“I doubt that when it rains, people blame the weatherman”

One of our fellow Realtor® Appraisers, Don Orttenburger, recently wrote a letter to the Editors of the Detroit Times, defending appraisers:

The tenor of the Feb. 16 article (“Builders losing on new homes”) was that if appraisers just found the right comparable value for a nearby home, everything would be fine.

Calculating a new home’s value means determining the value of the most recent sales of the most similar homes in the most similar location.

If the typical buyer can find the same or similar home for less money, why would they pay more? More to the point, why should the lender lend more than the value of what a similar home sells for (and take a greater risk)?

Remember, the appraiser is looking out for the interests of his client, not the builder or buyer.

I doubt that when it rains, people blame the weatherman — or when a doctor finds a cancerous tumor, people blame the MD.

And yet the article seems to find fault with the appraiser when he states the obvious — that prices have fallen and the same home can be had for much less money.

If more of my fellow appraisers had the backbone to be objective over the last 10 years and to not simply make the value fit the loan to keep the client happy, we might not have had such a dramatic and painful contraction in home prices.

Not a bad summary of the appraisal profession. Clearly, it’s not appraisers fault that the housing market is taking a hit right now. However, if more appraisers had just said “no” to the rampant pressure over the last several years, they might have been able to reduce the impact of this housing decline.

  1. Lucia

    Just say No? How many times does an appraiser have to say No before it makes a mortgage broker reject a loan application, or a borrower decide not to borrow or a realtor give up a sale? Appraisal firewalls are useless if nobody pays attention to it.

  2. C. Patterson

    Yes, on occasion appraisers stretched to “over optimistic” valuations of properties in the hot times. But by far, far, far, what got us where we are today were lenders’ programs based on 1) massive amounts of money available internationally aggressively loaned on real estate. This drove up demand which drove up values 2)new complex, opaque investment systems reselling mountains of high risk paper to
    investors wanting to recognize no end to ever escalating values, 3) and, most especially, no risk worries by lender underwriters BECAUSE LENDERS WERE NOT AT RISK for their loan losses, then or now. And 4) didn’t Mr. Greenspan assure us that all was wonderfully well in wall street’s world of risk diversification. If lenders were required to hold their loans for several years rather than sell them on the secondary market before the ink is dry, you would see an instant surge in their interest in accurate appraising. This letter says “don’t blame the weatherman for the weather”; then proceeds to do just that. When an aggressively overfinanced, overheated market sends up property values, how is an appraiser to prevent an honestly researched and skillfully developed document from reflecting the increased values in the sales of comparable homes? Now I notice an amazing blind eye being turned to the growth of concessions wrapped into housing sales prices in todays market. Who is reviewing the work of appraisers who are passing on this padding? Lenders? State’s licensing? No. Again loans are sold by the originators to the secondary market and again, someone else (taxpayers) takes the risk. Put the lender effectively at risk and watch the changes. (As if at this point we would dare do so.) And how accurate do you think the computers are with which reviewers and appraisers are being replaced? Think they are set low?

