Monthly Archives: May 2020

The Banks Hurt Themselves by Exploiting Real Estate Appraisers

The coronavirus highlighted a problem with appraisers and appraisals for banks. Namely, a sudden surge of short and long term borrowing has apparently created all sorts of shortages in appraisers willing to work for banks. What did they expect? They spent the last 15 years criticizing appraisers, blaming them for the financial crisis and demanding they work for peanuts. So do you think all that savings from slashing fees paid to appraisers was passed on to the consumer? Don’t bet the ranch if you don’t like city living. And for many appraisers, they lost their homes as well as banks gobbled up property with the government demanding they do so and Uncle Sugar bailing out the banks, instead of the borrowers.

There is a certitude that had the government made payments to the borrowers so they could pay their mortgage, real estate prices would not have collapsed, the real estate market would not have frozen, and hundreds of thousands who lost their homes would have been able to keep making payments and therefore, the banks would not have needed one single penny more.

As a real estate appraiser, I eschewed bank work and shifted to private appraising as rapidly as possible. There are years I have not done more than 10 or 20 bank appraisals. And why should I? Private parties need the appraisal. They want the appraisal. They don’t quarrel about the fee and they don’t file many complaints to the state boards.

Meanwhile, the banks fearful in the early years of regulation (circa 1989-1995) rarely crossed their appraisers. They didn’t demand they “take another look” at it. Nor did they ask them to pre-appraise the property, the notorious free “comp check”. And they ordered directly. They were responsible for hiring a competent appraiser familiar with the kind of property being valued. Today, the Appraisal Management Company (AMC) acts as a jobber, taking up to 50% or more of the fee and browbeating appraisers into taking low fees. They are run from clueless offices, many overseas in India or another foreign country, Pittsburgh, PA  .

The banks thought this was great news. They didn’t have to put the pressure on appraisers anymore, they had a stand in who would do that for them…and cut fees allowing the banks to make a profit off the appraisal often. If the appraiser demanded a fee appropriate for the job, then they would simply bid it out until some sucker took the bait.

From 1995 – 2006 appraisers faced increasing pressure to bring home the bacon. No value was too high. And no amount of pressure was too much. If you “killed their deal” (as they put it, appraisers prefer to think of it as writing the obituary) you are now a non-person, replaced by a newbie or appraisal mill cranking out flawed reports carefully crafted to pass underwriting.

2006 to 2008 was the ‘deer in the headlight” time when it finally dawned on banks that they were sitting on a “keg of dynamite” as N. N. Taleb put it in his book “Black Swan”. And blow up it did. Lending a million to a backhoe operator turned out to not be a very smart move. Lending money to buyers accumulating vacant homes to resell for a profit, was equally dumb. But, of course, the appraisers were blamed, not that there wasn’t some of the blame to go around. Our values were inflated often by such concessions we are not even told about, such as a new Hummer in the garage, a year’s free housekeeping, or a boat, concessions that were largely a wild discount on price in an effort to make the price of homes appear higher than the net to the seller actually was.

So to punish the appraiser in this faux blame game, HVCC was enacted that set certain practices in motion that were incorporated into the Dodd-Frank Bill (DF). From there the AMC model exploded and was adopted for secondary market work. Fannie Mae, Freddy Mac, FHA – all these assignments now were only available through the AMCs.

Only a few small banks persisted in ordering their appraisal and they were creating “credit departments” to order the report separate from the loan officers and often using a bidding system to assure they hired the cheapest appraiser with the best “turn time”.  Loan officers familiar with the individual abilities of an appraiser were no longer allowed input. And low paid new hires were the ones deciding who got the assignment.  Who can deliver quickest. Despite the bank laws which explicit urged banks to hire someone who was sufficiently trained and experienced for the individual assignment, the only mantra was “What is your fee and turn time?”. I can assure you I have been asked that many times. And my stock answer was “If you have to ask, you can’t afford me.” As a consequence, my bank clientele shrank and bank assignments were pretty much dead by the middle of 2015, when one of the last of the “old time” banks sold here and I have not had an assignment from them since.

