LiveValuation Magazine - October 2010

Magaz i n e > > O c t o b e r 20 10

| FEATURE |ZAIO… The Long and Winding RoadThe rise, fall, and reinvention of a valuation technology company.Brad Stinsonpg. 20

02 | LVM / September 2010

LVM | 03

LVM | 05

12 Learning from Markets Abroad

Spain mandates the use of AMCs.

Santiago Herreros de Tejada

16 New Legal Risks for AMCs

Passing the liability buck.

Peter Christensen

FEATURE:20 ZAIO…The Long

and Winding RoadThe rise, fall, and reinvention of a

valuation technology company.

Brad Stinson

26 Appraiser in Realtor Clothing Appraisers and Realtors:

the common ground.

Steve Ferguson

30 Observations of an Inspector Part IV

The “Improvements” section

of the URAR.

Michael Connolly

7Publisher’s Note

8Industry Stats July 2010

10Contributors

34Voices of Valuation

36Directory

38For What It’s Worth

Contents

| OctOber 2010 |

Tunnel VisionBill Waltenbaugh, SRA

12

16 20

26 30

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To learn more, call 800-640-7601 or visit us at www.intercorpinc.net

• The Disciplinary Endorsement to our Real Estate Appraisers Errors & Omissions policy provides reimbursement (up to $5,000) for defense expenses incurred in responding to complaints from regulatory bodies.

• Our Special Purpose Program is designed specifically for appraisers having difficulty finding coverage due to claim issues or disciplinary actions and who may not qualify for standard program rates.

• To help you deal with knotty problems before they become full-blown claims, appraisers insured through our program have access to a confidential Pre-Claim Assistance Hotline.

STRENGTH: A XV rated insurance company.

STABILITY: Serving appraisers since 1994.

SERVICE: Intercorp is second to none!

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LVM | 07

Founder Aman Makkar

Publisher Ernie Durbin, SRA, CRP

Editor-in-Chief Emily Vannucci

Copy Editor Kaitlin Dershaw

Creative Traci Knight

Director

National Sales David Peck

Printer Ovid Bell Press

Advertising Phone : 858.832.8900

Information Email : [email protected]

Subscription Phone : 858.217.5332

and Editorial Email : [email protected]

Web : LiveValMag.com

© 2010 LiveValuation Magazine.

All rights reserved. LiveValuation Magazine is a California limited liability company and is the publisher of LiveValuation Magazine. Reproductions or distribution of any materials obtained in the publication without written permission is expressly prohibited. The views, claims and opinions expressed in article and advertisement herein are not necessarily those of LiveValuation Magazine, its employees, agents or directors. This publication and any references to products or services are provided “as is” without any expressed or implied warranty or term of any kind. While effort is made to ensure accuracy in the content of the information presented herein, LiveValuation Magazine is not responsible for any errors, misprints, or misinformation. Any legal information contained herein is not to be construed as legal advice and is provided for entertainment or educational purposes only. Postmaster : Please send address changes to LiveValuation Magazine, 16745 W. Bernardo Drive Suite 450 San Diego, CA 92127

It is my pleasure this month to introduce you to our new Editor-in-Chief, Emily Vannucci. Emily joins us after the successful launch of our magazine under the leadership of Erica English. We certainly wish Erica all the best in her new ventures in publishing outside of the valuation space. Erica is a fine friend and a consummate professional who will do well at whatever she puts her hand to. That being said, I am excited that Emily has taken the reins of our magazine. This will be our largest issue with an even larger issue coming next month. We have great plans for the future of this magazine and Emily’s leadership will see these plans to fruition.

This month’s feature article tells the story of ZAIO. Brad Stinson, the founder, recounts his personal journey as an appraiser and technologist, beginning in the late 1970’s through today. Brad shares the implementation of technology and valuation that resulted in taking ZAIO public. The winding road seemed to come to a dead end on “Z-Day” in 2009 when investor capital and revenue sources dried up. At the end of that paved road, continued a path of reinvention. Brad lays out ZAIO’s path of reinvention from that fateful day. I have known Brad for a long time and always admired his tenacity and passion for technology. He has a “never say die” attitude and an interesting perspective on valuation that we can all learn from.

Be sure to read our Voices of Valuation section this month. We have had a tremendous response online to our previous articles and daily news summaries. LiveValMag.com provides an opportunity for our readers to interact with our authors online. The back-and-forth debate is vibrant with hundreds of contributions from our readers and also responses from our authors. In Voices of Valuation we only have room to publish a few highlighted comments. I encourage you to visit our website and tell us what you think; maybe your response will be highlighted in next month’s issue.

Please stop by our booth at Valuation 2010 in Las Vegas next month. I look forward to meeting our readers personally and introducing Emily Vannucci and others that make this magazine a success.

Ernie Durbin, SRA, CRP

[email protected]

Publisher’s Note

COME HOME TO THE E&O PROVIDER WHO REALLY MEASURES UP

To learn more, call 800-640-7601 or visit us at www.intercorpinc.net

• The Disciplinary Endorsement to our Real Estate Appraisers Errors & Omissions policy provides reimbursement (up to $5,000) for defense expenses incurred in responding to complaints from regulatory bodies.

• Our Special Purpose Program is designed specifically for appraisers having difficulty finding coverage due to claim issues or disciplinary actions and who may not qualify for standard program rates.

• To help you deal with knotty problems before they become full-blown claims, appraisers insured through our program have access to a confidential Pre-Claim Assistance Hotline.

STRENGTH: A XV rated insurance company.

STABILITY: Serving appraisers since 1994.

SERVICE: Intercorp is second to none!

inTERcORp–whERE wE nEvER sTOp Thinking Of wAys TO pROTEcT yOu.

int2562 House Ad.indd 1 7/22/10 1:33:55 PM

[

08 | LVM / October 2010

Stats| Highlights as of July 2010 |

+4.3%s.dakOta

+3.7%califOrnia

+4.5%Maine

+3.0%new YOrk

+2.6%virginia

The top five states with the highest appreciation in July, including distressed sales. [ ]

-4.3%washingtOn

-12.6%idahO

-9.7%alabaMa-4.8%

OregOn

[The top five states with greatest depreciation in July, including distressed sales. ]

-5.6%Utah

[ ]

LVM | 09

Stats| CoreLogic* Data |

“Although home prices were

flat nationally, the majority

of states experienced price

declines and price declines

are spreading across more

geographies relative to a few

months ago. Home prices

fell in 36 states in July, nearly

twice the number in May

and the highest since last

November when national

home prices were declining,”

said Mark Fleming, chief

economist for CoreLogic.

+5.1%s.dakOta

+2.8%califOrnia

-6.7%Michigan

+4.9%district OfcOlUMbia

-3.8%OregOn

cbsa

Chicago-Joliet-Naperville, IL Philadelphia, PA Phoenix-Mesa-Glendale, AZ Dallas-Plano-Irving, TX Atlanta-Sandy Springs-Marietta, GANew York-White Plains-Wayne, NY-NJWA-Arlington-Alexandria, DC-VA-MD-WVLos Angeles-Long Beach-Glendale, CAHouston-Sugar Land-Baytown, TXRiverside-San Bernardino-Ontario, CA

July 2010 12-Month HPI

change bY cbsa

Single Family Single Family Combined Combined Excluding Distressed

-2.9% -2.8% -2.7% -2.9% -1.6% -4.5% -0.3% 0.6% 0.6% -1.5% 2.4% 2.9% 2.6% 3.1% 3.3% 3.5% 3.3% 1.6% 6.9% 2.8%

* Source: CoreLogic HPI as of July, 2010.

July HPI for the Country’s Largest Core Based Statistical Areas (CBSAs):

+2.8%Mississippi

+3.4%new YOrk

-4.8%nevada

-5.6%ARIZONA

-9.9%idahO

| Highlights as of July 2010 |• �Excluding�distressed�sales,�the�top�five�states�with�the�highest�appreciation�in�July�were: District of Columbia, South Dakota, California, Mississippi, and New York.

• Excluding�distressed�sales,�the�top�five�states�with�the�greatest�depreciation�in�July�were: Nevada, Arizona, Michigan, Idaho, and Oregon.


Peter Christensen Peter Christensen is

the general counsel of

LIA Administrators

& Insurance Services.

LIA provides E&O

insurance to more than

24,000 appraisers and

is endorsed by the

Appraisal Institute. As

LIA’s general counsel,

Peter responds to

the claims, lawsuits

and disciplinary

matters affecting LIA’s

insured appraisers

and investigates and

researches emerging

legal issues related to

appraising.

Santiago Herreros de Tejada Santiago Herreros de

Tejada is Managing

Director of ST

International, an

international division

of Grupo Sociedad de

Tasación. ST minimizes

risks and operational

costs, automates

workflow, and increases

the quality of valuation

reports. Before working

at Grupo Sociedad de

Tasación, Santiago was

International Director

of Planner Reed,

company member of

Reed Exhibitions and

previously at the Global

Corporate Banking of

Citibank International

Plc in Madrid. Santiago

holds a MBA from the

Instituto de Empresa.

Contributors

Brad Stinson

Mr. Stinson is the

founder of Zaio. He

began photographing

entire cities from the

street in 1995 while

operating a successful

residential appraisal

business. He was a

mortgage underwriter

prior to his appraisal

career. His appreciation

for appraisal accuracy

and speed fostered some

of the industry’s earliest

appraisal software.

In 1984 his appraisal

team was completing

appraisal reports in

the field utilizing early

laptop computers and

mobile printers. Mr.

Stinson’s vision has

always been providing

exemplary service to

mortgage lenders and

others.

Steve FergusonSteve Ferguson started

his career in real estate

as an appraiser for

20 years, starting in

Cincinnati, Ohio. In 2004

he closed the appraisal

chapter in his career and

continued his formal

education in economics

where he began

applying statistical tools

to the field of real estate.

