My Analysis on the HVCC

July 16, 2009 at 12:08 am | Posted in Uncategorized | 2 Comments
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Here’s the layman’s synopsis of the dreaded Home Valuation Code of Conduct and why it’s important to you- regardless of who you are.  I recently gave this presentation to a group of other local professionals, and now I’ve attempted to put it in some sort of written form.  Now that I’ve read it back, it’s downright boring!  But it is important and worth a few minutes of your time.

BACKGROUND

In the late 1980’s there was the great Savings and Loan collapse.  “Bad lending practices” is the 2 second synopsis.  And the US Goverment (taxpayers) bailed them out to the tune of $125 billionish.  In the wake of this, among other things, Appraisers were officially required to be licensed, follow universally accepted standard, etc.  In other words, rules and regulations were established.  Those rules included minimum education hours, minimum experience hours, testing standards, licensing procedures, background checks, etc.  Today, that means 2500 hours of experience, 120 hours of initial education, FBI check, nationally established test, a 4 year college degree, errors and omissions insurance, etc.

And every two years, Appraisers are required to repeat one specific class known as USPAP, which basically covers the methodology of appraising- including ETHICS.

Why so much to be an Appraiser?   Well after all, Appraisers are signing a legal document saying what the estimated value of a property is.  And that document is then used by decisionmakers on whether a loan should be given for a particular property.  Basically, the Appraiser is giving the diagnosis on a piece of property, and the bank then decides the course of action.

Every state has an Appraisal Board which consists of a group of professionals who enforce appraisal standards and licensing.  And when someone complains about an Appraiser for competence, ethics, or any other legitimate reason, that board investigates complaints against Appraisers.   The board reprimands Appraisers up to and including revocation of licenses and even pursuit of criminal charges to be carried out by the Attorney General or whomever else would pursue the matter (I’m not a lawyer).

All these things have been mandated or expanded since 1989 by what is known as FIRREA- you can google that on your own if you’d like.

Recent Housing Situation

So as we’ve all seen, over the past several years, the market has seen a significant decline, and by significant, I mean huge.  But rather than accept the fact that it’s normal for markets rise and fall, the tendency is to try and place blame. 

So whose fault was this big mess? 

  • Was it the homeowners- who saw prices going sky high and did whatever they could to buy a house, or two, or ten.  Or maybe they irresponsibly overleveraged themselves to get these homes.  Or maybe they even lied in order to get these loans.
  • Was it the Realtors, who took their clients to homes that were above their price range and “sold” them into going through with a purchase that they really didn’t feel comfortable with.
  • Was it the Appraiser’s fault for falsely estimating values because they were scared that they’d lose clients if they “killed” deals?  Or perhaps they were working in cahoots with lender in some sort of “straw buyer” scheme.
  • Was it the mortgage broker’s fault for putting borrowers in risky loans- or fudged the financials of the borrower to make them fit into a loan? 
  • Was it the lender’s fault for creating these risky loans in the first place- like stated income, no income no job, or negative amortization loans? 
  • Maybe it the politicians- who passed legislation and threatened to sue lenders if they didn’t provide more loans to unqualified borrowers simply for the sake of giving more minorities the chance to own a home.

The answer- it was everyone’s fault and more.

But now that the mess is made, sure we see the news stories of heartache and trashed homes and bankruptcy and divorce.  But the people who we hear and see most now are the politicians who represent us and are able to promote legislation (or mandate it).  But let’s just say that I am cynical and although I believe that many politicians have noble intensions, oftentimes they are only posturing in order to let the masses think that they are doing their job.  The politicians have to look like they care right?

So here’s the deal.  A few years ago, Washington Mutual got in trouble for putting pressure on Appraisers to get deals done.  Turns out that WAMU owned their very own appraisal company subsidiary.  So if you got a loan through WAMU, your appraisal was essentially done by an employee of WAMU.  So ultimately their staff Appraisers were caught inflating values to make deals work- even if they weren’t wise decisions for the bank.  People complained and it was uncovered that the “objective” Appraisers were anything but- and that they were pressured into inflating values.  WAMU is now in the process of being bought by Chase so we know how that worked out for WAMU. 

