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Industry analysts are beginning to question whether servicers that delay foreclosure proceedings are essentially delaying an even bigger backfire when property values decline further, according to an Aug. 27 American Banker story.

At issue is the practice by many lenders over the last two quarters to take reserve releases based on more bullish assumptions about the value of distressed properties. While accounting rules mandate that banks set aside reserves covering the full amount of their anticipated losses on nonperforming loans, banks are reluctant to foreclose on properties or test valuations that may show they have wrongly gambled on a broad housing recovery that is not coming soon, American Banker reported.

The strategy of many banks has been to postpone the date at which they lock in losses, thereby delaying foreclosures and potentially benefitting from the recovery of the nation’s real estate market. But as housing prices continue to slip and sales slow – sales of homes in July slid to the lowest level on record – lenders are faced with the prospect that a rash of foreclosures and major losses could be on the horizon.

"The math doesn't bode well for what is ultimately going to occur in the real estate market," Herb Blecher, a vice president at LPS, told American Banker. "You start asking yourself the question when you look at these numbers whether we are fixing the problem or delaying the inevitable."

American Banker reported that some servicing executives acknowledged that as banks stall on foreclosure proceedings, delinquent borrowers may get a reprieve, but a bottleneck of foreclosures hitting the market is likely to pull down existing home prices and thwart the growth of new sales.

Appraiser News Online Headlines
Last Updated: August 25, 2010
Vol. 11, No. 15/16

Mortgage application refinance activity reached its highest level in 15 months the week ending Aug. 13, according to the Mortgage Bankers Association’s weekly Mortgage Application Survey. The MBA credited interest rates remaining near historic lows for the increased activity.

The Refinance Index rose 17.1 percent from the previous week. Refinancing made up 81.4 percent of applications, up from 78.1 percent the previous week, while adjustable-rate loan activity fell 0.2 percent to 5.7 percent. The four-week moving average for the Refinance Index increased 3.2 percent on a seasonally adjusted basis.

The survey, released Aug. 18, showed that the Market Composite Index, which measures mortgage loan application activity, increased 13 percent on a seasonally adjusted basis from the previous week and 12.4 percent on an unadjusted basis. The four-week moving average for the Market Index increased 2.6 percent on a seasonally adjusted basis.

The MBA’s Purchase Index dropped 3.4 percent from the previous week on a seasonally adjusted basis. On a non-adjusted basis, the index fell 4.6 percent from the previous week, down 38.6 percent from a year ago. The four-week moving average for the Purchase Index inched up 0.1 percent on a seasonally adjusted basis.

The average rate on a 30-year fixed loan increased to 4.6 percent from the prior week’s 4.57 percent, while points, including origination fees, increased from 0.89 to 0.92 for 80 percent loan-to-value ratio loans, the MBA reported. The average rate on a 15-year fixed loan rose from 3.95 percent to 3.99 percent, while points, including origination fees, fell from 1.08 to 1.05. The average rate on a one-year adjustable rate mortgage decreased from 7 percent to 6.9 percent, while points, including origination fees, inched down from 0.22 to 0.21.

by David Brauner,
Editor of Working RE magazine and Senior Broker at OREP

Given the fierce efforts to keep HVCC alive, it makes you wonder if AMC interests know something the rest of us don’t.

As federal legislation that would end the Home Valuation Code of Conduct (HVCC) moves closer to reality, appraisal management company (AMC) interests are blitzing the media with their message that overturning HVCC means a return to lender pressure/appraiser compliance and an environment that allowed the current real estate collapse.

Industry thought leaders have been saying for months that, no matter the fate of HVCC, the shotgun marriage between appraisers and AMCs is sealed: if appraisers want to do business, they will have to do business with AMCs on the terms dictated by these middle men, or so goes the conventional wisdom.

Representatives from the Federal Housing Finance Agency (FHFA), Fannie Mae, Freddie Mac and others, tell appraisers that there will be no going back to business as it was prior to HVCC, no matter if the Code is allowed to sunset in November of this year or terminated before then (FHA, Fannie/Freddie Tell it Like it Is, WorkingRE.com, Current Edition). If this is the case, what is the AMC trade group TAVMA (Title/Appraisal Vendor Management Association) so worried about?