Appraising is an occupation where most of the appraisers do not start out fresh from college as appraisers. They have life experiences, or they sell real estate. After a few years, they then venture into appraising. Looking back at the pictures of class photos from my earliest classes in the early 90s, few people were under 30 and many were over 40, like me. I was 42 and my job as a geologist was fast disappearing. As I start my 30th year soon, you can see I am no spring chicken. Many of the older appraisers I started with are now gone, returned to room temperature or retired.  The average age of appraisers today is estimated at 62 years. Retirement age.

Some quit years ago, disgusted with the direction bank appraising was going. Sick of the pressure and tired of low fees, they opted to find other jobs. Some went back to selling real estate. Some opened a store, or, if you cannot beat them, join them. They took jobs with banks.

Since the beatings continue until morale improves, the regulators decided to make more education mandatory. You needed a degree. You had to pass tougher tests and take more ‘qualifying’ education. Appraisers were hamstrung with more regulations from the lenders. By 2011 with new regulations and D-F legislation, almost all trainees were either starved out of the business or no longer qualified to even sit for the test to become an appraiser. They left the industry right and left.

Fannie Mae, bless their little tiny heart, created all sorts of landmines in the form of complex codes in reports that they can data mine and use for their own valuations. Not only that but those codes are read by computers which spit back automated requests for additional commentary which very often is actually there in the addendum of the report. So the appraiser who got $300 in 1994 and $350 in 2005 was not being paid $290 less a fee for downloading to a portal that costs from $10-25 off the invoice in 2015. Then they suffered hours of explaining that it was in the report already. RTFR…was the common response. Read the ****ing Report.

Dodd-Frank created its own joke in the form of something called “Customary and Reasonable fees” or C & R for short. It was supposed to protect the appraiser from pressure to do reports on the cheap. It was a lie. When Louisiana tried to enforce it, the Federal Trade Commission pounced upon them as an “unfair trade practice”. Appraisers were price fixing for asking a reasonable fee for their services.

As appraisers fled the field in 2008 and afterwards, a few had to stay. If you were over 55, your chance of even finding a clerking job in the 7-11 was bleak, even if you could stay on your feet for 8 hours. Those appraisers are now pushing 70 from one direction or the other. And many sought and have succeeded in developing work that comes through trust managers, CPAs, tax attorneys, and estate trustees. Bank work was few and far between and readily rejected if the fee was not sufficient. Many finally got old enough to retire and promptly quit the business even with state boards begging them to stay on and train a replacement. Trainees are a pain under any circumstance but with all the legal liability that goes with them, what retiree wanted to have that hanging over their heads for years waiting for the statutes of limitations to expire.

The banks blithely continued on until a round of falling interest rates led to a shortage of appraisers in places like Denver, Seattle, and other rapidly growing towns. Suddenly the whip hand changed and a very few appraisers simply doubled their fees or even quadrupled them. Simple houses cost $1,100 to appraise. Borrowers were outraged. Banks were outraged. But appraisers responded. You created this system and now when it blows up, what do you do? Where are all those newbies you exploited over the years?

Respond they did. After creating additional education requirements for trainees, the Appraisal Foundation’s qualifications arm relented and reduced that as well as the hours. Supervisors were required to take a class to train someone however, and still very few takers. No one wants a trainee. They just want to get to a point to retire then send their license back and tell them where to stick it.

Now the banks need appraisers in a pandemic. Masses of people need to refinance, take out home equity loans to make up for lost wages, and there will be a number of homeowners unable to pay their mortgage and will lose their home, or sell to get out from under the burden. So where will the appraisers come from? Do you think I care?

I have a few local bank clients who want and expect a good appraisal without the form monkey reports produced for FHA and Fannie Mae. I really don’t want more of them as I have a number of “frequent flyers” in the estate and private appraisal business. They are my bread and butter. I’ve turned down work several times this month. And as the old saying goes, “A lack of planning on your part does not constitute a crisis upon my part.”

The banks and regulators created the shortage of new blood in the industry. So they are getting exactly what they asked for. The appraisers today are not gullible. And no, everything is not forgiven. I hate the banking industry for what they did to America with CDOs and MBSs and frankly I think the big bankers all ought to be in jail.