Home Appraisal Reform: WSJ vs NYT
Two new articles — in the NYT and the WSJ — look at the home appraisal business:
Both article somewhat acknowledge the role appraisers played in facilitating the outsized run up in prices. Yet clearly, there are significant differences.
The Times wrote “A profession that should have been a brake on the spiral in home prices instead became a big contributor.” My view is even stronger, as I have called the appraisal industry corrupt, and the appraisers as prime enablers of the entire boom/bust/collapse cycle. They were one of the many “But Fors” — but for their failure to adequately perform their duties, much of what went wrong would not have occurred.
Surprisingly, the Journal seems unconvinced, beginning the piece with a more exonerating sentence “After being blamed for helping to inflate home values during the housing boom, the appraisal business is again coming under fire.”
Of the two, the Journal seems a bit more friendly to the NAR argument that Appraisers need to be local, and therefore somewhat less independent. This would generate more fees and business activity for RE Agents/Mortgage Brokers.
Part of the distinction seems to be the inherent anti-regulatory outlook of the Journal:
“The debate over appraisals is inflamed by a natural tension: Real-estate agents and mortgage brokers, who need to complete transactions to collect their fees, are unhappy when an appraiser nixes the sale price. But it also suggests that there may be unintended consequences to an attempt by New York Attorney General Andrew Cuomo to reform the appraisal business.”
That is a fair statement — yet somehow, the unintended consequences of allowing appraisers to run wild from 2002-07 gets overlooked. Such is the Journal’s approach focusing on whether lenders are “squeezing appraisers too hard.”
The Times piece takes a more sympathetic look at the new appraiser regs:
“On May 1, a sweeping change took effect that was meant to reduce the conflicts of interest in home appraisals while safeguarding the independence of the people who do them. Brokers and real estate agents can no longer order appraisals. Lenders now control the entire process.
The Home Valuation Code of Conduct is setting off a bitter battle. Mortgage brokers, lenders, real estate agents, regulators and appraisers are all arguing over whether an effort to fix one problem has created many new ones.”
Both pieces are worth reading in their entirety.
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Previously:
Fraud in Real Estate, Mortgages & Homebuilders (August 17th, 2008)
http://www.ritholtz.com/blog/2008/08/fraud-in-real-estate-mortgages-homebuilders/
Nonfeasance in Financial Oversight (August 18th, 2008)
http://www.ritholtz.com/blog/2008/08/nonfeasance-in-financial-oversight/
NAR, NAMB Fighting Appraisal Reform (June 24th, 2009)
http://www.ritholtz.com/blog/2009/06/nar-namb-fighting-appraisal-reform/
Sources:
In Appraisal Shift, Lenders Gain Power and Critics
DAVID STREITFELD
NYT, August 18, 2009
http://www.nytimes.com/2009/08/19/business/19appraise.html
Reappraising Home Appraisers
JAMES R. HAGERTY
WSJ, AUGUST 18, 2009
http://online.wsj.com/article/SB10001424052970203496804574348712795471006.html
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August 19th, 2009 at 7:25 am
I guess Alan Greenspan would say that he couldn’t believe that the banking industry would engage appraisers who would not properly deliver accurate information.
August 19th, 2009 at 7:32 am
I think that the banks will have even more problems lending for home purchases going forward. I have talked with my local banker a couple of times, but with the massive new increases in FDIC insurance rates, they I am sure will only be making loans to those they are sure have no chance of default.
…Unintended consequences…
August 19th, 2009 at 8:16 am
A quick glance at the 10y yield this morning shows it creeping down to 3.43%…
Maybe they’re going to get it [10yy] down to a two handle range to get another wave of re-fi’s through…If you can’t help ‘em on the “Appraisal” side, maybe you can on the rates side…
I mean look though… This [decession - whatever you want to call it] is all about JOBS, JOBS, JOBS (and loosely about leveraged and inflated asset prices)… When is someone going to wake up and realize that this sort of hoarding of capital by the lenders (whether by inaccurate appraisals, hiding non-performing loans, etc.) is just exacerbating the problem & not allowing that capital to flow out and hopefully create new jobs & initiatives?…
I mean, the USG is as bad as the banks [and equally culpable]… You “allocate” stimulus expenditures, yet you dole out the money in drips and drabs which are beholden to your re-election campaign polling numbers… Thanks for the help pal!
It’s like the Titanic is sinking and they’ve locked themselves in the closet with all the life preservers…
August 19th, 2009 at 8:37 am
Appraisals based on ‘comps’ cannot possibly be a brake on a price spiral because the whole intent is to evaluate based on what other people are paying.
Lenders ought to use a square-foot or other more objective standard; the frilly parts due to location, ‘hotness’ or other non-quantifiable reasons ought to come out of the buyers’ pockets.
