Why New Regulations Haven't Fixed Home Appraisals

jonathan miller

All week, we’ve been wrestling with the issue of how new home appraisal regulations have changed the housing market, since Larry Yun cited them for keeping back the housing market. At first it seemed as though Yun was just upset about mark-to-market pricing for houses, and we jumped on Barry Ritholtz’ bandwagon of attacking the NAR for opposing new regs.

But, on further inspection it certainly sounds like there’s a problem with the law, which has created a flourishing market for so-called appraisal management companies — appraisal factories, many of which have ties to the old subprime lenders.

To gain more insight, we did an interview (an IMterview, if you will, since it was over IM) with appraisal specialist Jonathan Miller, who writes the blog Matrix, and who has been critical of the NAR, the old regulatory regime and the new system.

The whole text is below, but the key is that the new regulations prevent mortgage brokers from handling the appraisals themselves, and since the banks (stupidly) outsourced their in-house appraisals long ago, they’re outsourcing appraisals to these low-quality operations.

Miller thinks the AMCs are being conservative on price for a few reasons, but in part because they think that’s what the banks — who are gun-shy about lending — want them. That alone isn’t enough to damn them, since conservatism on pricing may be what’s called for.

Anyway, hope you get something from the interview.


So what’s the simplest way to understand how the new regulations have changed appraisals?

brokers are describing their recent experiences with appraisals and its not good
cuomo attempted to remove the high value bias by keeping mortgage brokers from ordering appraisals since they only get paid if the loan closes
but what he ended up doing was enabling a 3rd party unregulated industry called appraisal management companies (AMC)
they are paid the same fee but split the diff with appraisers.
And what’s the problem with these AMCs?
you interact with 19 year olds out of high school
they expect 24 hour turn times when it takes 4-5 days to do a good job

So there’s no licensure to be an appraiser?

think of them as a factory
usually there is, but it means nothing
in other words, does having a drivers licence make you a good driver?
when i took my test, i waited int he hallway along with dog groomers, pool cleaners and tv repairmen
licence test that is
I just spoke with an agent who met an appraiser from Armonk doing an appraisal for half price in manhattan

ah, so why did the previous system not have the same problem of 19-year-old just-out-of-school appraisers?

his comment when he walked into the apartment was “Just how am I supposed to appraise this?

AMC have been around for years but since May 1, they have been enabled
So what changed?
during the housing/credit boom, mortgage brokers delivered about 65% of all mortgage deals to banks
banks closed all their inhouse departments because they were cost centres and effectively disconnected all their local relationships with appraisers
bank mergers made them even more disconnected
who do they call to do appraisals?
AMCs – an 800 number will get you an appraisal done in Idaho, Maine and Florida in the same call

I guess I’m still not clear how that was changed by the new regulations

the new reg banned mortgage brokers from ordering appraisals so now the banks have to pick up the slack and they have no relationships with appraisers anymore
banks have no inhouse valuation knowlege like they did 10-20 years ago

So what’s in it for them to use organisations that ostensibly aren’t doing a good job with the process?

crazy because that’s the collateral you are lending against

Shouldn’t the banks be pushing back if the appraisals are really such crap?

how do they know they are crap?

They’re not hearing it from brokers?

they have no inhouse appraisers that understand local markets
brokers are a biased party
its a bigger issue with refis
because the volume is much higher and there is no sales price to follow

So, on net, would you say that the appraisers are biased in one direction or another? The NAR seemed to think appraisers were now low-balling it

during the boom appraisers for lenders were biased high
now, the much much lower level of competence, and I mean much, causes them to be biased low
if you are from Albany or Armonk and are driving many hours to bang out 12 appraisals in a single day and don;t know the market, you’ll be conservative
because you think thats what the banks want
banks dont want to lend right now so the message being telegraphed is – be conservative
the bank does not know who the appraisers are that meet the borrowers
the AMCs control the entire process

How would you change the reg’s at this point?

you can’t return to the old way because that was one of the reasons we are in this mess
you need to create an incentive/liability on both the banks and the AMCs.
there is no penalty to have an army of incompetent appraisers on your approved list. Think about it – in the era of lending 20 years ago, in house appraiser vetted quality because lenders held the loans in portfolio. there wasnt as much offloading risk through securitization

Right. So it comes back to the banks not having skin in the game

and the AMCs

I see. Well I think I have a better feel for the issue now. Any other key points you think our readers should grasp onthis?

they key point is that nothing has changed, as far as improving the reliability of appraisals for mortgage purposes
you need to create an enviroment were all players have skin in the game
remember – banks aren’t excited about lending right now – more interested in survival as they see a rising tide of foreclosures and future losses, in other areas, such as commercial lending
recession, falling house prices, rising mortgage rates likely, recession
layoffs and rising unemployment
Yep, that makes sense
Well, thanks for taking the time to chat. Look forward to checking out your other interviews

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