Magazine >> November 2010
FEATURE
The Dawn of a New Era in Appraising Appraisers who adapt to the transforming valuation space will have a bright future Tony Pistilli page 24
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FEATURE:
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“The idea of doing an appraisal exclusively on a 1004 URAR form will become a distant memory. Appraisers will no longer be paid $350 for an appraisal; they will be paid for their services by the hour, not by the product.”
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Staiger on Stats
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Publisher’s Note Contributors 04
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/ November 2010
Voices of Valuation
Directory For What It’s Worth
A call for accountability and consistency
november 2010 16
20
Contents 16
Regulating AMCs
A key step toward protecting the
appraisal profession Leslie P. Sellers
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30
Training – A Responsibility of the Profession
The appraisal profession is at serious
34
risk; we must solve the trainee dilemma Alan Hummel
FEATURE:
24 The Dawn of a New Era in Appraising Appraisers who adapt to the
transforming valuation space will have a bright future
Tony Pistilli
38 26
30
44
Change to Appraisal and Appraiser Regulation Has Arrived... Are You Ready?
Appraisers need to be proactive in response to new regulations
Larry Disney
34
Quality vs. Cost
Should customary and reasonable fees influence appraisal quality?
Jordan Petkovski / David Majewski
United We Stand, Divided We Fall
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Regulators must work together as responsibilities increase and resources dwindle Bruce Fitzsimons
Observations of a Home Inspector (Part V)
The Improvements section of the URAR Michael Connolly
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Publisher’s Note
Almost everyone is attracted to watching a sunrise or sunset. There is something about seeing that ball of fire either appear or disappear on the horizon before your eyes. Most of us see many more sunsets than sunrises. Sunsets occur while we are still up and about, and, when we are afforded a vantage point, we pause to watch the end of another busy day. Sunrises on the other hand are only seen by those who are up early in the quiet morning hours. You usually have to make an effort to see a sunrise, to find the right spot, and welcome a new day. Many appraisers lately feel like “the sun is setting” on their valuation careers. Lower fees, demands for faster service and additional reporting requirements are pressing them hard; they feel like they are in the twilight of their careers. But others see things quite differently. Some appraisers look to the horizon and see a sunrise rather than a sunset. The beginning of something new. Our feature this month is entitled “The Dawn of a New Era in Appraising,” a forward thinking article written by Tony Pistilli. Tony begins his article discussing how technology will completely change the appraisal process, appraisers will need to embrace this technology or be left behind. Tony then moves to appraisal regulation and the affect it will have on business models in all sectors of the valuation space. Appraisers, financial institutions and appraisal management companies will all need to adapt to these changes. He concludes that appraisers ought to welcome the changes coming in the future. Those who embrace these changes will be highly valued by their clients and subsequently well paid. Tony sees a sunrise in the future of appraisers, the new dawn of a brighter future. Roger Staiger III, the Managing Director for Stage Capital, LLC also looks to the future. Roger is an expert in commercial and residential real estate portfolio investing and holds positions that Johns Hopkins, Georgetown, and Loyola universities. This month we begin a column by Roger on macro market statistics. In his first column Roger lays out the economic influences on the U.S. real estate market as a whole; in future articles he will focus on individual metropolitan statistical areas. These articles will provide our readers with timely information and a glimpse of what Roger expects the future to hold in macro markets around the United States. In addition to Tony and Roger, we welcome other new contributors this month: Leslie Sellers, Alan Hummel, Bruce Fitzsimons, and Don Kelly. Their articles along with those of our returning contributors are expected to generate lively discussions on our website (www.livevalmag.com). We welcome those discussions too!
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Contributors feature contributor
TONY PISTILLI
Tony Pistilli is Chief Retail Appraiser and Vice President for Consumer Banking Risk Management at US Bank in Minneapolis. His responsibilities include ensuring the quality and compliance of valuation products, policies and procedures with the federal regulatory agencies. Tony has been involved in the real estate appraising and lending industries for over 25 years and prior to joining US Bank he was President of Park Appraisal Service, had previously worked at the Department of Housing and Urban Development as well as several mortgage companies. He is a member of several organizations, including The Appraisal Foundation’s Industry Advisory Council, the American Bankers Association appraisal committee, and is Vice-Chair of the Minnesota Real Estate Appraiser Advisory Board.
ROGER STAIGER III
Roger Staiger III is Managing Director for Stage Capital, LLC. His areas of expertise are commercial and residential real estate portfolio investing, corporate business; and strategic planning, forecasting, valuation, financial modeling, asset repositioning and risk mitigation through financial hedging for physical assets. He holds positions at Johns Hopkins, Georgetown, and Loyola universities.
LESLIE P. SELLERS
Leslie P. Sellers, MAI, SRA, is president of the Appraisal Institute, the nation’s largest professional organization of real estate appraisers. Leslie, who has been a member of the AI for 30 years, also serves on the organization’s Executive Committee – along with the president-elect, vice president, immediate past president and chief executive officer (non-voting) – and also serves on the Board of Directors.
ALAN HUMMEL
As chief appraiser for Forsythe Appraisals, Alan Hummel, SRA, uses his 27 years of experience to help both appraisers and clients understand real property appraisal methodologies, principles and standards of practice. He has served in positions of leadership in several professional real estate organizations and has testified before the U.S. Congress on appraisal issues.
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LARRY DISNEY
Larry Disney is the Executive Director of the Kentucky Real Estate Appraisers Board, a licensed Kentucky real estate sales broker, Kentucky certified general real property appraiser, SRA designated member of the Appraisal Institute; 2005-2006 President of AARO; and is certified by the Appraiser Qualifications Board of the Appraisal Foundation as an instructor of the USPAP.
JORDAN PETKOVSKI
Jordan Petkovski has worked in the residential appraisal industry for most of his career. Currently, he is the Director of Staff Appraisal Operations at TSI Appraisal Services®, a wholly owned subsidiary of Title Source®. His primary focus is the successful development of operational processes based upon a greater understanding of the industry as a whole.
Contributors DAVID MAJEWSKI
David Majewski earned his bachelor’s degree in packaging sciences from Michigan State University and focused on MBA studies at the University of Detroit Mercy. He has worked in the mortgage and vendor management industry in a variety of positions and departments including sales, COO, product and business development. David currently serves as Vice President of Operations and Business Development of Title Source®.
BRUCE FITZSIMONS
Bruce Fitzsimons is a certified residential appraiser with over 39 years in mortgage lending and chief appraiser of a bank.
DON KELLY
Don Kelly, Executive Director for REVAA, manages the operations of the Association: an alliance of real estate companies involved in the development and delivery of real estate valuation products and services. Don is an author and contributor on industry panels and a member of the Board of the Bollinger Foundation, a nonprofit dedicated to helping families in need. don.kelly@revaa.org.
He is the immediate past President of the Association of Appraiser Regulatory Officials (AARO) and a member of the Kansas Real Estate Appraisal Board, and is affiliated with several appraisal-related industry groups and agencies.
Michael Connolly
Michael Connolly has over 30 years’ experience in the real estate industry and is owner of Smart Move Inspections in Cincinnati, Ohio. He is a member of the American Society of Home Inspectors (ASHI) and holds their highest designation of Certified Home Inspector (CHI). He has evaluated more than 8,000 residential homes for home buyers, attorneys and lending institutions. He holds licenses for radon testing and wood destroying organisms inspections and is a HUD fee inspector. Mike@smartmoveinspections.com.
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STAIGER on stats 11.2010 s a preamble, thank you for the readership and
interest in residential real estate, and the opportunity to express the data and comment on current and
future trends. I truly look forward to penning this column on a monthly basis and sharing current
market trends and forecasts. Further, while the hope remains and
the media discusses “a return to normal,” the reality is that this is
our “normal.” Housing historically appreciates at a rate at or near inflation on a long-term basis. The current market is a correction to long-term normality; in statistics parlance, this is considered mean-reverting.
As this is the first installment of “Staiger on Stats,” the
macroeconomic trends of the nation will be discussed to provide a basis going forward for future articles. It is the author’s intention
As a corollary, a chart is depicted below for inflation over the
issue, geographically sectored in the West, Midwest, and on the
Therefore, the tighter the circle, the closer to deflation for the
to highlight various MSAs (metropolitan statistical areas) each East Coast. A discussion of the nation’s real estate pricing will
always be included as well as special and time-specific areas of study.
The topic directly relating to residential real estate that
is omnipresent in the media is unemployment. An initial
discussion of residential pricing without its mention is simply
incomplete. Two key areas are important to residential real estate: unemployment and inflation. Both drive pricing and are moving
in opposite directions at the moment. The nation’s unemployment rate is critical due to the strong contribution of consumption to
the U.S. GDP. GDP is defined as the summation of consumption,
same period, 2006 – 2010. The scale for this graphic is 2% – 6%. U.S. economy. Notice that 2009 was a deflationary period but in
2010, a return to slightly positive inflation has been recorded due to the stimuli within the economy. While deflation may seem
positive for consumers, providing an ability to purchase more
for the equivalent dollar amount, it is destructive to the economy as a whole. As prices deflate, corporate balance sheets leverage
themselves with an unnatural tendency. Basically, deflation causes negative values for assets while maintaining constant values
for liabilities. To ensure the basic accounting equation remains
true, i.e. Assets = Liabilities + Equity. As asset values are reduced
through deflation, equity values reduce by an equivalent amount.
investment, government spending, and next exports, i.e. GDP = C + I + G + ( X - M ).
Over 70% of the U.S. GDP is
attributable to consumption. With unemployment
stubbornly high, and consumers leaving their checkbooks at home when they enter the plethora of retail establishments throughout the country, a recovery remains in the distant future.
A chart depicting the nation’s annual unemployment (seasonally adjusted) from 2006 – present is shown above. In 2006 the tight
circle demonstrates full employment of approximately 4%. The nation was consuming, and this consumption was fueled by
the abundance of credit made possible by the checkbook called “a home.” As the circle becomes wider, chronic unemployment persists. Full employment, as defined by the Fed, is between
4 – 5%, therefore the last year has proven to be twice the “target”
Further systemic risks facing today’s real estate values are bank
pricing.
insured institutions are at a high not seen for generations. The rate
amount to promote steady growth and therefore support home
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failures and charge-offs. Problem banks as a percentage of FDIChas surpassed the failures found during the Savings and Loan
/ November 2010
Stats
Crisis. 2008 was focused on corporate risk and through the effects
to consumer debt, i.e. credit cards, consumers used the “deferred
is on target to experience 40% more bank failures than occurred in
the race to the bottom started for home pricing. The structural
of the stimuli, this risk was transferred to sovereign nations. 2010 2009, despite the stimulus effects. The costs of these failures will
be shouldered by the U.S. taxpayer and most likely paid through higher taxes and, possibly, higher inflation. As discussed before, inflation remains low due to the high unemployment and while there is discussion about raising the inflation target for the Fed,
Ben Bernanke has dismissed the notion. Please note: Monetizing
mortgage payment” to pay off high-interest consumer debt; thus behavior change is clearly depicted in the charge-off graphic
below using Federal Reserve Data. Real estate delinquencies, commercial and residential, continue to rise while consumer
credit card charge-offs show a precipitous drop. None of this bodes well for the price of homes in America.
the issue through inflation is simply generational theft. It is
the Robin Hood approach to problem-solving, only a perverse
version. In the case of monetization, it is stealing from the fiscally
prudent and giving to the fiscally imprudent. As older Americans invest in fixed income securities and the younger generation in
equities, this Robin Hood approach amounts to early inheritance by the younger less fiscally prudent from the older generation.