So about this time, the attorney general of New York- a single person named Anthony Cuomo took it upon himself to dictate that mortgage companies are not allowed to directly contact the Appraiser, but instead use a “neutral” Appraisal Management Company (AMC) who then selects Appraisers at random.  You can read the actual code here if you’d like.  Appraiser independence, no pressure.  Yay!… But does it really provide Appraiser independence and does it really eliminate lender pressure? 

Once the code was announced, these AMCs appeared out of nowhere in droves.  Everyone wanted a piece of the action.  I mean where else can you start a business that mortgage companies have to use?  And did I mention that these AMCs are unregulated?  Did I mention that these AMC’s are unregulated? (yes I meant to repeat myself).  So starting May 1st of 2009, it is now required that for any transaction backed by Fannie Mae or Freddie Mac, safeguards must be in place to eliminate any whiff of guidance by the loan officer on the Appraiser.

So… how do these AMC’s make money?  Well, it used to be that the borrower would pay the Appraiser- around $350 for a typical home appraisal.  Good lenders would insist that borrowers pay the Appraiser directly- that way, even if the deal fell through, the Appraiser got paid for services rendered.  So if the Appraiser gets $350, then  how does the AMC make money?  Two choices- charge more for the appraisal so the Appraiser can still get paid the same amount, or find an Appraiser who will do the work for less than $350.  Oh wait, three choices- charge more for the appraisal AND find an Appraiser who will do the work for less than $350.  So it’s now common for borrowers to get charged $500 for an appraisal and the Appraiser gets paid $250, $200, or even less- depending on how much the AMC is willing to pay and how desperate the Appraiser is.  And since lenders must now use AMC’s, Appraiser must now work with AMC’s.  So in a given market- say Phoenix, a single AMC might have 30 Appraisers to choose from to do an assignment.  And one AMC in particular will simply email an opportunity to all local Appraisers and the one who quotes the best combination of cheap and fast, gets the work.  Or the “better” AMCs will broadcast an assignment and the first one to reply will get the work.  Sounds sort of like a feeding frenzy eh?

Now before you start saying that Appraiser’s are sharks, please remember the sharks aren’t filming the video, and the sharks aren’t providing the fish.  These sharks are hanging around waiting for food because they are starving to death.  Meanwhile the smart shark has been out on his own, doing his own fishing- but now he’s not allowed to do so and he has to join in with the others or starve to death.  Sounds a bit like socialism doesn’t it?  And who are the starving Appraisers who are doing the work for very little compensation?  It’s the freshest and greenest Appraisers who aren’t necessarily the best at what they do.  Why do high end cancer specialists and baseball players and singers get paid so much?  Because they have proven themselves and their work speaks for itself.   What if you wanted to see a concert and when you got there it wasn’t someone you’ve heard of, and it was rock when you are a country fan and they weren’t very good?  Not very good for the consumer is it?

And what happens if the appraisal is bad and the lender isn’t happy?  Who can they take it out on?  Sure the Appraiser’s name is on the report.  It’s the Appraiser’s errors and ommissions insurance and license and phone number on the report.  But with a dead deal, what’s the simplest solution for the lender?  Go to a different AMC who will provide appraisals that make value.  So the “pressure” was perhaps on the Appraiser from the lender, but now the pressure is on the AMC who now puts pressure on the Appraiser- another layer of beauracracy.  So if an Appraiser comes in at a value that isn’t good enough, he might stop getting orders from the AMC- again, the unregulated AMC.