He currently is the lead

Realtor working for a

medium size firm in

Indianapolis, IN where

he lives with his wife

and three children.

steve.ferguson@

livevaluation.com

| Featured Authors |

Michael ConnollyMichael Connolly has over 30 years’ experience in the real estate industry and is owner of Smart Move

Inspections in Cincinnati, Ohio. He is a member of the American Society of Home Inspectors (ASHI) and

holds their highest designation of Certified Home Inspector (CHI). He has evaluated over 8,000 residential

homes for home-buyers, attorneys, and lending institutions. He holds licenses for Radon testing, wood

destroying organisms inspections, and is a HUD fee inspector. [email protected].

Contributors

| Featured Authors |

Bill Waltenbaugh, SRABill Waltenbaugh, SRA is a certified appraiser of 20 years. During these years, Bill witnessed and

experienced first hand the many changes that occurred in the appraisal industry, from the advent of

licensing to the implementation of HVCC. Currently, Bill is the Chief Appraiser at AppraiserLoft, a

nationwide Appraisal Management Company, and writes a weekly blog called, “For What It’s Worth”.

LVM | 11

Peace-of-mind is just one of the advantages we offer.

Serving the Appraisal and Valuation Industry since 1977

16oo Anacapa Street, Santa Barbara, CA 93101 Ph: (800) 334-0652 I Fax: (805) 962-0652www.liability.com I [email protected]

Administrators & Insurance Services

In addition to our unsurpassed real estate appraiser E&O program, we offer coverage for:

n AMC Professional Liability (E&O) coverage, worded by LIA specifically for AMCsn Bonds for appraiser client contracts and state regulatory AMC requirements –

extremely competitively pricedn General Liability coverage for real estate appraisers including additional insured options

required by HUD and other clientsn E&O insurance for high risk real estate appraisersn Health insurance for appraisers and their families through the same exclusive program

endorsed by the AMA for its 400,000 physician members – includes 3-year rate guarantee options

LIA’s products are in response to requests made by real estate appraisers and other valuation professionals, seeking to meet the day-to-day challenges of the appraisal industry. In addition, LIA remains to be the leader in loss prevention and appraiser liability education.

For more information, visit our website at www.liability.com, or contact:

Robert A. Wiley, Asst. V.P. Peter Christensen, General [email protected], 800-334-0652, Ext. 128 [email protected], 800-334-0652, Ext. 148

CA License #0764257

F


For more than ten years, I have been

involved with the international real estate

industry, and am currently Managing

Director of ST International Company,

which belongs to Grupo Sociedad de

Tasacion. Due to this involvement, I have

had the opportunity to attend several real

estate and valuation seminars as well as

sessions of congress worldwide.

During these years, I have been able

to verify how concerns regarding the

valuation industry have increased

substantially. Industry professionals

have spent a great amount of time in the

past searching for a solution that would

offer security to the mortgage market

and quality in appraisals. Now, after the

financial crisis, there is an even greater

need for a change in procedures and

methodologies in order to ultimately

achieve excellence and stability in the

industry once again.

At ST International, we have in

depth knowledge about the appraisal

business and we strongly believe

that methodologies, procedures, and

technology in the Spanish regulatory

model (which has been reproduced in

other places, such as Mexico), offer safety

and security to the mortgage market.

The Real Estate Market

The key forces of the Spanish economy

have been tourism and real estate. During

the time between 2001 and 2006, Spain

experienced a real estate boom with very

high growth in bank credits, low interest

rates, and high rates of employment.

In 2003, more than 450,000 homes were

constructed in Spain, versus the 900,000

new homes that were constructed in

the USA that same year. Spain has a

population of 46 million, while the USA

has a population of 350 million. In 2006,

more homes were constructed in Spain

than in Germany, UK, and Italy combined,

and more than 1.8 million loans as well as

appraisals were delivered. Unfortunately,

the economic downturn has also affected

Spain’s economy. Nowadays, it seems

as if the situation is slowly recovering,

although there is still an oversupply of 1

million properties on the market, which

would need to be absorbed so the real

estate market can fully recover.

The Appraisal Profession

Due to the oil crisis of 1973, the Spanish

government decided to regulate the

mortgage market. In 1982, the mortgage

market law was established, which

included appraisal management

companies as a key element between

lenders and appraisers, and addressed

the compulsory use of them in the

mortgage market. There are actually 53

Appraisal Management Companies in

Spain currently under the regulation and

supervision of the Bank of Spain. The top

5 AMCs hold 50% of the Spanish market

share alone, with the leading independent

AMC being Sociedad de Tasación. The

AMCs develop appraisals done by

independent professionals (appraisers)

who collaborate with them.

They offer value to the process as they

investigate and develop the technical,

Learning from

markets abroadSpain mandates the use of AMCs.

~ Santiago HerreroS de tejada ~

LVM | 13

formal, and IT aspects of the full appraisal

process (from ordering to invoicing).

Through the process, the comparables

(which are introduced by the appraiser)

are grouped in one unique database.

AMCs also train and provide courses for

appraisers and lenders, so that all of this

knowledge and expertise is provided to

everyone. There is also a control team that

reviews the appraiser’s reports, and the

appraisal is not delivered to the lender

until the report is ratified by the team

(controllers). The AMCs are responsible for

the appraisals delivered through them to

ensure value and security is offered within

the mortgage market.

The Appraisers

Appraisers in Spain are also required

to be architects or engineers. The law

made the use of AMCs compulsory for

appraisals linked to the mortgage market

and therefore appraisers

where forced to

work for the AMCs.

Appraisers act in

an independent

manner, giving

their opinion about

value without

having any

pressure

from the

lenders; their responsibility is with

the Appraisal Management Company.

Appraisers are subject to a technical

control done by the AMCs. Those that

work for Sociedad de Tasación (ST) work

exclusively with ST due to high fees,

free leading technology, and continuous

support in the appraisal process.

Appraisers under the umbrella of the

AMCs benefit from the following:

• Methodologies, compliance, technical,

and urban aspects, etc. are normalized

by the AMCs’ technical departments,

which keep appraisers updated in

regards to new rules, and eliminate

possible mistakes due to lack of

knowledge.

• Allows appraisers to develop uniform

standard appraisal reports, which

facilitate the lenders’ understanding,

knowledge, and familiarity with them.

• The AMCs develop market and

technical control over the appraisals

and comparables introduced by their

collaborating appraisers.

• Appraisers receive training (in

classrooms and online).

• Appraisers receive orders directly via

the Internet (no commercial effort).

• The appraisal rates are already

assigned and negotiated by AMCs

with lenders (no negotiation effort).

• The billing management is done 100%

by the AMC, therefore appraisers

don’t spend any time in the charging

process.

• Each appraiser is assigned with

a general or specialized review

appraiser (controller) at the AMC,

who acts as a quality controller and

also as a consultant for the appraiser.

The review appraiser is available

before, during, and after the appraisal

to resolve any doubts or questions the

appraisers may have.

• Easy-to-use software that guides the

appraiser through the report.

• ST guarantees payment to the

appraiser and they are protected by

insurance issued by the AMC except

in cases of gross misconduct.

• The lenders invoicing is managed

100% and appraisers are paid monthly

by the AMC (no need to worry about

claiming payments at the banks).

• Offers the appraiser an enormous

shared database, which is infinitely

better than an independent appraiser

database (ST groups more than

500,000 comparables yearly).

• Appraisers operate on a municipal

level so that they can guarantee

perfect knowledge about the market,

the urban area, the real estate

agents of the area, the developers

of the area, the contractors, and the

macroeconomic factors that influence

the economy of the area.

• At our group, although it is not

regulated by the Bank of Spain,

we internally make sure that our

collaborating appraisers work in

a specific zone (each appraiser

works over a ratio of 40 km). In

cities, appraisers are even zoned by

districts.>>


The Market Regulation

The Bank of Spain, which is the equivalent

to the Federal Reserve, is the organization

that supervises the appraisal management

companies and the financial institutions in

the Spanish market.

Below are the most important laws that

regulate the appraisal profession:

• Ley del mercado hipotecario (RD

685/82). Modified por RD716/2009:

(Regulates the Mortgage Market).

This law created the Appraisal

Management Companies and made

them compulsory for any appraisal

linked to a loan that is intended to be

sold on the secondary market.

• Orden ECO 805/2003: Guidelines give

an opinion of value, how the appraisal

should be done, and the information

that the report must have.

• RD 775/1997: This law provides

requirements to register as an AMC,

how to be authorized, and sanctions

to AMCs. It also addresses appraiser

incompatibilities, etc.

Quality Control

The Bank of Spain specifies the type of

QC that should be done, and all AMCs

must assure the following:

• The appraiser has used all of the

necessary documentation.

• The appraiser has completed all of the

necessary steps required when doing

the appraisal.

• The technical proceedings (calculation

methods) to do the appraisal have

been completed.

• The information specified by law is

included.

The use of intelligent control systems as

a tool to achieve quality and productivity

in the appraisal process is key. It is

essential that the control process is fast,

therefore the technology used must allow

the fluent transmission of information

to the appraiser, with the existing issues

detected, and allow him to complete the

needed modifications.

There are several factors that imply risk

and should be avoided. Some of them are:

• Heterogeneous criteria between the

different professionals involved in the

valuation industry.

• Heterogeneous content in the

valuation reports.

• Non-existent independent quality

control over the valuation reports.

• Unaudited databases.

• Unstandardized information.

• Monopoly of valuers in several areas.

• Non-automated processes.

• Manipulable PDFs.

All of those factors create systematic risks

in the valuation market, which prevent an

efficient quality control of the valuations

linked to mortgage loans.

In order to achieve security in the

mortgage market, it is key to achieve

optimum control over the valuation

products. In my opinion, the combination

of strict regulations implemented

by governmental authorities with

technologies that allow statistical and

numerical analysis in the valuation process

is essential.

