Guest Columnist
Charles B. Warren, MRICS, ASA-urban real property San Francisco
Now that we are in the middle of a real estate disaster there is a great hue and cry for regulatory reform. We were here before in the early 1990's. The answer on that occasion was real estate appraisal licensing. Now the thrust is on Appraisal Management Companies (AMC's).
Licensing did and does have some potential to address the proper evaluation of collateral for loan purposes. In the intervening years, however, it was subject to what is known in political science as "regulatory capture*".
The emphasis in the New York State Attorney General Andres M. Cuomo proposal on Home Valuation Code of Conduct and Appraisal Management Companies (AMCs) to the exclusion of in-house or directly contracted appraisal services does nothing effective to address the inadequacy of appraisal and licensure. It is merely an extreme example of regulatory capture and sows the seed for the next crop of mortgage problems.
After the savings and loan bubble in the 1980's, Congress passed FIRREA (Federal Institutions Reform, Recovery and Enforcement Act). One of its provisions was that appraisals for loan purposes be obtained only by the lender (rather than the borrower) from appropriately qualified and licensed appraisers. Sounds good. My comments and observations apply to California. The implementation went fairly smoothly. There wasn't, however, any budget for enforcement for a number of years.
The California Republican governor appointed an appraiser to head the Office of Real Estate Appraisers. In the late 1990's the Democrat legislature held hearings impugning his competence and integrity. He was removed. The Democrat governor appointed an "acting director" whose experience was in alcoholic beverage control. The acting director addressed one of the legislature's concerns, processing of license applications. While the quality of applicants at the trainee level was pretty abysmal, pass rates on the test at or below 50%, persistence paid. After enough repetitions motivated trainees passed and were licensed.
At one point an old friend who worked at OREA said, "The foxes haven't just gotten into the henhouse, they've taken over and established a breeding program." At the height of the bubble over one-third of California appraisal licensees were trainees. About a year ago the AQB established more stringent educational standards for appraisal licensure.
At about the same time the governor, now a Republican again, appointed a permanent director for OREA who had at least some appraisal experience. Obviously, both measures were a bit belated. That doesn't mean that quality appraisal isn't achievable by these and other related measures**. The present direction, however, is unlikely to succeed.
It identifies in-house appraisal and client-appraiser contact as the root of the appraisal quality problem and proposes a (relatively) new intermediary, the Appraisal Management Company, to separate the institution from the appraiser. In house appraisal is not necessarily a problem. It is only a problem if the management of the institution is uninterested in a quality appraisal product.
At one point in ancient history, the chief appraiser of Wells Fargo Bank was personally wealthy. Between him and his wife they controlled a significant percentage of its stock. He believed in quality and there wasn't anybody in management who could push him around. He was replaced with a sincere young man who was dependent on his salary. Shortly afterward 90% of the appraisal staff was laid off. They were empaneled to contract independently for the bank, but to be employed by the borrowers. The explicit reason was to "put them closer to the customer". It took about two years to get most of the bank veterans off the panel. The appraisal department was always part of loan origination.
In another case a mortgage company replaced a certified general appraiser with a trainee to review their lending appraisals statewide. The head of underwriting quality control felt that quality control was purely his job.
Lessons learned - the in-house appraisal department has to be protected, either by the resources and integrity of its chief or some regulatory measure. Making it part of, say, the audit or regulatory compliance departments. In the last decade lenders contracting appraisal services has not been a particular problem because it has been rare. While FIRREA mandated lenders to contract for and obtain their own appraisals, during the last boom mortgage companies asked their borrowers to pay for, sometimes even obtain their own appraisals. Mortgage companies also eclipsed traditional lenders' market share.
Attacking the relationship between lender and appraiser is not addressing a problem, but may be creating one. But that is just what is proposed. In the new lending order appraisals will be ordered through appraisal management companies (AMCs). AMCs have no specific regulatory oversight.*** They basically are "black boxes". Appraisal requests are made by the lender. An AMC receives them. Orders go out to selected appraisers. Appraisals come back to the AMC and are somehow transmitted back to the lenders.
