Observations of a Review Appraiser

Wednesday, April 20, 2016
 
Recently I had the opportunity to work on a Class Action case. The case settled, and there are confidentiality agreements for both sides, so I cannot reveal any details. I will summarize the allegations and findings, as well as the scope of work performed.
 
I should say also that before being hired, I was interviewed, and vetted. Every reference provided, was contacted, as well as a records check and background check.
What they were looking for was a combination of a clean reputation for being unbiased, as well as depth of experience at review appraising. I worked on this case for about 18 months.
 
The result of my work came down to the following:
 
1) Los Angeles Metropolitan Statistical Area {MSA}. 
Of 198 appraisals, 5 were undervalued, and 165 were overvalued by 5% or more. The highest was overstated by 45%
 
2) San Bernardino/Riverside MSA. 
Of 77 appraisals, 1 was undervalued, and 74 were overvalued by 5% or more. The highest was overstated by 39%
 
The way the reviews were approached was to read the report, then check the accuracy and veracity of the Neighborhood, Site and Improvements for each Subject, from Value Trend, Supply/Demand, Exposure/Marketing Time. Then, Site characteristics were checked based on a combination of on-line information including the MLS, Realist, NDC, Google Earth, etc. Next were the Improvements, using the same databases.
 
In the majority of instances we found that the Neighborhood factors were not reported correctly, and that that section of the report was almost universally misleading.
 
Similar things were found in the Site and Improvements sections. Often, negative factors were omitted or whitewashed. 
 
When it came to the Market Data section, we searched for data by Location, Site, and Improvement characteristics, making a List of Market Data or Market Data Array. That would represent the most retrievable, most similar properties.
 
Next, we looked to see if the data used in the report was on the list. If not, then we looked to see why they may have been picked, often by Price.
 
Whether or not the data presented was appropriate, the next step was to check the reasonableness of the Adjustments. 
 
Universally, there were no Time adjustments. Every market in every report was Stable in 2007 according to these reports. Sadly, it was very easy to check the value trends and document the direction and magnitudes of the declining values.
 
Many of the sales were 100% financed, often with an 80%-20% loan. Often the 80% loan was shown, but the appraisers omitted the 20% loan. It has been my experience from the time I started making loans on houses in the late 1960’s, to selling them in the 1970’s, to appraising them; that the Low Equity Buyer will typically pay more than those who saved up a down payment. Sub Prime borrowers with no down payment, are particularly subject to being Preyed Upon by the agents and loan agents, essentially Packed Into Property.
 
There had been no published articles in any appraisal related journal or magazines warning appraisers about this Low Equity Buyer, issue. There had been in the past recessions, articles on Cash Equivalency which means if the seller gave the buyer cash back or personal property or allowances, we needed to make a downward adjustment to the Sales Price. I was once involved in an $8.500.000 sale that included $5,000,000 in personal property in the form of furnishings, original art work, antiquities, etc. 
 
When Sales Prices are being Propped Up by the Stilts of Concessions; appraisers are supposed to make adjustments for Cash Equivalency. This was not done
 
Location adjustments, though sometimes warranted, were usually woefully inadequate, or not made at all. Sometimes the Market Data came from a Country Club or superior location that was not adjusted or mentioned at all. Other times it was that the Subject had a negative location factor that was omitted or under adjusted.
 
Pretty much universally, the other adjustments appeared to come from some List or Automated as there was little if any relevant written analysis, none that indicated the appraiser did anything to develop the adjustment from the Marketplace. 
 
In other words, there would be comments like Site adjustments were made at $5.00, SF adjustments at $50, Pools at $10,000, etc.  I know when I was trained I was given a List of Adjustments.  I questioned them the first day, because I had just come from selling real estate and knew they were woefully inadequate or just wrong. And, yet, there seems to be a large number of appraisers who use a List, that they may not even know where it came from or when it was created; and use it in every Location, Price Range, Size Range, Quality, etc.
 
Granted, using a List and then automating it in a forms program, makes things go faster, but it has nothing to do with the Marketplace.
 
The lawsuit was against the partners of a failed lender, which included a title company and AMC. The allegations were that they either pressured appraisers to inflated value or used appraisers who would.
 