Additionally, in markets with high

volumes of valuations, it is virtually

impossible to conduct the business in a

secure way without the use of specialized

software that manage and automate the

process of the valuation work. If you are

a valuer or a valuation firm, the workflow

process must include technology which

will allow you to receive orders, highlight

important deadlines, track the status of the

report, and assure that compliance is being

met. Additionally it will assure that the

criteria, procedures, and methodologies

used are appropriate, as well as check the

coherence of the certified values with the

main goal of offering security and quality

control tools to the mortgage market.

Technology

ST International has been investing in

smart progressive valuation technologies

since the 1990s and nowadays our state of

the art technology is being used in Spain

by the AMC and by the leading financial

institution in Mexico. The technology

processes an average of 250,000 appraisals

yearly in both markets.

The valuation programs developed by ST

International generate reports adapted to

the Spanish legislation, European valuation

standards (TEGOVA), International

Valuation Standards, Mexican legislation,

and are currently working on a US version

called ST Appraisal.

The core offering of ST Technology is the

real estate appraisal preparation platform.

This unique approach combines the

professional judgment of the licensed

appraiser with intuitive scripts that drive

information gathering specific to the

characteristics of the subject property,

location, and the type of appraisal

assignment.

Once the form is created, the Appraisal

Management Company’s QC department,

the QC department of a lender, or even

the QC department at a governmental

organization can receive the form, plus all

of the information which has been used

to develop the form electronically. All

of the appraisals (reports and appraisal

certifications) are received via the Internet,

so all of the data is electronic, and all

possible mistakes in the appraisals are

highlighted through electronic tools

provided in the program. The lender

receives a PDF, which includes all of the

information on the property (more than

180 parameters from each appraisal), and

can file appraisals electronically with full

legal approval.

main characteristics of the system

LVM | 15

Appraisals must include photographs,

maps, and any other materials needed

for the appraisal certifications and

can be received at different locations

at the same time (financial institution

headquarters, bank office, mortgage office,

risk departments, etc.). This technology

reduces the number of QC people needed

in an organization by 70% due to the

integration between the valuation program

and the QC program.

Through the implementation of an

effective regulation, and through the use of

intelligent valuation technology platforms,

the mortgage market will see how the risk

is reduced substantially. It will be able to

achieve homogeneous technical criteria,

homogeneous reports, make sure that the

appropriate quality controls are produced,

and include shared and audited databases

as well as standardized information which

will allow a better analysis of the valuation

works.

The valuation market in each country has

its own characteristics but we have been

able to prove that the methodologies,

procedures and technology that are used in

Spain are 100% adaptable and exportable

to diverse legal and socioeconomic

environments. We can help to offer

security and safety to international

mortgage markets. It is necessary to make

the industry aware that it is extremely

profitable in terms of security to invest in

quality and automation of the valuation

process in order to achieve productivity

and profitability.

Never before has it been more important

for a new, viable system to be inserted in a

market place that restores the appraiser’s

ability to improve his efficiency and

accuracy, offering much more security to

the mortgage market, lenders, investors,

and international global markets.

«• It has a smart screen

progressive process that varies depending on the typology of the appraisal. Screens must be completed correctly in order to move to the next screen.

• 90% of the fields are pre-populated fields and each of them has a help button in order to avoid mistakes in the answers due to lack of knowledge.

• The appraisal residential program therefore intuitively guides the appraiser throughout the appraisal process with a permanent QC during the process of developing the report.

• There is a focus on solutions that increase the quality and speed of property valuations by bringing transparency and independence to bear.

• It provides appraisers with a flexible operating platform, where un-biased validation of appraiser quality is a true differentiator.

• The property valuation market is evolving with this program, which includes technology driven data capture, valuation, review, and risk assessment solutions.

• The program assures that the data is introduced only once.

• The program supports the

appraiser’s development of a personalized data source from his own work, his participation in peer-shared data resources, and third party data integrated into the system. In Spain, for example, we have a database of 2 million data and 300,000 new data are introduced yearly by the appraisers who use the technology.

• The criteria, methods, procedures, and techniques used depending on the typology and legal characteristics of the subject properties are appropriate.

• It automates and preserves complete work files of each assignment for the appraiser, eliminating cumbersome offline systems for record retention.

• Compliance is integrated into the program.

• Addendums and empty answer boxes are generated automatically as a result of the scroll-downs that appear at 90% of the fields.

• The system generates the official form required as well as another much more comprehensive form, which we believe is organized much more coherently.

• The report is multilingual, independent of the language in which the appraiser has completed the screens. The demo version produces the reports in English and Spanish for a better understanding among the Hispanic population in the USA or the Hispanic investors in RE, which do not understand the official existing forms.

• Each property has a family and the system recognizes if it has been appraised previously even if the legal aspects of the property have changed (urbanism, etc.).

• The system adapts to hundreds of specific client requirements.

main characteristics of the system

New

Legal Risks for

AMCs

Peter Christensen

PassiNg the LiabiLity buck.


LVM | 17

AAppraisers and appraisal management companies share the same lifeboat these days when it comes to their liability risk and they must row together if they are going to avoid sinking in the whirlpool caused by the mortgage crisis. This is becoming more evident as AMCs become visible to the public and subject to greater regulatory control. We’ve been advising appraisers for years about the claims and litigation that affect them and on strategies to reduce their risk. The information here is for AMCs and highlights a few of our current concerns about the risks they face.

AMCs Should Be Careful With What They Promise to Clients

One pronounced recent development we have observed in the relationships between AMCs and their lender clients is that many lenders have become more focused on contractually shifting valuation liability risks to AMCs. Lenders are demanding that AMCs accept financial and legal responsibility for appraisal quality and compliance.

Many AMCs execute contracts containing requirements like these without thought or negotiation. Their focus is simply on winning the work. However, in the current legal environment surrounding appraisals, this is a risky approach. Lenders know the cost of the risk they are passing on to the AMCs far better than the AMCs. They simply know their own default rates, appraisal-related losses, and mortgage repurchase problems better. Some of the lenders who are trying to shift the most risk are lenders who are predisposed to litigation about appraisal issues and who have recent histories of treating appraisals essentially as guaranties of value, not professionally developed opinions.

Prudent AMCs should carefully evaluate

proposed risk transfer provisions in their

lender contracts:

• Can the risk transfer provisions be more fairly negotiated? Some lenders are willing to revise the language they initially demand.

• If the provisions cannot be fairly negotiated, then the cost of accepting that risk versus the benefit of doing business with the lender should be weighed. Thus, what is the lender’s history with respect to appraisal-related claims and litigation? Key indications of a lender more likely to make demands under rep and warranty provisions are: a recent history of claims against individual appraisers or AMCs, and a high level of mortgage repurchases. An E&O carrier with relevant market knowledge can help assess these factors.>>

We see lenders doing this in several ways:

• Requiring AMCs to make more representations and warranties with respect to appraisal delivery performance, value accuracy and USPAP/regulatory compliance. In some lender/AMC contracts, the AMC is then required to pay liquidated damages to the lender for any breach of its reps or warrants. They must also agree to pay the lender’s costs and losses associated with any appraisal-related issues such as mortgage repurchases or mortgage insurance rescissions. Lenders are essentially mirroring the reps and warrants they’ve been making to the GSEs for years – promises that are now causing them to have to repurchase billions of dollars of mortgages.

• Requiring AMCs to agree to onerous, one-sided indemnification provisions under which the AMC must promise to indemnify and defend the lender for any and all claims, losses, expenses, attorneys’ fees, etc. relating to appraisals or other valuation products delivered by the AMC to the lender – regardless of fault in some cases.

• Demanding that AMCs carry extensive insurance coverage not only for professional and general liability risks but also for less commonly covered risks like intellectual property infringement (i.e., patent and copyright claims).

APPrAISerSand appraisal m a n a g e m e n t

companies share the same

lifeboat these days when it comes

to their liability risk...


AMCs Should Be Careful With What They Require Appraisers to Promise

The common reaction that many AMCs have to lenders requiring them to agree to onerous reps and warrants as well as one-sided indemnification provisions is to try to pass on these potential liabilities to their panel appraisers. It is, of course, prudent to use independent contractor agreements to clearly spell out the performance standards, payment terms, and other aspects of the relationship between AMCs and appraisers. Trying to pass on all of an AMC’s potential liabilities to its appraiser panel in such agreements, however, does not work well in practice, may violate various states’ AMC laws, and can result in an appraisal panel that is lower in overall quality. It’s usually fair and practical that each party to a contract will be responsible to the other for its own acts or omissions, but it’s quite another thing to shift the risk of all liabilities, regardless of who is at fault, to the individual appraiser.

We often see indemnification provisions like the following in AMC independent contractor agreements:

Appraiser shall indemnify, defend, save

and hold harmless [AMC] from and

against any and all liability, claims,

damages, losses, fines, judgments,

penalties suits, decrees, costs and

expenses . . . in any way related to .

. . any appraisal report submitted to

[AMC] by Appraiser.

This is very one-sided. Under such a provision, an AMC could contend that the appraiser must indemnify the AMC for liabilities or damages, and even fines or penalties assessed against the AMC relating in any way to appraisals delivered to the AMC by the appraiser – even if the alleged problems are the result of the AMC’s own conduct or wrongdoing.

Another example of one-sided indemnification language in an AMC-appraiser agreement is:

Appraiser shall further indemnify,

defend and hold [AMC] harmless

from and against any and all claims,

losses, liabilities, costs and expenses

attributable to any allegation of

intellectual property infringement

arising out of this Agreement.

Under this provision, the AMC is requiring the appraiser to indemnify the AMC for patent or copyright infringement in relation to any appraisals delivered by the appraiser – whether the alleged infringement is the fault of the appraiser, the AMC or some third party, such as a technology provider.

