In the real estate trenches right now, we seem to be fighting with appraisers more than any time since the and of the boom. Appraisers are chosen because they have selected a particular zip code as on that they are willing to service...usually because it's within a driving distance, not because they have any expertise in that area.

We are seeing huge valuation problems with both refinace appraisals and purchase appraisals right now. Not just with values being off a little bit...I've seen appraisals come in 10% or more low... mostly because the appraiser didn't understand the area. Some neighborhoods, streets, or blocks have more cache and value than others within the appraiser's 1-mile radius search for comps. Without intimate knowledge of a town, there is no way that an appraiser will do an accurate job.

In the past, if the value was going to come in low, the appraiser would talk with the mortgage broker and with the real estate agents involved to try and get the most accurate value. Sure, there was fudging involved sometimes...but at least the appraiser was well-informed. Most chose to be ethical. Now, agents and brokers can't talk with the appraiser...meaning there is no chance to correct a flawed appraisal before it is submitted to the bank.

And, correcting a bad appraisal after submission has been a hightmare. Because banks are backed up with refinances, challenging low appraisals can take 2 weeks instead of 2 days.
This puts home sales in an unnecessary state of limbo.

It would have been much better to let the banks weed out unethical appraisers on their own than impose this AMC "solution".

One of the problems with appraisals results from the large amounts of financing,dn pmt and other non-bricks and mortar costs that have been rolled into the selling price of new homes during the boom years.
I have seen $50K of such expenses rolled into the selling price of a $250K new home.

Buyers need to beware of appraisals based on recorded prices of new home sales.I do not have experience with existing home sales,so I can't say whether the problem exists there.
There needs to be a rational measure of the market value of the lot and the direct labor and material.

Appraisals are like the defacto speed limit on an LA freeway; which is "The flow of traffic plus 5 miles per hour". The net result is people rushing to pass you while you are cruising at 80 MPH.
If you look for a rational basis for real estate prices based on land, labor and materials cost you'll find that prices need to drop 40 to 60 percent from their current levels to reach replacement costs. When the issues surrounding the questions posed by that conundrum become clear and you understand why it is that way and who profits from this situation get ready to look at the world in a whole new light.

boo hooo

waaaaaaaaaaaaaaaaaaaaa

I agree the new system sucks, is REALLY STUPID and makes appraisers basically salute with the middle finger to the AMC - thief

OTOH I also believe the banks need to be allowed to fail

they milked the recent refi boom and DID NOT HIRE ONE PERSON

My friend has 10 escrows going and CANNOT GET LOAN DOC's from the BANKS

appraisals don't seem to be any problem for him though - as his buyers offer MARKET

but banks don't care and will make far more with the rates up 1.5% in past month

so delaying means locked rates - expire

we haven't seen anything YET folks

I just did a deal - 17 days from 1st look to closing - eezy peezy and I get a nice 40% LTV note too!!!

Owner financing is the only way to go today

Let's not forget the dozens (hundreds?) of appraisers who about two years ago bravely tried to warn the appropriate regulators of the rampant fraud taking place by signing their names to a widely published petition. They essentially lost their livlihoods when they were black-balled. The corrupted regulators? I assume they now get whatever kick-backs are flowing from new AMC regime.

Instead of letting the banks "weed out unethical appraisers", how about prosecuting the banks and others who fomented fraudulent appraisals? The Banks black-balled any appraisers who did not toe the line, destroying lives and careers.
Asking the Banks to maintain ethics is like asking Roaches to exterminate Rats.

Since the banks are the ones taking on the risk by providing the loan, it makes sense that they should determine whether an appraisal is accurate or not. They have access to automated appraisals, and are the ones who are looking at ALL of the appraisals coming in....not just from one appraiser, so it makes sense that they are just as informed, if not *more* informed than a lone appraiser. I've seen too many cocky appraisers, who feel their *opinions* are the absolute law. They aren't! So to all the appraisers who got their feelings hurt when someone questioned their opinion of value.....you got what you asked for! But now, they have no one to be accoutable to.....it's like eating at a restaurant that makes you eat whatever they decide, without asking your opinion, and also expecting you to pay for your mystery meal in advance. Even better, if I want to sell a doll on E-bay, and I have to rely on what "Bob the doll appraiser". "Bob" says my doll is worth $5, but I can;t talk to him and explain that this doll was owned by Princess Diana, and has diamonds sewn inside it ("Bob' recently moved from China, where all dolls are selling for $5). In addition, the government has decided that I can only sell my doll for what "Bob" has deemed it is worth. This is the current state of affairs in the appraisal/mortgage world.

As ususal, appraisers are going to take the blunt of the blame for the housing crash. However, it is the "good ol boy" system that is to blame. Just as the Savings and Loan crisis when Silverado S & L went belly up the appraisal profession got blamed. I will admit that some appraisers were to blame, but not all. The same situation is now rearing its ugly head again with this current crisis.

The "good ol boy" system continues to exist. The use of AMC's is good if it is allowed to operate freely with no pressure from the "good ol boys". Unfortunately, the "good ol boys" are raising hell because they no longer can control the flow of appraisal work to them. However, the AMC's are caving in to them and letting the banks just forward a list of their "good ol boys" appraisal list to them and the AMC's are even paying them higher fees than their other "less fortunate appraisers" who have worked for the AMC's for years past.