Who is benefitting from the HVCC?  It’s not the Appraiser.  It’s not the borrower.  In actuality it’s the lender and the AMCs that are benefitting most.  The lender can now charge a strange fee of say $500 that covers the appraisal.  The lender can pay the AMC $350, who then pays the Appraiser $200.  And even if the appraisal kills the deal, the lender makes $150.  So instead of the Appraiser charging a simple $350, two other entities make money out of the same transaction.  Now I know that this scenario is very simplistic, but it’s a perfect example of how some are taking advantage of the HVCC.

This rant has gone on pretty long so if you’ve even made it this far, I thank you and I will try to wrap it up.  I’ll actually give real examples later down the road.

What Can Be Done by YOU

Don’t get me wrong, clients come and go, so I still appreciate referrals of mortgage professionals, management companies, lawyers, Realtors and even homeowners.  But my request for you today is to take action against this legislation.  And here’s why it’s not a futile attempt.

  1. The appraisal industry has the weakest lobbying group in DC.  So it was easy for the HVCC to get crammed into action.
  2. The National Association of Realtors (NAR) has one of the biggest lobbying groups in DC and while they let this go into effect, the impact has been enormous in just two months.  Realtors and mortgage brokers are seeing their deals getting killed by inexperienced Appraisers and borrowers are seeing very high Appraisal fees and even second Appraisal fees for deals that go nowhere.
  3. So the president of the NAR is finally taking action against the HVCC and has met with Anthony Cuomo.
  4. Go to this website and watch the video which is very well done and explains much of what I have done in this blog.  (and sorry if you read it first and are now saying “you mean I could have watched the movie instead of reading this poorly written crap?!)
  5. Sign the petition on that same website.  Last I checked it had 52,000 signatures so far.
  6. Share that website with everyone you know.
  7. There is a bill in the US House of Representatives right now- HR 3044.  It already has 19 cosponsors.  Please contact your congressman and voice your support for this bill.  Hopefully he or she will want to cosponsor the bill.

Visit our website at www.advantageappraisalsllc.com, and if that doesn’t roll off the tongue, just try www.appraiserdude.com. Give me a call at 480-544-1217 if you have any questions. I look forward to working with you. Now serving the San Tan Valley community.

What’s in a Foreclosed Home?

October 20, 2008 at 3:46 pm | Posted in Uncategorized | Leave a comment
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That’s a weird question. i’d like to think that a Foreclosed home has the same stuff as a non-foreclosed home. You know, doors, windows, toilets, carpeting, kitchen, lights. Well in most of the ones I’ve appraised, everything’s there. And everything is in decent shape- no different than any other house that’s sold. But we live in an age with a lot of foreclosed homes that are so because of the screw financial situation we’re experiencing. And with that comes a lot of anger. And with anger has come some very vengeful and destructive behavior that’s downright shameful.

Over the past 5 years or so, the housing market has been booming- particularly in places like Phoenix- where I appraise. The ridiculous rise in home prices wa fueled by cheap money, relatively inexpensive homes and the mindset that homes were ATMs. Couple those factors with the phenomenon of multiple investment homes for oftentimes out of state owners, and the “demand” was more a demand for investments- not the need for
owner occupied homes.As an appraiser, I can do a little research and have done so for an example. I live in a master planned community of about 1700 homes- surrounding a golf course, with a community pool, clubhouse, parks, school, etc. On my street alone of 34 homes- built in 2005, we have “investment” homes which are owned by people who don’t live there, and “owner” homes which are owned by the occupants.  I can break it down to the following:
  • 9 bought as owner occupied and still owned and occupied by those original owners
  • 2 investment homes subsequently sold to owners who still live there
  • 13 investment homes that are still investment homes
  • 1 investment home that was sold to an owner that was then foreclosed and was bought by another investor
  • 1 investor home that was sold to an owner that was then foreclosed and was bought by another owner
  • 4 investment homes subsequently sold to other investors.
  • 1 investment home sold to an owner which is currently in foreclosure
  • 3 that I categorize as unknown since tax records show that the mailing address is the same as the physical address.
I won’t even go into analysis of their mortgage amounts compared to market values. It’s quite depressing. So the point of my breakdown hopefully demonstrates exactly what the situation is in many neighborhoods- not just mine.But getting back to the topic at hand, as you can see, there are a lot of investment homes out there and a majority of those homes are used as rental properties. Now I don’t want to knock on renters as a group- after all, we’ve had a few great renter neighbors who were good people, took care of their rental and cleaned up when they left so they could get their security deposit back. But there are a LOT of renters who really don’t care that much.When renters pay their rent on time that’s great for the owner, but what happens when the rental income doesn’t cover the mortgage? And what if the mortgage payment is increasing each month because they got an adjustable mortgage- and the rent amount is the same? Well, you get an owner who stops making his mortgage payments, and unbeknownst to the renter, the house goes into foreclosure and then all of a sudden the tenant gets evicted because the bank now owns the home- the tenant who has been faithfully paying his rent each month. Sucks for him doesn’t it?