How is the AMC selected? Could it be simply an off-balance-sheet affiliate of the lender? If not, why not? How are the appraisers selected? Is quality a function of education, experience and licensure, or reliable agreeability? The appraisal when received back at the AMC is presumably subject to review, also change? If changed, how is that to be supervised and what criteria apply to changes?
This leaves out the issue of payment. At present AMCs take about half of appraisal fees. Appraisers can only do a small finite number of quality appraisals per day and they have overhead expenses. At best, over the long run, appraisal fees might go up a little, but appraisal hourly rates will go down. Appraisers are probably underpaid for their skills in any event. Reducing their potential pay down into the low two-digit numbers is unlikely to attract high quality people to the field or even retain present people. Those with the ability to do as well or better in other fields will do so. Of course there is presently a pool of underqualified and underemployed appraisers who entered the field in the last five or ten years who might find those wages attractive. They might have worked in situations during the bubble where their take-home was no better. Unfortunately the quality of their work is now pretty well known to be minimal. But you get what you pay for.
What the AMC does provide is known in intelligence tradecraft as a "cut-out". The next time that appraisal quality is an issue, the lenders can simply point at the AMC and say, "I relied on them!" The AMC can then try to let it roll downhill to the appraisers. The appraisers, who may not have worked at all if they hadn't been willing to cut corners or even fabricate information, also may have gone back to selling used cars or working in telemarketing. The net effect is to give the lender "plausible deniability". As with the present situation, those who benefited most from creating the problem are absolved of most blame. If that isn't a case of regulatory capture, it must be one of regulatory blindness.
So, in the brave new world of the AMC important people will be seen to have "done something". That the something they did achieved no positive result won't be obvious for more than one election cycle.
Charles B. Warren, MRICS, ASA-urban real property San Francisco www.charlesbwarren.com 415.433.0959 *http://en.wikipedia.org/wiki/Regulatory_capture ** Simply requiring lenders to assign appraisals to appropriately licensed people whose office is proximal to the appraised property in numeric order of their license would remove lender pressure from the appraiser. *** 2nd definition may be more appropriate - http://www.merriam-webster.com/dictionary/oversight
Charles B. Warren, MRICS, ASA-urban real property San Francisco
Now that we are in the middle of a real estate disaster there is a great hue and cry for regulatory reform. We were here before in the early 1990's. The answer on that occasion was real estate appraisal licensing. Now the thrust is on Appraisal Management Companies (AMC's).
Licensing did and does have some potential to address the proper evaluation of collateral for loan purposes. In the intervening years, however, it was subject to what is known in political science as "regulatory capture*".
The emphasis in the New York State Attorney General Andres M. Cuomo proposal on Home Valuation Code of Conduct and Appraisal Management Companies (AMCs) to the exclusion of in-house or directly contracted appraisal services does nothing effective to address the inadequacy of appraisal and licensure. It is merely an extreme example of regulatory capture and sows the seed for the next crop of mortgage problems.
After the savings and loan bubble in the 1980's, Congress passed FIRREA (Federal Institutions Reform, Recovery and Enforcement Act). One of its provisions was that appraisals for loan purposes be obtained only by the lender (rather than the borrower) from appropriately qualified and licensed appraisers. Sounds good. My comments and observations apply to California. The implementation went fairly smoothly. There wasn't, however, any budget for enforcement for a number of years.
The California Republican governor appointed an appraiser to head the Office of Real Estate Appraisers. In the late 1990's the Democrat legislature held hearings impugning his competence and integrity. He was removed. The Democrat governor appointed an "acting director" whose experience was in alcoholic beverage control. The acting director addressed one of the legislature's concerns, processing of license applications. While the quality of applicants at the trainee level was pretty abysmal, pass rates on the test at or below 50%, persistence paid. After enough repetitions motivated trainees passed and were licensed.
At one point an old friend who worked at OREA said, "The foxes haven't just gotten into the henhouse, they've taken over and established a breeding program." At the height of the bubble over one-third of California appraisal licensees were trainees. About a year ago the AQB established more stringent educational standards for appraisal licensure.
At about the same time the governor, now a Republican again, appointed a permanent director for OREA who had at least some appraisal experience. Obviously, both measures were a bit belated. That doesn't mean that quality appraisal isn't achievable by these and other related measures**. The present direction, however, is unlikely to succeed.