Forty three years ago, if you were not born with a silver spoon in your mouth then you could not get a job in an appraisal company. The banks required that an appraiser have either a SRA designation or a MAI designation to do work for them. These are the same "good ol boys" that party with them at the country clubs, tennis clubs and yacht clubs, etc, get my drift. So a new college graduate with a double major in real estate and economics trying to get into the business and not born with "blue blood" hardly had a chance. You were told if you were not a SRA or MAI, they could not put you on the bank, FHA, or VA list of approved appraisers. Ironically, you could not get those designations without appraisal experience. Guess what? If you could not get a job with an appraisal company because of who your parents were, then you could not get the required experience.

Fortunately for some of the less fortunate, there were some smaller lending instituions who were willing to give you work if you had the qualifications and education. There are some appraisers who have found a niche with the first AMC's and provided a service and in return were able to gain experience and designations and earn a living.

Now the worm has turned again. The banks, mortgage companies, VA, FHA, all who formerly refused to add qualified appraisers to their list ( by the way the VA still refuses to add appraisers to their list unless you have pull)are now required to use third parties to order their appraisals. But with the help of certain organizations, power brokers, lobbyist and politicians, the "good ol boys" are screaming their lungs out supposedely to help the poor consumer and yellng "foul". Not because of bad appraisals, but because their pocket book is being hit. Yet they are the very ones who have all the lenders and banks in trouble again with bad or fraudulent appraisals. The same "good ol boys" in lending who got their best country club friends to put the "value needed" are sending their same "good ol boys" appraisers list to the AMC's to send assignments to so they can circumvent the intent of the HVCC regulation. Think they will be discussing that appraisal and loan over drinks at the country club or yacht club?

So, what will be the results? The "good ol boys", because of their country club friends and political clout will prevail. They will continue to give their appraisal assignments to their friends and the same cycle will start over again.

Are there some appraisers who should not be in the profession who are not part of the "good ol boys"? Definitely. They need to be weeded out and if the lenders were more concerned about the loan portfolio than they are about getting a "certain value", then the evolution of not giving appraisal assignments to these appraisers would remove them from the profession.

Those appraisers, who over the years have held on to their values, morals and professional ethics, struggling to eke out a living, will hopefully continue to survive. However, if the "good ol boy" system prevails, then it will be status quo in the coming years. The national and state requirements are being set so that, unless you can afford a college education and time to take additional courses and not worry about making a living to support yourself and your family, the appraisal profession will be very limited in numbers and those who are not born with a silver spoon in their mouth will look elsewhere in lieu of the appraisal profession. There are some very qualified people in the society who are not fortunate enough or economically able to attend college who deserve a chance to become an appraiser. There sre some appraisal company's out there who hold to their professional ethics and standards and do not cave in to pressure that can help these individuals become good appraisers. However, the future looks bleak for them in todays world of the appraisaing profession.

So, what is the answer. Remove all those people from all the Boards and Regulations setting committees that have a vested interest in keeping the appraisal profession limited to the ones born with a silver spoon in their mouth. Remove all contact between loan officers and the appraisers, with strict penalities if violated, and do not allow lenders, banks,etc, to furnish their list of approved appraisers to the AMC's. Allow the AMC's to do what the professional organizations have neglected to do. Monitor and clean out the ranks of ALL those who claim to be appraisers. Not just those who are not part of the "good ol boy" system.

Unless this happens we can just look for more of what has happened in past cycles.

Yes banks are the ones taking on the risk, but that is exactly why there are appraisal done. The bank does not want to loan more on a home than it is "worth" in the market. They send the appraiser to give, yes an opinion of value. The automated appraisals, or AVMs do not take into consideration the diamonds in the doll or whether Princess Dianna or Count Dracula owned it previously. Of course those have an effect on value and a competent appraiser "should" take all of that into consideration. One who doesn't has done a poor appraisal. I agree that there should be a rebuttal process, but it will slow things down.

Borrowers also need to be protected from paying too much for a home. I know-"buyer beware", but we are talking about the single largest monetary transaction in most people's lives. and they need an unbiased opinion. Here is the rub. For years appraisers and lenders have been working together to get the deal done. Any appraiser who would dare to "kill" a deal was destined to be a very hungry appraiser.

This is where the new HVCC, or Home Valuation Code of Conduct has come into our lives. The idea of the HVCC is to stop the pressuring of appraisers from being influenced this way by the ordering of appraisals through third parties called AMCs or Appraisal Management Companies. The problem is that many lenders are creating their own AMC, keeping their good old buddy network of toadies(appraisers who will play ball) on their "approved appraisers list" and taking a larger piece or the fee(which has gone up.....alot!)

