You Get What You Pay For

I don't mean to scare you by talking about dishonesty and lawsuits. But this is how the whole idea of Federal and State regulations and licensing came about for real estate appraisers. During the 1980's real estate prices were rising through the roof, (pardon the pun). The banks and savings and loans kept lending mortgage money on over-priced real estate transactions. A reason for this may be that they figured they couldn't lose money. If the buyer didn't make the mortgage payments then the lender could foreclose. If that happened, then the property would be worth more than the bank had lent and they would make a profit anyway.

Well, that's not how it turned out. Everybody ended up losing in a big way. When the recession hit the economy in 1989 an awful lot of banks lost billions of dollars due to real estate loans that had gone sour. The Savings and Loan bailout was estimated to cost over 250 billion dollars. Banks could foreclose on the properties but they couldn't resell them to get their funds back. Everybody loses in that type of situation including the homeowner, bank, the economy, the local town, etc.

The whole reason the Resolution Trust Corporation (RTC) was created was to take over insolvent banks. After taking over these banks, the RTC would try to sell the bank assets to investors to recoup some of the losses. The Federal Deposit Insurance Corporation, FDIC, and the Federal Savings and Loan Insurance Corporation, FSLIC, had to pay the depositors in the insolvent banks. Customers that had bank accounts were paid the insurance amount for their deposited money. Any funds that the RTC could not recoup with the sale of assets from insolvent banks were left to the American taxpayer to pay.

To try to prevent this whole mess from ever happening again, the Federal Government made some new rules. The government had to regulate some occupational group involved in the real estate industry. Since the banks and savings and loans were already regulated, they looked at real estate appraisers. In 1989 Congress passed the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), more commonly known as the Savings and Loan Bailout Bill. Title XI of FIRREA set up a real estate appraiser regulatory system involving the Federal government, the States and The Appraisal Foundation. The Appraisal Subcommittee (ASC) of the Federal Financial Institutions Examination Council has the authority to ensure that the States and the Foundation meet the requirements that the States use certifying appraisers and the standards of professional practice to which appraisers are held by the States (the Uniform Standards of Professional Appraisal Practice - USPAP).

Many bankers felt that they would not have made many real estate loans which ended up being foreclosed on if the appraisers had been more cautious during the 1980's real estate boom. The bankers felt that the appraisers erred because they kept arriving at inflated estimates of market value in their reports. On the other hand, many appraisers felt that many bankers and mortgage brokers had unfairly pressured them in the 1980's. The pressure on the appraisers was to arrive at high estimates of market value in their reports. The high estimates were necessary in some reports so that the lender or broker could grant the mortgage loan and earn a profit or a commission fee. Before the Federal requirements, just about anyone could call themselves a real estate appraiser. The only way to differentiate between appraisers and to measure their competence was to ask if they were designated by one of the large appraisal organizations that existed.

The current regulations may not be enough to eliminate the potential for future problems. Problems such as those encountered with bad real estate loans in the 1980's may happen again. I think a very important aspect that's being overlooked will all of the licensing requirements is the standard amount that mortgage lenders pay appraisers. Real estate appraisers are highly underpaid for the amount of work needed to do a thorough and high quality appraisal report. If you're a thorough appraiser, you can earn a six figure income in this business. However, I still think there are far too many lenders that are only concerned with how inexpensively they can have a licensed appraiser do their property valuation reports. They're so penny wise and dollar foolish it's amazing! If you pay an appraiser more money than the lowest fee possible, then you can insist that he provide you with higher quality appraisal reports. If the appraiser is getting paid a reasonable fee for the work involved to do a thorough report, then he's going to spend much more time on the assignment. The appraiser will make a bigger effort to do the best work that he can.

I met an appraiser once who owned a business that did work for insurance companies. His appraisal firm did replacement value appraisals on homes. These are needed for insurance companies prior to writing some homeowner's policies. This appraiser was telling me about how insurance companies don't want to spend any money on these appraisals. He would get calls from insurance companies all over the country looking for someone to handle their appraisal work. When he told them his fee, their response was always, "That's more money than we're paying now for these appraisals. You have to lower your prices. " After hearing this, the appraiser would ask the insurers why they called him if they already had an appraisal company handling their work. The insurers response would be, "We're not happy with the quality of the work we're getting from the appraiser. " The appraiser would answer, "That's why I charge more!" It's a simple concept that some people don't seem to understand. If you want top quality work, then you have to pay more for it.

