AppraiserLoft, an innovative and technology-focused appraisal management company, is now the premier and preferred appraisal management firm for TeraVendo, Inc., a leading loan origination software company. TeraVendo’s addition of a portal to AppraiserLoft in their popular loan origination software, LoanAce®, vastly improves and expedites productivity for loan originators, mortgage brokers, and loan professionals across the nation.
San Diego, CA (PRWEB) August 22, 2008 — AppraiserLoft, an innovative and technology-focused appraisal management company, is now the premier and preferred appraisal management firm for TeraVendo, Inc., a leading loan origination software company. TeraVendo’s addition of a portal to AppraiserLoft in their popular loan origination software, LoanAce®, vastly improves and expedites productivity for loan originators, mortgage brokers, and loan professionals across the nation.
AppraiserLoft’s online appraisal ordering platform allows users to order appraisals within minutes, providing immediate options for payment, and the ability to track the status of any appraisal order 24 hours a day. AppraiserLoft’s network of over 5,000 certified appraisers guarantees 72-hour appraisal processing in all 50 states across the nation.
Aman Makkar, founder and CEO of AppraiserLoft, is excited to partner with TeraVendo as LoanAce’s preferred appraisal management company. “As the premier online appraisal partner for LoanAce software, our online appraisal software will be even more accessible to the mortgage industry. We look forward to providing our services to LoanAce users and further enhancing LoanAce’s capabilities.”
TeraVendo launched LoanAce, the industry’s first free loan origination software, on August 1, 2006. Since that time, LoanAce’s user base has grown to over 3,000 companies and has quickly become a model of efficiency and cost savings in the mortgage industry. Their loan origination software is favored among loan originators and brokers because of its ease of use and fully integrated design, featuring the capability of its EZorder feature to order integrated credit reports, titles, appraisals, hazard insurance policies and leads. Another LoanAce feature, TEAM™, allows follow up on the loan process and its status in real time. LoanAce loan origination software, offered at no charge, is now greatly enhanced by the addition of an exclusive portal to AppraiserLoft.
Ariel Fleming, Managing Director of TeraVendo, states, “Our mission with LoanAce has always been to make the time-consuming process of loan origination flow more efficiently and expeditiously. The inclusion of AppraiserLoft’s services to our software significantly increases that efficiency.”
Because AppraiserLoft and LoanAce both operate via easy-to-use technology, their integration capabilities will attractively enhance the services they provide to mortgage brokers and loan originators. The joint venture is an opportunity for AppraiserLoft to experience even more growth and visibility as it strives to provide the highest level of customer service in the appraisal industry. The cooperative gateway between loan origination software and appraisal management is continued evidence of their organizations’ dedication to streamlining the loan origination process from inception to completion. Both companies pledge to continue their efforts to expedite the process and provide the highest quality professional services available to the mortgage industry.
About AppraiserLoft:
The Company was founded in 2006 by Aman Makkar, an entrepreneur passionate about the real estate and mortgage finance industries. AppraiserLoft is a leading provider of comprehensive collateral valuation products targeted towards the mortgage lending, servicing, and insurance industries. With coast to coast coverage, AppraiserLoft appraisers bring intimate knowledge of local markets and trends to meet all their clients’ needs.
AP IMPACT: Toothless rules, bumbling regulators cripple oversight of real estate appraisers
CHARLOTTE, N.C. (AP) — As soaring home prices set the stage for America’s great housing meltdown, a critical step in making sure those home sales were a fair deal — the real estate appraisal — was undermined from within.
After the nation’s last major banking disaster, Congress set up a system to catch rogue appraisers. Their game: inflating the value of homes at the direction of equally unscrupulous real estate agents and mortgage brokers, whose commissions are determined by the size of the deals.
But a six-month Associated Press investigation found that the system is crippled by both the bumbling of its policemen and their inability to effectively punish those caught committing fraud.
And despite ample evidence appraisers are pressured into inflating home values — sometimes to prices in support of loans that are more than buyers can afford — the federal regulators charged with protecting consumers have thus far made a conscious choice not to act.
“The system is completely broken,” Marc Weinberg, the former acting director at the federal agency charged with monitoring the appraisal industry, told the AP before he retired earlier this year. “It’s amazing that the system ever worked at all.”
The AP conducted dozens of interviews and reviewed thousands of state and federal documents, and found:
– Since 2005, at the height of the housing boom, more than two dozen states and U.S. territories have violated federal rules by failing to investigate and resolve complaints about appraisers within a year. Some complaints sat uninvestigated for as long as four years. As a result, hundreds of appraisers accused of wrongdoing remained in business.
– The only tool federal regulators have to force states into compliance is so draconian — it would effectively halt all mortgage lending in a state — that it has never been used.
– Both state appraisal boards and the federal agency charged with overseeing them are chronically understaffed, many with only one full-time investigator to handle the hundreds of complaints that arrive each year. Some don’t even have an investigator.
“The appraisal reforms of the late 1980s were good reforms,” said Susan Wachter, a real estate professor at the University of Pennsylvania’s Wharton School of Business. “But they were not sufficient to prevent what we have seen … because regulation without teeth is not regulation.”
