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AMCs Battle Over Appraisal Fees, The Subprime Monster

December 7th, 2010 by Bill Collins Leave a reply »

  • Attention Appraisers: Help Shape Future of "Customary and Reasonable Fees
  • Complexity and Difficulties in Commercial Appraising
  • Sex, Lies and Mortgage Fraud: It’s all in The Monster-How a Gang of Predatory Lenders and Wall Street Bankers Fleeced America-And Spawned a Global Crisis
  • Some Reader Comments Regarding Our Recent Discussion of AMCs and Customary and Reasonable Fees
  • Rates and Dates
  • Ask Angie
  • Tell us what you think!
  • Closing Remarks

  • Attention Appraisers: Help Shape Future of "Customary and Reasonable Fees"

    On October 28th, the Board of Governors of the Federal Reserve System published an “Interim Final Rule” amending Regulation Z, Truth in Lending Act, or TILA.  This interim rule implements Section 129E of the TILA which was enacted in July as Section 1472 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.  As AppraiserNews.com has reported, the “Customary and Reasonable Fees” provision bodes well for appraisers, with this part of the act scheduled to be implemented on April 1, 2011.  This “Interim Final Rule” has language that concerns appraisers in regard to whether the provisions related to appraisal fees will be truly enacted and not be a bad April Fool’s joke.

    A link to the Fed’s “Interim Final Rule” is found here: Part 226 Truth in Lending: Interim Final Rule

    More importantly, a link where you can register your comments with the Fed is found below.  The deadline for comments is December 27th so please take a few minutes to make your voice heard.
    Federal Reserve Board: Electronic Comment Form

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    Complexity and Difficulties in Commercial Appraising

    While residential appraisers deal with difficult valuation questions related to REO inventory and its impact in many markets, the steep decline in the commercial market along with a dearth of truly comparable sales has heightened awareness of the challenges facing commercial appraisers.  The 2011 Grubb and Ellis Real Estate Forecast released on November 18th in its Appraisal & Valuation Overview highlighted these areas:

    “The market seeks valuation clarity:
    -Generally accepted that values have dropped by 40% from their peaks
    -Values vary greatly by market and property type
    -Over $1.4 trillion in commercial real estate loans maturing shortly
    -The question is how to resolve the “underwater” loans
    -Smaller banks may face tough valuation challenges
    -The Fed will not push banks to mark to market assets
    -Realistic valuations vs. extend and pretend”

    Grubb & Ellis noted that in 2011, more conservative underwriting standards will place a greater emphasis on existing income and will scrutinize vacant space carefully.  Traditional valuation methodologies will be challenged with more detailed analysis expected of commercial appraisers including greater support of estimated rates of return.

    Additional information about Grubb & Ellis can be found by going to their website www.grubb-ellis.com and a link to the Grubb & Ellis Valuation Advisory Services report is found here: Grubb & Ellis 2011 Annual Media Forecast Preview

    The Wall Street Journal illustrated some of these problems in an article on December 1st in which they reported that the delinquency rate for commercial-mortgage backed securities rose again in November according to data provider Trepp LLC.  Trepp found that 8.93% (or $60.3 billion) worth of the loans packaged into CMBS (commercial-mortgage backed securities) were either in foreclosure or past due, compared with 8.58% in October.  The November rate is reportedly the second highest reading ever.  The Journal article noted that the delinquency rate by sector showed that multifamily CMBS loans were highest at 15.8% followed by hotels at 14.56% with substantially lesser figures for retail stores (7.59%), offices (6.95%) and industrial (6.64%).  Additional information about Trepp LLC can be found by going to www.Trepp.com.

    We understand that many of our newsletter readers are commercial appraisers involved in the valuation of smaller, “Main Street” type properties and that the above data relates to property classes quite different from those they typically appraise.  They face the same issues, however, of lack of comparable data, reasonable rates of return, etc. and face greater scrutiny of their work and higher expectations in the coming year.

