smoked em.

Your examples are perfect reflections of how far away "consistency" we all are, so bare with the malfunctions of a system in continual "construction" and with living documents that continually are in motion (change).

8)

 

[Fred]

Of course bias comes in both directions. Government agencies aquiring properties like low numbers. Some bureaucrats believe they are doing the taxpayers a favor.

Don, I have a question about all this "scope-of-work" blather. Even if SR-1 was not full of all these references to scope of work, how would an appraiser avoid disclosing the extent of the prccesses of gathering and analyzing information, the extraordinary assumptions, the limiting conditions, etc.; without "misleading."?

 

[Blue1]

The tail has always been wagging the dog. Just look at the URAR. Maybe it's time to come up with our own forms? Do you think any lender would accept a "home grown" form? We, as appraisers, are actually a part of the lending industry most of the time. Until we have the clout to break away and demand our rights as a stand-alone professional group the dog will just keep wagging.

 

[Don Clark]

8)

Steven,

There is and was no suggestion that you avoid any of the process you noted. However, the extent of that process may and should change depending on the extent of what it is that you are doing. If a homeowener wants to know what their home should be listed for, that calls for a scope of work different from say, a scope of work consistent with FHA financing. Or, if a commercial client wants an opinion of whether or not their property is worth at least $zzz that is what we can give them, although a more complicated analysis could result in a more definite value. I don't see how that is inconsistent with STD-1.

Don Clark, IFA

 

[rijman]

My main concern is guidelines that require me to add data that denegrates the report or rely on comparables that are not the best value indicators because of "industry" guidelines. I prefer to let USPAP and the Limiting Conditions/Appraisers Certification be my guide, the other guidelines and restrictions are BS.

I tell my appraisers to "appraise to market value" then just explain what you did. I have an appraiser or two who in an attempt to meet FNMA/FHLMC guidelines would rather arrive at a value less than market value than submit a report that can be questioned by reviewers and Underwriters. I say BS! This might include an unwillingness to make time of sale adjustments even though every published report clearly indicates increasing values of at least 1% per month. I suspect there are many conscientious appraisers who are conditioned to only submit clean reports with conservative values so as not to rock the boat. To me this is no better than those who consistently appraise high to unsupported values. Both ways are wrong and both miss the mark of our true goal, to appraise to market value.

In my rapidly appreciating market will I appraise differently for a homeowner looking for an appraisal to determaine a fair selling price versus an appraisal for a refinance? YES! Yet my Limiting Conditions with the definition of "Market Value" is the exact same. How can we have different approaches and value conclusions when the stated goal of the report is the exact same? The problem is FNMA/FHLMC guidelines, which have a goal other than "market value." Their goal is to use a value for loan purposes to protect themselves and limit the risk associated with the loan. I have no problem with their agenda, that is their business. What I have a problem with is their guidelines that conflict with the Limiting Conditions they gave me that state my true goal is to determine "market value" with no bias. There is bias.

When real estate agents, buyers and sellers are reacting to pending sales and this data is moving the market don't make me have to support my value with 3 closed sales. I am supposed to be an unbiased reporter of the market so let me be just that. Don't put unnecessary restrictions on me in an attempt to meet another agenda otherwise revise my Limiting Conditions to state exactly what my goal is.

What I tell my clients and ocassionally homeowners is that the lending industry doesn't really want market value. For loan purposes no one is telling us to go out and just hit market value. What the lending industry really wants is the best supported value using their form while following their guidelines. There is a huge difference between the two although the final outcomes in most cases may seem minor.

I still maintain the answer to this is all very simple. FNMA and FHLMC need to alter the definition of market value within the Limiting Conditions to include the fact that our value for loan purposes is a lenders value following lender guidelines while using the lenders form. I am not against giving FNMA what they want I just want to call it what it is.

Have a great day.

 

[Don Clark]

David,

Now I see your problem. Why do you use a Fannie Mae/Freddie Mac Certification and Limiting Condition for all appraisals? That is contrary to USPAP. Use the Certification that is required in USPAP, add to it for any specific needs that you have for the type appraisal you are doing. No one ever said the Fannie Mae/Freddie Mac Certification was to be used for all appraisals. What would you do if you were doing a "Desk Top" Appraisal? Even the Fannie Mae and Freddie Mac forms are different depending on what type of appraisal you are doing, such as the 2055, etc.

Don Clark, IFA

 

[Jo Ann Meyer Stratton]

And for Fannie Mae you need to add an additional addendum to reflect current USPAP, since they insists on their 1993 version. Also in a changing market, although you might have three closed sales as #1, #2 and #3, additional comparables for #4 and higher that might be pending, active, dated, further away but similar market conditions, etc, etc, etc. And of course lots of explanations. Since I am in an opposite type of market where values have been stable for years (getting very, very close to declining) I use whatever information is available either through additional comparables and/or additional addenda. So explain, explain and then explain some more. If the underwriter doesn't understand the situation then that is their problem, not yours. Of course the loan officer might lose a commission, but that is the way life goes sometimes.

 

[bradellis]

P. David,

An interesting conundrum. One the one had, you make the time adjustment and get questioned, and on the other you do not make the time adjustment and get questioned.

Now basing your time adjustment on published reports, etc. may or may not be reliable. Paired sales are better, but are they actually in the sub-market in which you are appraising? If yes, then they are likely supported well enough- was your analysis in your report? If not, you should have expected the question. If Yes, then the question is not appropriate.

Reviewers need data to do this. If they have it, then they have enough to provide an alternate opinion.

Brad Ellis, IFA, RAA