August 19th, 2009 at 8:44 am
http://www.fdic.gov/deposit/insurance/assessments/proposed.html
April 1, 2009
Below is the rate schedule effective April 1, 2009. These rates will apply to the September 30, 2009, debit (payment based upon June 30 data)
Risk
CategoryI
Risk
Category
II Risk
Category
III Risk
Category
IV
Initial Base Assessment Rate 12– 16 22 32 45
Unsecured Debt Adjustment (added) (5) to 0 (5) to 0 (5) to 0 (5) to 0
Secured Liability Adjustment (added) 0 to8 0 to 11 0 to 16 0 to 22.5
Brokered Deposit Adjustment (added) N/A 0 to 10 0 to 10 0 to 10
Total Base Assessment Rate 7 to 24.0 17 to 43.0 27 to 58.0 43 to 77.5
There is also a special assessment coming due in September for increasing monies to the FDIC…it is obvious that many class III and IV banks will not make it….
Whatever the appraisal, there is just not going to be liquidity in the system..you can call it velocity of money or whatever, but the money is not going to leave the bank under these huge new rate increases by the FDIC. People wonder why banks aren’t lending…they aren’t because massive increases in the insurance rates are really biting…(and other reasons, of course….)
(Sorry the chart copies so poorly….)
August 19th, 2009 at 8:51 am
The appraisal racket goes hand in hand with the ratings agency racket in the secondary market. A rating system that tracks default rates in loan portfolios generated by lenders over time and uses lender rating in assigning ratings to MBSs would cure some of these ills.
As is, appraisals and agency ratings do nothing more than provide cover. This is particularly irksome to consumers since it doesn’t take much to put dings in their FICO scores.
August 19th, 2009 at 9:03 am
@ Wally – I agree that appraisals need to be objective, but you definately need to consider all of a home’s aspects. If you only use things like square footage the nice homes will be undervalued and the crappy homes will be way overvalued.
I rehab, rent and sometimes flip homes. I have a lot of experience in this area and agree that appraisers need to be local. One of the ways I make money as an investor is by knowing my local housing market better than the out of area people. I don’t think the main reason for requiring local appraisers is to drive up fees. I’m happy to pay the $300 for an appraisal if it means I have access to the money I need.
The best way to get a good appraisal is to put the banks in charge of it and make sure they keep ownersip interest in the loan. If their money is on the line they will hire competent, objective appraisers or they will go out of business.
The local bank that funds all of my deals uses the same conservative appraiser every time and typically won’t accept an appraisal from someone they don’t know. The bank is doing very well and has largely avoided the mess that a lot of their competitors are in. They even call me asking if they can lend me more money!
August 19th, 2009 at 9:03 am
As a Commercial RE professional, I can say that Transor’s comments apply to the CRE market as well. It’s simply a misalignment of interests and lack of accountability. There are no consequences for being wrong in an appraisal – except if your wrong in the wrong way, you may not get the next assignment. It’s not necessarily the appraiser’s “fault”. Perhaps the problem lies with how much the MBS market relies on appraisals. MBS buyers should have their own real appraisals done. Maybe not practical on resi side, but definitely practical on commercial side.
August 19th, 2009 at 9:05 am
The 10 year has taken another hit and the rate is dropping like a stone. I believe I was wrong yesterday when I said the Fed was not going to be able to crash interest rates, as I have been prognosticating, and the 10 year rate would be close to 4% by 9/1. The Fed is in a serious frame of mind. The stock market is going down and the 10 year will be the flight to safety. It might see 3.25%.
I’m guessing the S&P will fall back to below 900. This will appease the magic chartists, provide a thrill, but still look like an opportunity to buy the dips. Then, before the end of Sept, the market will go straight up to 1000, more or less, as a result of a renewed pump to improve consumer confidence.
Then one more like this in late October. Afterward, the market will revert to a less manipulated model.
Re China: Only an incompetent news writer or a headline chasing TV pundit would think China is the tail wagging the stock market dog in the US. It’s a closed system of junk penny stocks. Sentiment wise, it might scare a few nutty speculators in the emerging markets, but those always have a 3x magnification compared to real markets.
August 19th, 2009 at 9:15 am
yeah it seems like WSJ does take the no regulation stance.
http://online.wsj.com/article/SB125054188939938015.html
August 19th, 2009 at 9:15 am
@dh
Lefty and I have been talking about a “2″ handle for a few months now.
Rosie was on a two handle as well (but he might have abandoned ship).
August 19th, 2009 at 9:22 am
I just received news that PPT will be on leave today.