When delving into real estate prices, the inevitable question permeates one’s thoughts: “What happened and when will
it stop?” To best understand both it is helpful to view pricing beginning January 2000 using the Case-Shiller data on the
following page. The index is normalized in January 2000 and the rise in pricing through the decade is seen for six metropolitan
statistical areas representing the West (CA – Los Angeles, OR – A final macroeconomic concern is the change in behavior by the American homeowner. The
American Dream of owning 2000s with easy credit and the monetization of home equity by Wall Street. The lofty dream of owning one’s home morphed through exotic products to become “Occupy the largest home one can!” Not only did Americans withdraw equity at a home died in the early
historically high rates during the past decade from their homes, but their commitment to the home changed. Traditionally the
last asset a U.S. homeowner would default upon was their home. After the change in bankruptcy law in the middle of the 2000s
disallowing Americans to easily repudiate one’s debts and the
significant negative equity buildup that began in 2007, Americans
changed their behavior. Realizing it was financially advantageous to default on the home, which has a low cost of interest compared
Portland), Midwest (IL – Chicago), and East Coast (NY – New York, MA – Boston). In addition, the composite-20 index is provided for a national overlay.
What is most striking is the return in real estate pricing to the
long-run inflation rate of 3%. Since January 2000, the gains in real
estate above the long-term inflation rate have been largely erased. The recent and continuing deterioration of real estate prices is
not an aberration but rather a return to “normal” growth rates
and price rises on a long-term perspective. What is most troubling is that the stimuli have prevented the return to “normal” as seen
in the graphic. Therefore, the last 12 months of stabilized and even slightly improved housing prices made pricing appear stable.
Although, this is not a fundamental stabilization at all but rather
a “bear bump” in a market, which, through a natural inclination, will return to normal. Using the national >>
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Stats composite-20 as the benchmark index, a return to normality
will require 7.5% negative adjustments, i.e. housing prices have another 7.5% to reduce nationally. The good news for Chicago
is that pricing has undershot the long-run price rise, which is a buoyant support in this region for future pricing.
Of particular interest is the pricing behavior of the composite-20 index from 2006 – 2010 depicted below. Traditional buying
behavior for home purchase is heavy demand in April – July, and low demand in the winter months. The recent and continued
downturn has returned to this behavior (demand is considered A discussion of residential real estate in the fourth quarter 2010 is not complete without a mention of the November elections.
A key and relevant topic for voters as each heads to the polls is
the support for housing values in the economy. The preliminary
elections have seen the current administration reel from surprises. Analyzing the pricing for all 20 MSAs and the two composite indices sheds light on voter anger throughout the U.S. Since January 2000, the DC-MSA has outperformed the national
composite-20 by close to 100%. DC’s source of employment and
growth is the federal government. With federal workers earning close to $90,000/year and their private sector counterparts
earning less than half this amount, voter ire will be felt at the
polls in November. The DC-MSA de-coupled from the national composite-20 in January 2007, being the largest gainer from
stimulus while contributing to the overall expense of the nation. One wonders if the American proletariat is dissimilar to the French proletariat of the late 18th century.
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/ November 2010
directly correlated to month-over-month pricing as supply over
the short term for real estate can be considered fixed). Particularly
fascinating is 2006, the last year of continued price rises, as annual behavior is 100% consistent, i.e. home purchases and price rising
remained strong each month of the year. 2009 – 2010 has returned home purchases to traditional behavior of stronger price rises in
the warmer months and decreased purchases in the shoulder and winter months. >>
Interested parties, please submit a resume and two current appraisal samples to recruiting@live.com (419) 255-9171 Ask for Karen
LV LVM M| |27 13
Stats The year-over-year price change for all 20 MSAs and two
composite indices demonstrates strengthening over the past year,
i.e. July 2010 – July 2009. Given the lack of wage growth and close to double-digit unemployment, the buoyancy is directly related to the waning stimuli by the government. Both of these issues
support the need for a QE2 (quantitative easing 2) by the Federal Reserve to maintain long-term rates at historically low values.
This author contends, for the record, it took WWII and 25 years
for the Dow Jones Industrial Average to recover after Roosevelt’s New Deal. And we all know how well the New Deal worked in reality!
As a final consideration for real estate pricing directions, consider the basics. The common belief is that a mortgage should be no
greater than three times’ gross income. If the average American household has an income of approximately $50,000 (in reality
it is slightly less), then the average mortgage should not exceed $150,000. Assuming a 20% equity cushion, this equates to the
average American home value of $187,500. Currently the median price is just under $200,000. This supports a price decline of approximately 7% to, again, reach historic norms.
Fall may be upon us and the excitement of the The question remaining in this entire article which covers
macroeconomics as they relate to residential real estate is,
“What’s next?”
Fortunately, there is an answer, or rather an instrument, that
provides insight into the future. In 2006 derivatives products began trading on the Case-Shiller index depicted in the chart
above. In 2007, long-dated instruments began trading, providing pricing for both futures and options on the Case-Shiller index.
The derivative pricing on futures products trading on the Chicago Mercantile Exchange demonstrates that recent price strength is
truly a bear bump and not a return to structural equilibrium. A
7.5% national adjustment is not predicted in the futures market, although this author contends at least a 7.5% adjustment is necessary prior to stabilization.
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/ November 2010
holidays is near. However, this year, holiday
cheer will not be financed with the checkbook
called the American Home. Instead, the holidays will be full of cheer, merrymaking and familial love. Our house prices may be declining, but
not the resolve of the American household.
Unemployment will eventually abate and house prices will
stabilize (this author predicts mid-2011). Let us just hope the cure is not worse than the disease. n
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Regulating AMCs A Key Step Toward Protecting the Appraisal Profession t’s ironic and noteworthy that after years of struggle for appraiser independence, the rules implemented to safeguard appraisers from unscrupulous parties to real estate transactions are the same rules that have allowed for the proliferation of new forces often working against the best interests of appraisers.
Leslie P. Sellers
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I’m talking, of course, about the
In what has been an imperfect situation,
Dodd-Frank bill is that individual states
Valuation Code of Conduct (HVCC), the
safeguards from unscrupulous parties
lenders and AMCs must, under federal
unintended consequences of the Home
subsequent rise of appraisal management companies (AMCs) and the rapid decline of “customary and reasonable” fees for
appraisers may end up with not only the they sought in the first place, but also fair wages for the quality work they perform.
are now required to regulate AMCs and
law, pay “customary and reasonable” fees to appraisers.
appraisers.
The regulation of AMCs and enforcement
In October 2008, the Appraisal Institute
For too many appraisers, the time since
appraisers are well within reach. We are
the registration and regulation of these
the establishment of the HVCC and the present has represented a dark period of lost business, severed relationships
with reputable brokers and lenders, and shrinking wages. An untold number of appraisers have left or are considering
leaving the profession because they can no longer make a decent living, and potential appraisers have undoubtedly rejected
working in a profession where they see
pay as low, turnaround times unreasonable
of “customary and reasonable” fees for
still in the early stages of the rulemaking process and must pay special attention
to how the Federal Reserve implements the Interim Final Rule on appraiser
independence. There is much that’s
unclear at present about the logistics of
AMC regulation. What is clear, however, is the appraisal community needs to remain united in order to ensure the real estate
lending process is what benefits most from
had drafted model AMC legislation for
entities. I’m pleased to say that our efforts (which were joined by three of our sister appraiser organizations) were seriously considered at the time and have been
used as the basis for provisions requiring AMC regulation in the Dodd-Frank Act. And that’s in addition to states that had adopted AMC regulations before it was mandated at the state level.
the new rules.
Two years later, as of October 2010, 20
Despite all this, there is a light at the
Addressing Unintended Effects of the HVCC
while four states have legislation pending
unintentionally created a situation in
For those disheartened by the
second-class citizens, appraisers may
to inform you that with the passage of the
and respect waning.
end of the tunnel. Just as the HVCC
which appraisers have often felt like
ultimately benefit most from appraiser
independence rules, thanks in part to the
basic foundations of the HVCC, advocacy efforts by appraiser organizations and
lawmaker recognition that the status quo isn’t working.
My reason for optimism is buoyed by
provisions contained in the July passage of
the federal Dodd-Frank Wall Street Reform
shortcomings of the HVCC, I am happy
Dodd-Frank Act, the HVCC no longer has any force or effect – however, its structure
states have enacted AMC legislation, and another two have passed study
resolutions, meaning they are considering introducing legislation. In addition, 14 other states are in the early stages of
addressing the issue and could introduce bills in the near future. >>
has largely been adopted under the new consumer protection legislation and the
States with AMC legislation on their books.
adopted by Fannie Mae and Freddie
The states that have passed AMC study resolutions and states in the early stages of addressing AMC regulation.
new Appraisal Independence Standards Mac on October 15. What has changed
greatly between the HVCC agreement and provisions in the passage of the
States with AMC legislation pending.
and Consumer Protection Act, which
requires states to enact laws concerning
the registration and regulation of AMCs
within three years of the promulgation of
regulations by the federal bank regulatory agencies. As part of the regulation, AMCs
are required to pay appraisers “customary and reasonable” fees for appraisal
assignments. Proper payment for appraisal services was a missing component
from the HVCC and one that appraiser
organizations have worked very hard to see included in the new legislation.
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Under the timetable of the Dodd-Frank
for new “customary and reasonable” rules
its Interim Final Rule on the “customary
their own AMC regulations, though in
the U.S. Department of Veterans Affairs as
18. Under the Interim Final Rule, which
Act, states have up to three years to enact reality most states could have regulatory measures in place before the federal deadline, if they choose.
Whereas the HVCC only sought to create a safeguard between those ordering and
performing the appraisal, the Dodd-Frank bill goes a step further. It requires that
AMCs pay “customary and reasonable” fees to appraisers to reflect what an
appraiser would typically earn for an
assignment absent an AMC’s involvement. Given results of surveys of appraisers
regarding AMC appraisal fees, this is a
necessary step. The ongoing Customary
and Reasonable Fee survey conducted by
by establishing the fee structure used by
the template for how AMCs and lenders should determine what “customary and
reasonable” means. The Fed decided not to delay the implementation of fee rules
in the face of mounting banking and AMC industry pressure. Lobbyists from both sectors had been seeking for the Fed to
postpone its “customary and reasonable” payment provisions. The central bank
should be applauded for taking quick, decisive and direct action.
The Appraisal Institute and its sister
appraiser organizations had advocated
Working RE Magazine – with more than
conducted by the Appraisal Institute, our survey found that of the more
than 600 appraisers who responded,
more than 70% believed VA appraisal fees were “reasonable” to “very reasonable.”
