Amidst all of the discussion of the mortgage crisis and the implementation of the Home Valuation Code of Conduct (HVCC), there has been lots of finger pointing, concerning who was at fault for the meltdown and what should and should not be done to fix the problem(s). Unless you have been in seclusion for the past year, you have heard of the attempts of New York Attorney General Andrew Cuomo to keep appraisers separated from loan originators. He, along with Fannie Mae and Freddie Mac, our two largest government-sponsored enterprises (GSEs), signed an agreement as a compromise to settle a lawsuit. This lawsuit was primarily about mortgage foreclosures, which resulted, according to Attorney General Cuomo, from lenders placing pressure on appraisers to appraise properties higher than their market value in an attempt to make fraudulent loans. These loans ended up costing homeowners their homes and costing taxpayers billions of dollars in bailout money.
The resulting agreement between the participants led to the creation of the HVCC, which, among other things, forbids mortgage brokers from ordering appraisals from appraisers on loans, which they make that are sold to Fannie Mae and Freddie Mac. It also restricts loan production officers in banks from ordering appraisals or communicating with appraisers who are performing appraisals on bank loans.
Many mortgage brokers and bank loan officers are crying foul, claiming that the HVCC has damaged their ability to make loans. They allege that the result has caused many appraisals to be assigned to bank-owned or independent appraisal management companies (AMCs) and that their applications are being turned down due to appraiser incompetence and errors. One of the most common complaints is that appraisers are being assigned work in areas long distances from their home bases or offices.
The details of the HVCC and appraiser independence are multifaceted and would require much discussion, far beyond the scope of this article. With this in mind, we will restrict our discussion to the distances appraisers travel to do appraisals and discuss “how far is too far.”
This question reminds me of the question of how long a man’s legs should be. U.S. President Abraham Lincoln is reported to have answered that question by saying, “Long enough to reach the ground.” In appraisal distances, an analogy may be made that it varies with the person and the circumstance. Not to trivialize the issue, there are distances and locations that individual appraisers will find excessive to travel in order to provide professional appraisal service. Having said that, some circumstances will warrant further distances than others and there can be no hard and fast rule. The circumstances that matter most in addressing the question, in my opinion are, the number of appraisers available to serve a specific location at a specific time, the geographic experience and competence of the appraiser, whether the assignment is commercial or residential and the availability of sales data.
A couple of examples of some real-life issues relating to the above are:
■ The property is located in a rural county and there are only two appraisers serving the area. One has a reputation of providing poor service and the other is located 50 miles away from the subject property. The latter does good work, has access to all market data and has time in his schedule.
■ A known and trusted appraiser has served a radius of 60 miles for 20 years successfully, has performed many appraisals near the subject, has access to all MLS data, but lives 43 miles away from a subject property requiring evaluation. The bank assigning the appraisal is not able to confirm the availability of any other competent appraiser; however, there are a number of other appraisers located near the subject.
In the above examples, it is easily understandable why appraisers may be selected some distance from a given property. It is only fair also to acknowledge that reports have been circulating that accuse banks and AMCs of sending appraisers from one large city to another, sometimes 50 to 100 miles apart. It is equally understandable why, in such cases, there would be major concern for such broad-reaching, geographic area, appraiser-stretching, assuming that the property is a residential property, not having any unusual characteristics addressable by local appraisers.
I would place no specific limit on how far an appraiser should travel to perform an appraisal. It is not unusual for commercial appraisers to travel across country or even into other countries to perform highly-specialized assignments. This is not usually the case with standard residential properties; however, some appraisers routinely cross state lines and cover several cities competently. Other appraisers never leave their city or even their part of their city in their practice. I suggest to you that all of these situations can and do produce acceptable practices. In the end, an appraiser closest to a property, one that is capable of delivering the most professional service, is usually the best choice.
In conclusion, distance alone is not a sufficient factor to determine whether a specific appraiser is the best for a particular assignment. Many other factors must be considered, and all factors must be evaluated. One of the primary considerations is whether the appraiser is able to deliver a fair, unbiased and honest appraisal, free from outside pressure. The mere fact that different appraisers are being used than those used in the past is not a legitimate basis to criticize the system. This is especially true when we consider that the old system has cost taxpayers billions of dollars, due to fraudulent loans where the “appraiser next door” may have performed the appraisal. It is the responsibility of those selecting appraisers for a particular assignment to find the best person for the job, not simply the one closest in proximity.
Charlie W. Elliott Jr., MAI, SRA, is president of Elliott & Company Appraisers, a national real estate appraisal company. He can be reached at (800) 854-5889.