August 19th, 2009 at 9:25 am
cvienne Says:
August 19th, 2009 at 9:15 am
Lefty and I have been talking about a “2″ handle for a few months now.
reply:
————–
Maybe. I’m trying to figure out the psychology behind the balancing act of interest rates and stock market values. It’s a problem to minimize rates while maximizing the stock market for the greatest period of time before doing it again. If the market falls too far, it might scare people away from the market, and, most importantly, risk damaging consumer spending via a hoped for wealth effect (HA HA, ridiculous I agree, but the bureaucrats probably have this in their equations)
Timing wise and ammo wise, they can do this 2 times, including the current dump. Also, regulations will make it harder to do pumps if HFT rules are put into place.
I’m guessing two buying opportunities. If they follow my script closely enough, I might go 20-30% in both times
August 19th, 2009 at 9:28 am
In a second Red October™ the 10-yr could see 2.5%. I doubt we will ever see enough panic for a 2% yield again.
The Death of Treasuries™ moment at 4% on the 10-yr was a good time to buy. :-)
Short oil today and it looks good so far. The € tried to rally briefly and was REJECTED.
LB may run the old TBT play again as a hedge at the end of the day, let’s see how this one plays out.
August 19th, 2009 at 9:30 am
“I guess Alan Greenspan would say that he couldn’t believe that the banking industry would engage appraisers who would not properly deliver accurate information.”
ROTF. Seriously appraiser is a low quality profession with rewards for one-way error and n0 penalties whatsoever.
What on earth did they think would happen?
August 19th, 2009 at 9:41 am
@LB
“I doubt we will ever see enough panic for a 2% yield again.”
I wouldn’t fully toss out that idea…
I mean, think of it this way… Let’s say Red October turns out to be “Pink October”… If equities don’t panic and FULLY retest 666, then bounce higher through year end, it’s the end of the world (in terms of MM’s declaring victory and saying the bottom is official)…
Not so fast! Let’s say that starting next March, you begin to see the “not so cupcake” YOY comparisons vs. earnings…
I could see wave upon wave of equity selloff (possibly culminating in July)… By the time we took out 666, there could, again, be PANIC buying down to 2%…
Just saying…
August 19th, 2009 at 9:52 am
What scares me most is Jane and Johnny finally pulling the plug on stocks in their 401K, that might get us to 2%.
But surely – by the time 2% comes into view, there will be a Son of Stimulus Package on the table.
OT, according to Bloomberg, Bernie Madoff’s “package” was actually rather minimal, like his trading book.
Wonder who his secret lover is now?
August 19th, 2009 at 9:52 am
[...] noted earlier (Home Appraisal Reform: WSJ vs NYT) the changes effected by Fannie Mae in settlement with Andrew Cuomo are prompting a fresh look at [...]
August 19th, 2009 at 9:59 am
Appraiser’s role in the 02-07 runup was not an UNINTENDED consequence, it was a wholly INTENDED consequence. It is absurd that some potential problem is highlighted when an actual problem is overlooked. Pretty much, it’s lying.
August 19th, 2009 at 10:03 am
@Bruce: Mish also has a post on that topic this morning. We will see the law of unintended consequences in action in so many big ways in the coming months/years ahead.
August 19th, 2009 at 10:07 am
Oil and equities bouncing. Thinking about shorting this bounce in oil.
August 19th, 2009 at 10:07 am
Why not use a 2 appraisal system: 1) would be the replacement value of an equivalent house (cost of building new) and a market appraised value. The disparity of both numbers should be a good guidance on how inflated the house is. No?
August 19th, 2009 at 10:08 am
I think on this one you are right and a little off… you are always right to analyze the spin. My Russian friends tell me you could always find facts printed in Pravada, you just had to filter it. The Russians I know read articles by going from article to article comparing facts to discern bias…
It was a top down fraud. Appraisers are lower down on the food chain. Prime enablers is crap, but then again the NYT would never point the finger at Wall Street. So any sap fall guy will do.
Though also responsible and contributors to the bubble, appraisers came in varieties:
1. Totally corrupt. ” Sure Mr. RE agent or Mr. Mortgage Broker… any number you want I can get.”
2. Don’t like it, but goes along: “I don’t like it but I got to eat, too”
3. Screw this: “This is totally corrupt and I am not going to be holding the bag when these slicksters start covering themselves by blaming appraisals…I can make money doing something else.”
I think buyers must be enjoying the less inflated appraisals…
August 19th, 2009 at 10:10 am
Manny:
Yes, I saw that too. I will try to talk with my (bright) banker tomorrow…we have a fairly easy day in the salt mine, and get his current ideas on small banks, the economy, and the FDIC. An update…
….I think the next twelve months will be almost as interesting as the last 12…
August 19th, 2009 at 10:13 am
“But surely – by the time 2% comes into view, there will be a Son of Stimulus Package on the table”
What came first, the chicken, or the USG laying an egg?