To be sure, there are many causes of the housing crisis — lenders who allowed people with spotty credit to buy homes with little or no money down, mortgage brokers who focused on selling loans without regard to the borrowers’ ability to repay, investment bankers who bought and sold risky mortgage-backed securities. A few of the worst offenders — appraisers included — have been put behind bars.
But experts and industry insiders, including appraisers who feel betrayed by colleagues who don’t follow the rules, believe the failure to effectively monitor the real estate appraisal industry contributed to housing’s collapse.
There is no doubt, Wachter said, “that fraud has increased and appraisal fraud has increased in a way to exacerbate the problems.”
This is the way the system is supposed to work:
Typically, an appraiser receives an order from a real estate agent, lender or mortgage broker to inspect a property. Based on a physical inspection of the home and comparable sales in the area, they develop an estimated value for the property. That figure is used by banks to set the home’s value as collateral for the mortgage loan.
Appraisers are supposed to come up with a value free of any outside pressure. But more than three dozen appraisers nationwide interviewed by the AP said they often felt pushed by a real estate agent or mortgage broker to fraudulently inflate a property’s value. They supplied the AP with documents from lenders asking them to “hit a number.”
“The higher the loan amount, the more money brokers and lenders make in the deal,” said Ray Haynes, an appraiser from Cherryville, N.C. “And they threaten you. They say, ‘If you don’t play ball with us, we’ll go somewhere else.’ And they do. I’ve seen my business shrink. They’re all doing it. It’s hard to stay honest.”
Documents obtained by the AP also show that hundreds of appraisers complained to federal and state agencies about such fraudulent inflation of property values.
The appraisal system has broken down before. In 1989, Congress concluded that “faulty and fraudulent appraisals were an important contributor to the losses that the federal government suffered during the saving and loan crisis.” And it passed the Financial Institutions Reform, Recovery and Enforcement Act.
Under the law’s reforms, a private group known as the Appraisal Foundation wrote the rules governing appraisers. The law also recommended that states begin licensing appraisers and disciplining those who break the rules.
A federal agency called the Appraisal Subcommittee, an independent federal agency that answers to Congress, would conduct field reviews and audits, and maintain a national registry of appraisers — including dossiers on those who break the rules.
But problems plagued the system from the start. It took years for some states to set up the independent review boards to supervise appraisers or hire personnel to investigate complaints. Even today, eight states still do not require appraisers to obtain a license or certification.
“We got to this point by a lack of enforcement. … The public has the right to expect the appraisal boards are taking care of that problem,” said Bob Ipock, an appraiser from Gastonia, N.C., who is a critic of the current system. “And they are not. They’re looking the other way.”
The Appraisal Subcommittee is supposed to help states remove from the system those appraisers who agree to “hit a number.” But it has only four employees to conduct field reviews and audits of 50 states and four U.S. territories, and hasn’t even had a permanent director since the agency’s former chief retired at the end of last year.
Following Weinberg’s subsequent departure in February as acting director, none of the agency’s current employees — including interim director Vicki Ledbetter — returned more than a dozen messages left by the AP over a period of several months seeking comment.
When the agency does find a state failing to follow the law, the only tool available to force compliance is a death sentence known as “non-recognition” — a penalty that would ban all appraisers in that state from handling deals involving a federal agency.
“Do you know what that would have meant? The net effect is it would have effectively shut down mortgage lending in that state,” former subcommittee director Ben Henson, who retired in December, told the AP. “To take that action would have been an unbelievable disruption to the economy. I wasn’t going to do that.”
When field reviews began in the 1990s, states were repeatedly warned they were failing to comply with the law — warnings that continue to this day. But without the ability to issue fines or impose a less destructive punishment, the Appraisal Subcommittee is powerless. It has never taken any action against a state for not obeying the law.
“Either you shut it off completely in a state, or you just send letters,” said Gary Taylor, an appraiser from New York who sits on the Appraisal Foundation board that writes qualification guidelines. “The threat of the atomic bomb is the only thing.”
And so, the violations stack up year after year, largely without consequence.
In the last three years alone, as the nation’s housing market went from boom to bust, 27 states or territories failed to investigate and resolve complaints within a year. In Washington, D.C., the agency found last August that 32 of the district’s 35 pending cases were older than two years. In Florida, almost 50 percent of 169 cases older than a year concerned appraisers involved in “fraud and flipping.”
Faced with such backlogs, some states just give up. In New Hampshire, the state appraisal board decided in July 2006 to close all outstanding files dating to 2002 — some of which included allegation of fraud — because they “were too old to investigate.”
In Ohio, the Appraisal Subcommittee found in 2005 that 40 percent of the state’s 199 outstanding cases were older than a year, many older than two. To help clear the backlog, Ohio began allowing appraisers to sign consent orders — a deal similar to a plea bargain in which an appraiser agrees to the facts of a case in exchange for a reduced punishment. That could be a short-term suspension, for example, instead of a license revocation.
In 2006, 11 appraisers signed such consent orders in Ohio. That figure swelled to 148 the following year.
“They know they can keep doing what they’re doing because they can get away with it,” said Carl Schneider, an appraiser who serves on the Oklahoma appraisal board’s disciplinary procedures committee. “They’re not getting punished. And states aren’t doing more because they know regulators won’t do a thing.”
