Why I’m Leaving Residential Appraisal 

Copyright © Michael N. Read 2010

The Law of Unintended Consequences is a law, like Murphy’s Law, which is always lurking in the background to foil the attempts we humans make to control the world around us. It is particularly true of government attempts to reduce crime. A couple of examples follow: 

I used to love air travel. I was a flight test engineer at Boeing and for many years I flew all over the world for both work and recreation. Then came the shoe bomber. Now I wait in long “security” lines while thousands of security workers peer at video screens as billions of pairs of shoes go by and more thousands of security workers watch as billions of travelers shuffle along in their stocking feet.  Do I feel safer now?

Then came the underwear bomber and now billions of travelers will have to suffer through crotch inspections by full body scans.  Am I even safer now?

Domestic airline passenger demand is expected to grow from 1.37 billion in 2006 to 1.77 billion in 2011 – International Air Transport Association 

I used to love appraising. Long before there was any appraiser regulation my clients came to me for valuation opinions because of my years of experience in real estate and their recognition of my accurate and reliable reports. Then came HVCC (Help Violators Cover Crimes). Now my clients of 24 years are not allowed to contact me. They have to order appraisals through a third party Appraisal Management Company (AMC) which takes up to 60% of my fee for their trouble. Is the consumer safer now?

 I have signed up with about a half dozen AMCs. One went out of business owing me over $7,000 dollars. Three asked for all my exhibits and I’ve never heard from them again. One expected me to complete a URAR for $90. My most recent AMC has not sent me an assignment in months due to their lack of volume. Am I happier now?

I recently testified before my State Legislature in support of a bill to regulate AMCs.  My first suggestion was to support the repeal HVCC at the federal level. Secondly to ensure that a certified appraiser is on staff at the AMC to do review work and third to require the AMC to have a surety bond of $500,000 to $1 Million so payment to appraisers is assured if the AMC defaults. Others recommended that AMCs become regulated by the State Appraiser Licensing Board. Will any of these recommendations solve the problem? I’m not hopeful.

So, why are these well-meaning regulatory actions so useless and demeaning? They are re-active and not pro-active. Instead of looking at billions of pairs of shoes the security personnel should be searching for terrorists and bringing them to justice. Likewise the financial services police should be looking for appraisal and mortgage fraud and punishing the offenders; not ruining the livelihood of many thousands of law abiding appraisers in the name of consumer protection.

Personally I have 24 years of appraising experience, am licensed in two states as a General Certified Real Estate Appraiser, have been HUD approved for the whole 24 years without any complaints and have completed hundreds of hours of special education. What good has that done for me?

So what is driving this patchwork quilt of ineffective appraiser regulation? Have you heard of “The Golden Rule”? The man with the gold rules! The greed of lenders is the source of the problem and always has been. They are the ones with the money to lend. They are the ones that establish the lending guidelines that have to be followed by everyone else in the lending chain. They are the ones with the “pipeline” to keep full and flowing. When they run out of borrowers with 20% down they reduce the requirements to encourage borrowers with 10% down. Keep that pipeline full. When they run out of borrowers with 10% down they reduce the requirements again to encourage borrowers with 5% down, then 0% down, then “no doc loans”. Keep that pipeline full.

What about the increased risk? Well, they just pack the loans up and sell them off to someone else in a mortgage backed security that is so far removed from the valuation process no one can figure out the value any more … not even the sophisticated investors. (Nobody thought to ask the appraisers!)

Now it’s time for me to say goodbye to my clients and friends in the residential real estate and financial service fields.  You’ve heard of the theory of “Trickle down economics”. Well here is how my exit from the business will trickle down to you all.

Dear MLS Provider, I will be cancelling my subscription for data services at the end of my current period ($105/Q).

Dear Title Company, I will be cancelling my subscription for data services at the end of my current period ($85/mo) 

Dear Software Company, I will not be renewing my annual software maintenance agreement at the end of my current period ($399/yr). 

Dear Board of Realtors, I will not be renewing my annual dues this year ($375/yr).

Dear Appraisal Institute, I will not be renewing my annual dues this year ($330/yr).

Dear E&O Insurance Company, I will not be renewing my policy at the renewal ($500/yr).

Dear State of Washington, I will not be renewing my Appraiser License at the end of the biennium ($500).

Dear State of Oregon, I will not be renewing my Appraiser License at the end of the biennium ($500).

Dear Education Provider, I will not be needing any more CE credits so will not need any more expensive classes ($500/yr).

Dear AMCs, Goodbye.

Dear Consumer, you are the only one I feel sorry for. I will no longer be in a position to provide you with an independent valuation for your largest lifetime investment. Your lender does not want you to know who I am, how to contact me, how much I charge, what value opinion I reach, they just want you to pay for some conforming paperwork. If they receive any bad news they just shoot the messenger.

JOHNS, PIMPS AND STREETWALKERS

The Systematic Destruction of Residential Appraising 

Copyright © Michael N. Read, April 1, 2009

Not so long ago I had multiple clients. They would call me if they needed my professional services and trusted me to perform a satisfactory service. I’m a streetwalker. I drive and walk the streets looking at houses and photographing them from the street (outcalls) and sometimes going inside to determine condition (in calls).

This worked well for many years until the Federal Government got involved in the late 1980s. The Feds discovered that a few streetwalkers had exaggerated their claims of professionalism and service and declared in the 1989 DIARRHEA that all streetwalkers must be licensed and regulated by the state in which they operate. The states got together and formulated a set of rules for streetwalkers they called USCRAP that outlined in minute detail how streetwalkers were to do business.