We sent our findings to the Fed in an Oct. 11 letter. It was in follow-up to
a Sept. 23 letter in which a coalition of appraiser groups pointed to the
VA’s Appraisal Fee Schedule as an
appropriate guide for determining “customary and reasonable” fees.
will be subject to severe penalties under
AMCs driving down the splits they pay appraisers has been the more alarming concern that has needed addressing.
Interim Final Rule In its Oct. 18 Interim Final Rule, the
Federal Reserve Board recognized the need 18
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/ November 2010
receive a fair fee. AMCs in violation of the requirement could be charged up
to $10,000 for each day that a violation
occurs and up to $20,000 for subsequent
violations. An additional and potentially
important point is that the new rules can
be enforced by state attorneys general. So, these rules will not only be overseen by
the new Consumer Financial Protection
Bureau, but by 50 top “cops” on the street.
reasonable” fees, the Fed’s Interim Final
effective fee determination system.
decrease since the HVCC took effect.
surely contributed to declining earnings,
assignment for an AMC is required to
we view as an already established and
As it stands, AMCs that violate the
Though the struggling economy has
2011, an appraiser conducting a valuation
In addition to establishing a framework
Department appraisal fee policies that
3,300 respondents – reports that 87%
of appraisers have seen their incomes
requires mandatory compliance by April 1,
strongly for the inclusion of VA
In a recent study of VA appraisers
The message for AMCs is clear: Pay your appraisers fairly and operate in a manner that best serves the health of the real estate lending system.
and reasonable” fee provision on Oct.
“customary and reasonable” requirements the Truth in Lending Act, which was amended by the Federal Reserve in
2008 to prohibit appraiser coercion.
The “customary and reasonable” fee
requirement is now part of the Truth in Lending Act, which can be enforced by state attorneys general.
The Federal Reserve Board, under the
direction of the Dodd-Frank Act, released
for determining “customary and
Rule created further safeguards to ensure an independent appraisal process. The
Interim Final Rule does the following: • Prohibits coercion and similar actions designed to cause appraisers to base the appraised value of properties on factors other than their independent judgment.
• Bans appraisers and appraisal
management companies hired by
lenders from having financial or other
interests in the properties or the credit transactions.
• Prohibits creditors from extending credit based on appraisals if they
know beforehand about violations involving appraiser coercion or conflicts of interest.
• Requires creditors or settlement service providers to file reports
with the appropriate state licensing
authorities if they have information about appraiser misconduct.
• Mandates the payment of “customary and reasonable” compensation to
appraisers who are not employees of
the creditors or of the AMCs hired by the creditors.
The message for AMCs is clear: Pay your
For those who have forgotten why
As we acclimate to the appraisal
that best serves the health of the real estate
in the first place, they need only look at
future is full of promise. Yet it is up to
appraisers fairly and operate in a manner lending system.
appraiser independence was necessary
where the real estate appraisal profession
the appraisal community to ensure the
was nearly four years ago. That lack of
Brighter Future
appraiser independence, pressure to inflate property values and a lending system that
As states work in the coming months and
punished ethical appraisers by denying
years to establish mechanisms to regulate
will not be jeopardized by unseen forces.
Until this point, it has been nearly
where we are today.
view the proliferation of AMCs as good
Frankly, we’ve worked too hard to get to
newsadvocacy) for the latest information
on legislative and regulatory news, as well as for updates on rule enforcement and
for the appraisal profession. And they may never be liked by appraisers.
independence was a much-needed but
very absent dream. Today, like it or not,
But AMCs, when operated properly, can
always to provide an unbiased opinion of
influence appraisers not only need, but
value, free from the pressures of financially
deserve. In a perfect world, appraisers
the recent financial crisis attests, ours is not a perfect world.
heard.
of “customary and reasonable” fees, if
meaningfully implemented and enforced, is the first step in the right direction – not
and their broker and lender clients would not need a firewall between them. But as
what appraisers can do to have their voices
The regulation of AMCs and requirement
provide the independence from undue
it is a reality. The job of the appraiser is
legislation. I encourage appraisers to
website (www.appraisalinstitute.org/
impossible given appraiser sentiment to
Just a few short years ago, appraiser
enforcement of appraiser independence
section of the Appraisal Institute’s
changed, it had to be changed.
ensuring our fees and independence
appraisal process isn’t overrun by subpar
regularly visit the News & Advocacy
assignments not only needed to be
AMCs, appraisers must be diligent in
vested or outside influences.
provisions of the Dodd-Frank Act, the
only for enabling appraiser independence,
but also for helping to safeguard the public trust in the appraisal process. With this
first step under way, it’s now time to take the next. n
Peace-of-mind is just one of the advantages we offer. In addition to our unsurpassed real estate appraiser E&O program, we offer coverage for: n AMC Professional Liability (E&O) coverage, worded by LIA specifically for AMCs n Bonds for appraiser client contracts and state regulatory AMC requirements – extremely competitively priced n General Liability coverage for real estate appraisers including additional insured options required by HUD and other clients n E&O insurance for high risk real estate appraisers n Health insurance for appraisers and their families through the same exclusive program endorsed by the AMA for its 400,000 physician members – includes 3-year rate guarantee options LIA’s products are in response to requests made by real estate appraisers and other valuation professionals, seeking to meet the day-to-day challenges of the appraisal industry. In addition, LIA remains to be the leader in loss prevention and appraiser liability education. For more information, visit our website at www.liability.com, or contact: Robert A. Wiley, Asst. V.P. robert@liability.com, 800-334-0652, Ext. 128
Serving the Appraisal and Valuation Industry since 1977 CA License #0764257
Administrators & Insurance Services
Peter Christensen, General Counsel peter@liability.com, 800-334-0652, Ext. 148
16oo Anacapa Street, Santa Barbara, CA 93101 Ph: (800) 334-0652 Fax: (805) 962-0652 www.liability.com lia@liability.com
I
I
LVM |
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TrainingResponsibility
A
of the
Profession
Alan Hummel
The appraisal profession is at serious risk;
we must solve the trainee dilemma 20
| LVM
/ November 2010
An old proverb says, “It takes a village to
There are two main facets to the trainee
their schooling given their technological
profession to raise a professional? If so, is
profession and obstacles of entry. Like
as the Collateral Valuation Report and
raise a child.” So does that mean it takes a the real estate valuation profession truly
living up to its responsibilities? And if not, by whose fault and at what risk?
Trainees go by many names and titles, but we all know them as those individuals who have not met the requirements
for “full state licensure/certification.”
Anecdotally, there are fewer trainees in
the industry now than at any time in the
last several years. That statement by itself
should not be surprising because there are also fewer certified appraisers, by some
accounts because of the slower economic times that limit appraisal volume; and
by other accounts because of a decline in earning potential for those assignments that are available. It is further surmised
by others that the profession as a whole is
getting “old,” with many more appraisers retiring than entering. Whatever the
reasons, the number of individuals leaving
the profession combined with the dearth of people entering it could produce a “perfect storm,” resulting in a lack of trained,
competent appraisers when the economy rebounds.
Some say supply and demand will cure
all ills. If there is demand, compensation (if that is the underlying problem)
will increase, resulting in more people
interested in entering the profession. While true, the problem is the lag between the
rise in demand and the time it takes to get someone through the required two years
of training. During that time, the users of
appraisal services simply cannot and will not wait. The singularly largest risk to
the real estate appraisal profession is that users of our services will find alternative providers and products to meet their
needs. This is already occurring in many
segments of the industry where appraisers have either chosen not to, or are restricted from providing valuation and analytical
products and services desired by clients.
issue: desire for someone to enter the many others, I got into this business because of family. Obviously there’s
absolutely nothing wrong with that, but
that it highlights one of the main problems our profession currently faces. Honestly,
most kids don’t say, “After school, I want to become an appraiser.” Admittedly, many may also not say, “I want to be
an accountant” or any of a number of other professions, but the difference lies in their
exposure to these other professions once they enter
post-secondary
education. Where is “appraisal”
found in the college curriculum at most universities? If it
exists at all, and with a few exceptions,
the coursework is
buried within other
programs and rarely provides enough
of the education to fulfill certification
requirements. This means that most
college graduates will have to take
even more education hours, a step many are not desirous of
savvy? New services and products such
other technology-assisted valuations have certainly piqued the interest of many
younger minds that I have worked with. They get excited at the opportunity of
being able to put to practice the statistical, financial and economic theories into
which they have put so much study and testing… and they genuinely appreciate the possibility of being paid for
it! But there is one
Whatever the reasons, the number of individuals leaving the profession combined with the dearth of people entering it could produce a “perfect storm,” resulting in a lack of trained, competent appraisers when the economy rebounds...
immediately after
matriculation and
problem they seem to face time and again: Very few are hiring
“trainees.” It’s a classic and unfortunate
catch-22. We’re only interested in hiring
certified appraisers, but you can’t get certified
until you have served
your time as a trainee.
It’s a vicious circle. So, who’s hiring trainees? There are some hands being raised, but not
many. Why? The most frequent response is,
“I can’t afford to train; too much risk and it’s just not feasible.” At
Forsythe Appraisals we had a very successful
program where we were able to bring in talented people and not only train them, but
retain most of them after certification. While I am
one that is not required if they choose
admittedly biased, we can count some
professions. And for those graduates who
country among them. The key to our
one of many other financial services
are willing to continue the education
needed to become proficient in appraisal analysis and reporting, is the current
“paired sale” – three comparables and a
listing on a form report (for residential) –
really all that enticing? Is it the best use of
of the most talented appraisers in the
success was extremely simple: Train and mentor; don’t merely supervise. Our
training program manual (several hundred pages in length) and processes, including continual mentoring and testing, have been intentionally designed to >>
LVM |
21
help an individual master the concepts of residential valuation. With 100% of our
appraiser staff being W-2 employees, we
necessary to properly comprehend the valuation process.
have a vested interest in making certain
As a profession, if we are serious about
end. However, during the last few years,
term sustainability, we must consider
our training investment pays off at the we too have found it more difficult to
justify bringing on trainees. The change in both regulations and client demands has made it all but impossible.
Regulations governing trainees and their supervisors vary from state to state,
though the requirements are likely to
become more consistent as states, at the recent behest of Congress, adopt the
minimum requirements outlined by the Appraiser Qualifications Board of The
Appraisal Foundation. A balance must be reached. The requirements must be
sufficient to make certain individuals are
properly trained by competent appraisers, while not making the requirements so
onerous that no one is willing to take on
the responsibility. An even harder task is
bringing in new blood and creating longwhether a “one size fits all” training
regimen is the only option, or if a system that also allows for mandatory training
goals to be met through alternative (and possibly accelerated) programs could be developed. Professional societies, educational institutions and private
variety of pseudonyms. Paralegal, medical
intern, dental hygienist and others provide assistance to their licensed counterparts
in order to provide quality services under strict supervision and accountability.