By law, the Appraisal Subcommittee must maintain a registry of appraisers that includes a disciplinary history. But a disciplinary action stays on the Web site only as long as it’s current — once the suspension is over, the action is removed, making it appear as if the appraiser has never been in trouble.
The flaws in the system also allow appraisers to stay in business while complaints against them are under investigation. North Carolina appraiser Jerry Gooden had eight complaints filed against him between 2001 and 2003, all related to a trainee who performed dozens of appraisals under his supervision and later pleaded guilty to mortgage fraud.
All the while, Gooden remained listed in good standing on the Appraisal Subcommittee’s Web registry of appraisers. His license was suspended in 2005 for nine months because of the complaints. But even today, his entry shows he’s never been disciplined. When contacted recently by telephone, Gooden said he was busy and didn’t have time to talk.
When Illinois appraiser Donald Martin wrote to the Appraisal Subcommittee in December 2000, he told of how lenders, mortgage brokers and real estate agents withheld business from appraisers who refused to inflate values, guarantee a predetermined value or ignore deficiencies in a property.
Honest appraisers, he wrote, were blacklisted in favor of those with a “rubber stamp.” He begged the agency to take action.
But as it would say in response to nearly a dozen such letters, the subcommittee answered that it didn’t have the statutory authority to investigate such complaints. It promised to forward the complaint to the appropriate federal agencies, such as the Federal Reserve, which could have acted out of concerns for the health of the appraisal industry.
There is no evidence that ever happened.
“They just blew me off,” Martin said. “I wasn’t alone. We had appraisers from all over the nation writing in and urging them to take action.”
That same month, subcommittee board member Thomas Watson Jr. — then the national bank examiner at the federal Office of the Comptroller of the Currency — did propose action. In a letter to appraiser groups and banking regulators, he called a meeting to discuss concerns “resulting from inappropriate pressure being placed on real estate property appraisers to ‘hit a certain value.’”
Henson, the subcommittee’s director at the time, attended the meeting and remembers hearing story after story about appraisers being pressured. But he called the information “mostly anecdotal,” never forwarded the information to the full board and never followed up to see if any federal regulator looked into the complaints.
“People who say we should have done more don’t understand how the system works,” Henson said. “Agencies just don’t lobby to change things. We had no interest in doing anything like that. It just wasn’t our area.”
The American Society of Appraisers formally asked the Appraisal Subcommittee to act in January 2001, noting the agency was in a “good position to work with bank regulators and others on the problem.” Again, the agency responded by saying it did not have the authority to examine the issue.
“It didn’t surprise me they didn’t do anything,” said Richard Amoling, the society’s former president. “Everything related to the issue went into a black hole. Why, I just don’t know.”
Weinberg, who worked at the Securities and Exchange Commission before he was hired as the Appraisal Subcommittee’s attorney in 1991, said the agency could have pushed more.
“I tried to push, but nobody wanted to hear what I was saying,” he said.
That included Congress. When serving as president of a national appraisers trade association in June 2004, Taylor — the Appraisal Foundation committee member — told a House subcommittee field hearing that “problem appraisals are being allowed, and in some ways even encouraged, by a regulatory structure that promotes lax enforcement and ineffective oversight.”
Taylor, president of Rogers & Taylor Appraisers Inc. in Hauppauge, N.Y., pleaded for help: “We are here to alert Congress that the licensing system it created for appraisers is broken … and needs to be fixed.” It wasn’t.
Records obtained by the AP also show that complaints about individual appraisers filed at the state level are left unresolved for months — and often for years — but for a different reason: Many states have only one full-time inspector. Some appraisal boards also are rolled into bigger regulatory agencies, where inspectors with little or no experience are assigned to investigate complaints.
“I think the design of the system is excellent,” said Philip Humphries, the current director of the North Carolina Appraisal Board. “But states don’t have the money to hire personnel to carry out what the system was designed to do.”
Henson said most of the complaints are frivolous, involving consumers upset because an appraiser “may have been rude or said my house wasn’t worth as much as I thought.” He said few of the complaints have anything to do with inflated appraisals. “That was just not a problem,” he said.
Filed complaints are considered private and are not open to public inspection. But consent orders are public, and the AP’s investigation found that Henson’s assessment that most complaints are frivolous is simply wrong. In North Carolina, for example, of the more than 300 consent orders filed since 1994, 65 percent involved mistakes that inflated a home’s value.
Even when states do investigate and find problems, rogue appraisers are rarely disciplined. Since 1994, only 13 appraisers — there are currently about 3,500 licenesed appraisers in the state — have had their licenses taken away by North Carolina’s appraisal board. During the same period, California, the nation’s most populous state, revoked 89 licenses; Tennessee, West Virginia and Wyoming did not revoke any, according to Appraisal Subcommittee records.
Violators are usually only reprimanded or, if their licenses are suspended, the suspension often is reduced if they agree to take remedial education classes.
Since 1994, consumers have filed 23 complaints against Richard Chapman, an appraiser from Emerald Isle, N.C. His license was suspended for five years in a case in which he was accused of submitting appraisals with “misleading information” and “inaccurate data.” Since his license was reinstated in 2000, 11 new complaints have arrived.
