Down the Rabbit Hole with the Form 1004MC

Monday, October 27, 2014

OK, I admit it. I am old school. I still think you need to understand how to do something manually before you throw caution to the wind and buy into new technology to replace a good, old-fashioned, hands-on process that has worked fine for years. I honestly believe the use of technology without a complete understanding of how to do the basic process manually just lets us make more frequent and more complicated mistakes faster. In other words, if you can’t drive a Chevy Nova very well, don’t buy a Maserati Ghibli and expect it to fix your driving problems.  All that will happen is that you will be going faster when you hit the wall.

What does this have to do with the Form 1004MC? In the old days when television was black and white and when reporters reported the news instead of making it up, the officers of banks and savings and loans had to decide what their home loan lending policies would be. First, they had to decide if they would offer home loans at all. Next, they had to decide what cities they would make loans in (typically they would only loan in markets where they had deposits so they had firsthand knowledge of those markets). Then they had to decide how to price each loan based on the credit of the borrower (FICO), the LTV, and the amortization schedule. Finally, they serviced the loan in-house so they could watch both the local market conditions and the borrower to stay ahead of changes that might increase the probability of a default and a loss of principal or interest. In other words, the banks and savings and loans had to do real, hands-on market research and not just rely on some computer model to make lending decisions.

Today, banks and savings and loans have loan origination offices or mortgage brokers spread all over the U.S. making as many home loans as possible with no intention of holding and servicing the loans they fund. The mortgage loan department funds or buys loans in cities nobody at the bank has ever even visited, let alone actually knows and understands. Borrowers aren’t real people the banker knows from Little League or Rotary or church; borrowers are just FICO scores on a form. The collateral isn’t the home of the banker’s old girlfriend or boyfriend; it’s just a pile of bricks and sticks sitting on a lot on a street the banker has never heard of. In other words, home lending has gone from a business done by people for people to a numbers game where the lender doesn’t know anything about the borrower or the collateral. No wonder the bank wants the appraiser to fill out a 1004MC for every loan. 

The problem with the 1004MC is that lenders use it instead of local market knowledge and not in addition to it. Banks are in the business of loaning money and if they elect to make home loans in cities they have never visited, to people they do not know, they are taking on risks that bankers just 20 years ago never would have touched. Asking an appraiser to conduct even a limited market analysis for the paltry fees lenders pay to appraisers today is not only unfair, it’s borderline insane. Lenders should be the party responsible for knowing which markets to lend in and which borrowers to lend to and the appraiser’s role should simply be to determine market value and not to predict market stability.

Even the best appraiser with the most experience could not have predicted the collapse of subprime lending would result in residential real estate prices dropping so quickly and so severely. Appraisers may know the local markets better than lenders, but lenders doing business throughout the U.S. could see the big picture better than any local appraiser, and the big picture foretold doom and gloom much earlier than a 10 square block area of suburban Modesto could. Now, the same lenders want appraisers to look at local markets and then tell the lender whether it’s a sound business decision to make loans in Boise versus Orlando.

When I worked in the investment business in the 80’s and 90’s, my customers used to ask me whether interest rates would be going up, going down, or staying the same. My primary response was that “it depends”. If the customer could tell me what, when, or where the next global crisis (economic, political, or environmental) would occur, then I could predict where interest rates were headed. Most replied they could not possibly answer my questions so I then turned to my secondary predictor, the large dart board on the back of my office door where I had marked three areas as UP, DOWN, and NO CHANGE. Yes, I really threw darts to predict interest rates. Trust me - between 1983 and 1996 it worked as well as any other system.

Maybe every appraiser should attach this graphic to the back of every 1004MC they are asked to complete and tell the readers to throw their own darts to figure out if the market conditions are trending up, trending down, or stable.

Adding insult to injury, the GSEs asking for the 1004MC to be completed by appraisers actually possess a new database called the Uniform Appraisal Dataset (UAD), which is populated by appraisal data provided by appraisers. This is part of the Uniform Mortgage Data Program (UMDP) and is NOT ACCESSIBLE TO APPRAISERS. In other words, perhaps the best recent data about current market conditions is already in the possession of the parties demanding appraisers fill out the 1004MC, and the appraisers are not even allowed to look into this database to determine market conditions and valuation trends. Maybe using the old dart board will get a better result than trying to predict market conditions without access to data.

In conclusion, the 1004MC is yet another tool being used by lenders to shift responsibility and blame for bad lending decisions from them to appraisers. Lenders are in the business of lending, and deciding to whom and where to lend is part of their business model, not part of an appraiser’s. If the market collapses because lenders make stupid credit decisions, the same lenders should not be able to say the losses they suffered resulted from an appraiser reporting a market as stable 5 or 6 years ago. After all, I’ve never heard of an appraiser telling a small bank in Iowa it would be a good idea to write or buy subprime loans in California, but that’s exactly what happened and the rest, as they say, is history. 

Brian Trotier, FREA

Written by Brian L. Trotier, JD,  the Executive Vice President and Chief Operating Officer of FREA and a former practicing attorney with more than 30 years experience in real estate and risk management.

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