In recent weeks, TAVMA has published stories in the appraisal press and in other online real estate-related publications strongly defending HVCC’s role as a “firewall” protecting appraisal independence. TAVMA also recently published a widely circulated “AMC Standards of Good Practice in Appraisal Management,” in an apparent effort to head off the growing trend of AMC regulation by states (see WorkingRE.com, Sidebar for the AMC Standards of Good Practice in Appraisal Management). Such regulation, they argue, would create a confusing and expensive tangle of legislation that would drive smaller AMCs out of business and raise costs for consumers.

Safe Act

What may have rattled AMC cages is passage by the House late last year of the Financial and Mortgage Industry Reform Bill (find the bill at WorkingRE.com, Sidbar: HR 4173). If signed into law, the Bill would establish a Consumer Financial Protection Agency and require lenders to compensate appraisers their full fees, rather than splitting them with management companies. There are also rules to assure appraisal independence. The bill gives the director of the new agency 60 days from the date of enactment of this legislation to establish such appraisal rules and calls for the HVCC to sunset at the time the new rules go into effect. The bill was referred to the Senate Committee on Banking, Housing and Urban Affairs earlier this week.

The bill includes the following:
(1) shall not prohibit lenders, the Federal National Mortgage Association, or the Federal Home Loan Mortgage Corporation from accepting any appraisal report completed by an appraiser selected, retained, or compensated in any manner by a mortgage loan originator—(A) licensed or registered in accordance with section 1501 et seq. of the SAFE Mortgage Licensing Act of 2008; and

(B) subject to State or Federal laws that make it unlawful for a mortgage loan originator to make any payment, threat, or promise, directly or indirectly, to any appraiser of a property, for the purposes of influencing the independent judgment of the appraiser with respect to the value of the property, except that nothing in this section shall prohibit a person with an interest in a real estate transaction from asking an appraiser to—

(i) consider additional, appropriate property information;

(ii) provide further detail, substantiation, or explanation for the appraiser’s value conclusion; or

(iii) correct errors in the appraisal report; and

(2) shall include a requirement that lenders and their agents compensate appraisers at a rate that is customary and reasonable for appraisal services performed in the market area of the property being appraised.

(c) SUNSET.—Effective on the date the appraisal independence requirements are promulgated pursuant to subsection (a), the Home Valuation Code of Conduct announced by the Federal Housing Finance Agency on December 23, 2008, shall have no force or effect.

The Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (“SAFE Act,” see the Housing and Economic Recovery Act of 2008 at WorkingRE.com, Sidebar), requires state licensing of mortgage brokers, including coursework, testing and fingerprinting.

These developments and a flurry of state laws to regulate AMCs may be what has TAVMA fighting back. Quoted in HousingWire.com, TAVMA executive director Jeff Schurman said, “Turning back-the-clock, and letting parties who are compensated based on closed deals order and interact with appraisers will inevitably lead to pressure and inflated appraisals.” (Find the story at WorkingRE.com, Sidebar: TAVMA Opposes New Consumer Protection Bill)

Reason to Believe- Speaking Up

Some appraisers have given up believing that their autonomy as businesspeople will ever be restored, since HVCC has cut them off from their mortgage broker clients. Indeed many have called it quits in recent months reporting that they can not earn adequate fees working with AMCs or generate sufficient orders to stay in business.

Passage of this Bill may be the light at the end of the tunnel. TAVMA and others are pushing hard to see that that light is extinguished and that HVCC remains in place. If you are opposed to HVCC, this may be a good time to make your voice heard with your Senators.