According to the Federal and State Appraisal Standards, an appraiser has to do the same amount of work for all of their reports, no matter what they're being paid. You can't cut corners because you're not getting paid enough on a particular assignment. If you take shortcuts, you're going to make mistakes and you'll end up regretting it. Unfortunately, many people forget this. That's why you have lazy and unqualified appraisers who are only concerned with mailing out as many reports as possible to clients. These appraisers don't have any concern about the quality of the work in their reports. The reason for this lack of concern is that these appraisers feel that they're not getting paid enough to spend sufficient time on each report. I think some lenders might want to refresh their memories about this old saying: "You get what you pay for!"

By doing so many foreclosure appraisals, I can tell you that I've seen the results of this problem firsthand on many occasions. I've seen what a nightmare it becomes for a mortgage lender to have to foreclose on a property. I've seen lenders lose a ton of money in foreclosures. One of the aspects that play a big part in those loans being granted in the first place is the appraisal report. Some of these lenders would never have granted the loan if they had hired a more thorough, competent appraiser to estimate the market value of the property. "Oh yes, but I forgot, those lenders are very intelligent businessmen. After all, they saved an extra $100 or $150 by hiring the cheapest appraiser in town. They didn't need to hire a competent, honest and knowledgeable appraiser and pay the extra amount by billing the loan applicant for the additional appraisal fee. " All those lenders had to do was to charge the mortgage loan applicant $100 to $150 more for the appraisal reports. If they had, then they could have saved themselves tens of thousands of dollars in losses for many of the loans that had gone sour! And I'm not talking about the lender paying the higher fee to get a good, competent appraisal done. The appraisal fee for mortgage loan applications is passed on to the potential borrower when they hand in their loan application. It makes me sick to my stomach to think that the American taxpayer paid for the whole failure of the banking industry due to foreclosures and a recession in the 1980's and early 1990's.

Surprisingly, in 2003 some major mortgage lenders began using electronic appraisals which are touted as a fast-growing "alternative" to traditional, full-cost appraisals. See section Electronic Appraisals for more information on why using electronic appraisals is a HUGE mistake for banks and mortgage lenders. "Intelligent" decisions like that may come back to haunt these lenders later with foreclosure loans and enormous financial losses - as it did in the late 1980's

Here's another example of "intelligent" mortgage lenders that focus on the minor costs and disregard the major costs: In 2004 real estate appraisers were complaining that one of their biggest problems was intimidation and pressure on them to "hit the number" desired by mortgage loan officers and others involved in real estate deals to move the deal along. Appraisers had been complaining for years that they are frequently pressured to value homes at the price needed to make the sale or refinancing loan go through. Appraisers who don't cooperate with loan officers say they are either: 1) Blackballed those lenders and third parties, 2) Receive no further appraisal assignments from those lenders, or 3) Are not paid their fees for the appraisal report. This is a very serious issue, especially if the appraiser is faced with being blackballed and losing that lender as a client. The long-term financial loss in income to that appraiser and appraisal firm can be huge! Over 6,000 appraisers had signed an industry-wide petition demanding an end to this type of pressure from mortgage lenders.

Legislation that includes the specific federal ban sought by appraisers was introduced in the House of Representatives by Rep. Jan Schakowsky (D-Ill.). The bill, known as the Save Our Homes Act (H.R. 2531), is primarily aimed at curbing "predatory lending " practices. The language of the bill would amend the Federal Truth in Lending Act to prohibit a creditor or mortgage broker from "influencing the independent judgment of an appraiser with respect to the value of real estate that is to be covered by a conforming home loan or is being offered as security according to an application for a conforming home loan. " The Schakowsky bill language would allow appraisers to report and document illegal pressure from lenders and mortgage brokers to federal authorities. Any infraction of this bill would constitute a violation of the Truth in Lending Act, subjecting the violator to a Federal lawsuit and fines of $10,000 per violation. Regulations implementing the ban would have to be drafted by the Federal Reserve. The language in the bill would appear to cover a wide range of situations, including loan officers "shopping " a contract by faxing competing appraisers the price "needed " for the deal. Appraisers that were unable to "pre-comp" the subject property (provide a preliminary valuation hitting the number) never get the appraisal assignment!

Appraisers feel that even more serious than this are forms of pressure where appraisers who already have an assignment are asked to "fudge the numbers" and bump up the value estimate of their appraisal report by the $10,000, $50,000 or more needed to close the sale or refinancing deal. Inflated appraisals are dangerous for banks and other financial institutions, and they force appraisers to violate their own professional and ethical standards to earn their income.

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