“Just because you’re disciplined, that doesn’t make you a bad appraiser,” said Chapman, who estimated he’s been involved in 80,000 appraisals since 1980 and trained about 60 appraisers. “I may have done some technical things wrong, but I’ve done a good job. I’m proud of my work.”
The North Carolina board dismissed two of the 11 recent complaints outright, while two others were dismissed with warnings to be more careful. Six were dismissed on the condition that Chapman complete appraiser education classes, and he was reprimanded for one complaint.
“There no habitual felon law for appraisers,” said board attorney Roberta Ouellette, defending the agency’s action. “Why should he get super-zapped for doing a lot of little things that a lot of other appraisers are doing every day but haven’t had complaints turned in on them?”
The failings of the appraisal regulatory system and its impact on the nation’s housing market led Andrew Cuomo, the New York attorney general, to reach a deal in March with Fannie Mae and Freddie Mac, which purchase mortgages from other financial institutions.
Cuomo’s deal requires Fannie Mae and Freddie Mac to buy mortgages only from lenders who use independent appraisers. The new rules also prevent lenders who want to sell loans to Fannie Mae or Freddie Mac from using in-house appraisers to do the first evaluation.
The agreement, which will take effect in 2009, will create a watchdog to monitor the appraisal business: Fannie Mae and Freddie Mac will spend $24 million to create the Independent Valuation Protection Institute, which will accept complaints from consumers and appraisers. It will also monitor the enforcement and report to Cuomo’s office.
But such a system duplicates the regulations already in place, including the same lack of enforcement tools that led the existing system to failure. And it’s already under fire. John Dugan, the U.S. comptroller of the currency, wants the deal scrapped, arguing it would increase the cost of home loans for borrowers without strengthening consumer protections.
Cuomo didn’t return repeated requests for comment. But Taylor, the Appraiser Foundation board member who asked Congress for action in 2004, doesn’t see much hope for his success.
“There has to be effective enforcement of some sort. There has to be reality to it,” Taylor said. “What are you going to do if there is pressure on appraisers? How are you going to penalize someone who puts that pressure on appraisers? Who’s going to do it? Who’s going to enforce it? They need to have that or it won’t work.”
By Mitch Weiss, Associated Press Writer
(article from Associated Press)
link: http://biz.yahoo.com/ap/080817/mortgage_mess_appraisers.html
This is a comment submitted from an appraiser in our national approved panel. Please feel free to comment and discuss.
AppraiserLoft.com Team
_____
We all understand that declining markets are a major concern to the general community. What is the best formula for the appraiser to make a time adjustment in the market?
This is how our firm handles the issue. If anyone has a better formula, please share.
We compile all sales from a specific market area for the last 12 months and total the sales prices, then compile the previous 12 months.
We then find the difference in total values from this time frame as a percentage. This is the average drop in price between the two years.
Now, utilizing any particular applied sale, multiply the sales price by this figure and divide by 12 months.
This is the depreciated amount occurring per month, based on the historic trend in that market area.
To apply the time adjustment, we multiply this figure times the amount of months that have occurred from the appraisal inspection date, back to the date of comparables sale contract.
The sale contract date best represents price to be paid at the time of sale.
The questions I have is, how general or detailed should the data be? Full county area? School district? Immediate neighborhood? Just 2-stories?
What about the time frame. Should it be twelve month? Maybe six?
And, how MUCH data would be considered relevant?
This story is discussed in our office on a daily basis…
April 15, 2008 - WASHINGTON - U.S. Senator Mel Martinez (R-FL) today joined with Senator Bob Casey (D-PA) in introducing legislation to reform the appraisal process for home purchases and deter appraisal fraud schemes. The Fair Value and Independent Appraisal Act is a move by Senator Martinez to continue his work towards reforming and strengthening oversight of the mortgage system.
“There are some truly bad actors out there posing as legitimate appraisers. The ripple effect has worsened the mortgage crisis,” said Senator Martinez, former Secretary of the U.S. Department of Housing and Urban Development. “There continue to be too many unchecked components in the appraisal process. This will protect both consumers and lenders by improving oversight and putting more checks in place.”
In cases of appraisal fraud, an appraiser and a mortgage broker work together to sell homes at higher prices than they are worth. An appraiser inflates the value of a property, which increase the size of the mortgage. While the unsuspecting homebuyer is stuck with an over-valued home and expensive mortgage, the scammers make out with more money from an inflated broker fee. These homeowners often end up in foreclosure and the lender is left with a worthless home.
“A disturbing byproduct of the increased rates of foreclosures is unscrupulous individuals trying to profit from other people’s losses,” said Senator Casey. “Stopping these flipping schemes will help give confidence to those buying homes that appraisals on their new homes are accurate and won’t come back to haunt them later.”
This legislation will:
Require a physical property visit and a second independent appraisal for any high-interest, high-risk mortgage offered for a property sold at a higher price within 180 days of its last purchase;
ensure appraiser independence by prohibiting interested parties from improperly influencing a property appraisal;
ensure that appraisers are qualified and follow certain minimum standards;
require a mortgage originator to make available to the credit applicant all appraisal valuation reports no later than three days prior to the transaction closing date;
and set increased civil penalties for violating these provisions ($10,000 for 1st violation; $20,000 for 2nd).