There are several issues and problems with including provisions like these in independent contractor agreements. First, AMCs need to be aware that some of these provisions will now violate various state AMC laws and subject the AMCs to investigation, potential monetary sanctions, and possible loss of their registration status. New Mexico’s AMC

law, for example, states: “An appraisal management company shall not require an appraiser to indemnify the appraisal management company against liability except liability for errors and omissions by the appraiser.” Similar prohibitions exist in the AMC laws of at least the following states: Minnesota, Tennessee, Utah and Washington. Very one-sided provisions are also often unenforceable under more general statutory or common law in many states.

A second concern, based on years of observing appraisal claims, is that when an AMC utilizes an agreement that is very one-sided or commercially unreasonable, the overall quality of its appraiser panel declines due to the loss of appraisers who choose not to do business under such agreements. This exposes the AMC and its clients to greater liability risk from poor appraisal performance. Appraisers who have the ability to make a choice about whether they do business with certain AMCs, on average, are more experienced and knowledgeable and have greater economic stability than appraisers who feel they must accept the one-sided terms of some contracts. Of course, good appraisers do work for AMCs that have unfair agreements but they generally do it only when they don’t have alternatives.

Finally, as a practical matter, we almost never see AMCs actually enforcing the one-sided provisions in their agreements. An appraiser’s professional liability insurance is not going to cover any liability that the AMC tries to shift for its own conduct. Relatively few individual appraisers have the financial ability to personally satisfy the monetary demands made in such claims, which may be tens of thousands or hundreds of thousands of dollars. Thus, in general, AMCs are not getting any benefit from including the provisions but are suffering from loss of appraiser quality and potential regulatory scrutiny.

The common reaction that many AMCs have to lenders requiring them to agree to onerous reps and warrants as well as one-sided indemnification provisions is to try to pass on these potential liabilities to their panel appraisers.

“ “

LVM | 19

Indemnification provisions are not the only contractual clauses that may cause regulatory scrutiny for AMCs or cause their panel quality to suffer. Another example is the following provision –wording similar to this appears in many AMCs’ current contractor agreements:

Appraiser may not disclose the appraisal

fees paid for services under this

agreement to any third party.

Provisions like this potentially violate new state prohibitions against AMCs prohibiting appraisers from disclosing their fees in appraisal reports. California’s emergency AMC regulations, for example, provide that “[a]n Appraisal Management Company cannot prohibit a contracted appraiser/client from disclosing the fee paid to the appraiser/client for an appraisal assignment in the body of the appraisal report.”

A Risky New Form of Appraiser Pressure

We do not receive many reports or claims anymore relating to valuation pressure from AMCs or lenders in connection with current appraisals for loan origination purposes. We do, however, receive reports and see the results of pressure by some personnel employed by AMCs in the business of delivering “forensic” review work for mortgage insurance and loan repurchase purposes. In recent months, for example, we have received confidential reports of AMC personnel instructing appraisers in writing that they must deliver forensic review appraisals with value opinions lower than the origination appraisal and must identify errors in the origination appraisals under review. It’s been reported that these AMC personnel threaten the appraisers with being cut off from further review work. This is a potential business and legal disaster for these AMCs. Mortgage insurance denials and mortgage repurchase demands are

the subject of significant current litigation and arbitration. If review work performed by a certain AMC for MI or repurchase purposes is contaminated by these kinds of practices, that AMC will have potential liability across a wide spectrum (magnified by any indemnification provisions it has agreed to) and, moreover, will quickly see demand for its services to evaporate.

Future Liability Issues under Dodd-Frank and State AMC Laws

As AMCs busy themselves preparing to comply with the initial TILA elements of the Dodd-Frank Act and new AMC laws, we are busy trying to determine the additional liability risks that both appraisers and AMCs will face.

We are most concerned about effects from the mandatory disciplinary reporting of appraisers under the Dodd-Frank Act (and the eventual complaint “hotline” that will later exist). In short, Dodd-Frank mandates that mortgage lenders, AMCs, and other parties report an appraiser to the applicable state licensing agency if there is a reasonable basis to believe that the “appraiser is failing to comply with the Uniform Standards of Professional Appraisal Practice, is violating applicable laws, or is otherwise engaging in unethical or unprofessional conduct.” This will mean many more complaints to state boards and, correspondingly, an increase in lawsuits against appraisers and AMCs because a certain percentage of such complaints evolve into civil litigation. AMCs also will be in the

awkward position of being required to file complaints alleging USPAP or other violations against their own panel appraisers, while in some cases being obligated to indemnify their lender clients for losses caused by such violations.

We are also concerned about the effect of new AMC laws which contain provisions requiring AMCs to have in place a system for ensuring that their panel appraisers’ work product complies with USPAP and in some instances appear to suggest a duty on AMCs to ensure USPAP compliance. Attorneys for consumers will likely contend that these requirements establish a legal duty of care owed by the AMCs to borrowers – if this occurs, we will see more consumer claims against AMCs.

The common reaction

that many AMCs have to lenders requiring them to agree to onerous reps and warrants as well as

one-sided indemnification provisions is to try to pass on these potential liabilities to their panel

appraisers.

“

“


LVM | 21

I have known Brad for a long time and always admired his tenacity and passion for technology.

He has a ‘never say die’ attitude and an interesting perspective on valuation that we can all learn from.

-ernie Durbin, Publisher

““

technology changes everything,


especially for the appraisal industry. this is the story of how Zaio’s vision came to be, based on my personal perspective as the founder and as a fee appraiser keeping pace with technical advances over the past 30 years. it’s about the rise of a simple concept that will enhance the appraisal profession and provide the collateral risk industry with valuation clarity in real-time, while also separating the appraiser from all undue value pressure.

My appraisal career began as a Canadian

mortgage underwriter when I was 19.

Back then, bankers drove long black

sedans, mortgage loans were a privilege,

not a right, and underwriters often wrote

their own appraisal reports by hand. The

year was 1979 and the Olivetti typewriter

was on the cutting edge of technology.

In the early 80s, mortgage rates were

like price tags. They just kept rising

with inflation, until they reached the

apex of insanity at 22%. At the bank,

we filled our days with back-to-back

games of Cribbage and began to talk

about a cool new desktop appliance

called a PC. As mortgage rates eased,

a new world emerged—a world filled

with mortgage money and loan officers

living in a constant state of panic, waiting

for independent appraisers to deliver

reports. Mortgage lending had suddenly

become a new and highly competitive

industry. From my perspective inside

the bank, it was easy to see how faster

service would mean plenty of business

for an appraiser. What if an appraiser had

a computer that prompted the questions

and then printed the appraiser’s response

right onto the form? Eureka! In 1983 I

left the bank, hired a programmer and

rode boldly into the new frontier. I had

visions of becoming this highly informed

appraiser that completely understood

what every home was worth, visited

open houses, studied market trends in

advance, and provided the accuracy

everyone was looking for. Unfortunately,

I was naïve and that was not how the

industry would unfold. There was

certainly no time or method to actually

study market conditions between orders,

and the business volume quickly began

flowing toward those appraisers who

always supported the necessary number.

I still believed integrity would rule the

day and better service could win.

With a Tandy 100 laptop and my own

new custom software application, I hit

the streets as a high tech appraisal shop

that delivered speed but not always the

requested number. I trusted that turn-

around time and service would keep the

orders flowing, even when the required

values weren’t really there.

The Tandy 100’s monochrome screen

only displayed 200 characters, 50

characters wide and 4 lines high. The

reports were saved onto a separate audio

cassette player by pressing play/record

and save on the Tandy at the same time;

there was no floppy disk yet. With my

printed sales books in the back seat,

a power generator, and a daisy wheel

printer, I was able to turn an appraisal

around in 2-3 hours and personally

inspect all of the comparables. Inspecting

comparable sales was overkill and

highly unique back then. I would print

the report while sitting in the lender’s

parking lot and then glue on that

Polaroid photo. It didn’t take more than

a month for lenders and competing peers

to notice a major change in the industry.

I sold my software to a few appraisal

firms in the mid 80s, but by 1990, larger

and more dedicated software developers

had entered the market. I had my CRA

designation (equivalent to an SRA)

and I was running a busy appraisal

business called Blueprint Appraisal

Services. Our software was really only

custom designed for our appraisal

firm, and we focused on helping our

clients provide prompt service to their

borrowers by trying to carve minutes

off the turnaround cycle and never

compromising quality. We had to provide

better service because we didn’t always

support the value our client needed.

On the front line of technology in 1990

was the cellular phone. The cell phone

companies told me it was illegal for us to

transfer appraisal data over radio, but I

knew the oil and gas industry outside of

Calgary, Alberta, was transmitting data

logs by wireless every day. Why couldn’t

an appraiser log onto the MLS or transfer

appraisal files by cell phone? “AT X19 -

enter” turned out to be code that would

tell a modem to connect with a squealing

LVM | 23

modem on the other end. This was cool

stuff…until the MLS website became

graphical and the page load times

jumped to 5 minutes at the pathetic 300

baud rate our modems could maintain

over a cell phone. The competition didn’t

mind our little technical setback and they

were beginning to dislike our technical

ways. We bought faster modems and

more comfortable cars and carried on.

Exclusive appraisal contracts were

unheard of, and considered unfair for

the competition, but lenders wanted

what we had, so I signed one of the first

contracts in Canada for the entire city

of Calgary. We posted and distributed

orders through our private Bulletin

Board Service (BBS) because the Internet

didn’t yet exist. Our appraisers logged

onto our BBS from their vehicle and the

company grew very quickly even though

our appraisers rarely met each other at

the central office. As technology settled

in, we began to imagine the tremendous

potential of electronic data interchange.