The use of “paras” allows for blended
professional rates, thus making it possible to offer services at overall lower rates while maintaining the quality of the service, and providing a supervised
training ground for individuals working toward higher credentials.
entities should work in cooperation to
In order to get clients comfortable
training that will allow for the desired
assignment, they need to be assured that
develop and test alternative methods of surety of knowledge and experience before allowing an individual to become certified. The second-largest obstacle stated is that
many lending institutions and other users of valuation services prohibit the use of
trainees in the completion of assignments. On the surface, this is understandable given the current supply of certified
appraisers versus workload. Why would
with the participation of trainees on an
trainees are receiving proper supervision. A system needs to be developed for a
“gold standard” protocol that defines
the expectations and obligations of all
parties participating in the development
of the report when trainees are involved. This “gold standard” would require documentation and auditing of the
parties to ensure clients that all proper
and appropriate procedures are being followed. Again, this would take
As a profession, if we are serious about bringing in new blood and creating long-term sustainability, we must consider whether a “one size fits all” training regimen is the only option...
coordination and cooperation between
clients, appraisers, professional societies,
academia, regulators and any other
entities that have a stake or play a role in the real property valuation process. Without collaboration within and
between the parties in the industry,
the appraisal profession as we know it
measuring the time and number of trainees
they want anything “less,” given what
is at serious risk. This is a call to arms.
at one time. Individuals learn at different
lies. They shouldn’t be getting anything
you have influence, advocate for the
any one supervisor can or should handle
speeds and in different ways; and teachers (supervisors) teach at different speeds and with different methods. It’s very possible that one individual could successfully teach many trainees at one time (for
example, two that were brand-new, one
that had 12 months of experience, and two that had 23 months of experience), while other supervisors might struggle due to personal abilities and workload to give
even a single trainee the time and attention
22
| LVM
/ November 2010
is at stake? This is where the fallacy
“less”! Clients must be assured that an
appraisal completed with the properly supervised trainee carries with it the
same level of credibility as one completed
entirely and solely by a certified appraiser. Government-Sponsored Enterprises do
not disallow the use of trainees, but they do require that the certified appraiser
take full responsibility for the analysis
and contents of the report, as they should. Other professions use trainees under a
Through whatever venue(s) in which
removal of unnecessary obstacles to entry,
recognition of the importance of attracting new individuals to the profession, and
the development of procedures to allow
for the orderly and timely training of the
next generation of valuation professionals. In my opinion it is our professional responsibility. n
We’re hiring. Join Us. TSI AppraisalŽ is hiring 100+ staff appraisers to supplement its existing appraisal network across the United States. We are seeking highly skilled candidates to fill numerous open staff appraiser positions. Opportunities are only available in specific geographic areas. Qualified residential appraisers are invited to complete our short appraisal evaluation at: tsiappraisal.com/appraisers
877.762.5342 TSI Appraisal
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tsiappraisal.com
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Troy, MI 48098
LVM |
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24
| LVM
/ November 2010
Tony Pistilli
Appraisers who adapt to the transforming valuation space will have a
trusted advisors
bright future
The Dawn of a New Era pproximately 30 years ago the automobile industry began to introduce computers into cars and since that time they have never been the same. What was once considered a rather simple procedure – tuning up your engine or even changing the spark plugs – has become an almost impossible project for anyone, except the highly trained automobile technician.>>
LVM |
25
Today nearly every aspect of your car is
the highly trained – and highly paid –
With all of these changes, appraisers are
computer. Digital radios with CD players,
those mechanics who didn’t adapt and
group of professionals, but as significant
aided or controlled in some manner by a climate control systems, cruise control
and pollution control devices are just a
few of the components that are aided by computers. Computers now control the
engine functions and other systems within the vehicle where mechanical components once ruled.
The introduction of these new
technologies into automobiles required
mechanics to learn new ways to maintain cars. They needed to become proficient in computer analysis of the new, non-
mechanical systems and they learned new terminologies. In addition to the ratchets
and wrenches they have always used, they were now using computers to help them do their jobs.
At the time, this must have seemed
like a huge change. However, the auto mechanics that embraced the new
technology, seeing it as a way to enhance their current core skill sets, were greatly rewarded. The mechanics that didn’t
adapt and learn the new technologies… well, they are now picking up the phone and calling
maintained by
longer earning a living maintaining cars.
Technology Will Transform the Appraisal Process
certainly more productive today as a
as they may have seemed, these changes
are merely incremental improvements on an existing process.
Technology has allowed us as a profession to reduce the turnaround time for
This same transformation of an industry
that occurred in the automobile industry in the ’80s has been under way for many years in the appraisal industry. With the
average age of an appraiser approaching his or her mid-’50s, I know many of us have been around long enough to see
what we thought, at the time, were some pretty big changes over the years. It
might have seemed almost revolutionary when we went from two-sided tape to glue sticks, or from carbon copy FHA
delivering reports while reducing the
costs associated with preparing them.
Email has eliminated the need for faxing and mailing reports. We are no longer bound to photocopying and collating
reams of paper to create multiple copies of our reports for our clients. We buy
fewer printer cartridges and have been able to eliminate our photo processing
and mailing expenses. We have become
more efficient and more productive and this has, in a small way, made it more understandable why appraisal fees
appraisal forms and tractor-fed forms
printed by the first-generation computers to appraisal form software – not to
mention the industry’s effort to enter into a “paperless” environment with digital cameras, online mapping, electronic
sketch programs and
ly ti n a a t on s
digital signatures.
haven’t increased in the last 20 years. We all know it is a far more complex environment to be appraising today
than it was just five years ago. But the
technological changes that have occurred over the years haven’t addressed that
issue. All these changes haven’t really
altered the way we do things and how
we value real property. We can do reports
eater r g dat
quicker but not necessarily
d e n
/ November 2010
ts
at
i on of l ar g e d at a
se
ghly
hi | LVM
i on
ct
trai
le
interp r e t
26
better.
a c ol
upfr
to have their cars
learn the new technologies are also no
c
to make appointments
automotive technicians! And by the way,
At a time when the banks and financial
Whether you know it or not, a new
graphic, but they will also be much more
rightfully so - for more reliable appraisal
change it is bringing is unlike anything we
This combination of upfront analytics,
institutions are all clamoring - and
reports, we have responded by routinely providing a fourth or fifth comparable
sale and occasionally a few comparable listings. We are essentially still doing
things the same way we always have and as a result it now takes longer to
frontier in appraising is upon us and the
have ever seen before. Right now there are many very intelligent and creative people working to develop the next generation
of valuation tools and processes that will
transparent and objective to the end user. greater data collection, and increased
transparency and objectivity, delivered in a more graphic and
catapult appraisers into the role of highly trained and well-paid valuation
addendums. What we need today is
Real change is affected when new breed of appraisal professionals, systems or technologies are however, my friend Mark Linne has coined the term introduced that alter the entire “econometricians,” and process and ultimately the way others have used terms such as “trusted advisors” things are done. Real change and “valuation technicians.” produces a totally different result, not just a polished Regardless of what they will be called, the members of this version of the same new era of valuation professionals old thing. will be highly trained and possess a
dramatic result.
and regression analysis. They will have
complete an appraisal report than it ever
has, despite all of the efficiencies that have been introduced through technology. In the flight to create more reliable
and accurate appraisal reports, the
agencies have introduced a multitude of
requirements on how appraisals are done: comparable listings in declining markets, the 1004MC form and most recently the inclusion of interior photographs of the
subject. Again, these have not necessarily
proven to produce more reliable appraisal reports, just ones with more pages and real change that will in turn produce a
Real change is affected when new systems or technologies are introduced that alter
the entire process and ultimately the way things are done. Real change produces a
totally different result, not just a polished version of the same old thing. Compared to what is about to happen over the next few years, what we have experienced to date has been a “buff ‘n’ shine” of the
appraisal process. The real change that is
about to occur will transform the way we do things and bring about a new era in real estate appraising!
analysts. I use the term “valuation analyst” to describe this new
thorough understanding of statistics
scores of data and analytical information
understandable format, is exactly what
process that up until now was either
searching for in their quest for a more
available to them at the front end of the unavailable or very expensive for the individual appraiser to obtain. They
will be highly trained to understand
reliable valuation of the collateral in the lending process.
how to collect, manipulate and interpret
Much like the transformation of
processes via the web to present data
performing an appraisal in the near future
large data sets. They will use tools and in visually understandable graphs
and charts. They may complete their
reports on the Internet rather than using
traditional appraisal software and the time to complete the reports will be reduced to a fraction of what it is today. In addition,
their reports may look very different than they are today, much more visual and
the
lenders and financial institutions are
automobiles in the 1980s, the process of
will be much different. Those appraisers who choose not to learn and adopt the
new technologies will be left behind, like the mechanics who chose not to change
with the times, and will be left looking for a new way to make a living. This change should be viewed as an opportunity
to appraisers. This change should be embraced by appraisers. >>
new breedappraisers of
LVM |
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Appraisal Regulation Will Intensify In addition to the technological change that is occurring, we are in the midst
of some of the most intense regulatory changes since the passage of FIRREA
company. Ironically, the unintended
Subcommittee for enforcement of both
more business to the same industry it
companies, which is exactly what the
consequence was that it actually drove was meant to control. The market share of appraisals ordered from appraisal
management companies pre HVCC was approximately 20%. That number grew to over 80% as financial
and USPAP in the
institutions scrambled to
late ’80s. In the last 18 months
we have seen the
introduction of the Home Valuation
Code of Conduct, numerous Fannie Mae and Freddie
Mac Seller Servicer
Bulletins and FAQs, multiple HUD
Mortgagee Letters, the proposed Interagency
Appraisal and Evaluation
Guidelines, and
most recently the Dodd-Frank Act. Appraisals and
appraisers have
certainly been very
popular topics with rule makers and
legislators. Despite
the rumblings from Realtors, mortgage brokers and even
some appraisers, I
believe that overall,
The requirement for paying a “reasonable and customary” fee is imposed on both financial institutions and appraisal management companies… The impact of “reasonable and customary” will play out over the next few months, but one thing is certain: Things are about to change!
these new rules and laws have been a
very positive thing for
the appraisal industry. We are all familiar with the HVCC and
the changes it has made in the industry
over the past 18 months. The intention of the HVCC was to “correct” a perceived
independence issue between a financial
institution and its appraisal management
28
| LVM
/ November 2010
appraisers and appraisal management
industry desperately needs. In addition, the act has established a requirement for appraisers to be paid “reasonable
and customary” fees for their appraisal services.
find compliant solutions
Without a question, the “reasonable and
HVCC didn’t mandate
Act has been the most talked-about and
to the Code. Although the the usage of AMCs, many
lenders saw the outsourcing of their appraisal
procurement obligations
as an efficient, compliant
and inexpensive solution
to performing this function
internally. While not widely seen as a perfect solution, the HVCC has been
successful in furthering and more deeply embedding
appraisal independence in the lenders’ processes.
