Appraisal Fraud in Clackamas, Oregon? , by Brett Reichel,

Wowza…..pretty bold headline, isn’t it?

How can that claim be made or the question raised?

First – a quick note on technicalities on appraisals – Comparable Sales are compared to the Subject property to try to lead the appraiser to a supportable “opinion of value”.   Differences in properties are accounted for by “adjustments” to the comparable sale, which then leads to an “adjusted value” of the comparable.  The adjustments are supposed to equalize differences in properties.  Adjustments are supposed to be supported through market analysis, specifically “matched pair analysis“.

A simplified example of a “matched pair analysis” would be two houses that are identical in every way, with the exception of one of them having a fireplace.  House A, without the fireplace sells for $100,000, and House B, with the fireplace sells for $101,000.  What’s the value of the fireplace?  Since the houses are identical in every way, the value of the fireplace is clearly $1,000.  In that market area, in that price range, fireplaces are worth $1,000 and until proven differently, the appraiser is justified in adjusting comparable sales $1,000 for fireplaces (having them or not having them).

One of the things we’ve seen adjustments for lately, is the adjustment in “time”.  This adjustment is made for changes in the market between when a comparable sale is sold and when your subject sold.  If the market is dropping, then the adjustment to the comparable would be downward, and in a rising market, upward.

As you might suspect, appraisers have been making this adjustment…..a lot….lately.  The problem is, they have been skipping the “matched pair analysis” process and just using median prices to justify the adjustment.  This is NOT acceptable appraisal practice.  But, if it’s become the norm, if it’s become acceptable, it should apply when median prices escalate.

Thus the headline.  A recent market report indicates that median prices have been on a 90 day upswing in Clackamas, Oregon.  Have the appraisers reversed their course and adjusted upward for time?  No they haven’t.  Why?

Lender pressure is why.  The whole point of industry reform (HVCC and/or Dodd-Frank) was to eliminate lender pressure, but now the lenders have even greater methods of applying pressure with the new rules.  Really, the problem starts in two places, regulation and the GSE‘s.   The GSE’s are Fannie Mae & Freddie Mac.  Their forms require the use of Median Prices.  Fannie/Freddie, Barney and Chris (a criminal “friend of Angelo”) are behind this lender fraud.  The rest of the market is captive and held to their criminal standards, including the poor appraiser.

Frankly, this only helps the banks, and it doesn’t do anything for the borrower, the seller.  It doesn’t help stabilize our markets or improve our economy.

What to do?  Well, don’t shoot the appraiser – he/she can’t do anything about what the lenders force them to do.  Complain to the lender, complain to your legislators, complain to regulators, call Elizabeth Warren, complain long, hard and loud….maybe if enough voices are heard we can get out from under the tyranny of the banks and Fannie Mae and Freddie Mac.

The Median Price Fallacy, by Brett Reichel,

Every month or so, the news media generates articles based on the latest statistics from various multiple listing services. In those articles they relate how “Median Prices” have either fallen or increased. What’s that mean? Well, a median price is one where it’s the middle price of all the sales in an area. So, let’s say we have a small city called Brettville. In Brettville last month, there were 15 sales. One sale was at $200,000, 7 were above $200,000 and 7 were below $200,000. Then the middle price, or median price for Brettville last month was $200,000.

Market analysts watch median prices for changes, and use them as an indicator of market price changes. However, median prices are not a good and clear indicator of an individual houses value, despite what most appraisal reports say today. In fact, when an appraiser uses changes in median prices as a justification for time adjustments to value, it is inaccurate analysis.

What’s a time adjustment? An appraiser uses comparable sales (comps) to determine their opinion of value on the property they are appraising. The appraiser makes dollar value adjustments on these sales when they compare them to the subject property . A “comp” might be 200 square feet bigger than the subject so the appraiser would adjust for that difference. One thing appraisers do commonly in today’s market is adjust for the difference in time between when a “comp” sold and the date of the appraisal. If a market is appreciating or depreciating at 1% a month, the appraiser would make an adjustment to the value of the comp in comparison to the subject to compensate for the difference in time.

It’s inaccurate analysis to use median price to justify this time adjustment. Why? Because median price could be affected by more cheap houses selling in an area or more expensive houses selling in a neighborhood. It could have zero to do with any change in value.

Another factor that makes median prices not appropriate for time adjustments is that different market value ranges could have different changes in value. In some of the markets, larger, move up style homes are depreciating faster than starter homes. Why? Because there are more first time home buyers in the market than move up buyers.

If you are not happy with your appraisal, review it, and read the comments. If the appraiser justifies the time adjustment with median prices, and not a matched pair analysis, you have a faulty appraisal, and valid grounds for a complaint. Don’t expect your lender to do this, your loan officer doesn’t understand, and the underwriter probably doesn’t either. But the appraiser knows what they are doing. They used to laugh at Realtors for doing this in an appreciating market. Now they’ve jumped on that bandwagon, too.