The Casey-Martinez bill contains many of the appraisal improvement provisions found in H.R. 3837, the Escrow, Appraisal, and Mortgage Servicing Improvements Act, by Chairman Kanjorski and Congresswoman Biggert, Ranking Member of the Financial Services Financial Institutions and Consumer Credit Subcommittee. Chairman Kanjorski has been the leading advocate in Congress for appraisal reform for many years.
In November, the U.S. House of Representatives passed H.R. 3915, the Mortgage Reform and Anti-Predatory Lending Act. With the help of Congresswoman Biggert, H.R. 3915 incorporated H.R. 3837 as an amendment on a unanimous voice vote. The similar appraisal reforms found in H.R. 3837 and the Casey-Martinez bill also respond to the mortgage lending problems that occurred several years ago in the Poconos, part of Chairman Kanjorski’s Congressional District.
As many of you may know, Fannie Mae and Freddie Mac have initiated monumental changes in the appraisal ordering process. Below is the article from the Wall Street Journal.Please feel free to contact us for more information on how this change might affect you or your organization. We can be reached at 877.229.7799.
Article:
Fannie Mae, Freddie Mac Agree
To Loans That Meet New Standards
By CHAD BRAY March 3, 2008 1:13 p.m.
Fannie Mae and Freddie Mac reached an agreement with New York Attorney General Andrew Cuomo to only purchase loans that meet new standards designed to ensure independent, reliable appraisals.
Included would be no longer buying mortgages in which the brokers selected appraisers or when lenders used “in-house” staff appraisers or appraisal-management companies they own or control.
Mr. Cuomo said the mortgage giants also have agreed to create an independent organization to implement and monitor the new appraisal standards to be funded with $24 million from Fannie and Freddie, while their regulator — the Office of Federal Housing Enterprise Oversight — also has agreed to the creation of the independent institute to be called the Independent Valuation Protection Institute. The institute will report to the attorney general’s office and OFHEO on a bi-annual basis. (See the full text of the Code of Conduct.)
The moves come amid wide sentiment that inflated appraisals have been an important contributor to the mortgage crisis. Appraisals, generally required by lenders before making home loans, are supposed to ensure that the lender has an authoritative estimate of the property’s value. An inflated appraisal can cause lenders to advance more money than a house is worth, exposing both lender and borrower to losses, especially when home prices fall.
Fannie and Freddie buy roughly 60% of all home loans originated in the U.S. and repackage them into bonds they guarantee, freeing up funds for further mortgage lending.
“With this agreement, Fannie Mae and Freddie Mac have become leaders in transforming the mortgage industry,” Mr. Cuomo said in a statement Monday. “Now national banks have a clear choice: Immediately adopt the new code and clean up appraisal fraud in the mortgage industry or stop doing business with Fannie Mae and Freddie Mac - it is that simple.”
Howard Glaser, a mortgage-industry consultant who was a senior housing official in the Clinton administration, said, “The restoration of certainty in home valuation will help restore borrower and investor confidence, which is what the mortgage market needs most right now.”
OFHEO Director James B. Lockhart said the agreements “should help restore confidence in the mortgage market by enhancing underwriting practices, reducing mortgage fraud and making home valuations more reliable.”
Mr. Cuomo’s announcement comes after his office subpoenaed Fannie and Freddie last fall for information on loans they had obtained from Washington Mutual Inc. Shortly thereafter, the companies agreed to appoint independent examiners to look at whether they had done enough to protect mortgage investors from the risks of inflated home appraisals.
Washington Mutual — which Mr. Cuomo didn’t pursue in civil litigation because it’s a chartered federal financial institution — has said it was cooperating with subsequent investigations by federal regulators into whether the company had made or improperly accounted for loans based on inflated appraisals. The company has told The Wall Street Journal that “there has been no systematic effort by WaMu to inflate home appraisals.”
Mr. Cuomo, a former housing and urban development secretary, began a probe last year into the appraisal business, which culminated in a lawsuit against the appraisal unit of First American Corp. The suit claimed the company had submitted to pressure by Washington Mutual to make sure appraisals were high enough to justify the bank’s loans. First American has denied the charges and has moved to dismiss the suit, which is pending in U.S. District Court in Manhattan.
“We believe that the appraisals were often fraudulent because there were conflicts of interest and pressures on the appraisers,” Mr. Cuomo said at a press conference Monday, referring to the alleged improper activity his probe uncovered. He said the year-old investigation — which is still ongoing — has looked into dozens of banks and resulted in the issuance of hundreds of subpoenas. He said Monday’s announcement is the only agreement his office was close to signing in the matter and declined to discuss whether agreements with other lenders were in the works.
Regulator Checks Handling
Of Loans Possibly Based
On Inflated Valuations
Article from WSJ.com
By AMIR EFRATI December 21, 2007; Page A2
The Securities and Exchange Commission is investigating how retail bank Washington Mutual Inc. handled and reported on mortgage loans that may have been based on inflated home appraisals.
The SEC’s inquiry is in its infancy and involves several possible issues, including whether WaMu accurately disclosed to investors of mortgage-backed securities how its loans were appraised as well as whether the company properly accounted for its loans in financial disclosures to investors of the company, according to the people familiar with the situation.