What we are not as familiar with are the long-term changes that will be
brought upon the appraisal industry as a result of the
Dodd-Frank Act. The DoddFrank Act spans more than 2,400 pages with over 200 pages devoted entirely to
appraisal- and valuation-
related issues. The Interim Final Rule clarifying the act is an additional 132 pages. The act sunsets
the HVCC, but it also memorializes
many of its provisions and advances
the concept of appraiser independence even further. There are now significant penalties on financial institutions and
appraisal management companies for
non-compliance. The act provides far more authority, and funding to the Appraisal
customary” provision of the Dodd-Frank controversial part of the act. Basically,
this means appraisers will be paid what they would have received without the
involvement of an appraisal management company. The requirement for paying a “reasonable and customary” fee is
imposed on both financial institutions
and appraisal management companies. What is yet to be understood is if
appraisal management companies will
be able to “negotiate” with appraisers to develop an additional standard of what is “reasonable and customary”, given
the benefits provided by the appraisal
management company to the appraiser.
In my opinion, most financial institutions
will regard the penalty for non-compliance ($10,000 per day, per violation) to be
too significant to test and will instruct
appraisal management companies to treat the appraisal fee as a “pass-through” to the appraiser and “negotiate” with the appraisal management companies for
the services they provide to them. The
impact of “reasonable and customary” will play out over the next few months, but
one thing is certain: Things are about to change!
valuation analyst
trusted advisors
valuation technicians
Business Models Will Change With all of the technological and regulatory changes on the horizon, appraisers, appraisal management companies and financial institutions will be changing the way they do business. Appraisers
First of all, as I mentioned earlier, appraisers will become highly sought-after “valuation analysts,” “econometricians,” “trusted advisors” and “valuation technicians” that will be paid for their knowledge and expertise. The idea of doing an appraisal exclusively on a 1004 URAR form will become a distant memory. Appraisers will no longer be paid $350 for an appraisal; they will be paid for their services by the hour, not by the product. Over the years appraisals have become commoditized by the financial institutions and the appraisal management companies that have ordered them. Forcing appraisers to perform appraisals for a fee that is constantly challenged and outbid by a less experienced appraiser will no longer be the norm. Appraisers will earn more money per hour in the future than they earn today, but it will require a dramatic shift in their mindset to achieve. The only question is, are appraisers ready and will they embrace this change?
Financial Institutions
Financial institutions will change their business model as well. No longer will they be looking for the best fee on an appraisal; they will now be looking for the best appraisal, regardless of the fee. Over the last four years, one thing that has become painfully clear to the financial institutions is the impact of poorly performed, inaccurate appraisals performed by incompetent appraisers.
Certainly the losses incurred would not have been avoided solely by better appraisals, but the loss severity would have been dramatically reduced if there was a good appraisal behind every bad loan. Financial institutions have figured out the “V” in LTV now matters and that it actually costs less to pay a reasonable fee to engage a qualified, competent appraiser upfront than it will cost to have a portfolio full of defaults from inaccurate or fraudulent appraisals.
Appraisal Management Companies Appraisal management companies may have the biggest changes of all on the horizon. For decades they have provided valuable services to financial institutions and appraisers, and that will not change. What will change are the services they will get paid for, and, more dramatically, how much they will get paid. If it becomes the norm for financial institutions to consider the appraisal fee a “pass-through,” the services provided by the appraisal management companies will receive much greater scrutiny. Financial institutions will begin asking appraisal management companies to itemize the services they provide and attach fees to those services. More transparency in what the appraiser is getting paid and what the appraisal management company is charging is a good thing. A new term, “cost plus,” will enter the lexicon of more appraisal management companies. The “cost” will refer to the fee paid to the appraiser and the
“plus” will refer to the fee paid to the appraisal management company. I can see a day when financial institutions will select what individual services – or perhaps what bundle of services – they decide to “outsource” to the appraisal management company. As an example, financial institutions may decide to rely on the appraisal management company to manage a panel of appraisers, maintain license information and use their appraiser selection process, but forgo the appraisal review traditionally performed by the appraisal management company since the financial institution has a regulatory obligation to do it themselves anyway. “Reasonable and customary” will place appraisers in a competitive market among their professional peers and it will also place appraisal management companies into a similarly competitive market among their peers. As a result, there will most likely be fewer appraisal management companies in the future, whether it is through failure or consolidation. As it stands today, financial institutions may pass along the fees incurred from using appraisal management companies to the consumer. Any further changes to disclosure laws or an interpretation that the fee to the appraisal management company must be borne by the financial institutions could ultimately cause them to administer these functions internally and totally avoid the appraisal management companies altogether.
In summary, what we are seeing unfold today is, in many ways,
new regulations and the new ways of doing business, and we
changed the cars we drive and the way we do appraisals. But
era. Appraisers ought to welcome this change with open arms and
a return to the way we used to do things. Sure, technology has what is occurring today is a return to a time when valuations
mattered, when appraisers were valued and when the industry saw the appraisal as an integral part of the lending process.
Combine this change in attitude with the new technologies, the
quite certainly are in the midst of the most exciting times of our take advantage of the new opportunities or prepare to face the
same, certain extinction that the stubborn, inadaptable automobile mechanics experienced. n
LVM |
29
CH
E G N A
to Appraisal and Appraiser Regulation Has Arrived... Are You Ready?
Appraisers need to be proactive in response to new regulations Larry Disney
30
| LVM
/ November 2010
he Home Valuation Code of Conduct (HVCC) has been
removed from life support and will soon expire. Although I
am sure this is welcome news
to many appraisers and others who have felt so abused by one brief agreement
between one state attorney general with
Fannie Mae and Freddie Mac, the question is now:
What next? What does the future hold for appraisers
and appraiser regulation with the passage
of the Dodd-Frank Wall Street Reform Act? As I write this information, I am told that
the Appraisal Independence Requirements, SEC. 1472, will soon be published in
the Federal Register. Upon that action
taking place the Interim Final Rules for
that section will become effective within
approximately two weeks of publication. It is not possible for me, or anyone else with whom I have communicated, to
provide any advice as to which specific agencies will be given the authority to enforce the bill language, because that
decision has not been made. Therefore, we must all remain patient and wait
and see what the final answer will be. That includes the regulatory officials,
the appraisers, and the lenders and their
agents, including appraisal management companies.
While the specific information for
enforcement is not available, I am of the
opinion that the act will create one of the most sweeping changes for the appraisal profession and the appraiser regulatory agencies since the passage of Title XI.
employee of an appraisal management
It is my opinion
company, consumer or any other person
of significance for the lenders, the
by the principal dwelling of a consumer
regulatory agencies.
an appraiser is failing to comply with
Language from the HVCC that
Appraisal Practice shall refer the matter
against coercion, extortion, collusion,
and licensing agency.”
intimidation from anyone in
The above was magnified with the
assignment is included within the act.
was included within “Announcement
It shall also be a violation for a lender
Requirements,” dated October 15, 2010,
with an interest in a real estate transaction involving an appraisal in connection with
that the following items will be
a consumer credit transaction secured
appraisers and the state appraiser
who has a reasonable basis to believe
requires appraiser independence instructions, inducements, or
the performance of an appraisal
or lender representative to withhold or threaten to withhold timely payment
for an appraisal report or for appraisal
the Uniform Standards of Professional
to the applicable State appraiser certifying
following Fannie Mae requirement that SEL-2010-14 Appraiser Independence and effective as of that date:
“VII. Referrals of Appraisal Misconduct
services rendered when the appraisal
Reports
accordance with the contract between
Any seller that has a reasonable basis
report or services are provided for in the parties.
to believe an appraiser or appraisal management company is violating
The above language is not meant to imply
applicable laws, or is otherwise engaging
mortgage bankers, real estate brokers,
the matter to the applicable State appraiser
employees of appraisal management
relevant regulatory bodies.”
that mortgage lenders, mortgage brokers,
in unethical conduct, shall promptly refer
appraisal management companies,
certifying and licensing agency or other
companies, consumers, or any other
person with an interest in a real estate
Within the above, the term “seller” is
consider additional information, including
loans to Fannie Mae, not to the sellers
substantiation, or explanation for an
almost guaranteed, that Freddie Mac, VA
appraisal report.
that will include the above language or
transaction cannot ask an appraiser to
intended to refer to the sellers of mortgage
comparable sales; provide further detail,
of real property. It is anticipated, and
opinion of value; and correct errors in the
and FHA will also initiate a requirement
While it is not known how the above
something very similar.
prohibitions will be enforced or what
There is no question that the above
enforcement, the following language is
complaints that will eventually be filed
agency will be responsible for the
requirements will increase the volume of
very clear:
with state appraiser regulatory agencies
“Any mortgage lenders, mortgage
do little to stop a complaint from being
brokers, appraisal management company,
the possibility of violations being levied.>>
brokers, mortgage bankers, real estate
against appraisers. While appraisers can filed, a great deal can be done to mitigate
LVM |
31
It is critical that appraisers perform
assumptions, extraordinary assumptions
appraiser who can professionally develop
with USPAP, client requirements, state
required for credible assignment results.
technology is available today and more
ethically and competently, in compliance statutes, rules and regulations that
govern the activities of state-certified and -licensed real property appraisers. Also, if appraisers practice independently,
and hypothetical conditions that may be Remember, preprinted forms do not
always contain sufficient information to produce meaningful opinions of value.
objectively, impartially, and without
Today, as never before, professional
the independence requirements will be
previous education and experience will
bias, the possibility of any violation of negated.
Appraisers are cautioned that clients will
often request certain actions and possibly describe those actions as being required by the client, or by USPAP. Often, the appraiser is also threatened that if he
or she fails to comply with the request
a complaint will be filed with the state
appraiser regulatory agency that issued the appraiser’s credential.
While no one wants a complaint filed,
to combat illicit requests and the threat of
complaint is to invite the filing rather than comply with demands that are known to
be contrary to USPAP or against state law and regulation.
Real property appraisers must take
immediate control of their professional
practice and become as knowledgeable, or more so, of USPAP, the client
requirements, the statutes and the
administrative regulations as the clients, review appraisers and others who
threaten unwarranted actions because the
appraisers will not acquiesce to ridiculous demands. Given this knowledge, the
appraisers will have no need to fear a
frivolous complaint being filed at the state
will become available in the future to assist professional appraisers with developing and reporting more credible assignment results.
appraisers cannot take for granted that
Only the appraisers have the ability to
be sufficient to continue competently
more informed professional and each
and professionally completing
appraisal assignments. Therefore, it is highly recommended that appraisers
contribute ample time each month – a
seize today’s opportunity to become a
appraiser must be ready to answer the call of clients that seek professional appraisal services.
more enlightened by having regular
Will the Market Reward Professional Appraisers for Their Services?
their market area, staying abreast of the
Again, there is no direct answer for that
market activity.
is also contained within the appraisal
minimum of three hours – to continuing education. Also, appraisers can become
communication with other appraisers in changing market trends and real estate
question. However, the following language independence section of the Dodd-Frank Wall Street Reform Act:
regardless of how frivolous the allegations may appear, the one way for appraisers
and report opinions of value; however,
There is no question that these requirements will increase the volume of complaints that will eventually be filed with state appraiser regulatory agencies against appraisers.
“Lenders and their agents shall compensate fee appraisers at a rate that is customary and reasonable for appraisal services
performed in the market area of the property being appraised. Evidence for such fees
may be established by objective third-party information, such as government agency
fee schedules, academic studies, and private sector surveys. Fee studies shall exclude
assignments ordered by known appraisal management companies.”