Pressure Tested

According to the Working RE/OREP HVCC Appraiser Talkback Survey, with over 4,500 appraisers responding as of this writing, 92 percent of appraisers are not in favor of HVCC as written and 82 percent do not consider AMCs to be a legitimate business model. Fifty-three percent (53%) report that they experience pressure for value with the AMCs they work with at least some of the time (47 percent say they “never” experience this pressure). Over 55 percent say that, with the AMCs they work with, they are asked to re-examine reports with the intention of trying to “make the deal work” at least some of the time (44 percent say they are “never” asked). So despite TAVMA's PR to the contrary, appraisers say pressure still exists.

Quality Not Job One

Survey and Blog results also support anecdotal evidence from appraisers that appraisal quality has diminished since HVCC, not improved. The reason, they say, is that many AMCs look primarily for the lowest bidder when selecting appraisers, not the most qualified professional. According to the survey, 98 percent say that, in their experience working with AMCs, appraiser selection is based solely on obtaining the lowest fee at least some of the time (less than two percent answer that appraiser selection is “never” based solely on obtaining the lowest fee).

Survey results clearly indicate that pressure for low fees and quick turn around also is hurting quality. To the question: “Do ‘low fee’ appraisals result in a product that is less reliable for the end user compared to a report where adequate fees have been paid, 45 percent answer that this is “never” the case (55 percent say it happens at least some of the time). To the question: “Does the time pressure (from AMCs) result in a product that is less reliable for the end user, compared to a report where adequate time has been allowed, 31 percent say this never happens (69 percent say it happens at least some of the time).

Freddie Mac, on the other hand, reports that an internal review indicates that appraisal quality has improved since HVCC and that complaints are down. (See FHA, Fannie/Freddie Tell it Like it Is, WorkingRE.com, Current Edition.)

FHA Fees- Customary and Reasonable?

An appraiser poll hosted by AppraiserSupport.com finds that today the majority of fees for FHA appraisals are under $250 nationwide. At issue is FHA’s new policy, which takes effect this week and mandates that appraiser fees be customary and reasonable. According to AppraiserSupport.com, “In 1986, FHA mandated the appraisal fee of $225 be paid to all FHA appraisers. FHA realized that a fair wage was required to produce quality appraisal reports. If you adjust the 1986 mandatory appraisal fee for inflation, a current appraisal fee would be $436, which was approximately the amount appraisers were charging prior to the HVCC. HUD has addressed the issue of ‘reasonable and customary’ appraisals fees. Their definition is that ‘customary and reasonable’ are reflective of those fees established and negotiated by an FHA-approved, self employed independent fee appraiser.’ However, we have evidence that, on average, AMCs are only paying 60 percent of the reasonable and customary appraisal fee.”

New FHA changes also stipulate that the fee for the actual completion of an FHA appraisal may not include a fee for management of the appraisal process or any activity other than the performance of the appraisal. (See Appraisers Talk, FHA Listens at WorkingRE.com, Current Edition.)

Side Notes: The Good, the Bad and Shangri-La (Montana)

Reaction to coverage of HVCC and AMCs in the current issue of Working RE magazine has been mixed, to say the least. Comments range from gushing praise to tirades that would make Senator John McCain blush. Here are two of many.

”I just read your latest article, it was very enlightening. I have been in the business for 23 years and sound very much like the appraiser at the end of your article. I worked very hard to build a reputation and good list of clients, just to have it all taken from me. I have to start all over again but this time it is not about my education or my designations. The only thing 95 percent of the AMCs ask for if my license, that in itself should indicate they are not interested in quality or education of any kind. The only requirement they have is the bare minimum and the lowest fee they can get. I have one exception, and that has been Landsafe. Landsafe is the only reason I am in business today, they have a staff that is knowledgeable and they actually look for quality work,” said Kevin Talbott, SRA.

And this from another appraiser: “So how much are AMCs paying you to help them? Give me an article that defends appraisers and criticizes our enemies.” (Name withheld.)

Also, several appraisers wrote us puzzled about what the acronym “HVCC” stands for- they had never heard of it! One of these appraisers, who lives in rural Montana, told us he has not been effected one way or the other by the Code.