August 19th, 2009 at 10:29 am
Appraisals were one of the positive reinforcement mechanisms of the residential real estate inflation of the early to mid-aughts. The inflation caused by loose money was the but-for causation that mattered–appraisals just confirmed the illusion that houses were worth more because people were paying more.
There are two values assigned to a house by an appraiser doing a “conforming” appraisal: The market price, based on recent sales in the neighborhood, which have something of “duh” aspect to them; and the replacement cost value, which is what it would take to build the house over again. Banks used market value almost exclusively over replacement cost. Market value always captures the insanity of the local market prices, replacement cost, not as much.
An example: in 2006, a builder bought a lot with an old house in a local neighborhood that is undergoing rapid gentrification. The lot/house sold for $200,000. He then put what couldn’t have been more than $200,000 into tearing down the old house and putting up a new one that was nothing special except it was cute and in this newly-desirable neighborhood. He had about $400,000 in the whole thing. He sold the house almost a year to the day later for $635,000, making off with $200,000 plus in the process. Had the bank used replacement cost, the house maybe would have appraised for $450,000. The purchaser used two loans to buy the house with only 10% down. Now he (and the bank for the second mortgage) is undoubtedly underwater, because even as desirable as the neighborhood is, prices have come down substantially from their 2007 peaks.
There is a sound economic reason for using replacement cost as the proper value as well. Every first-year econ student recognizes that a properly functioning market eventually resolves to a situation where marginal cost equals marginal revenue. Marginal cost is the cost to build one more house, and that should be the best estimate of what a house is actually worth, stripping out the loose-money-induced illusion that values houses (or anything, really) for their anticipated appreciation.
But it all goes back to monetary mischief. But for the mania induced by an inflationary fed, none of this would have happened.
August 19th, 2009 at 10:41 am
Don’t forget the self-esteem factor in American life. Even buyers wanted their homes appraised higher b/c it made them feel wealthy even though their net worth was often zero or less at the time they bought the home. Scary… sad.
August 19th, 2009 at 10:42 am
Great point, leftback. If people couldn’t/can’t be rich in reality, at least it was/is fun to pretend to be like the rich….until the bill(s) come due (which is now).
August 19th, 2009 at 11:13 am
Cost of replacement is more in the area of homeowner insurance policies, which the bank can certainly require just as an auto financing company requires that an auto policy with minimum coverage amounts be kept in force.
You just can’t escape the location, location, location thing. An oceanfront two-bedroom Cape on a quarter acre with beach access valued independent of location? I don’t think so.
August 19th, 2009 at 11:46 am
Tranzor Z…by replacement cost I meant land and improvements–the total economic value of the project. In the example I used, land in the neighborhood was about $200,000 per buildable lot. From there, figure out how much the structure sitting on it cost to build. Use the total as appraised value, not whatever some dimwit thirty-something using the bank’s money wishes to fork over.
August 19th, 2009 at 12:03 pm
How about letting them guarantee their appraisal. If the house cannot sell for that amount later it will be up to them to prove that their appraisal at the time was fair, or cover the banks loss. Nothing like getting your own skin in the game, that will keep people honest. It’s all about the incentives as everything else, and as it always is.
August 19th, 2009 at 1:18 pm
[...] appraisals and mortgage rules both played a role in the housing boom. (Big Picture, Atlantic [...]
August 19th, 2009 at 1:32 pm
Or maybe we should let the PMI companies hire the appraisers. They would certainly not hire someone who consistently overvalued.
August 19th, 2009 at 2:48 pm
TC, I see what you’re getting at, but I think the better approach is to just hold originators accountable through a ratings system. If your borrowers default more than normal and if foreclosure recovery is consistently lower than expected, potential upstream holders start to have concrete reasons to doubt your operation and the accuracy of your appraisals.
The biggest red flag in all of this for me is still that nobody upstream gave a shit what was really going on at the property level. That’s why my favorite part about Michael Lewis’s article “The End” http://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boom/?print=true%22 is Steve Eisman and his crew physically traveling to the sand states to find out what was really going on. It would have costed the investment behemoths nothing to send a few savvy people to do due diligence and perform site visits at properties and mortgage offices.
August 19th, 2009 at 4:12 pm
I still think all of this talk about the appraisers is misguided – even if a lot of it is accurate. If the banks keep the loans on their books or a sizeable percentage of it anyway, then they will make sure that they obtain good appraisals.
The reason we had so many inflated appraisals is because the mortgage originators were just in it for the commission. They didn’t care if the appraisal was bad as long as the loan went through. When the loan defaulted later on someone else would own it and take the loss. Until this fundamental problem is solved the rest of this discussion is pointless.
August 21st, 2009 at 7:06 pm
[...] The Big Picture 8/19/09: Home Appraisal Reform: WSJ vs NYT [...]