The fees that are considered “reasonable and customary” for each region of the
United States must be identified through
a fee schedule that as of this date have not
been developed. Also, no agency or group has been identified to enforce this part of the act.
appraiser regulatory agency.
Appraisers should immediately begin
Appraisers must realize that this is their
However, it is perceived that the fee
assignment for client-required items of
success of the profession will depend upon
will become a minimum. The appraiser
the process of reviewing each appraisal development and reporting, and review the scope of work for any 32
| LVM
/ November 2010
profession; they represent the future. The
how well appraisers embrace change and adapt to the change. It is my opinion that technology will never replace a qualified
schedule, when developed and identified, can choose to accept the minimum fee
or charge a different fee if and when it is considered necessary to do so. n
LVM |
33
quality
V
Should customary and reasonable fees influence appraisal quality?
The Question ave you ever Googled
“Appraisal Quality”? If so, your
search results were a mélange of real estate appraisal companies touting that they offer the
highest-quality appraisal products known
a bulge will appear inadvertently, and
over the previous years that bulge was
indicative of the industry-wide limitations
placed upon the quality of most residential appraisal products.
quality is, did it? Did your search provide
seemed to have an implied correlation
be useful when attempting to identify
a correlation between the quality of an
appraisal and the subsequent cost of the appraisal product? If only it were that simple…
The industry has been ruminating on this topic as an adjunct to the Dodd-Frank
question of what constitutes “reasonable and customary” compensation for
independent fee appraisers. It is often
espoused that when evaluating between
appraisal quality, the cost of the appraisal
and the turn-time in which it is received by the lender, that a maximum of two of these / November 2010
proverbial balloon is being squeezed,
In the days of refinance booms, the speed
you with a guideline as to what would
| LVM
manner at any given time. When the
to man. Your search didn’t yield any
results that clearly identify what appraisal
34
criteria are achievable in an acceptable
at which the appraisal was received
to the quality of the report. Moreover,
during the 1980s, the appraisal cost for a
standard URAR in most states was roughly $175 – $300. Now, I can’t speak to either the integrity of the appraisals nor to the fairness of payment for services at that
time, but logic begs the question, “How in
2010 are we paying appraisers less than we did in 1987, with more requirements than
ever before?” Truth be told, technology has come a very long way to help facilitate and accelerate many of the manual functions required more than two decades ago.
But the core function and artisanship of
appraising a property still endures to this day.
VS
cost
What nuances, when aggregated, validate
and is resolute in
report? Is it simply arriving at a defensible
of importance:
or discredit the quality of an appraisal
value conclusion, or is the concept more
complex? Over the years, those of us that have been faced with the daunting task
of reviewing the work of our peers have
concluded what we believe to be a quality appraisal report. Our findings are most often quantifiable, but communicating
what differentiates a modestly substandard report from a report that could be used for academic study is likely subjective. Even a marginal appraiser has the potential
to provide a robust and comprehensive
valuation product, if they are adequately motivated. Is compensation the ultimate motivator or is an acknowledgement of
legislative requirements enough to induce an appraiser to complete high-quality, viable valuation products?
The Facts TSI Appraisal® has traveled throughout the country interviewing candidates in
key markets for staff appraiser positions
requiring, in order excellent report quality, great
communication and solid turntimes. In those
discussions, we have heard a
constant refrain
where independent
fee appraisers are being paid as little as $125 for a standard 1004 on a property
located in an urban market! An appraiser would need to perform 2 – 2.5 reports to
equal what they once were being paid for completing a single appraisal. Even if an appraiser has the absolute best intention
of providing a superior appraisal product, there may be a higher propensity for error
Jordan Petkovski and David Majewski
due to the need to complete more reports in an effort to “make ends meet.” There is no malice aforethought, but human
nature dictates there could be an unspoken reticence and a possible lack of attention
to detail knowing a fair wage is not being
paid for such an important aspect of the >>
LVM |
35
underlying transaction: the collateral. So
what can be done to change the course of this conundrum?
Who has benefited most from the drawing down of acceptable appraisal costs? Most appraisers will resoundingly indict the
legislators and AMCs for the most recent
change of events; primarily, the impact felt by independent fee appraisers after the
industry-wide adoption of the guidelines set forth within the HVCC. This set of
rules eliminated what was considered a commonplace relationship between
individual loan officers and individual real estate appraisers. Was quality a mainstay throughout the industry prior to these changes?
The quality of appraisals has been diluted for far longer than the most recent round of regulatory changes. During the
boom eras, appraisal quality played second or even third fiddle to an appraiser’s willingness to hit a predetermined value. The
parity between an appraiser’s volume and that appraiser’s overall compliance when asked to meet or exceed
The Debate We believe that the pendulum needs to
swing from quick turn-times and low cost
toward providing a quality, compliant and defendable appraisal. Have we learned
nothing from the ongoing meltdown in
the mortgage market and the continued
heightened scrutiny locked on collateral?
It seems counterintuitive to pay less for the item that is arguably the most analyzed
and pivotal to the mortgage transaction.
As an AMC vying for additional appraisal business, we would much rather have
a spirited debate with a lender prospect about supplying a quality report for a “reasonable” fee that will survive the
scrutiny of an audit versus pioneering a relationship that would lead to the
dissemination of cheap, quick and dirty valuations. Although the Dodd-Frank
legislation may have the best intentions in
defining what “reasonable and customary” compensation is, it doesn’t close the loop by tying in the quality expectation of the report. We understand why: It is nearly impossible to monitor, measure and
quantify what constitutes a quality report.
the “owner’s estimate of
If we, the leadership within the valuation
inversely proportionate. The
guidance that would standardize practice
value” has historically been appraiser who conceded
to the originator’s request
typically had all the volume they could handle; while those that refused to
capitulate struggled to survive. The
bad actors among our ranks became well versed in reconciling at
the value needed to
successfully collateralize the mortgage loan, but
they failed to produce a
fully compliant, qualitydriven appraisal.
community, were able to offer interim
beyond the scope of USPAP, we might be better aligned and more capable of
achieving a common goal. For too long
we have watched the quality of appraisals suffer. Sometimes the reports’ deficiencies can be credited to a reduction in the time
allotted to complete the assignment. Other times the appraiser is simply stretched
too thin, forced to cover enormous swaths of land as a necessity of survival. In both
scenarios, the impetus to complete a highquality appraisal report is lost among the more pressing matters aforementioned.
The Resolution Should the industry expect high-quality appraisal products independent of the
associated fee? Maybe, but the crux of the matter is more deeply seeded. The old
adage of “You get what you pay for” may
be applicable, but does it justify the mindset of a misanthropic industry participant feeling as if they’ve been slighted
somehow by those legislating changes? Whether you believe the fees being paid are substantive enough to warrant a
quality job is really immaterial to the
argument; you are now and always have been responsible for the quality of your work, period. We as an industry are
gaining ground, but it needs to be at the
forefront of our collaborative efforts if our hope is to meaningfully affect positive change within our ranks. This means
continually increasing the veracity of our appraisal products independent of the associated fee. I ask that all appraisers
shoulder this responsibility. This proactive approach might just prove to those
detractors that we are professionals
and are capable of ensuring quality on
every single appraisal we’re engaged to complete. This should be our mantra,
audibly recognizable when discussing the business of collateral valuation: Quality! Quality! Quality!
During the course of many discussions on
this topic, a singular analogy has remained a constant: Do you believe a cardiothoracic surgeon is cutting corners in surgery if
they don’t think the predetermined fee
for the associated procedure is adequate? Doctors live by the Hippocratic Oath.
Maybe it’s time we as appraisers develop our own standards of practice… oh yeah, we already have. Now we must simply live by them! n
LVM |
37
united WE
ST
nd,
divided
WE
F
all
Regulators must work together as responsibilities increase and resources dwindle
bruce fitzsimons
rofessional appraisers have had opportunities to join appraisal organizations and/or state
appraiser coalitions for years, yet only about one-third of appraisers belong to an organized
professional appraisal group. I will not dwell on how critical it is to affiliate with an organization that will not only provide accurate information on current issues, but also represent you on proposed regulatory and legislative issues.
38
| LVM
/ November 2010
I understand the challenges appraisers must cope with as the mortgage and
regulatory environment changes, and that many appraisers have limited resources
and/or time to commit to a professional
•
Develop and encourage cooperation
AARO, ASC and TAF formed a task force
objective is similar in nature to the
Action Matrix, with different levels of
with all other organizations whose objectives and purposes of AARO.
appraisal organization, but the decision to
Communication and Research
could result in unintended consequences
AARO has two conferences every year:
profession.
in various cities; and the fall conference,
sit on the sidelines and go with the flow that directly impact the future of the
A very similar statement can be directed at state appraiser regulatory agency
board members and staff. Regulators are also challenged by changes that must
be implemented and communicated in
accordance with ASC policy criteria. One exception is regulators have just one
professional organization to represent them: the Association of Appraiser Regulatory Officials (AARO).
that developed a Voluntary Disciplinary sanctions based on the type of USPAP violation(s), used in conjunction with a chart describing aggravating and mitigating circumstances.
the spring conference, which takes place
This disciplinary tool is available for
always in Washington, D.C. ASC and
comply with their specific statutes and
TAF representatives participate in panel
discussions, providing vital information and clarification of issues affecting state appraiser regulators. The AARO web-
based discussion forums are restricted
to AARO members to discuss issues and concerns, share thoughts and ideas, and
provide timely information on legislative changes and proposals.
states to use and edit as necessary to
regulations. Although not mandatory,
this matrix could provide more consistent disciplinary actions as board members,
staff and attorneys are constantly replaced. This could also level the playing field
between state appraisal boards that have
very aggressive sanctions compared with
neighboring states with lenient sanctions.
Education/Training Programs
Develop and Encourage Cooperation with Other Organizations
Association of Appraiser Regulatory Officials (AARO)
AARO formed an alliance with the
AARO conferences include a wide
Established in 1991, AARO’s mission
AARO Regulatory Agency Investigator
related industries, including professional
enforcement of real estate appraisal laws
to send selected individuals from all 55
through the following primary objectives:
of the country to attend the training
•
Facilitate communication and
were the highest ever received by
appraiser regulatory officials and
investigator training course was developed
appraisal issues.
appraisal agencies.
AARO has worked closely with federal
Conduct research and obtain
Investigator training is critical for proper
Referral of Suspicious Appraiser Activity
matters.
and USPAP. While some state appraisal
Participate in educational programs
whatever reason, whether it be a lack of
instructions, administration, and
requirements, more than a few do a poor
for regulatory officials and others.
The ASC should continue to hold the
strive toward raising the level of
must be provided to or retained by state
appraiser regulatory officials.
investigations and enforcement.
ASC and TAF to enhance the existing
is to improve the administration and
Training Program, and provide funding
in member jurisdictions, accomplished
jurisdictions to four geographic areas
•
•
courses. Survey ratings from attendees
cooperation between and among
TAF. Subsequently, a level II advanced
others concerned with appraiser and
and is also offered to prequalified
information relative to appraisal
enforcement of state appraiser regulations boards do a good job of enforcement, for
on appraisal and assist with
funding or lack of mandatory licensing
regulation of appraisal education
job. This cannot be allowed to continue.