Getting Out: Why I’m Leaving Residential Appraisal

A sometime contributor to WRE, appraiser Mike Read, sends us this letter:

I used to love appraising. Long before there was any appraiser regulation my clients came to me for valuation opinions because of my years of experience in real estate and their recognition of my accurate and reliable reports. Then came HVCC. Now my clients of 24 years are not allowed to contact me. They have to order appraisals through a third party appraisal management company (AMC) which takes up to 60 percent of my fee for their trouble.

I have signed up with about a half dozen AMCs. One went out of business owing me over $7,000. Three asked for all my exhibits and I’ve never heard from them again. One expected me to complete a URAR for $90. My most recent AMC has not sent me an assignment in months due to their lack of volume.

I recently testified before my state legislature in support of a bill to regulate AMCs. My first suggestion was to support the repeal HVCC at the federal level. Secondly to ensure that a certified appraiser is on staff at the AMC to do review work and third to require the AMC to have a surety bond of $500,000 to $1 million so payment to appraisers is assured if the AMC defaults. Others recommended that AMCs become regulated by the State Appraiser Licensing Board.

I have 24 years of appraising experience, am licensed in two states as a General Certified Real Estate Appraiser, have been HUD approved for the whole 24 years without any complaints and have completed hundreds of hours of special education. What good has that done for me?

What is driving this patchwork quilt of ineffective appraiser regulation? Have you heard of “The Golden Rule?” He who has the gold makes the rules! The greed of lenders is the source of the problem and always has been. They are the ones with the money to lend. They are the ones that establish the lending guidelines that have to be followed by everyone else in the lending chain. They are the ones with the “pipeline” to keep full and flowing. When they run out of borrowers with 20 percent down they reduce the requirements to encourage borrowers with 10 percent down. Keep that pipeline full. When they run out of borrowers with 10 percent down they reduce the requirements again to encourage borrowers with five percent down, then zero down, then “no doc loans.” Keep that pipeline full.

What about the increased risk? Well, they just pack the loans up and sell them off to someone else in a mortgage backed security that is so far removed from the valuation process no one can figure out the value any more…not even the sophisticated investors. (Nobody thought to ask the appraisers!)

Now it’s time for me to say goodbye to my clients and friends in the residential real estate and financial service fields. You’ve heard of the theory of “trickle down” economics? Well here is how my exit from the business will trickle down to you all.

Dear MLS provider, I will be canceling my subscription for data services at the end of my current period ($105/Q).

Dear title company, I will be canceling my subscription for data services at the end of my current period ($85/mo).

Dear software company, I will not be renewing my annual software maintenance agreement at the end of my current period ($399/yr).

Dear Board of Realtors, I will not be renewing my annual dues this year ($375/yr).

Dear Appraisal Institute, I will not be renewing my annual dues this year ($330/yr).

Dear E&O insurance company, I will not be renewing my policy at the renewal ($500/yr).

Dear state of Washington, I will not be renewing my appraiser license at the end of the biennium ($500).

Dear state of Oregon, I will not be renewing my appraiser license at the end of the biennium ($500).

Dear education provider, I will not be needing any more CE credits so will not need any more expensive classes ($500/yr).

Dear AMCs, goodbye.

Dear Consumer, you are the only one I feel sorry for. I will no longer be in a position to provide you with an independent valuation for your largest lifetime investment. Your lender does not want you to know who I am, how to contact me, how much I charge, what value opinion I reach, they just want you to pay for some conforming paperwork. If they receive any bad news they just shoot the messenger.

Foreclosure activity in the United States set a new record in the third quarter of 2009 with one in every 136 housing units receiving a foreclosure filing, increasing 5 percent from the previous quarter and 23 percent from the third quarter of 2008, according to RealtyTrac Inc.

Despite government and lender efforts to assist struggling homeowners, foreclosure filings – including default notices, scheduled auctions and bank repossessions – were reported on 937,840 properties in the third quarter. That marked the highest quarterly foreclosure rate since RealtyTrac began issuing its reports in 2005.

“REO activity increased from the previous quarter in all but two states and the District of Columbia, indicating that lenders may be starting to work through some of the pent-up foreclosure inventory caused by legislative delays, loan modification efforts and high volumes of distressed properties,” James Saccacio, chief executive officer of RealtyTrac, said in a news release.