  3. I agree with you 200%. Just say “NO” really sums it up, that too many Appraisers can’t. They go and do comp checks without following Standards 1 & 2, contingent valuations, ignoring repairs. When deals do not get made, we all to often are blamed as the culprit, rather than looking at the obvious information – “the market.” Too use or not use foreclosures as comps, really depends on the choices that are available, but truly when many markets are saturated with these, at the “saturation point” there is no discerning difference between foreclosures, short sales and “normal” arms length transactions. How long do the foreclosures impact the market? I saw an article that suggested it was a year. I thought I would be ill. The market does not work so simple. It is the market that decides not a PHD in R.E. or an Appraiser. When the market rebounds, the sales will speak for themselves and good Appraisers will report the market when this happens. Just as Appraisers should be making time adjustments when appropriate now for a declining market, so should they when the market turns the other way. The same author of that article also tried to suggest a specific radius from a subject property, which again is nuts! Every market is different. The radius of impact from a foreclosure could be many miles or a few short blocks. How anyone can generalize and think of a specific time or distance for the impact of foreclosures and try to apply that to specific situations is just off the wall. The Appraiser as always has to use their best judgement tempered by experience and education to review the data available. Any Appraiser that has worked for me and many of my students will tell you my view on guidelines. Basically, go out find the best data and look for that data as though three or four of the most honest, well trained Appraisers you know were looking over your shoulder doing the job, if you think it would pass all four of them, then you did your job, if not then keep looking at the data over and over again, till you figure it out. I also tell them that once you do this and the Appraisal is basically complete, then think about the Fannie/Freddie/FHA/VA/ERC guidelines and explain in detail why the guidelines don’t fit. Too many Appraisers do it backwards and choose comps that “fit” and make adjustments “fit” line/net/gross requirements on the adjustments or proximity/time/GLA variance requirements in bracketing, etc… Stop, take a look at the data, are these sales, listings, pendings that you are considering as comps, are they really alternatives that a “typical” buyer that would be interested in your subject property, would they really consider these “comps?” There are always anomalies to the market, some buyers and sellers that do things not typical of the market, thus they are not “the most probable.” If they are not within the realm of the most probable and represent an extreme at either end, then it is obvious they should be discarded. Quite a number of years the definition of market value included “The highest price….” instead of the “most probable price.” They changed it because the highest price could be an extreme not representative of the majority of the market and had as much consideration as does the lowest sale of the market, neither of them in most circumstances being the most probable. When there is rapid increase due to no supply, there is an obvious argument for the upper extreme as being the most probable and conversely there is also an argument that when there is very excessive inventory, perhaps in some cases the lowest extreme price may be representative of the “most probable sales price.”

  4. Tim

    Oh yes the just say no plan. For most appraisers active during the “boom” years this was the normal course of business. Buyers complained loudly that would would have to come to the table with more downpayment money. Mortgage brokers complained that Realtors were on their back for not being able to give their borrowers the lowest mortgage rates because of equity position of the loan in question. Mortgage brokers were in great supply and salespeople finally jsy found one that could “make the loand happen” The solution to for mortgage brokers was to find appraisers who WOULD make these deals happen. After a while it became inefficient to call 3,4 or 5 appraisers get a “cooperative” one. ordering out multiple appraisals became costly. Enter Appraisal Managment Companies. With a flood of new real estate sales people, mortgage brokers and appraisers the climate was perfect for this business model. Appraisers who became newly certified had not been in the business that long enough to have established honest and ethical client lists and customers to be able to derive the income level they thought they deserved after two years or more of schooling and apprentice. AMC’s provided instant stable monthly incomes and a steady stream of assignments. As long as they serviced these clients to the exact preference thay had (ie; continue to hit numbers and you continue to get work). This made it more efficient for mortgage brokers and dubious lenders to assign out the appraisals needed. Thats when the tide shifted. Independent and career mionded appraisal professionals were not at a disadvantage. No one wanted real value identification, property description, market conditions indentification or anything but “making the deal work”. Why even give a thought to these appraisers who clearly did not want to “play ball” when managment companies could gaurantee no appraisal issues if they were able to handle all the assignments. Even better the cost of the appraisal could be “discounted” and profits shared. Charge the borrower $500, pay the appraiser $200. It was the absolute best system available to power through thousands of loans with little regard for anything more than the almighty commissions. Lenders realized that all that regulation from the S & L bailout could be circumvented by using the AMC model and even THEY could also get a share of the profit from overcharging borrowers and underpaying appraisers. Independent professional appraisers saw their incomes shrink, voices of concern laughed at and everyone was happy. Till now. I find it anazing that some of the largest subprime lenders that were the most guilty in these schemes now have closed their lending doors and emerged as new Appraisal Managament Companies ! Taking advantage of the crisis they created in the first place. Why not ? They have all the names and contacts of appraisers who have demonstrated they are willing to “play ball” for low fees. Now its all about the “appearance” of quality and independence in appraisal reporting. But actually nothing has changed; “do it the way we we want it, do it fast and do it cheap”. Oh and the borrower still picks up the tab for the profit sharing. AMC’s do not need to be regulated, THEY NEED TO BE ILLEGAL.

  5. I will admit there are a lot of unethical appraisers that will/would do what is asked of them by a lender. I seriously doubt that any appraiser woke up one morning and decided that they would inflate the value of a proerty they would appraise that day. NO! They had to be asked by a lender, broker, builder or realtor. If they did not have sufficient backbone to say no then, yes it was the appraisers fault for doing the deed. I personally have been asked numerous times over my years to do the wrong thing. Thanks to my mother & father I was taught from a very early age what a large part of your life ethics would play. I lost clients over those decisions but, hey who needs clients like that. They did not care about my livelyhood or my appraisal certificate, I did!