In addition, AARO will continually
states responsible and additional resources
competence and professionalism of all
appraisal boards to conduct appropriate
variety of speakers from many appraisalappraiser organizations, education
providers, state appraiser coalitions, appraisal management companies,
lenders and federal enforcement agencies. Their presentations provide valuable
information on current topics affecting the regulation of appraisers and soon
appraisal management companies as well.
agencies to develop a standardized
form that could simplify the process of filing complaints with state appraisal
boards. Many lenders fail to comply with Title XI of FIRREA requirements to refer unacceptable appraisal reports to state
appraiser boards, because of the hassle with complying with each individual
states complaint process. Acceptance of a standardized complaint form and a streamlined process may result in a
significant increase in the volume of
complaints, which may be a burden on >>
LVM |
39
understaffed appraisal boards, but the
will have their interests much better
shortfalls and is unable to appropriate
public) would be much better served.
their voice heard. Double taxation of
directors are forced to take unpaid
regulators’ primary purpose (to protect the
AARO is also developing a similar form to
be used by appraisal boards for the referral of suspicious criminal activity to federal enforcement agencies.
State Appraisal Board: A Three-Legged Stool
represented and a better chance of having appraisers must stop, but it won’t happen
until their voices are heard loud and clear.
enough to cover expenses. Many agencies’ furlough days to assist in balancing the agency budget.
Sweeping of funds encompasses a variety
Most states have experienced a reduction
an appraiser program in the various
impact of this attrition can also have a
of issues. The proper organization for
jurisdictions can’t possibly be the same,
due to the number of credential holders and other reasons. With respect to fees,
of licensed/certified appraisers. The
significant impact on the agencies’ funds.
For example, if a state with a $300 annual fee loses 500 appraisers, that results in a
This three-legged stool involves appraisal
you have to start at the beginning. The
Each is equally important and must be
respect to their annual licensing fee
Staffing
the ASC more opportunity to require
$50 to $475. Some states, even if they
Sufficient funds are needed to recruit,
would still be inadequately funded.
individuals. Training them is expensive
board funding, staffing and organization.
jurisdictions are all over the place with
adequately addressed. H.R. 4173 gives
amounts. States’ annual fees range from
adjustments in each of these three areas.
retained all the fees that they generate,
Funding
Some states are non-appropriated and
Funding is paramount to hiring the
are financed by means of a revolving
the regulatory functions necessary to be
that are generated by the agency. There
have the authority to mandate the states
by the state
as a result of H.R. 4173, the ASC now has
during budgetary
state agency that fails to have an effective
state government,
was critical, since the only tool previously
can remove funds
halt all mortgage lending in the state. That
through a crisis.
was never used.
having a revolving
At an appraiser meeting several years
states “borrow”
forming together at their state capitols
fund, leaving behind
swept into the state general fund. Many
never be repaid.
not being used for purposes other than the
appropriated. The
a form of double taxation. Addressing
by the agency are
can become a lost cause. By joining a
the legislature makes appropriations for
or state appraiser coalition, appraisers
these agencies is when a state experiences
necessary staff to adequately perform
fund. The board retains 100% of the funds
compliant with Title XI. The ASC does not
is no portion of the fee being withheld
to stop sweeping appraiser fees, however,
government, but
the authority to impose sanctions against a
shortfalls of the
appraiser regulatory program. This reform
the legislature
available to the ASC was to effectively
to help the state
penalty was considered so severe that it
That is referred to as fund “swept.” Some
demanding that appraisers’ fees stop being
an IOU that may
appraisers are unaware that their fees are
Other states are
regulation of appraisers, and that is truly
fees generated
this concern as an independent appraiser
deposited in the state’s general fund and
professional appraiser organization
the agencies’ expenses. The problems in
/ November 2010
and time-consuming. Their compensation has to be sufficient to retain them once
trained. It takes a certain amount of work hours to accomplish all the things that
must be done to effectively supervise an appraiser program. Each state can do an
adequate job of issuing
Many appraisers are unaware that their fees are not being used for purposes other than the regulation of appraisers, and that is truly a form of double taxation.
ago, I was asked why appraisers weren’t
| LVM
train, and retain highly capable, motivated
an appraiser credential
from the agency
40
reduction of $150,000 per year.
based on established experience and
education criteria, and
renewing credentials in
an appropriate manner. But boards are also
required to perform
sufficient research to issue permission for appraisal schools,
instructors and courses,
and are just as obligated to supervise course
providers as appraiser organizations. This
may include auditing
courses and seminars, which is a very
expensive and time-
consuming duty. >>
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Organization
H.R. 4173 replaced this statement with a
Appraisers are not undocumented aliens
The agency must be organized in such
licensing such appraisers must have
must reciprocity provisions be a barrier to
a manner as to assure success. Some state appraiser directors are also the
education coordinator for the Real Estate Commission and now must take on the
responsibility of regulating AMCs. Some of the states have a staff of one and no board. This is, at best, a forced-to-fail situation. Regulation of AMCs may turn out to be the straw that breaks the camel’s
(appraiser regulator’s) back, throwing
additional responsibilities onto the backs of underfunded, understaffed, poorly
organized agencies. It is estimated there
will not be sufficient funds generated by AMC registrations to provide relief.
When an appraisal board is required to
regulate, they are putting the seal of the state on the appraiser, appraisal school, appraisal instructor, education course, and/or AMC. The public then looks
upon that seal as an indication that the appraiser, appraisal school, appraisal
instructor, education course, or AMC has been properly vetted and meets some reasonable standard. When a citizen (consumer) has been victimized or
exploited by an appraiser or AMC, they
don’t really want to hear that the agency
was insufficiently funded, understaffed or improperly organized.
Can’t We All Just Get Along?
requirement that a state certifying or
requirements that meet or exceed the
licensure standards established by the
state where an individual seeks appraisal licensure.
Intentional or not, many states are now using this language to deny reciprocity to appraisers that are in good standing and meet minimum AQB standards to
ASC Statement 6: Reciprocity (May 1,
1997): The ASC shall encourage the States to develop reciprocity agreements that readily authorize appraisers who are
licensed or certified in one State (and are
in good standing with their State appraiser certifying or licensing agency) to perform appraisals in other States.
| LVM
/ November 2010
Appraiser regulators must level the playing field.
Develop and encourage cooperation with all other organizations whose objective
is similar in nature to the objectives and purposes of AARO.
I invite all appraisers, appraiser regulators,
the reciprocal state has requirements that
appraiser coalitions, appraiser education
reciprocity to a qualified appraiser because exceed the licensing state requirements?
Examples of denying reciprocity in some states: 1) State B requires 16 hours of
professional appraisal organizations, state providers, appraisal software providers, banks and mortgage lenders, appraisal management companies, realtors,
assessors, and other users of appraisal
services to find out more about AARO at www.aaro.net.
continuing education, or 32
Get to know your state appraiser
A requires the AQB minimum
source of accurate information, not
two-year cycle. Reciprocity denied
blogs. We all have the best intentions and
hours in a two-year cycle. State
regulators. They can be a valuable
standards of 30 hours of CE in a
misinformation provided from Internet
in State B.
motivations to improve the appraisal
experience to 25%. State A allowed
Attend your state appraisal board
accordance with AQB guidelines.
of your organization attend an AARO
2) State B limits mass appraisal
industry and protect the public.
100% mass appraisal experience in
meetings. Be sure to have a representative
Reciprocity denied in State B.
conference. Together we can make a
3) State B requires a written
reciprocity agreement signed by
both states. State A refuses to sign reciprocity agreements because may change in State B without
notification provided to State A.
4) Appraiser licensed/certified in
State A. Moves to State B and is granted reciprocity. Appraiser does not renew credential in
original issuing State A. Two years later appraiser moves back to
State A and is denied reciprocity because existing credential in
State B does not meet minimum requirements in State A.
42
keeping qualified, experienced appraisers?
be licensed or certified. Is it fair to deny
statutes and qualifying criteria
Reciprocity
crossing borders for illicit purposes. Why
difference. n
All of the statements, thoughts, and opinions expressed in this article are my own and may not reflect those of the Kansas Real Estate Appraisal Board, AARO, the ASC or TAF.
LVM |
43
observations of a
Michael Connolly
home inspector The Improvements section of the URAR V
ast month we started into the
Exterior Description
Masonry block foundations are often
URAR form and discussed a home
Foundation walls can be constructed
of a poured-concrete foundation. If the
Determining the type and material used
concrete but hairline stair-step cracks are
Sometimes the basement or lower levels
masonry block with a cement stucco finish.
vegetation and soil grade around the
Stone foundations (dry-laid or mortared)
foundation.
these inferior to modern foundations.
Improvements section of the
inspector’s observation as it might relate to the General Description
and Foundation sections of the form. This installment will continue in the
Improvements section. We will discuss
some common issues and deficiencies an inspector might uncover if he were to be
inspecting from the Improvements section of the URAR form. 44
Part
| LVM
/ November 2010
coated with stucco, giving the appearance
of many different types of materials.
foundation walls appear to be poured
in a foundation can be challenging.
visible in the walls, the wall is most likely
are finished, preventing evaluation. The exterior of the house may also mask the
are found in older houses. Some consider However, the size and weight of the
stones often make these foundations very
coated with the synthetic stucco. This
often inadequately pitched or pulling
stable. Many stone foundations last
stucco by feel. If you press on the wall
look fine at a quick glance, poorly pitched
resistant to movement and thus very
more than 150 years. Stone foundations often allow moisture penetration into
the basement or crawl spaces. This is a
common trait of stone foundations and
can usually be corrected by proper surface water management around the house.
Wood foundations are specialized and can require someone with special training to evaluate the condition of the foundation
and the adequacy of the installation. This
type of foundation should always be noted and the client advised to seek the opinion of a qualified contractor or engineer. Pre-cast concrete walls and foam
material is distinguishable from real
and the stucco feels resilient (because of
its flexible nature and the fact it is backed by Styrofoam), it is probably EIFS. If
the wall is solid, like concrete, then it is
probably real cement-based stucco. EIFS
can allow for moisture penetration behind the material into the wall cavity, causing
extensive moisture-related damage. Since
the Styrofoam and the synthetic stucco are not compromised by water, the exterior finish can look great while allowing
moisture penetration and rot in the wall
The centers of the blocks are designed
with a hollow void, which is then filled
with concrete at the site. While there are
many different methods of construction in this category, these types of foundations
direct roof water toward the foundation, can lead to moisture intrusion through
the foundation walls. Suspected roof leaks are often not attributable to roof leaks
but overflowing gutters. Water stains and
damage on the exterior and interior facing
walls are often the result of water flooding
the eaves and leaking down into the walls.
allowing light to enter the home. Window
as asphalt-based shingles, are designed to
Styrofoam building blocks that interlock.
terminate too close to the home or simply
trained to inspect this type of siding.
are manufactured and brought to the
connected. Foam core blocks are usually
gutter flood rim. Downspouts, which
Windows perform another basic design
the report and evaluated by an inspector
Roof surfaces protect the structure from
building site where they are installed and
gutters will allow water to overflow the
cavities. EIFS should always be noted in
core blocks are newer methods of
building foundations. Pre-cast walls
away from the fascia. While they may
water in one of two ways. Most roofs, such shed water from the structure. They are
not waterproof. Some roof surfaces, such as rubber membrane roofs (often seen in
flat roofs) are waterproof and are usually pitched to allow for drainage. They are designed to be waterproof with water
ponding on the roof for extended periods.
of shelter: to keep out the weather while designs are many, but all perform the
same basic function and design. A largely overlooked safety issue with double
and single hung windows is a defective
sash balance or broken sash cords. These
windows may open and stay in the open position but will quickly drop when
bumped or moved. The guillotine-like
drop of a sash can seriously injure a child whose fingers are placed across the sill of the window.
are generally considered to be superior in
Gutters and downspouts are used to
A home inspector rarely evaluates storm
penetration to other common foundations.
and away from the structure. These are
insect screens on windows to see if they
strength, energy efficiency and moisture
Exterior wall coverings keep the elements from penetrating the building envelope
manage rainwater off the roof surfaces
often the most overlooked systems in a
house but are, in this inspector’s opinion,
one of the most significant systems. Water
while providing aesthetic appeal.
management is critical to the condition of
coverings requires time to closely evaluate
design needs of shelter: to keep us dry.
