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Lenders Gain Power and Critics in Appraisal Shift August 19, 2009

Posted by John Watch in News Feed.
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Reports from NY Times and WSJ have been released over the past few days regarding the appraisal industry in real estate and the impact that Lenders have had. While appraisers are responsible for upholding the truth in the industry, their payback is undercut by less experienced appraisers viewing property data who are more willing to meet the desired prices of Appraisal Managment Companies. The following commentary is response to these recent articles.

Well written article representing various viewpoints that can be better summed up with the phrase “Been there, done that!”  Several commentators referred to FIRREA XI.  This law and corresponding regulations were created as a result of the S & L crisis of the 1980’s.  This is twenty years ago folks, so the under 40 crowd were not out of college back then.  As a matter of fact, most of those in control of critical decisions regarding the current crisis may not have even been in the business back then to even understand the scope of FIRREA.

During the early 1990’s, appraisers feared the phrase FIRREA; regulators enforced it and financial institutions accepted it as a course of doing business.  The professional and ethical real estate agents and mortgage brokers learned how to work with it and eventually embraced it.  Then “Been there, done that!” took a new turn called Greed.

Financial institutions needed to offer more cost effective solutions to keep lending and making money.  Did we all forget that financial institutions only make money if they lend? And the spread of what banks pay depositors must be covered with the rate earned through lending. 

Bad appraisers exist.  Just like there are bad mortgage brokers, bad bankers, bad lenders, etc.  But here is where the core issue lies, and it comes in two components (using a $200,000 purchase or refinance to demonstrate the point):

  1. The appraiser at best earns $400 to $500 to inform the lending institution if the loan being made has the correct collateral.  The appraiser is legally responsible for the value, and must carry Errors and Omissions insurance.  The appraiser can lose their license and be subject to criminal charges if the appraisal is fabricated or wrong through the omission of property data.

The Real Estate Agent earns a 4% to 5% fee on the $200,000 sale. This totals $8,000 to $10,000, and most real estate agents sell 5 to 8 homes per year.  Not a bad living, but not great either.

The mortgage broker earns between 1% and 2%, let’s say $2,000 to $4,000.  The broker averages about 25 to 30 mortgages per year.  Again, not a bad living.

he bank makes 1% to 2% in points and fees.  Again, not bad when over 8 million mortgages are done annually.

In every aspect of the deal, all parties except the appraiser make well over $2,000 per deal.  The appraiser makes $400.  And yes, the consumer is paying the $4,000 in banking fees as well as the appraisal fee.  But who is responsible for the Value of the Asset? Who is responsible for telling the truth? The Appraiser and their compensation is a joke compared to the others.  The appraiser is the only one without a vested financial interest.  I do not think we need to give this much further thought other than this; someone needs to be the fall guy for this. And for the last 30 years the appraiser stands up like a perfect punching bag. The individual appraiser is their own worst enemy.  Instead of organizing to fight for their rights, appraisers succumb to greed and selfishness and have failed. But then again, comparing a $400 fee to a $4,000 fee clearly shows who has the motivation and financial resources to organize.

  2.   Current Laws:  The article states clearly that the over site board exists on paper, but not in reality.  How true this is for many states in the country.  FIRREA provided that individual State Boards be created to regulate the appraisal industry at the State level, not Federal level.  Investigation of these Boards and the actions taken over the past five years would be of great interest.  In New York, the Board is a paper Tiger, and how ironic is it that the AG from New York pushes for Federal change and does not even clean up his own back yard.

As one senior bank executive once stated:  “You are an appraiser, not the policeman of the Industry”. If appraisers don’t police, then who will?  Where are the policemen for the Appraisal Industry, Mortgage Brokers and Bankers?  What is the AG for New York and every other state doing to assist in providing real solutions, not just political headlines? New laws are being creating without the enforcing of previous ones.

We need to prosecute fraud and set examples so that no matter what happens, the fear of jail far outweighs the fear of doing an appraisal assignment for $200. 

As far as the AMC’s go, you get what you pay for!  What excuse will they have when more bad appraisals continue to occur under their direct control?  Oh yeah, one new law that exempts them from any wrong doing because they are just Management companies, not the actual appraiser. 

Only in America!

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1. New Mortgage Info » Blog Archive » Lenders Gain Power and Critics in Appraisal Shift « AccuriZ - September 5, 2009

[…] John Watch wrote an interesting post today onLenders Gain Power and Critics in Appraisal Shift « AccuriZHere’s a quick excerpt […]

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