  6. David

    Tim you are certainly on the right track. I’ve been following this for a year now and I’ve only run across about 10 appraisers who truly understand what has happened and why it happened. I only with NBC Nightly News would be willing to interview you on this subject. The rest of the appraisal profession will figure out what’s going on soon enough. We are only 7 weeks away from receiving a careerectomy.

  7. LHuston

    I continue to be amazed at how weak we appraisers really are. We will buy into any theory, including the crackpot theory that we were all pressured into producing high appraisals. Do you still not get it.
    The reality is that there was a huge, huge ponzi scheme going on that packaged 1,000s of loans into a dirivitive packages which Wall Street sold to the world as Triple AAA Rated Investment Bonds. And while it was all smoke and mirror this created unprecidented demand. Using proper appraisal technique, based on the market, most appraisers were finding ways to keep their estimation of value from coming in too high. Anyone could get a loan. Demand was high. And if a property was overpriced, just wait a month for the market to catch up.
    And, here is the kicker, even with this huge demand, most appraisers in our market never, ever adjusted for the apprciation in the marketplace. Not doing so is, of course, a USPAP violation. And when Agents and Lenders complained that Appraisers weren’t paying attention to what was happening in the market…many Appraisers complained that they were being “pressured.”
    Now, of course, these same appraisers are having no problem at all hitting value because they are not adjusting for negative growth in the market. There are a whole lot of Appraisers who fill out forms and never appraise. This, of course, will only get worse with AMCs, when the pressure is on speed, and paying appraisers the minimum amount they will accept, without regard for quality.
    Quality appraising begins with the premise that all value is based on FUTURE benefit. Those who simply take “comps” and adjust them based on historical sales prices are not appraising. They are filling out forms using math.

  8. janis

    As a realtor, I have seen and argued immensely withmortgage brokers who explained to me that the client, buyer, meerly had to come back in 3,6,,months or so and REFINANCE once the market raised !!! and their equity would be proved and pmi gone, lowering their overburdened payment, and voila!, they could now afford their home that was not affordable for them with no money down, no vested interest. And now they tell me;”well, who knew the market was going down?”

  9. Johnny

    The fact that anyone in the industry things an appraiser can do any kind of a good job at the appraiser table for 2-300 hundred bucks is an absolute bafoon. Who can work for 4 bucks an hr, because if we did what USPAP and all the other bafoons ask, that is about what you get an hr- maybe 2 bucks.

  10. Jill

    Any time I’ve ever said NO on a deal, and I’ve gone back to check later… it always went through. There is always someone out there that is willing to say anything to make a buck. And the banks weren’t making the underwriters do their jobs, and so all those bogus appraisals just went through anyway!

  11. Chris

    I agree with the tone of the article, and many of the comments posted, especially the comment about how independent professional appraisers saw their incomes shrink, and voices of reason were laughed at. It appears that the economic downturn started for honest appraisers years ago. Based on my experience in this business, if you want to find yourself and your opinions of value unpopular, just be the person standing in the way of sellers, buyers, agents, and bankers getting what they think they want.
    It’s hard to convince the majority of people in our society that the “good” appraiser is the one you had trouble with. From what I’ve seen over the past 10+ years, the appraiser who is willing to compromise principles, overlook vaue and marketing issues, and turn a blind eye to the real duty to his or her clients is somehow the good guy. The guy who got you what you wanted…
    Sadly enough, this a larger social issue with many places to assign blame. I could write a book about it. “Struggling Author” looks pretty good as a career move at this point.

  12. Neil

    I worked as a residential mortgage broker for 15 years. During that time, I never once stopped sending business to a quality appraiser because of a less than hoped for value. Conversely, I once requested a preliminary comp search from a well known appraiser for a potential refi where the interest rate was linked to equity. I told him I wanted to attempt to establish max supportable value to quote rate as accurately as possible. His response: “What value do you need”? The crystal clear meta-message: rest assured Mr. Broker, my number will not be lower than hoped for. I never called that appraiser again.