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    Sex, Lies and Mortgage Fraud: It’s all in The Monster-How a Gang of Predatory Lenders and Wall Street Bankers Fleeced America-And Spawned a Global Crisis

    In his new book The Monster, author Michael W. Hudson, former Wall Street Journal reporter and writer for Forbes, The New York Times and other publications, details the rise and fall of the subprime mortgage business starting with its beginning in the late 1980s after the savings and loan collapse and leading up to the expansion and collapse that occurred during the past decade.  The book chronicles the creation of Ameriquest Mortgage by Roland Arnall along with the births and deaths of other big subprime lenders such as Option One, Fremont and New Century Mortgage.  It discusses how the building of “boiler room” subprime mortgage sales operations in Orange County, California enabled by Wall Street’s development of complex mortgage backed securities created by companies such as Lehman Brothers allowed for the huge expansion of subprime loans in the early 2000s.  Lehman’s help in the growth of notorious subprime lenders such as Delta Financial from a loan volume of $100 million in the middle 1990s to $1.5 billion in the late 1990s is described.  After the initial subprime scandals are exposed, Mr. Hudson discusses the relatively minor penalties imposed by regulators which led to even more brazen unethical and fraudulent conduct as subprime loan volumes increased exponentially. 

    The author dedicates the book “To anyone who’s ever been broke, busted, ripped off, cleaned out, or drowning in debt.”  He describes the blatant fraud, forgeries and schemes developed by these subprime companies including Ameriquest’s “Whoops Technique” whereby a borrower with an annual income of $56,000 might be reported as having an income of $66,000, a fact that could be explained as a simple typo if discovered in underwriting.  The book describes the various pressures placed on appraisers and discussed how cooperative appraisers used “inventive camera angles to make homes appear more valuable”.  It quotes an Ameriquest loan officer named Stephen Kuhn, a car salesman turned mortgage salesman, as saying that with such creativity “You can make the biggest piece of s_it look like a mansion”.  Stephen Hudson discusses how sexual favors became commonplace with wholesale representatives offering sex to brokers willing to send loans to them.  It quotes Sharmen Lane, a former New Century wholesale rep as saying that “I didn’t want to be a mortgage slut” in referring to turning down the solicitations of one mortgage broker who had propositioned her.  The importance of alcohol, cocaine and other drugs such as crystal meth in the subprime lending culture are also discussed. 

    Mr. Hudson notes that between 2003 and 2004 subprime lending grew by 60% to $529 billion and that it increased to $665 billion in 2005.  By 2006, though, the housing market had stalled and began to decline. The book describes some of the fraudulent schemes which were prevalent including the use of straw buyers and the fabrication of homes and developments that did not exist. In May of 2006, the author notes that Ameriquest Mortgage shut down all 229 of its branches and released 3,800 employees.  By the fall of that year, however, Mr. Hudson notes that Alan Greenspan was saying that he saw “early signs of stabilization” in the market and Angelo Mozilo, chief of Countrywide Financial, is quoted as having said that “We’ve already had the hard landing” and that while he expected 2007 to be flat he said that “In 2008 we’ll have one hell of a year.”  Michael Hudson makes the important point that: “Complexity and shadows are corporate looters’ best friends. The more complicated assets are, the harder it is to put a value on them. That makes it easier for slick operators to inflate the assets’ prices and entice investors to risk their money—and keep regulators and journalists from stirring up too much trouble”.

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    Some Reader Comments Regarding Our Recent Discussion of AMCs and Customary and Reasonable Fees

    The following is taken from a letter written by Margo Henson, an appraiser in Seattle Washington, to Kathleen Ryan of the Federal Reserve Board last month:

    “Dear Ms. Ryan:  I have been a residential appraiser for twenty years in the Puget Sound area.  I worked long and hard to build a clientele based on doing the extra for them in terms of service whenever it was needed.  I was able to negotiate my fee and give them a lower cost when it meant that they would get the applicant so we both had work.  But I had a choice of whether to change my business procedures or not and it was truly a business decision.  Appraisal management companies have gagged appraisers with low fees, ridiculous turnaround times, etc…

    The only aspect of the financial reform bill that was a bright spot for appraisers was the rule that we had to be paid customary and reasonable fees based on independent surveys that did not include what AMCs have been forcing on us the past year and a half.  Now I see that TAVMA has written a letter saying there is no basis for these surveys. 

