The following is a letter I sent earlier today to Sens. Barack Obama, Evan Bayh and Richard Lugar. I know it's a bit presumptive of me, but what the hell.
I have been a real estate appraiser working in central Indiana for more than 20 years. The following are some observations and suggestions for perhaps solving some of the problems facing our economy - specifically problems in the housing and mortgage lending industries:
Whatever happened to appraisals?
The troubles in the housing industry have many sources. Among them are the processes adopted by various mortgage lenders over the years in determining the value of real property to be secured.
In years past - certainly prior to the S&L melt down in the early 90s - most mortgage lenders required detailed valuation reports which included full exterior and interior inspections by approved appraisers. However, over the last fifteen years or so that requirement has changed significantly. Now, a large portion of properties secured by mortgages are not backed by thorough "on the ground" inspections and detailed written appraisal reports.
So called drive-by reports have become far more popular which are, as the name indicates, literally done by "driving by" a property, usually taking one or more photos of the front of the house from the public street, usually having no observations from the rear and no access to the interior. Some lenders are also relying on even less detailed and reliable "desk top" appraisals completed without any inspection of the property at all.
Even more troubling, given the current dire situation in the housing industry, many lenders have adopted the use of Automated Valuation Models or AVMs in determining the value of real property. There are now several companies offering AVM services to both the lending industry and individuals for both residential, and more recently, for a variety of commercial properties as well. AVM reports are computer generated valuations utilizing property and sales data acquired from a variety of sources all over the country. These reports also do not include any type of inspection of the properties. They are all done sitting in front of a computer screen. It is unclear just what oversite exists and to what standards these companies must adhere.
It has been my experience that AVM data is lacking in detail and is often inaccurate. While these models may at times work fairly well for properties located in large sub-divisions having a high number of recent sales, their reliability drops off drastically in areas of less homogeneity. The end result is that properties are often improperly valued through this process. While many people rightly repeat the mantra of 'location' being a primary factor in the value of real estate, there are also other factors having significant influence as well. An AVM generated report cannot make any determination regarding the condition of any improvements on a property, nor as regards quality and amenities. AVM reports usually cannot adjust for recent additions in living area or remodeling, etc. Neither can an AVM report adjust for unknown damage from storms, floods, fire, etc. If the core data is in error, there is no way in which an AVM valuation can be accurate.
There is no substitute for a complete exterior/interior inspection of the property and a full, well considered appraisal report completed by a qualified and impartial appraiser.
Pressure!
The word "impartial" is vital.
All too often appraisers are pressured by mortgage brokers, loan officers, realtors, buyers, sellers, etc., to arrive at or above a specified figure. Since the current system allows these brokers and loan officers to choose their appraisers, they then become beholden to those brokers and loan officers for their very livelihood. Consequently, inordinate pressures can come to bear upon appraisers torn between doing one's job impartially, and the need to have an income.
Up until a dozen or so years ago, FHA maintained a panel of appraisers from which FHA, not the broker or lender, made appraisal assignments in an ongoing rotation. Pressures from the lending industry, and, I believe government cut backs caused HUD to abandon that system in favor of allowing individual brokers and lenders to maintain their own lists of FHA approved appraisers from which appraisal assignments are made. The effect of this is the loss of the "arms length" relationship between the lender and the appraiser. As you may know, most banks and mortgage companies have, over the last several years, done away with employing "staff appraisers" owing to the appearance of a conflict of interest. There is though, from the appraiser's perspective, little difference in being an employee or an independent contractor. The relationship remains largely the same.
Lastly, it has been suggested in some quarters that regional or national appraisal management companies or AMCs should be given the task of making all appraisal assignments. While on the surface this may seem an attractive answer, it does not adequately create or maintain that "arms length" relationship owing to the fact that the AMCs are beholden to the lenders. Some appraisal management companies are owned by lenders. AMCs are NOT impartial.
What to do?
It is my contention as noted above that most if not all mortgage transactions should require full exterior/interior inspections and written appraisal reports completed by
licensed or certified appraisers with assignments made through a government entity to insure impartiality. I realize that I am talking about more government bureaucracy, but the consequences we now face, which are at least in part the result of lax lending procedures including the improper valuation of properties, weighs far heavier on us than what would be a relatively minor addition to government. The banking industry has pushed and shoved its weight around in its effort to divorce itself from responsible lending practices. Closer oversight and involvement by government could go a long way in preventing another such financial catastrophe.
I understand that I have an abiding interest in this issue. I could possibly benefit personally if my suggestions were adopted. I certainly don't deny that. However, that does not obviate the problem nor invalidate either my concerns or the course I suggest to remedy the problem. Accountability and transparency are at issue. Accurate and impartial valuation of secured real estate is essential to achieving both.
TLS
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