We didn’t know it at the time, but what

we had imagined soon arrived in the

form of the Internet. We were gaining

market share while the competition was

growing more unsettled with us every

day. Lenders loved us.

Digital signatures were next on the

horizon in the mid 90s, along with

those binocular-shaped digital cameras.

We bought 26 Logitec™ cameras and

photographed Calgary’s 300,000 homes

in 1996. When the Internet became

mainstream in 1997, our photo database

raised eyebrows and questions from the

privacy commissioner. After a few radio

interviews and a 30-minute television

debate, the excitement over privacy

rights abated. Lenders could suddenly

see any Calgary home from the street

through their computer screen. Banks

were centralizing their operations and

our goal became the task of centralizing

the appraisal supply and data on their

behalf. We wanted to be faster, better, and

allow appraisers to spend more time on

real valuation research while transferring

the clerical mechanics of production into

the burgeoning world of information

technology on the Internet. We had 12

appraisers, all with complete briefcase

office systems on the passenger seat

of their car, and our quick turnaround

time with higher quality research had

a markedly positive impact on our

client’s market share for

mortgage origination.

Real estate agents soon

knew where they could

get quick mortgage

approvals and where

NOT to send fraudulent

deals. Our lenders

were winners on both accounts.

A separate company called PhotoInfo

Digital Photography Inc. was formed

and we began to generate interest

from appraisers in other cities. The

competition then wanted to partner with

us and we were happy to oblige if it took

us national and could help fund the very

expensive data collection.

By 1998, with the help of a large national

partner, we had become Canada’s largest

appraisal management company. Our

appraisal contract expanded nationally

as did our national photo shoot. Lenders

could see any home instantly, but now

they wanted the appraised value along

with that photo. We began to focus our

technical development on a database

structure that would help an appraiser

organize market data and research values

even before an order was received. That

naïve idea about >>

NEXT ? YEARS


doing market research in advance of the

order was on the table again. The risk

manager at one of our lender clients said,

“Our sales department wants to issue

mortgages as quickly as a credit card

transaction, while I need to make sure

we maintain a quality appraisal.” Things

were still too slow and clients seemed to

always want the report yesterday. Those

scary black sedans from the 70s would

soon become black box Automated

Valuation Models (AVMs) that would

attempt to determine a home’s value

instantly or simply risk rate the loan and

not conduct any valuation at all.

Our best client had been predicting a

doomsday for all residential appraisers

unless appraisers could somehow learn

to analyze more than one house at a

time. Lenders needed neighborhood

trends and statistical data to manage

risk, while the mortgage sales side

needed those same statistics for better

service and marketing. Black box

AVMs would become the appraiser’s

archenemy. Trying to carve another 10

minutes off an appraiser’s turn time was

no longer the question. In fact, the whole

question had changed for the appraiser.

It was no longer “What is this house

worth?” but “What are these houses

worth and where is this particular

market going?” Loans were securitized

into mortgage pools to reduce risk and

appraisers were becoming outmoded.

Clearly, the key was to help the appraiser

measure value on more than one house

at a time. Appraisers had to become local

market analysts even before the order

was received. The appraiser needed to be

more than just a person who could tally

up the physical assets of a house and

find three comparables that sold near the

suggested value. They needed to become

professional market analysts for local

market conditions and value trends,

and they needed to do it better than a

real estate agent, tax assessor, or the

dreaded AVM. We could feel statisticians

breathing down our necks. On the flip

side, those AVMs had data errors and

were inaccurate 30-40% of the time and

we knew appraisers could do a much

better job if they had the tools. It was at

this critical juncture that our Canadian

business partner would decide to buy

us out, leaving me with a non-compete

agreement for Canada. We entered the

US market in January 2000 and ZAIO

was born (Zone Appraisal and Imaging

Operations). We were right on time for

the tech wreck, AKA the Dotcom market

crash. I had to re-invest every dime

from the Canadian sale and refinance

my home for the second time, but the

company survived.

It was hard to know where this

long and winding road would lead,

especially when the capital markets

and investors had the jitters too. ZAIO

had to unite US appraisers with photo

and data collection, and it needed

capital. When we took the company

public in 2004 with a small IPO at 30

cents, we had completed most of the

photography in Spokane, St. Louis and

Denver, and we had the rudiments of

GeoScoring. GeoScoring crystallizes

qualitative words like “good” and “fair”

into meaningful and consistent numbers

on a scale of 1 to 10. The vision for an

appraiser-backed valuation database

was clearly on the road ahead. With seed

financing, we developed the first version

of our valuation software and

pre-appraised most of the homes in

Spokane, Washington. Within days, we

were instantly delivering the original

2055 appraisal form to a few small local

lenders. The valuation research had

taken months, but the lender could

receive it instantly. However, the larger

lenders with most of the market share

felt they needed national coverage before

they could really play ball, and the

middle of a refi-boom was not exactly

ideal for lenders to re-tool their existing

appraisal supply chain. It was a Field of

Dreams scenario. “If we build it they will

come…”

This would be a very steep uphill

curve. Photographing and GeoScoring

a large portion of America would cost

millions unless appraisers liked the

concept enough to purchase a software

license for a specific geographic area.

In 2006, with a new CEO and an office

in Phoenix, we launched an aggressive

Zone Sales program. Appraisers would

1979My appraisal career began as a Canadian mortgage under-writer when I was 19…the Olivetti typewriter was on the cutting edge of technology.

1980Mortgage rates

were like price

tags. They kept

rising with

inflation until they

reached the apex of

insanity at 22%.

1990 The cellular phone

was on the front-

line of technology.

Cell phone

companies said

it was illegal to

transfer appraisal

data over radio.

1990sWe began to imagine the potential of electronic data interchange. What we had imaged soon arrived in the form of the Internet.

1996We bought 26

Logitec ™ cameras

and photographed

Calgary’s 300,000

homes.

1998We had become

Canada’s largest

appraisal

management

company.

>>

LVM | 25

own rights to a geographic area called a

Zone. A Zone contained approximately

10,000 properties and the Zone Owner/

Appraiser would research all the homes

in detail, fixing errors in the property

data, selecting comparables and

analyzing the value of every home in the

database. Appraising in advance of the

order would ensure pure independence,

geographic competence, and adequate

time for quality research, while the client

would receive real-time delivery, quality,

and cost efficiency. The appraiser’s

local research would be the most critical

aspect of the entire value proposition.

Appraisers caught the vision and

purchased software rights for one third

of metro USA, and those selected Zones

encompassed half of the country’s

strategic lending footprint. With ZAIO’s

stock price soaring as high as $5.60, the

company then found itself in acquisition

mode. ZAIO purchased appraisal

management companies, software

development companies, photography

networks, and even Appraisal.com.

Some of the best known names in the

appraisal industry were happy to lend

their expertise and join the management

team. The concept was solid, but there

were still a few sharp turns in the

road, and in early 2008 stress fractures

began to appear in the business fabric.

Operational costs were high and it

became difficult to see the road. We

were running mainly on revenue from

traditional appraisal services, Zone sales,

and investor capital, when industry

icons like Bear Stearns and Lehman

Brothers toppled. When lenders hit the

brakes, all revenue sources and investor

dollars for ZAIO vanished and our US

subsidiary was closed and dissolved.

Zone owners dubbed that fateful day as

“Z-Day”.

ZAIO’s Board of Directors managed to

keep the public parent company alive

and out of the ditch. Dedication to

preserving the investments from Zone

Owners and shareholders carried the

company through 2009, saving its critical

assets for a better day; saving it for days

like today, when market research and

valuation clarity is really taking center

stage. By keeping the faith, shareholders

and Zone Owners would emerge from

this economic disaster stronger than ever

before and the database would grow

again.

The crisis proved to be an ideal

opportunity to revisit the business

relationship with local appraisers.

Between economic change and

technological advancement,

perspectives can change overnight,

making a company’s willingness to

reinvent itself a major asset. Zone

owners wanted to mitigate risk and

needed more control. They wanted

higher revenue potential. ZAIO felt a

strong need to unify the Zone Owner

network, reduce capital expenditures,

and accelerate GeoScoring and database

growth. The solution was for Zone

Owners to unite under their own banner

and for ZAIO to issue one national

software license to this new entity. That

new company is Zone Data Systems LLC

(ZDS). Independent valuation research is

the future for appraisals. Whether the

final product is a desktop, drive-by, or

full interior appraisal, knowing the valid

comparables and market trends up front

makes complete sense for everyone

involved. The ability for local appraisers

to accurately track property values every

month will add an entirely new and

necessary dimension to the appraisal

and collateral risk industry.

As the country continues its effort to

clean up and restructure America’s

mortgage woes, and leaders in lending

and government have that deer in the

headlights look, they need to know that

technologies such as, ZDS and ZAIO

are coming down the road with a major

helping hand. Real-time valuation clarity

will inspire new investors to absorb the

troubled loan and REO portfolios, and

accurate value tracking in the future

will foster better lending programs and

mitigate fraud. The entire lending and

collateral risk industry reside on this

long and winding road, and I think we

all know where this road leads.

2000ZAIO was born

when we entered

the U.S. market in

January.

2004We took the

company public

with a small IPO at

30 cents.

2006 With a new CEO,

we launched an

aggressive Zone

Sales program.

2008Stress fractures

began to appear in

the business fabric.

Bear Stearns and

Lehman Brothers

toppled.

2009ZAIO’s Board of

Directors managed

to keep the public

parent company

alive and out of the

ditch.

2010ZAIO issued a

national software

license called Zone

Data Systems.

the long and winding road

realtor


appraiserin

ICLOTHING

I have been involved in some form of the real estate industry for the better part of my life, from

construction with my father as a teen, to appraising and loan originating, and now as a realtor.

even when I decided to go back to school in the early part of the decade to pursue an education

in economics and leave the business, I saw more opportunity and application in real estate than

anything else. The study of economics has allowed me to create models to simplify the complex,

and recognize there are problems that cannot be explained rationally: perfect for real estate. It

is from this background, specifically my experience appraising real estate, that I have gained a

significant foundation as a Realtor.