Well, we studied USCRAP, passed the tests and got our state certifications and went back to walking the streets like before. Unfortunately our clients, like typical JOHNS, wanted more and more for their money. They pressured us into providing service ‘over and above’ the typical service. If we refused they would blacklist us and no longer engage our services or pay us for services rendered. We would complain to the State regulators and they would do nothing since the JOHNS were not regulated by the States.

This continued to get worse over the years until 2008 when the financial system collapsed due to the JOHNS’ greed and over indulgence. Again the Feds stepped in, not to regulate the JOHNS but to stimulate them with more money and punish the streetwalkers with a new law HVCC (Help Violators Cover Crimes) so we will no longer be allowed to take calls from our clients.

Theoretically the JOHNS will no longer pressure us directly to provide ‘special services’ above and beyond USCRAP. Orders for our services will not be directed to any particular streetwalker but must be funneled through third parties known as Streetwalker Management Companies or PIMPS.  

This makes the JOHNS happy now they have more money and can call the PIMPS to order any type of extraordinary service they desire without breaking the law because the PIMPS are not regulated either.  With our access to our clients foreclosed we are now forced to use the PIMPS to get our business contacts and give up half or more of our fee in the process.

But wait, there’s more …

Now the PIMPS can relay messages to individual streetwalkers about servicing a particular JOHN who has requested a ‘special service’. If the JOHN does not like the service provided by a streetwalker he can ‘blacklist’ them with the PIMP, who can demand retribution or withhold payment for the service.

It seems to me like we’re back to square one, but with half or less of our fee.

Here’s my suggestion …

The 200,000 or so appraisers in the USA should form a union and call for a national strike. This will allow us to take DIARRHEA, USCRAP, HVCC, the JOHNS and the PIMPS and flush the whole mess down the WC.

Like a lot of folks I’ve been fascinated with dinosaurs since childhood. My first recollection of them was in the Crystal Palace grounds near London in the early ‘40s where there were giant stone depictions of dinosaurs looking like slow pondering beasts lounging around the shores of artificial lakes.

 

http://en.wikipedia.org/wiki/Crystal_Palace_dinosaurs

 

Modern science and years of archaeological research has brought them into sharper focus and shown that the raptors were agile and voracious beasts designed to kill and eat the equally large vegetarian monsters. There is still some mystery and discussion as to why they suddenly disappeared from the face of the earth. One of the more feasible and supportable theories is that a giant asteroid exploded over what is now the Gulf of Mexico creating a cloud of dust that encircled the planet and blocked out the sun. The result was a blow to plant life causing the extinction of all that ate plants and then the carnivores. The scientists also know that dinosaurs were still around after the catastrophe and they morphed into different and smaller creatures.

 

I’ve always had a suspicion that as the dinosaurs reached their peak of size and aggressiveness they ate themselves into extinction. First eating all the vegetarian dinosaurs and then turning cannibalistic the raptors ate themselves out of existence.

 

This preamble leads me to my main point and introduces the ‘Virtual Monsters’ that we are all faced with in this most recent financial crisis. The banks and many Wall Street financial institutions became so huge and voracious (like the giant raptors) they ‘ate up’ the nation’s assets (the plantlike public) and when those assets were all gone they were forced to devour each other, but none were able to survive in their original form.

 

Now we are in the stage where they are morphing again into different forms, maybe nice furry little critters that are well behaved and well supervised. But don’t bet on it!

 

Virtual monsters have an advantage over the Jurassic versions, they can be instantly regenerated by computers and video screens. The greedy Wall Street types have not been destroyed; they’ve only gone into hiding. We will have to be vigilant and insist that they are kept under strict observation and control, or else we’ll be all eaten up again just like before.

This current financial crisis is truly a collapse of confidence in the valuation of financial assets. Of course real estate has to be included in financial assets as it is the de facto collateral standard for the largest loans and movements of money. Also, if independently and fairly valued, it has a reputation for being solid collateral; more functional than gold.

 

This collapse has been exacerbated by the lenders essentially being in charge of the valuation process. They hire and pay appraisers or employ their own in-house appraisers, who are expected to do exactly what they are told. Independent appraisers have to apply to be on a lenders ‘Approved List’ in order to get assignments. This is part of a quality control process that is entirely managed by the lender and effectively insulates them from a true and independent valuation. When they ‘pay the judge’ how can we expect an independent verdict or value?

 

For instance, if an independent appraiser marks a little box with a check mark to indicate ‘Declining Market’, he/she would be instructed to remove it, put the check in the ‘Stable Market’ box or they would not get paid their fee, or they would be removed from the ‘approved’ list of the lender. I’m aware of lawsuits by appraisers over this practice and have had personal experiences that have been previously written about in appraiser related publications. Two of the lenders involved have since failed, one being the largest bank failure ever.

Changes and new provisions to the Washington State Condominium Law, which took effect June 12, 2008, may impact valuations and appraiser liability. These need to be understood by appraisers (and by owners, purchasers and real estate agents) when becoming involved with a condominium, whether it is newly declared or has been in existence for many years.

For a quick overview of Washington State Condominium Law, refer to an excellent article by Elizabeth Rhodes of the Seattle Times.

For a complete and detailed look at the law itself, go to the Condominium Act at: http://apps.leg.wa.gov/RCW/default.aspx?cite=64.34 and scroll down to Section 64.34.380 through 64.34.390. The history of the new legislation is available at: http://www.leq.wa.qov/leqislature.  Click on ‘Bill Search’, type in “6215” and click ‘Search’ then go to the bottom of the page and click on ‘Original Bill’ and ‘Bill as passed in Legislature.’

The goal of the new law, sponsored by Senators Rodney Tom, Jim Honeyford and Bob McCaslin, is to enhance consumer protection in the purchase and ownership of a condominium.