Affordable Housing Institute : US

[Continued from yesterday's Part 1.]

In yesterday’s exploration of the changing appraisal world, using an interesting Wall Street Journal article, we’d identified the intrinsic challenge of appraisal – having to simulate a forward-looking market by using exclusively backward-looking evidence from past sales. Called upon to appraise a pending sale, the appraiser is in a really weird position:

• She has to simulate actions of hypothetical people buying and selling a property
• Somehow overlooking that there are, in fact, actual people who are buying and selling that same property.

“What you are doing is irrelevant,” says the appraiser. “I have to figure out what rational people would do.”

Who are you going to believe, your lying eyes or me?

In light of this, what’s a borrower to do? A Journal inset offers helpful advice:

How to Appeal a Flawed Home Appraisal

In today’s turbulent real estate market, appraisals can easily kill a home sale or an application for refinancing. So what can you do if you believe you got a bum appraisal?

Lenders generally say they are open to appeals from homeowners who believe the appraiser got it wrong.

The appraiser got it wrong?

They should be. Lenders don’t make money rejecting loans; nor do they make money making loans that will default. And in these times, lenders will be hypersensitive to charges of consumer insensitivity. That doesn’t mean, however, that you can appeal emotionally:

You’ll need to provide evidence. Read the appraisal report carefully and check for errors. Did the appraiser miss one of your bathrooms?

Did you miss this amenity?

Miscalculate the square footage? Fail to note your two-car garage?

At my for-profit company, we do valuations of complex structured interests. After making our initial data request, which includes a comprehensive checklist of information we think relevant, we also invite our customers to provide any information they think worthwhile for us to know. Unless the circumstances are unusual, we also give our customers a chance to look at and comment upon our draft, and to provide additional evidence. This creates an intellectual argumentation, where the client is advocate for its view of the right value, and we are judge and jury of what we think is the right value. For this tension to yield improved (more accurate, more thoughtful) results, we as valuation experts have to be strong enough to repel improper suggestions and to resist flimsy or unsubstantiated argumentation.

More important, take a close look at the recently sold houses listed as “comparable” to your home. How comparable are they? Is one in an inferior school district or adjacent to an adult-video store?

Adult video store? So 1995, dude!

Undermining neighborhoods since 1995?

Try downtown erotic lingerie shop.

Ask a friendly real-estate agent [Like the selling broker – Ed.] to check if there are any better “comps” that you could provide. But don’t cheat:

They just sell short

Use only homes that you can justify as being similar in quality and location to yours, and use all of those, not just the ones that sold for the highest prices.

The principle here is ‘minimizing differences.’ Just as no two snowflakes or people are alike, no town houses are identical. (Condos are closer; stacked in high-rises, they can be almost identical.) Appraisers work on the principle of additive differences – that each element of difference is a plus or minus, much like the price of a car goes up or down as you add satellite radio, leather seats, and other accessories.

There is no guarantee that the lender will budge, of course, but it’s worth a try, especially if you see signs that your appraisal was seriously flawed.

By far the most common flaw in appraisals is omission brought on by time pressure or price cutting. At my for-profit company, we’re seldom the cheapest valuation expert for any given assignment, but we pride ourselves on being the most sophisticated, thorough, and evidence-based.

It pays to be a choosy mother

Do we get chosen? Depends on what the client cares about. And for that matter, it depends on who’s doing the hiring – which, as we discover back in the first Wall Street Journal article, has recently changed.

[The Home Valuation Code of Conduct, which applies to mortgages placed via Fannie Mae and Freddie Mac, bars loan officers, mortgage brokers or real-estate agents from any role in selecting appraisers.]

This has encouraged lenders to outsource the selection to appraisal-management companies, or AMCs, which take a sizable cut of the appraisal fee.

This is value-chain re-engineering. If the link between commissioner and appraiser is too cozy, then it’s necessary to add a link. Adding a link adds costs. The first-order systemic response is simple:

As a result, appraisers are under pressure to “do it faster, do it cheaper,” said Bill Garber, a spokesman for the Appraisal Institute, a trade group.

With costs cost, we have the second-order reaction – adverse selection by quality. Premium providers are pushed out of the business.

Debbie Huber, a Las Vegas appraiser for 20 years, said she has turned down requests from AMCs that offer to pay 50% to 70% of her standard fee and require that the work be completed in as little as 48 hours.

I don’t mind the speed requirement – a single-family appraisal can be done in that interval – but normally, drop-everything-do-it-now speed commands a premium, not a discount. If you need a discount, offer more time.

Pick any two?

If you choose solely on lowest-price bid, you can get lowest quality product.

Some appraisers said AMCs settle for appraisers who have little experience or live far from the homes they evaluate. John Simms of Peoria, Ariz., said he often gets assignments more than 100 miles away in neighborhoods he doesn’t know well.

Market knowledge includes a holographic element. Everything you know can potentially bear on everything else you know, particulary when it comes to neighborhood locations, which include factors both visible (comparables, daily use) and invisible (reputation, evening and night use). Do it too fast and quality declines.

The upshot, appraisers said, is less accuracy and certainty about a property’s actual value.

We saw in Part 1 that all appraisals have inherent uncertainty. Reducing the band of uncertainty should e the goal. Slapdash appraising increases the band of uncertainty, but that may be very hard to perceive without a review more thorough than the original appraisal.

Remember, buyers and sellers make the market; appraisers estimate the market. Appraisers simulate what buyers and sellers do. And there’s another wrinkle which might seem to undo the independence – or at least, throw it a curveball.

Independent?

The code also permits lenders to own stakes in AMCs. That means lenders can profit from a service they require borrowers to buy — and that protects the lenders themselves.

Now, this is one of the many sins of which Angelo Mozilo has been accused. Among the least of them, to be sure, but still!

Appraisal-management companies said they need a big cut of fees to cover their costs and ensure quality.

‘Cover their costs,’ dear reader, includes ‘pay our salaries and make our profits,’ so it’s a classic meaningless phrase. Ensuring quality depends on two things: initial qualification of the stable of appraisers, and pre-submission review of the draft appraisal.

When you need the horses, make sure they’re all qualified

Jeff Schurman, executive director of the Title/Appraisal Vendor Management Association, said AMCs typically take about 40% of the fees and appraisers get the rest.

Two-fifths isn’t exorbitant, but it’s not minuscule either.

Mr. Schurman said he has seen no evidence that AMCs’ practices lead to lower quality.

At that I laughed out loud. “The head of an association that takes 40% of another’s fees said he has seen no evidence that cutting what’s paid for actual work leads to lower quality.”

A four-year-old child could make it out!

Quick, get me a four-year-old child, I can’t make head or tail of it

While the new code is likely to prevent some abuses, it also removes flexibility. For instance, loan officers or mortgage brokers used to be allowed to discuss specific home values with appraisers, who sometimes would advise against ordering an appraisal if it seemed unlikely to be high enough to warrant a loan. That would save borrowers money.

Conversation is information. It is also influence. The challenge is balancing the two.

The new regime also results in higher costs in at least some cases. Mitch Ohlbaum, a Los Angeles mortgage broker, said one client was recently charged $500 for an appraisal that would have cost about $300 before the code took effect.

Here’s the third-order outcome of the change in appraisal rules. We’ll stabilize with higher appraisal fees as the market will price back in the cost of the intermediaries who do the choosing.

Will raising the price of appraisal raise the price of housing?

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