Nevada once again topped the list as the state with the most foreclosures with one in 23 housing units receiving a filing – nearly six times the national average. Foreclosure filings in Nevada totaled 47,925 properties, representing a 10 percent increase from the previous quarter and a 59 percent increase from a year ago.

Arizona and California were tied for second place with one in every 53 housing units receiving a foreclosure filing. Arizona increased 5 percent from the previous quarter and 24.55 percent from a year ago while California decreased 1.5 percent from the previous quarter and 18.60 percent from a year ago.

California, Florida, Arizona, Nevada, Illinois and Michigan accounted for 62 percent of the nation’s total foreclosure activity in the third quarter, having a combined total of 579,541 properties receiving a filing, according to RealtyTrac’s report.

Vermont had the lowest foreclosure rate in the U.S. with one in 5,023 housing units receiving a notice in the third quarter despite its foreclosure rate surging 170 percent compared with the third quarter of 2008. North Dakota had the next lowest rate with only one in 2,724 units receiving a notice.

Home foreclosures are expected to climb through late 2010 as unemployment continues to increase. “The number of people who can’t pay their mortgages, we haven’t seen the peak of that,” David Lowman, head of JPMorgan Chase & Co.’s mortgage unit, told Bloomberg. “That’s going to weigh on us for some time to come.”

According to industry experts, the fastest growing area is in the 180 days-plus late category, the most seriously delinquent borrowers. “It’s going to be a lingering problem,” said RealtyTrac spokesperson Rick Sharga.

Appraiser News Online Headlines
Last Updated: October 21, 2009
Vol. 10, No. 19/20

Responding to recent testimony before the House Small Business Committee, the Appraisal Institute reminded the Committee’s leaders Oct. 14 that appraisers are not responsible for so-called low appraisals.

The Appraisal Institute joined the American Society of Appraisers, the American Society of Farm Managers and Rural Appraisers, and the National Association of Independent Fee Appraisers in a letter reacting to testimony earlier this month by National Association of Home Builders President Joe Robson. The four appraisal organizations, representing more than 35,000 members, urged Committee Chair Nydia Velazquez, D-N.Y., and Ranking Member Sam Graves, R-Mo., not to “shoot the messenger.”

“It is important for the Committee to understand that appraisers do not create value in the housing market; they report on what is occurring in the market,” the letter stated. “ The fact that some home sales have failed to close is largely the result of the housing market we are in today. … Accordingly, we urge caution in connection with those who would prefer to ‘shoot the messenger’ rather than face the realities of today’s distressed market.”

Robson’s testimony to the Committee alleged the improper use of foreclosed properties and properties from distressed sales as comparables in determining values of single family homes where no adjustment had been made to reflect the relative condition of the properties. His testimony also suggested that a high number of new home sales have fallen through because the appraisal reflects a value below the contract sales price for the property.

“Professional appraisers fully understand and agree that if foreclosure and/or distressed property sales are used as comparables, they must be treated carefully,” the letter stated. “Appropriate adjustments must be made by a qualified appraiser to reflect the physical condition of such properties as compared to the subject property. This is common practice. … It is the professional real estate appraiser’s responsibility to be aware of these conditions and analyze the market, considering all relevant data and applying proven techniques and methods.”

The letter also stated that “Given the complexity of this issue in today’s market, the competency and qualifications of the real estate appraiser is of critical importance in our system of real estate financing. … Lenders or their agents – including appraisal management companies – would be well served by retaining the services of highly qualified appraisers where such conditions exist.”

The appraisal organizations recommended four specific areas of guidance to mortgage lenders and financial institutions:

• Seek out the services of highly qualified appraisers for complex appraisal assignments.
• Recognize that sales concessions are as important as the condition of a property to the credibility and reliability of the appraisal.
• Provide sufficient time for the real estate appraiser to conduct the proper analysis of the subject property and comparables used.
• Promote communication between appraisers, builders and real estate agents.