I think that I shall never see
An appraisal as lovely as a tree.
Perhaps, until the scope of work shrink
We will continue to cut trees and print with ink.
Hey, I am no Ogden Nash but seriously folks, appraisers are living a “death by a thousand cuts”. It really is long overdue.
The 1004 form was last updated in 2005 and at that time the major rewrites were to the addendum. Technology-wise we are about where we should be if it were 1993. Digital cameras and delivery via email brought the last leap in technology gains to the appraisal world nearly two decades. During that time period Kodak and Polaroid went down the tubes. Think about that for a minute.
If you aren’t thinking it I am sure the rest of the housing finance world is thinking it. Please do pardon the pun but what value do you bring to the process? If the only purpose you serve is to measure a house, take photos and type three recent similar sales on a grid they really don’t need you to do that.
10 million people filed their own taxes this year with Turbo Tax. You need H&R block why? Do you know the training these folks have at these tax prep companies? How many shares of stock do you think traded through online trading platforms like Scottrade? Do you need to pay a broker a high fee to do that for you? Maybe you do if you want their advice. Perhaps you value their analysis.
I think we need to rethink practically everything we do. An awful lot of things we do in the appraisal process are simply based on legacy systems. We need to take a fresh look at it all. I have had the pleasure to get to know Ed Pinto, former chief credit risk officer at Fannie Mae in the 80s. Ed shared with me how the forms were tinkered with over the years not so much based on sound appraisal theory in an effort to reduce misrepresentation and fraud. I know it is shocking, but people lie on appraisal reports. Most of the crazy stuff including today’s expanded scope is all meant to stop appraisers from lying. How is that working out?
I have done a little bit of forensic work and spoke to Gregg Opelka. The “green hornet”, the first appraisal form, was designed in 1962 by Mr. Opelka for the Savings & Loan League. Prior to that there was no standard report. Jack Weaver, former chief appraiser for Fannie Mae developed the predecessor to today’s 1004 in the early-1970s, but in a strange twist it was adopted first by Freddie, before Fannie quickly followed suit. Both GSEs adopted the 1004 in 1982 and that brings us up to where we are today… pretty much where we were in 1962.
What’s so bad about it? I think it is pretty abysmal actually. I am trying to find something positive to say, really, I am. I began my career in 1982 at a Savings in Loan in Baltimore. I first began in commercial work and from time to time would fill in and assist the residential appraisers in peak periods. I remember being shown how to make adjustments. Yes, I was trained by an SRA and my training was excellent. But I must tell you I thought the process was kind of dumb then. It is dumber today in the context of what we should and could be doing to add value to the process. I wrote my demo too and earned my SRA in 1989. I think that was the first and last time I addressed matched pairs.
I remember the conversation when I learned that the GSEs didn’t get a copy of the appraisal. It went something like this but not exactly ... “What?” I said. My friend at a GSE, “ Yes, that’s correct. We rely on reps & warrants”. I gulped. “OK, why is Morley Safer and the 60 Minutes crew not busting down your doors?” This is like learning as an adult there is no tooth fairy or Santa Claus. I was in a state of utter disbelief. I felt lied to. Duped. Like my boyfriend had just cheated on me. “Why exactly do you require appraisals”? My GSE friend says “Well, you see lenders are responsible for the quality of the appraisal report.” That was said somewhat tongue in cheek because in the same conversation an admission was made that they knew appraisals were grossly inflated. And in that same conversation it was also stated that borrowers don’t default because of inflated appraisals. My reaction was that I believe they will. “I can’t prove it but you are wrong, very wrong.” The rest is history. Today we actually have a name for those… strategic defaults.
So what sort of makeover do the forms need to bring value back to the appraisal process? At a very high level the forms need to collect all of the data points necessary for the lender and the secondary market to determine collateral risk. We don’t do that well today. And then we need to supply better analysis. Would you pay someone $400 to tell you what Apple’s stock price sold for over the past 3 weeks? Not likely because you can look at a stock chart yourself to see where it has been. You might be interested in your financial advisor’s opinion on Apple’s value taking into account fundamentals such as earnings, balance sheet, and competitive environment.
Most everybody thinks of MLS data as the Holy Grail. I’m thinking garbage in, garbage out. I am not suggesting at this point in time there is a viable alternative because there isn’t one. There could be. Why are you using sales data for valuations? Why aren’t agents using valuation data for listings? It is entirely backwards. We must create the architecture for Valuation 2.0. The infrastructure is not in place. In fact, we can’t even get the identity of the subject property correct. Can you believe we aren’t challenging that a little louder?
Appraiser conversations go like this…. “Mr. Lender did you know that this property I quoted you a fee for is actually an auto body shop with an illegal apartment on 4 acres with 2 mobile homes?” Lender…” what is your point”? Appraiser: “Well, I can’t do it for $300 in 7 days and I can’t do it on a 1004 form”. Lender replies loudly… “ Sure you can. It must go on that form or Fannie Mae won’t buy it. And if Fannie Mae won’t buy it, I don’t get paid. And besides, the borrower has cancer and really needs it for an operation to save their life.”
I rest my case.
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