Appraisers and Realtors: the common ground. STeve FerGuSON

realtor

LVM | 27

“As an appraiser, I had respect for some of the Realtors in the field, but largely, my perception was that they were paid a lot of money to turn a

key; I will not even tell you what most Realtors think of appraisers.

As an appraiser, I had respect for some

of the Realtors in the field, but largely,

my perception was that they were paid

a lot of money to turn a key; I will not

even tell you what most Realtors think

of appraisers. Even though I am not an

appraiser now, I still become defensive.

I figured that with my background in

valuation, it would be a snap to adapt to

this part of the industry. Keep in mind I

was an appraiser, then became a Realtor

during two very different and distinct time

periods of my career. Believe it or not, the

job of a Realtor can be very demanding,

especially for a closet introvert. It turns out

I have learned quite a bit as a Realtor—

things that I did not know or consider as

an appraiser.

There are many similarities to our two

sides of the business, including client

relationships as well as valuation and these

two similarities take on different forms.

For instance, we as Realtors need to get to

know our clients very well as it pertains to

their lifestyle and even finances. It is not

uncommon for personal relationships to

spawn out of a business relationship, to

know names of kids, and to have common

friends and hobbies. As appraisers,

especially now, you may not even know

anyone at the mortgage company/bank

you are charged with protecting. However

the same client confidentiality applies to

both.

The valuation techniques were, I believe,

the best tools I learned through the years

as an appraiser. There are many appraisers

and Realtors who are good at estimating

market value. I have found that many

Realtors throw around the price per square

foot statistic more than appraisers. Taking

something so complex and reducing it to

one all encompassing figure is dangerous

and violates the axiom of each property

being unique. I am sure it is used because

most buyers and sellers can relate. I still

look at contributory value as the way to

advise clients, which makes me feel more

confident. When determining a list price

for a house and sometimes purchase price

for a buyer, I will run a multiple regression

and do a modified appraisal on the

property. At the very least, I will complete

a truncated appraisal using sales from the

neighborhood and from time periods in

which marketing influences are somewhat

similar (remember this mess started in

August 2007). I do use older sales (12

months plus) in order to stay within the

confines of a neighborhood rather than

extracting an adjustment for differences

in amenities and location. Again, this is to

protect the interests of my clients, not for

an underwriter. I realize I am not doing

an appraisal by today’s standards but it is

the way most appraisers would operate if

given the freedom.

Perhaps a story would be useful

in illustrating how our worlds are

different. In my office, my experience

as an appraiser comes in handy and is

especially centered on training other

Realtors. Recently, I became concerned

with the April 30th expiration of the

buyers incentive specifically as it relates

to appraisals—low appraisals. I wanted to

bring Realtors in line, if only temporarily,

with how appraisers estimate value. It was

early April; I did not want to see anyone

lose a deal and cost a client $8,000 and

possible litigation. I had approximately

thirty Realtors in the training group and

started with USPAP definition of market

value and moved into neighborhood

definition and comparable selection. All

was going well until I discussed matched

pair analysis. To be fair, this systematic

approach to valuation is in many ways

like learning a new language. For good

measure, I have been in many appraisal

courses where the slightest hint of algebra

brings panic to appraisers. The intent

of the exercise was to borrow some best

practices from the appraisal world in order

to help them think in an organized and

systematic way. My conclusions were that I

shouldn’t have had such high expectations

while giving them a crash course in

everything I had learned over the course

of 15 years inside of a two-hour training

session. I also concluded that the average

personality of a Realtor is not conducive to

thinking in a linear way (cheap shot). We

did manage to close all deals from April

and only had one “low” appraisal for the

month.

Even though many Realtors do not

methodically look at contributory value

the same way, after looking at so many

properties in a specified market, the value

of a specific property almost becomes

visceral. From my experience working

with buyers, this is particularly true.

Buyers, whether they are thinking or

feeling, can organize data and come pretty

close to market value, in somewhat of a>> “

STeve FerGuSON


qualitative manner. Translation: whatever

their ideas are of the market, they

price-adapt quickly once they have

developed their own set of priorities or

bundle of needs. Will they pay more for

a full fenced rear yard? Deck? In-ground

pool? My experience tells me it depends.

If they did not have it in their bundle of

needs and it is an added feature to the

house they have selected, they may be

inclined to pay a little more for the added

feature. For those buyers who had to have

an in-ground pool, or a fenced rear yard,

well, they wouldn’t be looking at that

property if it were not included. This leads

me to the question: is there one price that

a pool, fence, deck or house is worth? This

one is hard to pound into the heads of the

secondary lending market, but the answer

is no. There is a range of values or multiple

demand curves. In the first example where

the buyer was not necessarily interested in

a deck, but the house had one, it seems the

buyer is more in control of the contributing

value. In the second example where the

buyer had to have a deck, the seller is more

in control of the value so long it does not

exceed the cost of installation. Of course

this is hard to observe unless it is part

of the transaction. I have witnessed the

market working first hand and it is slightly

different than the way I thought it behaved

as an appraiser.

The best way I found to model

the real estate market is through

a form of regression. It is a

rigorous approach to observing

and smoothing out contributory

value. In the example with the

pool, deck and fence it can infer

a value point and then also

a range of values within the

upper and lower 95% confidence

interval. There are at least three downsides to this approach.

• the first is that you will need

plenty of observations, 30 plus

sales, listings or pendings, but this

can be done at light speed with

the right program; on the more

obscure features you will need

even more.

• the second downside is that

you should be trained. You should

know how to select the features

that are important in the market

place, be able to convert data or

have a program that will, and also

be able to interpret data.

• the third and final downside

is that it will absolutely change

all the canned adjustments

most appraisers use in their

report—$500 for a half bath on

a $200,000 home will be history.

The benefit I have found to this

approach is that regression takes

all the information objectively

and gives back what is important

to buyers and sellers in that sub

market by giving a coefficient and

also standard error.

Leaning hard on my clients’ bundle of

needs and also the ability to use statistical

tools have kept me from having problems

with appraisals. Of course, being a former

appraiser does not hurt either, which leads

me back to the beginning.

I believe it is my duty to protect my client

and earn the commission I am to be paid. I

also believe I am helping the appraiser do

his job and to protect his client relationship

by making sure I can justify a purchase

price. Entering into this downturn, there

were probably many appraisers who

were aware there was a growing crisis.

Maybe we could not have predicted the

magnitude of the downturn but there

were enough warning signs that lead to

concern. The rise in LTVs since the mid

1990s and the concerns within Fannie

Mae even going back to 2004 were only

a couple of the problems. Mentioning

anything about over supply or decreasing

values was career suicide for an appraiser.

Being on this side of the industry for a

good portion of the run up of appreciation,

I can see why we reached a critical mass.

Almost every client I worked with prior to

the collapse chose the most house he/she

could afford. So predictable was this that

it was unusual for a client to buy a house

that was less than the limit of the pre-

approval. Greed is part of human nature

and has been talked about and studied

from the beginning of time. This of course

puts more pressure on me, their Realtor, to

find something that is a solid investment.

Appraisers tend to be the scapegoats of

most real estate crises, but in this case it

was, in my opinion, unchecked greed. This

greed was not only on the part of lenders

and secondary market (they did quite

well), but on the part of the general public.

Remove, change, or alter credit guidelines,

allowing more people to own homes and

it will skew demand. Buyers will always

want more if they are not restrained by

guidelines. What else is an appraiser to

do but follow past supply and demand? I

witnessed more zero down loans to people

that could barely hold their credit together

long enough to close the loan. HVCC

and FinReg, I am sure, are well intended

but not the answer. Fraud, coercion of

appraisers, is only a small part of the

problem. If you could barely pull together

$500 or $1,000 (FHA minimum amount

purchaser had to contribute) to purchase

...appraisers could improve their business and understanding of THE MARKET by s h a d o w i n g a Realtor for a day or two...

““

LVM | 29

a home, how long would you stay around

when your home just lost 5-10% of its

value? Add to that the sub prime market

and it was clear to see we were just

borrowing money for an unsustainable

lifestyle. Taking the homeownership rate

from 65% to 69% of the American public

could not be done by corporate greed

alone. Homeownership has gone from

being a dream to being portrayed as a

right. Rest assured it will be fixed by the

same organization that created HVCC and

FinReg.

I may be cutting my own throat, but the

answer to this is obvious: larger down

payment and lower LTV. This flies in the

face of the right to homeownership and

also the ability of the secondary market

to have such control over the origination

process. Analogous to this is the health

care insurance that most have. When

offered full access to doctors without any

type of co-pay, demand is much higher

than when there is even a small $10 co-pay.

As a consequence, the group insurance

premiums are much lower when there is a

co-pay. The patient is vested in that doctor

trip and will not waste their own money

over a hangnail.

Lenders and the secondary market are

asking appraisers to know more than ever

while receiving an unfair portion of the

blame; the lenders will probably get part of

the blame for holding the current market

static. Part of the responsibility to educate

is that of the lenders and Realtors—both

buyer and seller need to be properly

informed or advised, and to act in their

own best interest. What happened to

buyer beware? As an example, FHA will

not allow the buyer to purchase a home

on a well when city water is available.

