Posted by: appraisals4realestate | September 29, 2008


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.


The practice of lenders controlling the remuneration and vendor approval process for appraisers is directly responsible for the corruption of the system. We have to build a new system that removes this corrupting link.


I remember well the ‘Savings and Loan’ crisis in the 1980s, I was an appraiser back then too, before appraiser licensing was in effect. The bad valuations got blamed on appraisers who became strictly regulated under FIRREA – 1989. There may have been a few bad appraisers but they were working directly for the lender involved. No appraiser was ever convicted of overstating value by billions or trillions of dollars!


The creation of the secondary market (Fannie Mae and Freddie Mac) turned portfolios of real estate into portfolios of paper and digital data that could be moved around the world on the Internet by computers on Wall Street.


Whose job was it to put a valuation on this newly created paper? Well the bond rating companies like Standard & Poor’s and Moody’s. They are a lot like appraisers. They examine the collateral underlying the bonds and rate them accordingly. Their independence is crucial.


When the sub-prime paper came into the picture and was presented to the bond rating agencies they must have been initially horrified at the thought of rating these products AAA. They may have suggested a more appropriate grade such as A or BAA, which is just above the junk classification. See Bond Rating Table below.



Bond Rating




S&P/ Fitch




Highest Quality




High Quality








Medium Grade

Ba, B







Highly Speculative




In Default



But no! They apparently rated them in the ‘Quality’ range, which of course had a higher price and was easier to sell for their Wall Street clients. How did Wall Street persuade the bond raters to overlook the higher risk of the Collateral Debt Obligations (CDOs)? All you have to do is follow the money trail. Let me suggest this scenario.


Stock Broker warns Bond Rater that if he issues a lower rating on the CDOs it results in a lower income for the Broker and thus lower income to the Rater. A lower income for the Rater, acknowledged by the broker, would necessitate the lowering of the Raters company stock value and thus a reduced company market valuation. Does this remind you of something we were discussing earlier about appraiser compensation?


The rising popularity of Appraisal Management Companies (AMCs) seems, at first blush, to create a system where appraisers are not in direct contact with the lender. Unfortunately the trend here is for the big lenders to buy a controlling interest in the AMC then gain control over the process and access to the appraisers’ data to form its own Automatic Valuation Models (AVMs). The independent valuation process is corrupted again.


The corrupting link again is the ‘Paying of the Judge’ and allocating the judge’s ‘caseload’. There has to be a better way.


Here’s a suggestion. Create an association of valuation professionals to act as a clearing house for valuation requests. The request orders are paid for up front according to a sliding scale or bid system and the assignments and results are anonymous to the requestor. Such an association would be like the old Craftsman’s Guilds but could operate on the Internet and be accessible to everyone 24/7. This company’s stock would not be on the ‘big board’.



  1. Great info
    keep me in the loop

  2. Great Minds!!

    Good job, Mike. I have been explaining mortgage back securities for weeks, as there are many people who have no idea how this has all happened. Sad, but true. That is why we keep getting into these “messes” on a national level.

  3. I have more work now that the banks are actually failing than I have had in the past year or more. Does it really matter who pays for the appraisal?Isn’t the value the same regardless? Personally I fire any client that demands I make false statements in my reports. Those that have are now seized. It appears to me that the system is working. Especially when congress takes a stand and says no mo money!

  4. It’s a giant conspiracy! Except that you have uncovered it! Well done.

    One of the real problems is that all those young, money grubbing stock brokers sold mortgage backed securities to unsuspecting buyers with the caveat that the paper was backed by the government. Though it wasn’t. But will be. So maybe they were just prescient! There was no accountability.

    And I believe that you are right about appraisers who are (were) being selected by the lender because they didn’t “trust” the lowly loan officer not to influence the appraisers judgment. Chicken in the hen house is the lender. The little guy has some responsibility, however we were all raped by the lender, wall street, bond rating agencies and a government who wanted 65-67% home ownership- payments be damned.

    Alan Greenspan and the Clinton administration aren’t looking too clean either.

    If you want an insight into bailouts for banks and their genesis read ‘The Creature from Jekyll Island’, which is out of print but can be found on Amazon.

  5. Unfortunately your analysis is correct, but the further regulation or private reorganization of the appraisal industry fixes nothing. Until there is a quantum shift in our financial origination industry from fee based income to long term point spreads this shell game will continually reinvent itself and find new and creative ways to skin the consumer.

    Without meaningful evaluation of risk ANY economic system will fail.

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