The settlement was in the millions of dollars. I can imagine now, that they are going to be looking at suing the same appraisers that their people had pressured to inflate values and write misleading reports.
 
Many of those whose reports were reviewed, may not have had any idea there was actual liability that comes from being licensed. Most civil lawsuits against appraisers for their work product, comes down the lender pipeline.  We should always think of the Stream of Commerce through which our reports might flow, and who down line, will be the entity that relies upon it. It might be the investor or mortgage insurer.  Under Tort Law, we are responsible to those who, in the normal course of business, come to rely upon our report.  Which is separate from Certification 23. 
 
Working fast and cheap, is not a good thing for a licensed appraiser. Slowing down, and charging for more time to research, verify and analyze the Market and the Market Data, as well as the Subject; is a goal I set for myself many years ago, even though I was trained to do 3/day. I can’t do 3/week now even with more experience and course work, and I don’t want too. I would rather do one report for $4,000 and not have time pressure, than to do 10 as fast as humanly possible. But, then, that is just me.
 
Written by guest author: Steven R. Smith, MSREA, MAI, SRA, AG2123.
 

Comments

Thanks for the insight Steven on this case, 2005 to 2007 was certainly an interesting time period.

We often forget that AMC's are an agent of the lender, that needs to change. The AMC should be an agent of the Appraiser and be held to the exact same standards. If an appraisal report goes to a State Agency for alleged violations the AMC should also be there with a suspension of privileges and placed on a Do NOt Use list also. If a lender puts an Appraiser on a Do Not Use list the AMC should also be on that list.

Where do you find clients willing to pay $4,000 per appraisal? Considering all the regulatory demands on the appraiser and low fees, we should adjust our mantra to 'Did the client get his moneys worth?'

Depressing. But, as always, well done. I am troubled though. Was there no "up side comment" possible? At the least a comment that sets "all appraisers" apart from these appraisers. Your piece seems to indicate these appraisers might have been selected because they could be, or were, weak links.

A question - do you use, or is there, a guideline for a +/- value relationship range... what is acceptable if support is present. You used 5% on the plus side. Is that acceptable? Since ours is an imperfect science seems some acceptable range might exist.

You piece was appreciated.

George St Johns, AR028191

Good morning, I am a Mexican Appraisal, working in Mexico City and nationwide. Your comments were very interesting. I have seen quite similar behavior in property appraisals here in Mexico. I woul like to ask you if you are interested in stablishing contact in order to talk and write about the subject.
Regards, Alberto Ochoa
cencarq@prodigy.net.mx

Thank you for your comments. Sara, in the circle I operate in, the minimum retainer seems to be in the $4,000 range when it is for litigation. Fees are lower for other intended uses.

George, you are correct that they may have been using appraisers who had been conditioned to anchor on Price, rather than using good selection criterioin in their SOW search for relevant data. That, plus not verifying anything, or omitting major things, or under adjusting for major things in the comps; all led to higher values. As far as 5%, you are correct. My job was only to reevaluate the property value,not take action because of any particular variance. I only reported the results of statistics that were kept. For sure though, there is a certain kind of appraiser who will push the value 5%-10% upward. Beyond the Pusher, there are others that go to great lengths to inflate the values. Those that were Pushers, did not seem to be the flagrant Inflaters.

Alberto, I am happy to talk about and/or write about the subject. I have been involved in review work since 1978. Back then, it was commercial appraisers, often Designated MAI, SRPA, SREA or ASA's that were inflating values for the Savings and Loans. One of the big offenders that I saw then, was married to the construction Lending VP at the S&L where I worked. If a deal came in from one of our staff or fee appraisers and it was not high enough to do the loan her builder wanted, she would take it home and have her husband reappraise it higher. He was the chief appraiser for another S&L and my Income Approach instructor, Chapter President, and {later} the first
USPAP instructor for my Chapter. haha.

The past two bubbles have been more on the shoulders of the residential appraisers, as opposed to the 1978-85 era that became the S&L Crisis, that triggered the formation of the Appraisal Foundation and the law that mandated Licensing {FIRREA}.

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