Can the buyer not make some of these

decisions, especially in an economy where

saving $30-$50 may make a difference

to an individual? If there is a correlation

between well water and mortgage default,

I have not been made aware. To clarify, I

am referring to a functional well in good

working order. What if the buyer was

interested in the property in spite of, or

because of a so-called deficiency? I know

this sounds a little old fashioned and

utopian, but we now have more checks

in the system than ever: public access to

MLS, home inspections, and Realtors and

appraisers are more educated. I recognize

it is not easy, if not impossible, to uncover,

research and resolve all issues as they

relate to an assignment based on an hour

long (sometimes less) site inspection,

especially in isolation from the rest of the

industry. That is why the very least we can

do as Realtors is protect our clients’

interest. The appraisal is only one pillar

when building a quality loan file. There

are credit, title, and income (and its source)

of the buyer as well. The appraisal is only

ordered when the first three pillars are in

place. As we all know, a three-leg table,

if all legs are strong, should be able to

stand on its own; the fourth leg is there to

provide extra stability equal to the other

legs, should one fail.

Realtors and appraisers will probably

never think exactly the same way and

I consider the lessons I have learned as

a Realtor invaluable. We have a lot of

common ground, we share an enormous

amount of data, and we are experiencing a

time where banked technology is changing

the way in which we do business.

Change is inevitable in any industry.

As professionals from both sides, there

will always be a need for interpretation

between real estate and technology, and

there will always be a need for human

interaction. We can stick to our old ways

or adapt to new more efficient ways to do

business for what I believe to be the good

of the industry and consumer.

In my years of appraising, the systematic

approaches to highest and best use,

income capitalization, etc., have all made

me a stronger Realtor. Realtors could

benefit if we attended a class or two on

appraisals to expand our knowledge in

the valuation methodology, so we as a

group could understand what concerns the

appraisal side has in the process. On the

other hand, based on what I have learned,

appraisers could improve their business

and understanding of the market by

shadowing a Realtor for a day or two, or

at least be a part of a small business group.

We deal in the same industry, we both

encounter similar problems in the

industry, and it would be beneficial to both

sides if we “cross-trained” to the other

side. We are in a unique time and we need

to share ideas, information, and support

each other’s efforts toward stabilizing the

market.

Lastly, Realtors look out for Realtors.

We get to know each other through our

dealings in the market; we sit across the

table from each other and even develop

friendships. There is competition but

there is also a set of ethics that require us

to explicitly treat each other fairly, and

by nature agree to work together. The

strength of the local, state and national

boards create a cohesiveness that I did

not witness as an appraiser. It is from this

unity that we have developed strength in

the market and with our PAC. Like many

blogs I have read before, I would suggest

appraisers do the same. There is strength

in numbers.

Appraisers tend to be the scapegoats of most real estate crises, but in this case it was, in my opinion, unchecked greed. This greed was not only on the part of lenders and

secondary market (they did quite well), but on the part of the general public.

A30 | LVM / October 2010

As you would expect, the “Improvements”

section of the URAR form is where

the largest cross over exists between

appraisers and home inspectors. The

appraiser is asked to describe the

improvements and generally advise

on the condition, needed repairs, and

deficiencies of the property. The appraiser

is asked if the property conforms to the

neighborhood in terms of functional utility,

style, and condition. Most home inspectors

follow “standards of practice,” often

mandated by a professional association

like the American Society of Home

Inspectors (ASHI). These standards of

practice require the inspector’s description

and inspection of specific areas and

improvements in the home.

The home inspector goes into much more

detail and analysis than an appraiser

would, but is ultimately asked to

conclude by answering the same three

questions as indicated at the end of the

“Improvements” section of the URAR:

Describe the condition of the

property.

Are there any physical

deficiencies or adverse

conditions that affect livability,

soundness, or structural

integrity?

Does the property conform to

the neighborhood?

OBSERVATIONSInspector IVof an

Par

t

The “Improvements” section of the URAR.

Michael Connolly

1

2

3

LVM | 31

In this installment, I will follow along with

the URAR form in the “Improvements”

section and touch on a few methods and

protocols home inspectors use to evaluate

the improvements (house) and ultimately

answer these three questions.

General Description

If a home is attached to another unit

or building, the inspector should

closely evaluate the common wall. The

common walls should provide privacy

and separation from a neighboring

unit. However, a common wall’s most

important purpose is to provide adequate

fire stopping between adjoining units.

It should be examined for any breaks or

penetrations in the wall. If there are any

breaks, these need to be adequately sealed

to prevent the migration of fire. This

common wall should also extend up into

any attic spaces. If a wall has penetrations

that are not sealed or a separation wall

is missing in the attic, this should be

mentioned in the report.

If a home is new construction, the home

inspector should look for any signs of

municipal inspections and permits. Every

municipality has different procedures for

posting their inspections. These are usually

in the form of stickers or tags placed on the

main electrical panel (electric inspection)

and on the water heater or main soil stack

(plumbing inspection). If no inspection

notifications are present and no occupancy

certificate is present, the builder should be

asked to present proof that the home has

been inspected and approved by the local

public building department.

The design and age of a home can dictate

many common problems and areas of

concern for homes. The scope of this article

does not allow for a full exploration of the

unique attributes of each design of a home,

as well as age related issues.

Foundation

There are three basic designs for slab

foundations: monolithic, floating and

supported. It is often difficult and outside

the scope of an appraisal to identify the

design of the slab, but this is required of a

home inspector.

Most slab homes of the Midwest, where

I am from, are supported slabs where the

floor rests on a poured foundation that is

deeper than the frost line. In other parts of

the country, based upon the climate and

soil conditions, the slab can be monolithic

and placed on grade, as the soils are

more stable. Most garages and patios

are a floating slab, which means they

are independent of the foundation walls

(sometimes tied into the foundation with

steel rebar).

Slabs can crack and settle. When walking

through the home, be aware of uneven

floors, cracks beneath the finished floor

coverings and gaps, or separation between

the floor and the outer perimeter walls

(foundation). Most slabs have the load

bearing walls resting on the foundation,

and the floors are not load bearing.

However, any noticeable cracks or

settlement of more than 1/4” should

be noted and evaluated further by a

qualified contractor or engineer.

Crawl spaces are generally shallow and

uninhabitable areas under the main floor.

These crawl spaces should provide access

of at least 18”x24” to allow for inspection

of the under floor area. If mechanical

equipment is present in the crawl space,

the minimum opening should be 30”x30.”

Wood framing members such as floor

joists should be more than 18” above the

floor of the crawl space to minimize the

possibility of termite infestation. The crawl

space should be adequately ventilated

(usually to the exterior, or it can be opened

to the interior of the home and conditioned

with the HVAC system). A vapor barrier

over dirt floors should be in place and

continuous to prevent the build up of

moisture vapor in the crawl space which

can lead to mold and fungus growth.

The very nature of crawl spaces makes

them an undesirable place to visit. Most

homeowners ignore the crawl space

of their home and may never enter to

inspect. Moisture and insect penetration or

plumbing leaks can occur for years before

being discovered (usually by a home

inspector). By the time they are discovered,

the damage to the structure can be

extensive. A crawl space is the most likely

place one will find issues, defects and

deficiencies in a home. It should not be

overlooked! I once inspected a crawl space

in a thirty-year-old one story home that

had a pin hole leak which had developed

into a 1/2” water line running under the

bathroom. This leak was not a “drip drip”

sort of leak, but a fine mist spraying out

from the pipe spanning nearly a 10-foot

radius. This misting of the crawl space

had been occurring for at least 9 months

(this time frame has been estimated, since

the pipe had ruptured from freezing,

which must have occurred in the winter;

the inspection was in the summer). The

misting caused rotting of the floor joists

and subfloor as well as extensive mold

growth over half of the crawl space area.

The owners had to remove the finished

floors and subfloor in all of the bedrooms

and bathroom areas to effect repairs, which

were over $30,000! Always inspect the

crawl spaces or make sure that if you

cannot inspect the crawl space that this

limitation is mentioned in your report.

Full basements provide the best

opportunity for moisture penetration.

Most basements are 8-to-10 feet below

grade. A hole that is 10 feet in the

ground will, at some time, have moisture

penetration. This could be a chronic

issue or a one-time occurrence such as a

flash flood or plumbing leak. There are a

number of clues that may >>

“


indicate moisture penetration such as rust

stains on the carpet or flooring, which can

be indicative of prior water penetration.

Staining from water penetration can

often be seen on the baseboards (push the

carpet down to look at the bottom of the

trim). If possible, view any drywall from

the unfinished sides of the walls. Water

will stain the paper on the drywall and

it is usually not painted to cover up the

staining. Floor drains in the basement

(which are connected to public sewers)

will be the first drains to back up if there

is a back flow or blockage in the sewer

connector pipe (between the house and

the public sewer). Always look for signs

of moisture penetration around the floor

drains, as this is usually the lowest place

in the basement floor. Look for any stickers

from local plumbers and drain cleaner

companies (usually found on the water

heater or on a soil stack); this may be a

sign of chronic blockage or past water

penetration.

Below grade areas with outside entries

provide additional opportunity for

moisture penetration into the lower level

past the doorways. Many doors are not

adequately flashed and elevated to prevent

moisture penetration. If the surrounding

area of the basement is finished, the

moisture penetration may not be readily

visible, so closely check the adjoining

walls, trim, and floor covering for moisture

penetration. Open the door and look at

the doorjambs and the sill for signs of rot.

Lots of small insects and worms around

the doorways is also a sign of moisture

penetration.

Sump crocks and pumps are one of the

most overlooked systems in a home. Many

owners never think about their sump

system until their below grade

area is filling with water. Sump systems

are usually connected to underground

perimeter drain tiles that collect ground

water around the foundation and direct

it to a sump crock, then an operable

pump evacuates the water from the crock

(usually out to daylight somewhere in

the yard). However, when the pump is

inoperable, the drain tile is still collecting

ground water and filling the crock. A

house with an inoperable sump pump will

flood much faster than a basement without

drain tiles and a sump crock. For this

reason, all sump pump systems should

have a secondary or back up system.