Washington Mutual said in a statement: “We are voluntarily and fully cooperating with the SEC’s inquiry as well as the [Office of Thrift Supervision]” — WaMu’s federal regulator — “and look forward to bringing the facts to both the regulators and public.”
The WaMu inquiry comes on the heels of a lawsuit filed in November by New York state Attorney General Andrew Cuomo that didn’t name the bank as a defendant but alleged it exerted pressure on an appraisal company to inflate property valuations to ensure its loans went through.
WaMu said yesterday, “After spending a month and a half investigating these allegations, we can say with confidence that there has been no systematic effort by WaMu to inflate home appraisals. We take these allegations very seriously.”
Last month, Freddie Mac and Fannie Mae, which acquire mortgage loans from lenders and package many of them into securities for sale to investors, agreed to appoint independent examiners to look at whether they have done enough to protect investors from the risks of inflated home appraisals, particularly on WaMu loans.
WaMu, the country’s biggest savings and loan and one of the largest U.S. home-mortgage lenders, has been battered by the subprime-mortgage crisis this year. The company’s stock price is down 68% this year, and its home-loans unit had a loss of $348 million in the third quarter.
The suit filed by Mr. Cuomo, which alleged that the home-appraisal unit of First American Corp. compromised the independence of appraisers it hired, also claimed that WaMu hand-picked appraisers who brought in high valuations and said bank employees pressured the appraisal company, eAppraiseIT LLC, to increase estimates that came in too low.
According to the suit, eAppraiseIT’s president wrote in an email that it would “roll over” and submit to WaMu’s demands. Later, in an email, he wrote that he viewed the bank’s conduct as a violation of federal regulations, which prohibit infringing on the independence of appraisers.
First American denied the allegations and has moved to dismiss the suit, arguing that Mr. Cuomo can’t bring enforcement action in the area of mortgage-loan origination by federal savings and loans, which are overseen by the Office of Thrift Supervision. A court hearing on the matter has been set for February.
Lenders generally require appraisals before making home loans. The appraisal is supposed to ensure that the lender has an authoritative estimate of the property’s value. An inflated appraisal can cause lenders to advance more money than the house is worth, exposing both the lender and the borrower to losses, especially when home prices fall. Critics of the appraisal business have warned for years of growing pressure on appraisers to inflate home values. Appraisers are often hired by mortgage brokers or lender employees whose incomes are based at least partly on the number of loans they get approved.
As many of you may know by now, AppraiserLoft has a new Blog and News section on the website. We created this section to give you industry news as well as our company updates. This section is accessible from the home page, or by going to http://blog.appraiserloft.com. We will also send you an email every Tuesday with news updates that will link to complete stories on our website. (If you would like to opt out of the weekly email, you can do so by logging in to AppraiserLoft and going to the My Account section.)
In the coming week, we will also be releasing an Ask The Experts section where users will be able to ask detailed appraisal questions (not property specific) and get answers back from our expert appraisers from across the nation. For example, you can ask questions about the appraisal process, specifics parts of the form, what GLA means, etc.. Anything that you want to know (about appraisals), we’ll give you the answer! We’re excited to bring this to you and hope you find it helpful!
Appraisers are taught about the life cycles of a neighborhood, “growth, stability, decline and recovery”. This is the physical cycle of the neighborhood, not the real estate cycle. The real estate cycle is influenced by interest rates and the local economy, has an irregular pattern and generally last 3 to 6 years.
Unlike real estate or neighborhoods, housing demand doesn’t “cycle”, instead, it “contracts and expands” to meet the needs of the market. To understand housing, we need to examine the “collective market” (all housing types, single family, apartments, etc.), the economic, social, governmental and environmental forces acting upon it and also the “segmented market” for the specific property type (single family condo, land, etc.).
When supply and demand are out of balance, participants in the market often act in a manner that does not reflect the direction of the collective market.Price is what someone is willing to pay, while market value reflects a price that is justified and sustainable within the market, the collective judgment of the market and not the actions of speculative or uninformed buyers.
At the peak of the market and prior to, many homes were purchased at prices that were “not justified”, driven by speculators or uninformed buyers. Even though prices (and in theory values) have receded from the peak, perspective on the rise in values and price points over time is necessary for the client to identify and measure the risk associated with the property.
Simple in theory … more complex in practice.
In many markets, “housing problems” are not a result of “a lack of demand” but rather a shift in demand from “purchase” to short-term rental. This is the “market’s correction” in response to over-pricing. The housing market isn’t “over-supplied”, as much as it is over-priced.
The national economy is expanding, despite problems in housing. Population is increasing, as is employment. With an expanding economy, gains in employment and a growing population, there cannot be a “decline in housing demand; there can only be a shift in housing preference”. While the “for sale” market may be experiencing difficulty, other segments such as the “rentals” are faring better. Even in a declining market you can have neighborhoods or segmented price ranges that are outperforming the collective market.
FNMA and the 07-11 announcement … Where’s the beef?