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Why Are Appraisals So Bad?, by Brett Reichel,

Ok – so….blinding flash of the obvious here….Appraisals are serious problems for real estate transactions right now. Lawrence Yuen, the Chief Economist from the National Association of Realtors said this week “Home sales are being constrained by the twin problems of unnecessarily tight credit and a measurable level of contract cancellations from some appraisals not supporting prices negotiated between buyers and sellers”.

Many of you have experienced first hand the effects of a low real estate appraisal. Maybe you were denied the ability to refinance to a lower interest rate or worse yet, maybe you had a sale blow up on a home you were trying to purchase. Or, if you are a Realtor or lender, you’ve had clients you can’t help due to a low appraisal.

The appraisers say, that they are just reading the market. To a degree, that’s true. Nearly no one’s house is worth what it used to be, and with the market making that move downward, clearly there are going to be lower appraisals (another blinding flash of the obvious).

Mortgage guys(used in a gender neutral way here) and Realtors will blame the Home Valuation Code of Conduct (the HVCC, which has been recently replaced by a new law with similar restrictions). It’s true the HVCC has created some issues.

Personally, I can live with an accurate appraisal, even if it doesn’t give me my desired outcome. That’s life, appraisals should be as accurate as possible, and lenders need a good report to base their analysis of the collateral on. But, we aren’t getting accurate appraisals. Why?

Here are a few reasons:

First – the HVCC created a monster by leading most lenders to decide to order their appraisals through appraisal management companies. Many appraisal management companies require cheap and quick appraisals. The biggest national appraisal management companies that the “big 4″ lenders require the market to use, order appraisals from wherever they can get the cheapest fee’s and the quickest turn-around times. Little consideration is given to the qualifications of the appraiser, other than appropriate licensing, certification, insurance, and bonding. Sometimes, this means an apprasier is coming from two or three hours away from the subject property!

Why is this an issue? Because all real estate is local. Identical houses just blocks apart, sometimes across the street, can have significant differences in value because of market perceptions. Differences in schools, addresses, and many other factors create value differences in markets. If you are from two hours away, you probably don’t know all these nuances. It’s easy to miss that a buyer will pay $25,000 more for a house within certain elementary school boundaries, and that the boundary can be in the middle of the street. If the appraiser isn’t extremely familiar with the market they shouldn’t do the appraisal there, or they should learn and quantify these differences really quickly and complete an accurate report.

Second – appraisers have a tendency to forget markets are driven by psychology. In the stock market, the “efficient market theory” has been proven to be inaccurate. Psychology affects an illiquid investment like real estate even more. Too many appraisers approach appraisal from a technical viewpoint that ignores market psychology. The reason we need good appraisers is to quantify these nuances that make differences in value that a computer can’t pick up on. That’s why lenders rely less and less on “Automated Value Models” run through computers, and instead rely on an expert in the local market.

Third – seasonality is an issue. Most markets have seasons where houses don’t sell as readily. Maybe it’s too much snow, maybe too much heat, maybe it’s the holidays, but really these seasons affect sales prices, and this too should be quantified and reflected in reports.

Fourth – lender meddling is another issue. FannieMae and FreddieMac (the agencies)force repurchases of loans on to the big lenders, who force them on smaller lenders. Repurchasing loans creates huge losses for lenders. The agencies use flimsy excuses, like claiming valid appraisals are invalid, to force these repurchases, and scare the other lenders to death. Thus lenders get more conservative and pressure appraisers to bring appraisals in lower through their underwriting practices. The agencies create additional pressure on the appraiser through the use of the Form 1004 MC, which was created to analyze market conditions, but is really an ill-conceived form that can lead to poor analysis of the market by both underwriters and appraisers.

Fifth, incompetence is all too common in the appraisal profession. A recent appraisal report done in a suburb of Seattle indicated that the appraiser depreciated the value of the house at 1/2% a month because median prices dropped in that Multiple Listing Service area by 6% over the last twelve months. On the surface this would appear to be an appropriate decision. But, median prices are not the best indicator of values. Appraisers and underwriters will not accept median prices to determine appreciation, why would they be appropriate in a declining market? In fact, many appraisal text books identify this practice as wrong. We see this poor reasoning time and time again in appraisal reports and it is invalid analysis.

What do we do about this? Apply pressure to get accurate appraisal reports! Your loan officer might not be able to do much, but maybe someone higher up can. Make sure your complaints are based on sound data, and not just your emotional involvement in the transaction. If you are in the real estate or lending industry, learn more about appraisals so that you can know what to look for and give your clients better advice. In any event, we need to continue calling attention to this ongoing problem.

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