Yes, we as taxpayers did lose hundreds of billions of dollars recently due to the mortgage crisis. This is the second time that this has happened during my career as a mortgage professional.
The first time it occurred was in the 1980s, when it was called the Savings & Loan (S&L) Crisis. Back then, the government stepped in and bailed out the S&Ls along with some banks. Many people blamed the appraisers for the debacle, because they were not state licensed. The S&L bailout resulted in a national campaign to require state licensing of all real estate appraisers. Before that time, appraisals had been performed by designated appraisers, who had demonstrated their proficiency through belonging to appraisal trade groups, such as the Appraisal Institute and the American Society of Appraisers. Now, it seems that state licensing of appraisers is not enough. Many are blaming appraisers yet again for the huge losses experienced by the banks. This time around, there are practically no S&Ls left. Will we ever learn?
In an attempt to stem further losses, Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA) have taken steps to promote appraiser independence by not allowing mortgage brokers to select appraisers or to place appraisal orders. This has caused an outcry from many quarters in the industry, including mortgage brokers, Realtors and appraisers. They are blaming appraisal management companies (AMCs) because they are now handling appraisal orders, which once were ordered by mortgage brokers. Those complaining say that AMCs are appraising properties too low, using unqualified appraisers, sending appraisers too far to perform appraisals and not paying appraisers all of the fees collected by the bank when the loan application was taken.
If this sounds like sour grapes, it probably is, at least some of it. Very few of us in the mortgage loan industry are making the money we were two or three years ago. People are trying to position themselves to make up for the shortfall. Realtors need to close deals, mortgage brokers need to make loans and appraisers need to perform appraisals. The industry is in an economic meltdown, property values have plummeted, loan parameters are tighter, many people do not have jobs, and those with jobs, in some cases, are afraid that they will lose them.
This all boils down to very select few qualified borrowers with tons of people applying who do not make the cut. What it comes down to is that many are blaming the appraiser-selection system for the lack of business. Does this equate to rigging the system to make loans close? Is this not just what we are trying to get away from? Appraisers must be independent in order for them to provide honest and accurate appraisals.
Given the above statements, should we go back to the policies of the past that got us into this mess, just to provide jobs to those who now do not have as much income because of the mortgage crisis? I should think not, and as a taxpayer, I hope not. It is a much bigger and more important issue than just providing industry members with jobs.
There is plenty of room to discuss the shortcomings of appraisals and appraisers. That being said, I do not believe that there are many appraisers out there intent upon killing an otherwise healthy loan package with a bad appraisal. The problems we currently face are too few qualified borrowers and declining home values. This cannot be corrected with appraisal legislation, rule changing or loosening up of the standards. Such action would only make things worse in the long run.
This begs the question: Is there a better way to select appraisers? I suggest that there very well may be. Whatever it is, it should not include the lender making the loan, selecting the appraiser, ordering the appraisal and paying the appraiser. When the lender is really not lending his or her own money, there is just too much temptation for the undue influence of appraisers.
It is my suggestion that a bank, funding a loan, give the customer at least two options for the selection of a management company to acquire an appraisal for their property. At least one of these must come from an independent management company. Each would include all-inclusive prices, which would be the dollar amount charged by the company providing the appraisal service, including the management of the process. There would be no other appraisal fees charged to the customer. Banks, opting to engage in the process of offering their clients appraisals, would be required to set up management companies and register in all states, as well as at the federal level, if and when required of other AMCs. Said another way … bank-owned AMCs would be required to follow the same rules as all other management companies.
Would this be perfect? Probably not, but I believe that it would foster competition, while giving the borrower at least a bit of say-so in the appraisal process. It would go a long way toward providing transparency and would help to remove questions as to the ethics of the bank in the transaction. Banks would undoubtedly benefit from the increased customer satisfaction and could focus more on what they do best, make loans.
Charlie W. Elliott Jr., MAI, SRA, is president of Elliott & Company Appraisers, a national real estate appraisal company.