    The implications that the AMCs don’t want to happen by continuing to restrict our fees is that they will not be able to stay in business.  The TAVMA letter states that customary and reasonable fees should not be implemented because it does not help appraiser independence.  What you may not know is that although AMCs keep a list of people who have applied with them, if you don’t change your adjustments or take comparables out of a report at their request, they don’t order from you again.  When you call to ask why, they either say there’s no work or that there is nothing wrong with your profile, but you still don’t receive orders.  Also, they allow lenders to each have their own list with no minimum number of appraisers on it.  So they could have only two appraisers on their list and the lender effectively still chooses the appraiser…

    Saying there are no authoritative surveys is absurd.”  –Margo Henson, IFA, Market Appraisal, Inc.

    “Bill: As with most other appraisers, I have been forced to accept work at reduced fees from AMCs.  It is my opinion that these low appraisal fees will never be increased by any amendments that may pass in Washington. My reasoning for this has to do with price regulations and the open market.  That being said, it is up to the individual appraiser, and the individual appraiser alone, to request an increase in their fee structure…

    Here is my solution to the problem of low fees:  Once I have completed a number of appraisal orders with a particular AMC, I then request an increase of 25% in my fee structure.  Of course, in order to increase your fee, your work must be exemplary and on time, every time.  I state my case that my work passes all quality control and time requirements and that my work saves the AMC time and money and puts them in a better position with the lenders due to the quality of my work.  Once my work has proven itself, I am most often given the increased fee.  Due to my increase in fees, I estimate I lose 30% in orders, but at the same time, my income has risen 25%. Considering the time and money spent on gas and business expenses, I think it is a good trade off.  As I have stated, it is up to each and every appraiser, on an individual basis, to take the action that I have taken.” —Just another appraiser from Long Island, NY
    (Editor’s note: this appraiser requested anonymity due to his concerns that further work would be withheld by the AMC if he was identified).

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    Rates & Dates

    Freddie Mac reported that rates for 30-year fixed-rate mortgages rose to 4.46% for the week ending December 2nd, up from the 4.40% rate reported on November 24th.

    The Mortgage Bankers Association (MBA) in its most recent Weekly Mortgage Applications Survey for the week ending November 26th reported an increase to 4.56% from the previous week’s average of 4.50%. 

    Additional information from Freddie Mac can be found by going to: Primary Mortgage Market Survey PMMS – Freddie Mac

    Additional information from the Mortgage Bankers Association can be found by going to their site at: Research and Forecasts – Mortgage Bankers Association

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    Ask Angie

    We want to congratulate our most recent winner, Britton Oglesby, a Certified Residential Appraiser with Oglesby Appraisal Service in East Alton, Illinois. 

    Today’s questions:

    1) Where is the following verse found: “Do not get tired of doing what is good,  Don’t get discouraged and give up,  For we will reap a harvest of blessing  At the appropriate time.”

    a) Section 283 of the Dodd-Frank bill
    b) Conclusion of the Fed’s Interim Final Rule
    c) Leslie P. Sellers, Message from the President of the Appraisal Institute
    d) Galatians 6:9 in the Bible
    e) None of the above

    2. Who said: “Stuff happens”

    a) Michael Hudson
    b) Mark Zuckerberg
    c) Angelo Mozilo
    d) Roland Arnall
    e) None of the above

    The first person to respond with the correct answers wins a choice of either:

    One Free Regular Listing on AppraiserHelp.com

    A Free Copy of the UPDATED Directory of Appraisal Management Companies (Available Now to Members of AppraiserHelp.com and FHAAppraisers.com FREE!)

    Angie’s Hall of Fame: Those who have been crowned winners more than once during the past two years and who have been retired from competition for the rest of 2010:
    Suzanne Fahien
    Pat Reass

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    Tell us what you think!

    We invite your responses to any of the issues raised in this newsletter. Please e-mail us at: bill@appraiserhelp.com with your thoughts!

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    We really hope you find our newsletter to be informative!  If you have any input on future topics for discussion, please email me your questions and I will do my best to address them in the next issue.  If you want to look back at past issues you can see our archive at www.appraisernews.com

    Regards,

    Bill Collins, Appraiser Help Inc.

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