Reese's Observed Conditions

When does it end? …….When does it start? | May 11, 2011

If you are like me, you read and hear a constant barrage of what’s happening in the local and national economy.  For the last several years it hasn’t been very good news. Like most, if not all professions, appraisers have been impacted by changes wrought from the recent past and current economic climate. It continues to happen with what seems all too much frequency. I’ll give you a few examples.

 When does it end?

When the market/real estate market took the initial turn downward, probably sometime in late 2007 to early 2008, but officially in about 3rd quarter 2008, the impact to appraisers was pretty fast.  Lending to commercial real estate investors all but stopped….so real slowdown in lender appraisal work. 

Attorney General of New York, Andrew Cuomo, back in 2007 and even perhaps a little before that, started looking at the issue of appraiser independence. There is a well known ethical standard within the appraisal community that appraiser independence needs to be maintained at all times. Unfortunately, in too many instances prior to the market downturn, there was pressure to either come forward with a prescribed value or condition statements or other conclusions in the appraisal which were marginally, or not at all supportable.  It became a real pain to field calls from loan agents asking appraisers to push the value so they could make the deal! It took determination on the part of the appraiser to stand his of her ground and say NO! I’m sure I lost some lender appraisal work during that time as a result of maintaining my appraisal independence.

The result was the HVCC (Home Valuation Code of Conduct) which died a timely death in early 2010.  We are still left with AMCs (appraisal management companies) that were created in an effort to cut the communication links between lender loan originators and appraisers. These middle management type firms work for major, larger lenders to fee out appraisals to a fee panel of approved appraisers.  Granted, these mostly impact residential appraisers, but there are many AMCs that fee out commercial appraisal work as well.  The fees are often lower than paid by other users of appraisal services and the turnaround time required is often very short.  Sometimes the only appraisers willing to work under these conditions are from other areas and unfamiliar with the locale where their subject property is located. This sets up a whole new bunch of problems relative to area knowledge competency…….and the list goes on!  Wonder how come so many experienced appraisers shy away from AMCs? Wonder no more.

The following was announced in 4th quarter 2010:

” Federal Reserve Board Announces Appraisal IndependenceRequirements

On October 18, 2010, the Federal Reserve Board released an interim final rule on appraiser independence. The interim final rule is required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Public Law 111-203). In their release, the Fed states that the purpose is to “protect the integrity of the appraisal process when a consumer’s home is securing the loan.” The interim final rule covers a host of appraiser independence issues, including reasonable and customary fees. Comments on the rule will be due 60 days after publication in the Federal Register, which is expected shortly. Compliance to the rule will be mandatory as of April 1, 2011.”

This was supposed to elevate fees from unreasonable to reasonable, but the jury is still out on whether or not this will be true.   Seems to me, as long as there is a middle-man in the process that has to be paid, the provider of the service is giving up some of the potential profit in the transaction.  There is also the question of oversight as in who reviews the work done by the fee panel appraiser for quality control? Lots of kinks to work out to make this process work the way it should.

Bottom line is that there is less lender work for appraisers due to the more stringent lending guidelines now in place, the lack of qualified borrowers who meet the new guidelines and the closed fee panel lists of AMCs, if you really want to work for them.

None of these has been particularly good for the business of appraising from this appraiser’s point of view.  Lower fees, faster turn-around and less oversight, all in a market where comparables are scarce and motivations of the parties to the transactions questionable – REO, Quick Sale, or Market Rate transaction – making the development of a credible appraisal product harder than ever! Oh, if only all appraisers had maintained their independence!  Our work world may be a different place today.

 When does it start?

Really, really trying to be apolitical here, but regulation upon regulation doesn’t appear to be helping in any economic situation today.  Appraisers on the whole, I suspect, would love to have their oversight from one of their professional organizations such as the Appraisal Institute or the American Society of Appraisers, along with their state licensing agencies, currently OREA (Office of Real estate Appraisers) in California, and the Appraisal Foundation (federal) .  Most recent news in CA is that there are plans in the works to combine the OREA with the association of the DRE (Dept. of Real Estate). Not sure how that will increase appraiser independence. Brokers want there properties to sell for the highest price possible to make a higher commission on the sale…..whereas appraisers, well that’s already been addressed. Will it really save the state money?

Lenders are just now (how many years later?) starting to be more proactive on making commercial property loans. However, with the number of qualifying borrowers diminished in the marketplace, finding one to make a loan to, I’m told, is often difficult.

Upside down commercial loans have been extended (again for how long?) and the lender community is still coming to terms with what to do with these properties. Ok….so not much lender work…still.

Many of us in the appraisal business have, over the last several years, opted to seek employment (fee appraisal work) from alternative users of valuation products. These include attorneys for litigation support as expert witnesses, non-profit organizations such as Habitat or Humanity, estate appraisals for tax purposes, partial interest valuations for partnership dissolutions, and public agencies such as land trusts.  I have found that these alternative sources of work potential are often more interesting and in a lot of cases more challenging. I personally like to be challenged!

But all things considered, until the state and local economies pick up and jobs are created, creating the need for more space/buildings to be purchased or leased,  and the hoarded money of investors comes out to play again, the outlook for my profession still looks a bit gray.

Better news on the horizon? I’m really hoping so, but with cautious optimism. Give me a challenging valuation problem with a decent fee and long enough to do a credible appraisal……I’m ready, but is the market?

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