FNMA 07-11 requires the appraiser and lender to determine and report the trends. Increasing, stable or declining aren’t defined, raising the questions, “what determines the trend and how is it measured?Is it a change in price over a short time period (3, 6 or 12 months) or the movement over the short real estate cycle? What signals a shift from decline to stable or increasing and how do appraisers support a change from one trend to the other?
It’s acceptable to select either the increasing, stable or declining box when data clearly supports such a trend, however in a fluctuating market it is critical for the appraiser to present perspective of the trend over a reasonable time period (short real estate cycle – 3 to 6 years) and to qualify the nature of the trend as primary or secondary.
Primary trends are longer-term, lasting years while short-term (secondary) trends can be caused by any sudden imbalance in the market (supply, demand, etc.). The primary trend may be showing a price increase over a 5 to 10 year period, while the short-term trend reflects a market correction (decline) due to excessive pricing, over-supply, etc.
How can this be analyzed and communicated to the client?
Graphing the SREC will provide the reader with a visual of historical price points, market peak and correction that reflects the overall price pattern of the market. For example, the trend analysis over 2000 -2007 is shown for new and resale housing in the Las Vegas, NV market.
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The primary trend for both new and resale housing is increasing over 7 years.
The market correction is apparent in the graph, showing both the 3 to 6 year trend (short real estate cycle) and the more recent correction.
While current prices (secondary trend) are below the market peak, they are still above 2000 - 2004 price-points.
Presenting both trends provides the client with perspective of the overall market. The client can see that homes acquired prior to 2004 have price points below the current decline and that purchases after 2004 have greater risk if the decline continues.
Both primary and secondary trends are important to gain perspective of the overall housing market, however the URAR is asking for neighborhood trends. While FNMA cited several trend information sources (Case-Shiller, NAR and OFHRO), it’s important to note that these are trends of the overall housing market in major metropolitan areas and do not reflect a specific neighborhood or segmented property type or price range.
About the author:Patrick Egger is a Certified General Appraiser located in Las Vegas, NV. He teaches continuing education classes on the housing market, appraisal issues for real estate agents and appraisers. He can be reached at lvreqa@cox.net
As house prices continue to stabilize in many of the nation’s housing markets, industry observers have expressed concerns about the predictive accuracy of automated valuation models (AVMs), particularly in areas where house prices are falling.
Critics have expressed concerns that some AVMs may overvalue properties in cooling markets because of ‘data lag,’ or the interval between when a sales transaction occurs and the model receives this information in its backend database. According to these detractors, outdated sales prices will result in higher value estimates that do not reflect current market realities.
Further complicating matters, there is a common misconception that AVMs struggle to ’see over the hill’ and are restricted to making linear adjustments to update prices and counteract data lag.
Finally, critics argue that sales concessions occur more frequently in declining markets, compromising sales data used by AVMs and increasing the probability of overvaluation.
This article will examine the validity of these claims as well as whether traditional appraisals are necessarily a better option in areas afflicted by depreciation.
AVMs calculate a property’s market value based partially on market information contained in public records. Several larger counties deliver this data through online distribution channels as soon as the transaction is recorded. However, this timeliness comes with a price; online data is usually more expensive than alternative sources and delivery methods. In other areas, AVMs receive this information monthly on a CD Rom. In counties where sales transactions occur less frequently, an AVM developer might receive data on a quarterly basis.
In general, AVMs have online access to current market intelligence in high frequency sale transaction areas. AVM vendors receive thousands of valuation requests every month; hence the extra cost of online data per order is negligible. On the other hand, appraisers do not have the scale to invest relatively significant amounts of money to acquire the most current data. In counties where vendors receive sales information on a monthly basis, appraisers and AVMs are on par in terms of access to current data.
Appraisers do have an advantage in those counties where data is reported quarterly; however, in these areas there are not many sale transactions in the first place.
Overall, AVMs actually have a slight advantage over appraisers in terms of access to current data. The time lag in the underlying data collection process in large markets is not usually more than a month. Although the time lag in low volume markets can be as high as 3 months, AVM developers remedy this problem in several ways to ensure valuation quality.Critics of AVMs frequently assume that these models can only compensate for data lag by making linear, time-based adjustments to bring older sales data up to date. In reality, the best AVMs also consider a number of macroeconomic variables when estimating a subject property’s market value. Even though real estate transacts in highly localized markets, regional and national factors still exert a meaningful influence on house prices.
For example, after real estate prices peaked in coastal CA, people who sold their properties moved inland; hence the prices in other parts of CA started to increase. After a while, this phenomenon spread to neighboring states like AZ and NV. What stopped the increase in real estate prices was the increase in interest rates, which affected homebuyers in every state.
AVM developers employ statisticians and econometricians who are experts in building sophisticated models to analyze the affects of local, regional and national factors on real estate prices. Few if any appraisers have the training and knowledge to identify these spatial autocorrelations in real estate prices; these advanced estimation methodologies are essential to accurately predicting the path of home prices.It is a misconception that AVMs cannot see over the hill and naively employ simple linear regression. On the contrary, AVMs use cutting edge analyses to see over the hill and beyond.
The last concern about the accuracy of AVMs is data related. In declining markets sales concessions are more common, potentially resulting in overvaluation. This is a serious issue not only for AVM developers but also for appraisers. However, vendors have access to vast quantities of data, sophisticated statistical software and enormous computing power. AVM developers can quickly and accurately analyze data and eliminate outliers as soon as a model receives an update.