Well some of these upset tenants, and sometimes owner occupied residents all of a sudden lose their home, then it becomes a scene from The Jerk, where Steve Martin leaves his mansion with an armful of stuff. And how they leave varies depending on the type of person we’re talking about.

Neglect: The obvious is letting things go. Pools evaporate (after they turn green), weeds grow, black widows breed. Typically nothing intentional here. One extreme version is when a leak occurs and nobody knows about it til it’s too late. I had one of those recently where a toilet leak at the supply line seeped out into the bedroom and then you get what you see below- a virtual forest of mold:

Rapture: These are the sad ones. Toys in the backyard, clothes in the closet, food in the pantry, DVDs on the floor, pictures on the wall. Incidentally, I’ve always wondered what happens to all this stuff that is left behind. I recently did a house where some guys were putting in a pool pump and it was a company who does foreclosure home cleanup. According to them, they take that stuff to the Salvation Army as directed by the bank. So actually that’s reassuring. I’ve always wondered if these companies simply take whatever they want. (but I wouldn’t be surprised if some of that happens)

Messy: Everyone has different definitions of cleanliness. I’ve been in plenty of non-foreclosure homes that feel, look and smell like model homes. And I’ve been in plenty where I wished that I had a gas mask and some booties. so this is by no means a foreclosure phenomenom. But the most prominent thing I see is carpet that is covered with pet stains- and sometimes ones with actual pet droppings still there. You see that in a house, and you know you’ll see plenty on the outside as well. How about a shopping bag full of feces? Not sure what happened there “we’ll collect it, but we won’t put it in the trash can”

Removal: You buy a house, you add some stuff to it like ceiling fans. Well the foreclosure consensus is that those are yours to take. Technically those sort of thing are fixtures once attached just like over the range microwaves and garage door openers. But once they are gone then who’s to say they weren’t there in the first place? After all, garage door openers aren’t standard on many new homes. About 90% of the foreclosed homes I do have the exposed wires from where the ceiling fans were.

Destruction: Ahh, the good stuff. Some of it could be accidental, some of it could be intentional and in most cases I simply assume that it was due to a rushed exodus from the premises. We’re talking drywall holes, maybe a broken window or a stair rail that’s not mounted anymore. I’ll let you be the judge on the cause of these things.

But then there’s the obvious intentional destruction, and destruction doesn’t just mean damage. As you’ll see in the following photos, I’m talking about water heater taken, air conditioning system taken, kitchen cabinets, faucets and countertops taken. I’ve even seen examples of homes with graffitti inside the house.

So yes, these situations happen, and they happen in nice looking houses, in nice neighborhoods. It’s a shame.

Here’s the next question, which I’ll save for another article: Where does this stuff go?

Visit our website at www.advantageappraisalsllc.com, and if that doesn’t roll off the tongue, just try www.appraiserdude.com. Give me a call at 480-544-1217 if you have any questions. I look forward to working with you.

Sincerely,

George

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