It identifies in-house appraisal and client-appraiser contact as the root of the appraisal quality problem and proposes a (relatively) new intermediary, the Appraisal Management Company, to separate the institution from the appraiser. In house appraisal is not necessarily a problem. It is only a problem if the management of the institution is uninterested in a quality appraisal product.
At one point in ancient history, the chief appraiser of Wells Fargo Bank was personally wealthy. Between him and his wife they controlled a significant percentage of its stock. He believed in quality and there wasn't anybody in management who could push him around. He was replaced with a sincere young man who was dependent on his salary. Shortly afterward 90% of the appraisal staff was laid off. They were empaneled to contract independently for the bank, but to be employed by the borrowers. The explicit reason was to "put them closer to the customer". It took about two years to get most of the bank veterans off the panel. The appraisal department was always part of loan origination.
In another case a mortgage company replaced a certified general appraiser with a trainee to review their lending appraisals statewide. The head of underwriting quality control felt that quality control was purely his job.
Lessons learned - the in-house appraisal department has to be protected, either by the resources and integrity of its chief or some regulatory measure. Making it part of, say, the audit or regulatory compliance departments. In the last decade lenders contracting appraisal services has not been a particular problem because it has been rare. While FIRREA mandated lenders to contract for and obtain their own appraisals, during the last boom mortgage companies asked their borrowers to pay for, sometimes even obtain their own appraisals. Mortgage companies also eclipsed traditional lenders' market share.
Attacking the relationship between lender and appraiser is not addressing a problem, but may be creating one. But that is just what is proposed. In the new lending order appraisals will be ordered through appraisal management companies (AMCs). AMCs have no specific regulatory oversight.*** They basically are "black boxes". Appraisal requests are made by the lender. An AMC receives them. Orders go out to selected appraisers. Appraisals come back to the AMC and are somehow transmitted back to the lenders.
How is the AMC selected? Could it be simply an off-balance-sheet affiliate of the lender? If not, why not? How are the appraisers selected? Is quality a function of education, experience and licensure, or reliable agreeability? The appraisal when received back at the AMC is presumably subject to review, also change? If changed, how is that to be supervised and what criteria apply to changes?
This leaves out the issue of payment. At present AMCs take about half of appraisal fees. Appraisers can only do a small finite number of quality appraisals per day and they have overhead expenses. At best, over the long run, appraisal fees might go up a little, but appraisal hourly rates will go down. Appraisers are probably underpaid for their skills in any event. Reducing their potential pay down into the low two-digit numbers is unlikely to attract high quality people to the field or even retain present people. Those with the ability to do as well or better in other fields will do so. Of course there is presently a pool of underqualified and underemployed appraisers who entered the field in the last five or ten years who might find those wages attractive. They might have worked in situations during the bubble where their take-home was no better. Unfortunately the quality of their work is now pretty well known to be minimal. But you get what you pay for.
What the AMC does provide is known in intelligence tradecraft as a "cut-out". The next time that appraisal quality is an issue, the lenders can simply point at the AMC and say, "I relied on them!" The AMC can then try to let it roll downhill to the appraisers. The appraisers, who may not have worked at all if they hadn't been willing to cut corners or even fabricate information, also may have gone back to selling used cars or working in telemarketing. The net effect is to give the lender "plausible deniability". As with the present situation, those who benefited most from creating the problem are absolved of most blame. If that isn't a case of regulatory capture, it must be one of regulatory blindness.
So, in the brave new world of the AMC important people will be seen to have "done something". That the something they did achieved no positive result won't be obvious for more than one election cycle.
Charles B. Warren, MRICS, ASA-urban real property San Francisco www.charlesbwarren.com 415.433.0959 *http://en.wikipedia.org/wiki/Regulatory_capture ** Simply requiring lenders to assign appraisals to appropriately licensed people whose office is proximal to the appraised property in numeric order of their license would remove lender pressure from the appraiser. *** 2nd definition may be more appropriate - http://www.merriam-webster.com/dictionary/oversight
Very interesting article. You made some very good points.
Posted by: Rita Bradley | February 28, 2009 at 09:09 PM