I am an independat appraiser in California. As an independant appraiser there has never been any incintive for me to bow to lender demands. My only incintive is to get it right and have a product that a mortgage broker can use without conditions. AMC's do not select appraisers by a (proprietary quality scoring mechanisms employed by each AMC). They look for the appraiser that will work for the lowest fee because he/she can't make thier house payment unless they take the assignment. If you think that appraisers have colluded with mortgage brokers to the point of collpasing the real estate market then you truly do not understand the appraisal process. I am about to loose a busness that I have worked hard to grow because I have been shut out from my clients with the exception of FHA loans and all of the AMC"s that I have signed up with don't seend work or they put it out to bid and someone with less experience and inferior credentials out bids me. Appraisals take longer and cost more for the agent or borrower and some new company just skims off more profit. How is this better business?

Oh Greggy, Greggy, Greggy (browbeating condescension fully intended). Of any person involved in a real estate transaction, it's you that knows better than the Appraiser what the value of a property is, right Greg? It's you who has more intimate/everyday dealings with assigning value to a property, determining market affecting factors, etc. than the Appraiser, right Greg? If the value isn't there to "get the deal done" then, of course, the appraisal must be flawed. More specically - If the value doesn't cover the amount needed to refinance into a lower rate, pay off all of the borrower's credit card debt, pay a year worth of property taxes, all of the ridiculous fees the broker & banks charge, and also leave a nice little chunck of change for a little trip to Vegas to boot, then the appraisal is obviously FLAWED. Pleeeease spare us brother.

Realtor = 1st grade education (know how to color inside the lines), 30 hours of classes, pass a test, and VOILA, you're a Realtor that knows better than anyone else how to value property.

Mortgage Broker = 1st grade education (knowing not to go pee pee in your pants), 20 hours of classes, pass a test, and POOF, you're a MB. Now you too know better than anyone else how to value property.

APPRAISER = College Education, 250 hours of classes, 2,500 hours of direct apprenticeship (hour-for-hour logged experience, not pouring coffee in an appraisal office kind of experience either)

SOOOOO, YOU'RE FREAKING KIDDING US RIGHT, GREG??!!

J -- I think you give appraisers too much credit. Sure, they have more education, but what does that really get them other than the ability to fill out a complicated form?

Valuing properties doesn't require hundreds of hours of education. It requires integrity and the ability to put yourself inside the shoes of a potential buyer. They "art" to valuing properties is picking the comps, and any appraiser (or agent for that matter) would tell you that comps can support a value 10-20% above or below market, just based on how you pick them.

Are all appraisers/appraisals bad? No, but very few are truly unbiased, and even fewer offer the type of integrity indicative of someone who takes pride in getting it right.

From my work in the trenches today, here is what I see...

FHA is the new source for new subprime lending. Yes, it still exists. The FHA actually called us and wanted us to find a "new" appraisal to fit a deal that wouldn't work. Yes, that is the "new" FHA and it is happening today.

Home prices are heading down - take a look at 1998 - that is where the bottom will be. You can look at the long term inflation-adjusted Case Schiller data, you can look at the relationship of income to RE value and you can look at the relationship of rent to housing prices - they all point to the same thing. Think 1998. If you own RE, just check what your home was worth in 98 - that is where it is headed.

This is what is causing the problem with appraisals. As prices fall, appraisals are very difficult to make.

With the government over 90% of RE activity and the pace of changes in rules and regs happening weekly - often daily - I see periods of dislocation in the RE lending process that will cause the system itself to seize up periodically.

Think Amtrak. Sometimes the trains run, sometimes not.

It is getting uglier by the day.

Great Article... but lets get it right!!! The selection of an appraiser through the AMC system is not through a proprietary quality scoring mechanism... it's by "who will do it for the least amount". The cheaper they get the deal done, the more money they make off the backs of the appraiser. So. the method to their madness is ... lets call every appraiser in the area and get the cheapest guy to do the deal. So season, professionals who choose not to prostitute their skill, end up out of business. ....

You hit the nose on the button. Like nearly every other profession in this Country, Appraisers are spending more time per appraisal assignment due to the additional, required Market Conditions form and requirements to include Listings (?) into the Sales Comparison Approach and are getting paid 30% less due to the advent of AMC's.

Hi Gloria -- glad you enjoyed the article. I guess it depends on who you ask, I know AMCs do have scoring mechanisms, and you will notice that I threw in a "purport" as to how well they actually evaluate appraiser performance. I think in addition to cost, they pick appraisers who can do the work fast, as turn times are key in the industry. Net result: values that may be "unbiased," but are still lousy quality.

To Joe and Jeff:

The net result of all of this is that very educated, experienced appraisers, some who have built relationships for decades and yes used to "business as usual" cannot get with this AMC thing. Like myself most are unwilling to or cannot live on a reduced income brought on by sharing their fees with an entity that does little more than forward an email. (assignment). The entire industry will be lose qualified people to complete complex appraisals. We in the industry know that education is just a small part of this puzzle. It takes years of appraising , every type of property to become proficient in the process. Every property is different. Couple this inability to market your business.... lets face it what other industry is dictated to and regulated to such a degree that you cannot speak to your client, and with so much liability. So the net will be that there will be many old appraiser's (like me ) out looking for new careers, and a real difficency in the industry. Every one will pay for this.... not just the homeowners..... every facet of the industry is going to suffer from all this regulation, and by the time they figure it out... the damage will be done.