Some houses may have a sump pump and

an ejector system. A sump pump system

handles clean ground water, while an

ejector system handles either gray water or

sanitary wastewater. The sump discharges

to daylight while an ejector system will

discharge to the sanitary drain system

(sewer or septic system). The two systems

look similar so it is important to take a few

minutes to evaluate and determine if you

are looking at a system to handle ground

water or wastewater.

Evidence of infestation can be difficult

for an inspector or appraiser unless they

have specific training in inspection for

such animals or insects. As such, this type

of inspection is usually outside the scope

of an appraisal or inspection, but some

home inspectors are trained and licensed

to inspect for wood destroying organisms

(WDO). These would include termites,

carpenter bees, carpenter ants, powder

post beetles, and wood destroying fungus.

The two main types of termites that can

be found in homes in most of the United

States are the subterranean and dry wood

termites. Dry wood termites live in the

wood and can be found in large colonies

inside a house. Subterranean termites live

in the ground and only forage for food

(wood) inside the house. Mud tunnels

extending up a foundation or wall from

the ground are a sign of subterranean

termites. Any signs of termites warrant

further evaluation by a licensed pest

control technician.

Dampness in a basement or crawl space

can represent a significant issue in a

home and could impact the habitability

as well as the structural stability of the

house. Mold and fungus can seriously

affect the health of the occupants, so any

noticeable signs of dampness should be

further investigated by a professional.

The most likely cause of dampness in the

below grade levels is water penetration

past the foundation walls. This is

attributable to poor soil grade around the

house and inadequate management of

water draining off the roofs.

Settlement is often a term used to describe

any sort of crack in a foundation or

walls, which is associated with building

movement. A house can just as easily

be rising or lifting rather than settling.

Expansive clay soil, when hydrated, has

enough force to lift foundations, piers, and

columns. Many people might see a crack in

a foundation or a wave in a floor and think

the house has settled (sunk) when in fact

a section of the foundation or a footer has

lifted due to expansive soils. Furthermore,

a structure can settle or rise uniformly,

often without noticeable evidence such as

cracks. Differential settlement is the term

used to describe uneven movement, which

often results in cracks and out of square

doorways. When in doubt, it would be

prudent to recommend that a professional

evaluate the structure.

In the next installment, we will finish up

the remainder of the “Improvements”

section of the URAR.

A crawl space is the most likely place one will find issues, defects and deficiencies in

a home. It should not be overlooked!

“

LVM | 33

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Last month’s articles sparked a lot of debate. Here are some responses from our readers.

31

2

Publisher’s NoteAagcNothing short of the individual appraiser setting his or her own fees for an assignment, AFTER reviewing available Subject data and establishing the Scope of Work, is acceptable in my opinion. Per the USPAP, the Responsibility for the SOW Decision rests squarely on the appraiser’s shoulders.

Voices of Valuation

What Do I Do? BeachappraiserThe problem is: there are way too many appraisers practicing today with little or no formal education i.e.; Appraisal Institute Courses. The state licensing courses only make you dangerous!!! I recently had an appraisal review

on three appraisals on the same property that ranged from $535,000 to $900,000!!!!!!

BayhillAppraisers didn’t cause the last mess. Foreclosures are a result of people not being able to pay their mortgages due to bad loan

programs, like 30/5, adjustables, ez qualifiers, & fraud. The mortgage industry caused this. Even if appraisers over appraised by a few thousand, or a few appraisers committed outright fraud, that didn’t bring real estate to its knees. AMC appraisals will.

Reasonable & Customary FeesLGOrlandoJordan, I have technically known you for 10 years. You are an intelligent business minded professional. Always have been and became successful in the process. But I have to interject on the comment regarding “If your competitor is willing to complete the same assignment for a reduced fee – one that he/she deems to be reasonable & customary – shouldn’t they have that right?” No they should not since this is why we got into this mess in the first place. Self-hating appraisers who do poor quality work.

MillettwThe lenders off loaded their appraisal management needs to AMCs. Now it’s time for them to pay for that service, not the appraisers.

JimThe lender is the AMC’s customer and will promise low fees and quick turnaround times to get and keep the lender’s business. This is a common business practice, competitive pricing and quality work. Until HVCC, fee appraisers did this as part of their business model. I know I did! I marketed my company and my product daily but the fees and product quality I promised were based upon what I knew was needed to stay in business based upon my expenses and to compensate us for our education and appraisal knowledge to the level of other similar professionals. The problem with this practice now is that the fee appraiser is expected to fulfill the unreasonable promises made by the AMC to it’s customer, the lender, with no regard to the appraiser’s expenses, education, experience and competence!

do you have something to say?

www.livevalmag.com

LVM | 35

4 Granny on ValuationJamesAmazing Roger. That generation was simply one of the most practical and consequently smartest we have known so far. Humble, family oriented and hard working. Thanks for sharing.

EthanThe 2nd most significant word in Roger’s essay (after “Granny” of course) is “Probability”; a term lost upon investors, home buyers, refi-consumers, lenders, appraisers and political decision makers through ignorance or willful neglect. These stakeholders twisted assumptions so that “Probability” was often replaced with “Certainty”.

“Certainty “ suggests a single point value when forecasting a future value (which for a continuous variable such as home prices or interest rates will always be incorrect), while the correct method of forecasting is around bands of probability, which would have resulted in the instinctively correct conclusion made by Granny.

6Relocation Appraiser SherrielisaThis is something maybe we should really consider. When I complete my reports I always note pending sales and then follow up to check on their closing status. It is a bit time consuming but it is a great help to train yourself for relocation reports. Forward thinking!

5

For What It’s WorthMarcThere are several AMCs, which I have encountered, that are professional, fair and courteous. Most of them, however, don’t fit into that category and are bottom feeders who resort to bullying tactics to keep appraisers in line and their cash registers ticking. I hope that this bill gets implemented and thins the herd of these slugs and sends their staffs scurrying back to the jobs they are best suited for such as being carnival barkers, used car salesman and crawl space inspectors.

JerrySame typical comments reflecting how appraisers are going beyond local areas for work assignments. Rules are in place for appraisers not to accept assignments in areas or scope of work they are not familiar with - the rules also allows for professional appraisers to appraise anywhere providing they provide due diligence in making themselves knowledgeable for whatever particular assignment type or area. This appraiser receives orders outside general coverage areas often (ex. U.S. Marshals Office) due to quality of work. Someone please come up with a better argument - as this one is played out and weak...


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LVM | 37


My high-school football coach would always talk to his players about tunnel vision. In a medical sense, tunnel vision is the loss of peripheral vision with retention of central vision, resulting in a constricted circular tunnel-like field of vision. However, my football coach used this term to describe a player that loses sight of what is going on around him by focusing too much on one thing. For example, a defensive lineman can become so focused on the quarterback and the ball that they don’t recognize the trap block coming their way or the screen play setting up behind them. In short, they are knocked off guard and taken by surprise because they were too focused on one thing and lost sight of what was occurring around them.

Ever since the passage of Dodd-Frank Bill, it seems everyone’s attention is focused on reasonable and customary fees. I understand this is a big issue for appraisers and others in the mortgage lending world, however there are other things in this bill that, if overlooked, have the potential of catching appraisers and their clients off guard. For example, things like mandatory reporting and the softening of the firewall between the appraiser and loan production staff definitely deserve more attention.

The purpose of HVCC was to prevent undue pressure from being placed on appraisers to inflate home valuations. In short, a full communication firewall was put in place between loan production staff and the appraiser. It’s difficult to argue that this isn’t a good thing. Keeping the person who is paid when a loan closes from being in charge of ordering the appraisal needed for loan approval seems to make sense. However, in accordance with Dodd-Frank Bill, the HVCC is expected to sunset sometime in the mid part of October 2010 after the appraisal independence-related provisions of the Act are released.

I totally expect the new regulations will maintain the firewall between loan production staff and the appraiser when it comes to ordering an assignment. However, there’s a provision in Dodd-Frank Bill that specifically states that an appraiser cannot prohibit anyone with an interest in a real estate transaction from asking them to consider additional information, to provide further support, or to correct errors found in the report. Those with an interest in a real estate transaction include the mortgage banker, mortgage broker, real estate agent, and consumer. In short, appraisers will still be protected from being punished if not complying with a loan officer’s demands, but the days of hiding behind HVCC and not entertaining additional information or answering specific questions from interested parties are quickly coming to an end.

Although the ground rules have been set, the question remains, how do lenders and appraisers comply with these new rules, yet preserve the spirit of appraisal independence? How, under certain circumstances, does an appraiser comply with these new provisions and still maintain confidentiality under the ethics rule of USPAP?

Looking back pre-HVCC, I think communicating with the loan production staff of my clients made me a better appraiser. To stand the scrutiny of a loan officer (LO), a report had better be well written, well documented and well supported. If the report wasn’t rock solid, you were certainly going to hear about it. If I had to defend my report from long time LO clients like Jim and Bill, I better have a solid case. However, I had long-term relationships with these guys. We didn’t always see eye to eye but we were always able to put the last assignment behind us and move on. Personal client relationships like this are few and far between these days. As such, when participants in the process are unhappy with the results, it’s a lot easier to be vindictive.

Which brings me to the mandatory reporting provision of Dodd-Frank Bill that states: any person involved in mortgage related real estate transaction who has a reasonable basis to believe the appraiser is failing to comply with USPAP, is violating applicable laws, or is engaging in unethical or unprofessional conduct, shall refer the matter to the applicable state appraiser licensing agency. Although I agree with this statement, I believe it opens the door for abuse. One has to question, are the state licensing agencies ready to receive and process the flood of reports from mortgage brokers and real estate agents who feel the appraiser didn’t do an adequate job? Customary and reasonable fees are important. However, let’s not lose sight of other issues that, if not addressed, might catch us off guard and end up taking us by surprise when they happen.

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| Tunnel Vision |

LVM | 38

Documents

LiveValuation Magazine - October 2010