Determining the condition of the wall
the materials, the method of installation and maintenance.
There are some wall coverings which can present as “good” in condition but are
in reality failing and allowing moisture penetration into the wall cavities. One
such material is EIFS (exterior insulated finishing system), which is synthetic stucco. EIFS is a system by which
Styrofoam boards are mechanically
attached to the exterior walls and then
the house and performs one of the basic
Rain and surface water is the enemy of a
house and can be the underlying cause of many issues. For example, the presence of termites, ants and other insects in a home
can be linked to poor water management.
Insects need water to survive and flourish. If a gutter is overflowing or directing
water at the foundation, this provides a
source of water and even an attractant to
sashes and screens. However, I look at the are puckered. A screen that is not stretched tight can indicate movement or crush
in the window frame. This is common in new-construction homes where the
builders install the windows too tightly
against the brick. The framing of the house settles (shrinks) down about an eighth
to a quarter of an inch per floor and will pull the window (attached to the house
framing) down against the brick (sitting
on the foundation). This causes an upward compression on the frame of the window
that usually can be seen in the screen that deforms.
insects, which can then invade the home.
In the next installment, we will finish up
water away from the home. Gutters are
Improvements section of the URAR. n
Downspouts should adequately direct
the remainder of the series with the final
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Voices of Valuation Last month’s articles sparked a lot of debate. Here are some responses from our readers.
1
ZAIO...The Long and Winding Road
Cbressle Yeah, I know where the road ends, with appraisers, friends of mine, struggling in this AMC ridden market to get enough work at high enough fees to recover some of that $10,000 they “invested.” David Let’s say right from the start that each one of the zone owners knew there was risk in a start-up company from the get go. Just as buying stock in a .com company was. There was no scam, no greedy appraisers, no promises. Just a good idea that sounded worthy of pursuing. No one was forced to buy into the concept. They did it of their own free will. Guest Zaio and ZDS have enormous potential and the believers will continue to push past the criticism they have received to change an industry for the better. Keep up the good work you have the potential… Eddgillespie It continues to amaze me why appraisers are so dedicated to turning appraisals into stuff like assembly line widgets. Appraising is a profession and it takes a lot to learn it and do it well. Why cast all of that like pearls before the lenders? Kudos to Zaio folks for their earnest efforts to keep their idea and company afloat, but why? 46
| LVM
/ November 2010
Do you
have something to say?
www.livevalmag.com
Learning From Markets Abroad
2
Gil Ramirez Good article and overview of the Spanish real estate market as compared to the USA. The result is we have more in common than not. Motives for buying are similar worldwide the difference is purchase power opportunities. Valuation methodologies measure these trends everywhere. Jordan Petkovski Great insight into the AMCs of Spain. Always happy to hear your input on the subject.
New Legal Risks for AMCs
Riclif Excellent points. Seems to me that the AMC’s and the appraisers need to work together to protect themselves from the lenders.
3
Mik AMCs are not concerned about legal risks in any way, shape, or form. Since the HVCC, AMCs have attempted to: ORDER me to put higher comps in a report; identify whether the owner is married or unmarried, a clear violation of federal fair housing laws; and discuss the results of an appraisal with a lender who was not the client; a clear USPAP violation, among other violation requests. These items have been violations for 20 years, so I will not be holding my breath to see any cleanup of newer legal issues any time soon.
For What It’s Worth
chace This whole change has been a profession killer. In the next five years the loss of most of the experienced appraisers will cause another change, the consumer can not afford to lose all the experience that is leaving the appraisal industry. Perryg362 Imagine what would happen if all legal actions first had to be presented to the court, then the court decided which lawyer would be assigned to present or defend the case and tell them how much their fee would be, or send an e-mail to all the lawyers and whoever replied first got the case (at a reduced fee of course), now imagine the same scenario with realtors and loan originators. The whole premise is ludicrous yet that is what appraisers now have to contend with.
4
Appraiser in Realtor Clothing
5
Concerned Appraiser No, I won’t be shadowing any Realtor in the near future. But I think a Realtor or two could learn a few thinks from me. It would likely save them some embarrassment when the appraisal came back under value!
Barry Noble As a Broker/Realtor who works as an appraiser and has done so for over 20 years, I agree with a lot of this - I notably don’t follow the ill used values of baths, bedrooms, extra rooms etc. They should be adjusted by the end value range and should be notably higher, in most markets. Appraising is an art, beyond its technical plodding. I am also amazed at how many Realtors and Appraisers look down on each other -as noted in a couple of the comments already - when they could work together to make this one hell of a good industry with an emphasis on ethics, communication and accuracy. Eddgillespie I believe it is my duty to protect my client and earn the commission I am to be paid. I also believe I am helping the appraiser do his job and to protect his client relationship by making sure I can justify a purchase price. You sir, are unique and rare exception to the mold most brokers seem to have been made in. I’ve never heard one give even lip service to your credo. LVM |
47
PRIDE. PASSION. PROFESSIONALISM.
Directory Get Connected ACI
Relocation Appraisers & Consultants RAC is a nationwide organization of Independent Appraisers who are trained professionals in relocation appraising.
What distinguishes RAC from all other appraisal organizations l
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The majority of our organizational activities are devoted to education, research, and client outreach.
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Each of our select group of members is considered the relocation appraisal experts in their respective markets.
800.234.8727 www.aciweb.com
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Appraisal Institute
LIA Administrators & Insurance Services
888.756.4624 www.appraisalinstitute.org
AARO
919.235.4544 www.aaro.net
Appraise All
858.232.3348 www.appraisalmanagement companies.com
CoreLogic
978.762.7000 www.corelogic.com
Forsythe Appraisals
REVAA
202.223.7800 www.revaa.org
Smart Move Inspections 513.896.5434
202.640.8912 rstaiger@gwmail.gwu.edu
Kentucky Real Estate Appraisers Board
/ November 2010
972.658.9216 www.rac.net
Intercorp
800.333.4510 www.interthinx.com
| LVM
Relocation Appraisers and Consultants
www.smartmoveinspetors.com
Interthinx
48
800.334.0652 www.liability.com
651.486.9550 www.forsytheappraisals.com
800.640.7601 www.intercorpinc.net
For more information visit our web site at: www.RAC.net
LANDY
859.623.1658 www.kreab.ky.gov
Kirchmeyer
800.771.5246 www.kirchmeyer.com
Stage Capital, LLC
Title Source
888-848-5355 www.titlesource.com
US Bank
612.973.2559 www.usbank.com
The William Fall Group 419.255.9171 www.williamfallgroup.com
Zone Data Systems
775.828.ZONE www.zonedatasystems.com
LVM |
49
For What It’s Worth
A Call for Accountability and Consistency
Don Kelly
For those who recall the last real estate financial crisis, you will remember that reforms were made, regulations promulgated and proclamations voiced that such a disaster would never happen again. Well, so much for such well-intentioned predictions. While the Financial Institutions Reform Recovery and Enforcement Act (FIRREA) did allow for the orderly disposition of failing real estate assets through the Resolution Trust Corporation, it wasn’t designed to deal with many of the factors that have led to the current financial turmoil. Problem assets – whether they became toxic, be it through exotic financing and creative leveraging schemes, fraud, or poor oversight – nearly brought down the world’s economy. Our challenge now is to work through remnants of the financial inventory and look toward, yet once again, taking the steps necessary to ensure that such a calamity is avoided in the future. With the growing demand for efficient and reliable data regarding troubled properties and the increasing use of BPOs to identify value trends and property characteristics, companies that provide these services recognize the need for accountability and consistency. If conventional appraisals were the only valuation tool available, it would have a dramatic effect on overall cost to homeowners, servicers, lenders, banks and investors. It would also have a significant impact on the time it would take to obtain an appraisal or valuation. Currently, there are estimates showing approximately 1 million BPO, AVMs, or alternative valuation products being completed on a monthly basis. Data from 2009 shows more than 10 million BPOs were completed. Currently, there are approximately 100,000 licensed or certified appraisers in the United States, with only a portion of those serving the residential market. It’s clear that the residential appraisal community could not keep up with this demand and thus extend the time before a recovery indeed occurs. The time and costs would be borne by homeowners and consumers. During periods of rapid market appreciation or market deprecation, there appears to be an increase in the incidence of mortgage- related fraud. While some may argue that BPOs and brokers that prepare BPOs 50
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/ November 2010
are involved in short sale fraud by preparing “low” or “undervalued” price opinions to facilitate short sale transactions, we see little real evidence of such activity. Indeed, a BPO is one of many data points that are analyzed to facilitate a short sale transaction, but major BPO providers do not list properties nor do they allow agents to market themselves to list the properties being inspected or valued. The Real Estate Valuation Advocacy Association (REVAA) in Washington, D.C. represents alternative valuation service providers. REVAA is an alliance of member companies dedicated to the maintenance and further development of high-quality standards within the real estate valuation industry and the advocacy of related causes. The association promotes high ethical standards, political awareness, and the growth of the real estate valuation industry as a whole. REVAA is comprised of companies that produce and deliver real estate valuation products including appraisals, broker price opinions, automated valuation models and other innovative valuation approaches that benefit mortgage investors, servicers, originators and borrowers. REVAA has drafted model legislation incorporating language from the Dodd-Frank Act that facilitates the use of BPOs in various transactions except as the primary basis for a loan origination decision in a primary residence. We know the 2011 state legislative season will see many progressive state bills introduced and passed, bringing outdated or vague state laws up to date and in compliance with federal law as well as the market realities and needs. The comprehensive reforms in Dodd-Frank and those allowing the use of BPOs point the way for muchneeded accountability and reform in the mortgage marketplace. In this regard, REVAA is committed to helping find solutions to our current real estate contagion. We believe BPOs and alternative valuation products must be and will be a part of the solution. REVAA members continue to deliver necessary products that are consistent, transparent, accurate and reliable. For more information, point your browser to www.revaa.org. n
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