Now that we have addressed several common misconceptions about AVM performance in declining markets, we will focus on how the housing downturn affects the accuracy of traditional appraisals.
Have you ever thought about why the number of transactions goes down and inventories go up in declining markets? There is a disconnect between market prices and actual listing prices. Homeowners and Realtors, the people who are supposed to have the ‘local knowledge,’ are slow to revise their asking prices downwards to reflect current market realities.
This has two consequences:
first, the number of sales transactions declines significantly;
second, some buyers (not many) will pay the inflated prices.
These buyers need mortgages to finance their purchases. This is where appraisers come into the picture. October Research surveyed 500 appraisers in 2003. Their survey indicated that 55 percent of respondents said they had experienced some form of inappropriate pressure by mortgage brokers to come up with ‘the right value’ to close the deal.
In 2007 they repeated the same survey with 1200 respondents. As expected, the picture got bleaker under current market conditions; 90 percent of the appraisers reported feeling pressured to restate, adjust or change values. Those appraisers who refused to give in to coercion also paid a steep price; 68 percent reported losing a client and 45 percent did not receive payment for their work.
These are widespread, unethical practices instigated by unscrupulous loan officers and mortgage brokers. In many quarters, automated valuation models are regarded as the most effective way for responsible lenders and investors to combat inflated property valuations. The inherent objectivity of AVM-based value estimates has prompted industry stakeholders to use these solutions extensively for quality control purposes.
Wholesale lenders frequently employ this technology to double-check the property values for loans coming through their pipelines, while investors rely on the batch-processing capabilities of AVMs to identify questionable appraisals. In situations where valuations are likely to be inflated, many lenders actually prefer an AVM’s valuations to traditional appraisals.
AVMs are econometric models that continue to evolve and become more accurate. They use innovative technology to overcome data problems and advanced statistics to estimate future path of home prices accurately. A careful analysis of AVM performance will reveal these tools’ ability to consistently follow market trends both in declining and increasing markets.
Still, although AVMs are a valid option in all market conditions, these models may not be suitable for all lending situations. Decision-makers should evaluate the different approaches to property valuation and identify which methods are appropriate given the risk in a particular transaction. Likewise, the accuracy of individual AVMs will vary by property type, price tier and geographic area; lenders must consider each model’s unique strengths and weaknesses to determine which AVMs match their business objectives and tolerance for risk.
AUTHOR: James A. Kirchmeyer, CMO - Real Info, A division of Zaio, Inc., 40 Gardenville Pkwy, Ste 100, Buffalo, NY 14224. Email: mailto:jakirch@real-info.com
Two weeks ago, The First American Corp. was sued in New York for allegedly colluding with Washington Mutual to inflate appraisals. Now, four law firms are investigating the company for potential violations of the Employee Retirement Income Security Act of 1974 (ERISA).The investigation focuses on investments in First American stock by the First American Corp. 401(K) Savings Plan. The four firms pursuing possible litigation include Milberg Weiss LLP, Keller Rohrback LLC, Kahn Gauthier Swick LLC and Brower Piven.
In response to the investigations, First American issued a statement to The Title Report that said it “believes the plan has been appropriately administered.”
The law firms said a breach may have occurred if the fiduciaries failed to manage the assets of the plan prudently and loyally by investing the assets in company stock when it was no longer a prudent investment for participants’ retirement savings.
Kahn Gauthier Swick said First American employees’ 401(K) accounts may have been weighted too heavily with First American stock.
“These accounts may have been overly invested in First American stock during the time First American shares declined significantly in value, thereby resulting in excessive losses for First American employees,” the law firm alleged.
Lawsuits over company 401(k) plans are a common tactic of firms such as Milberg Weiss, which sue companies after big drops in their stock or other problems.
The investigation relates to certain facts alleged in the lawsuit field Nov. 1 by New York Attorney General Andrew Cuomo against First American and its subsidiary, eAppraiseIT.
The suit alleges that First American violated federal and state laws by conspiring with Washington Mutual to inflate real estate appraisals.
“Disturbingly, evidence collected by the attorney general, including internal e-mails, are alleged to show that eAppraiseIT executives knew that their scheme was illegal,” Milberg said in a statement.
First American has vehemently denied the charges, saying the attorney general’s allegations are based on a handful of e-mails that were taken out of context and mischaracterized and provided an incomplete review of the facts.
“The program called into question today by the attorney general has been vetted and approved by the federal regulator responsible for oversight of such programs,” First American said. “We welcome the opportunity to now present all the facts before an impartial third party. In that presentation, we will demonstrate the appropriateness of our appraisal practices in the state of New York and we will vigorously defend the reputation of Washington Mutual and the reputation we have labored more than 100 years to build.”
Cuomo’s lawsuit did not target Washington Mutual, however, the largest U.S. thrift, was sued last week by investors claiming the bank sought to inflate real-estate appraisals. New York-based law firm Wolf Popper and San Diego-based Coughlin Stoia Geller Rudman & Robbins said in statements they had filed lawsuits alleging WaMu’s results were boosted by such alleged practices.
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