LiveValuation Magazine April 2010 by The Reverse Review

Re-Engineering The Appraisal Process Are We Ready Yet? Leland Trice pg 16

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PUBLISHER’S NOTES

Founder : Aman Makkar Publisher : Ernie Durbin, SRA, CRP Editor-in-Chief : Erica English Copy Editor : Kaitlin Dershaw Production : Wilferd Guenthoer Creative Director : Traci Knight National Sales : David Peck Printer : Ovid Bell Press

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Subscription and Editorial Content Phone : 858.832.8910 Email : erica@livevalmag.com Web : LiveValMag.com © 2010 LiveValuation Magazine. All rights reserved. LiveValuation Magazine is a California limited liability company and is the publisher of LiveValuation Magazine. Reproductions or distribution of any materials obtained in the publication without written permission is expressly prohibited. The views, claims and opinions expressed in article and advertisement herein are not necessarily those of LiveValuation Magazine, its employees, agents or directors. This publication and any references to products or services are provided “as is” without any expressed or implied warranty or term of any kind. While effort is made to ensure accuracy in the content of the information presented herein, LiveValuation Magazine is not responsible for any errors, misprints, or misinformation. Any legal information contained herein is not to be construed as legal advice and is provided for entertainment or educational purposes only. Postmaster : Please send address changes to LiveValuation Magazine, 16745 W. Bernardo Drive Suite 450 San Diego, CA 92127

elcome inaugural readers of LiveValuation Magazine!

Our mission is to stimulate innovative ideas in the ongoing valuation conversation. We will focus on the fusion of technology and knowledgeable professionals to enhance existing methodologies and advance new valuation solutions.

No valuation space will be left unexplored. AVMs, BPOs, appraisals, and hybrid products all compete for market share in the valuation arena. Each of these has their own strengths, and weaknesses; the strengths pointed out by their proponents, the weaknesses by their competitors. Despite their differences, all of these products are employed by the same consumer; collateral risk decision-makers. LiveValuation magazine will not avoid the natural tension between different product providers. We want them to engage each other in the pages of our publication. Those involved in valuation decision making will benefit from the dialogue, and those with divergent opinions can learn from each other. Let’s get started!

Ernie Durbin Publisher ernie@livevalmag.com

LVM page five

In This Month’s Issue

6 Joe Appraiser

12 What Does The Future Hold

Steve Papin

For The Professional, Competent, and Ethical Real Property Appraiser? Larry Disney

30 For What it’s Worth Bill Waltenbaugh

FEATURE 16 Re-Engineering The Appraisal Process – Are We Ready Yet? Leland Trice

24 The War on BPOs: I Think I Will Sit This One Out Barry Bates

Re-Engineering The Appraisal Process: Leland Trice poses some “what if” scenarios and suggests some positive steps to reviving the appraisal process.

Contents

20 Data Standards Empower Appraisers Elizabeth Green

J oe A ppra is

Stev

e Pa

>>>

LVM

I’m Joe Appraiser.

I prefer running my appraisals first thing each day with the goal to return to the office in time to write a report or two. It is spring in the Midwestern part of the country that I call home, which brings rain and flowers. When coated by morning dew, asphalt and wood decks can be like skating rinks

in the morning, so I must watch where I step. I hope to avoid leaving footprints in the fresh mulch, stepping on a flower, finding a sticker bush

the hard way, or discovering Fido’s unpleasant present in the yard. I am one of few visitors welcomed not just into a home, but into the corners of the basement storage areas as well as the normally private bedroom wing. At times I am even allowed in someone’s attic or crawl space. Unless I have a tour guide, I open every door to be sure what I think is a closet really is just that, and not a surprise room or bathroom. I often take photos inside the home, trying to avoid the family photos on the wall, while demonstrating the features of the home. I always hope for successful days during which I manage not to set off a security system, no one chases me down for taking a photo of their home, and the local law enforcement officers are not curious about who I am. Most of all, I hope that I do not need a photo of a home where the babysitter or young mother is in the driveway with the small children and I am left deciding how to effectively get the photo. Do I strategically place a tree or a car in my view finder to get the photo and move on? Is it appropriate to approach the people? Is it wise to ask the owner or the babysitter to leave their own front yard so I can take a photo? Do I sacrifice more time and drive around the block to see if they are gone when I return?

If this sounds like you, then you are Joe Appraiser as well. If we line up every independent fee appraiser we describe above, every “Joe” out there and ask: “How are the life and times of the independent fee appraiser these days?” we are likely to hear a resounding “not good”. The number one problem is clear. Profitability in a fee appraisal shop is at an all time low. Report content has exploded and report writing time has increased, while at the same time, there has been an erosion of income caused by downward pressure on fees. Since the Home Valuation Code of Conduct was enacted, the entry of increased numbers into the arena of appraisal management companies has contributed to this issue. >>

page seven

You’ve heard of Joe the Plumber.

LVM page eight The business model of the AMC entails taking fees that have been earned by the appraiser for many years. As a result of the conf lict in the business models (we each want the same dollar), there has been growing animosity between these two parts of the valuation industry that need one another to survive, but are unsure how to work together. It is common for an AMC to ask the appraiser to accept a fee that is between 30% and 60% less than local market fees. Regardless if you are an appraiser reading this article or an industry participant outside of appraising, it is easy to understand the difficulty the independent fee appraiser faces. Imagine your boss entering your office and letting you know you are the greatest employee s/he has, that you are an important and necessary part of the company, and s/he is cutting your pay. This parallels the experience an appraiser has when there is a loss of a local client to an AMC. It is common to be recruited by that AMC, but the compensation can be a big stumbling block. The national lenders and AMCs also have been expanding the report requirements for some time. I have analyzed the difference in the time it takes me to write an appraisal report as compared to the entry into the appraisal arena of the 2005 series of secondary market appraisal forms. I use this to mark the beginning of the expanding appraisal report. This series of forms added some very important items to the industry standard appraisal report, such as the crystal clear disclosure and analysis of the listing and sales history, and the focus on full disclosure of property condition. The reports take a little longer to complete than the prior versions. In the middle of the decade the market began to tank and significant amounts of time were invested in completing more detailed neighborhood studies in order to determine housing trends as appraisers caught on (anywhere between 2005 and 2007 in

different parts of the country). Listings were no longer just in work files and began to find their way onto the grid. In April of 2009, the 1004MC became a requirement. This form has been a great tool for appraisers as it focused the entire profession on segmented market studies and enforced the concept that each sub market can perform differently. These are all important steps. The result is that it now takes 3 times longer to write an appraisal report than it did a few years ago, and the compensation range is about the same to well under the fees earned in the past. We have now entered a phase known as “scope creep” where some lenders and many AMC’s have adopted the belief that adding requirements to the report content will improve appraisal quality. This misguided concept has caused an array of special report requirements that range from unnecessary to just plain silly. Is it reasonable to ask me to return to a property to take another front photo because an AMC reviewer can’t see the house number in the photo? Is it reasonable to ask for a photo of every interior room? How about the most popular of the report requirements where I am required to submit a high number of comparable properties (there is one lender in my region that requires 7 comparables

Appraisers need to recognize that the playing field has changed, and it will likely continue to change. Watch the future and embrace technology, as it may be the key to the next cycle in our profession. on all appraisals) without adjusting the compensation? Meaningful or not, all of these add to the time it takes to complete the appraisal report, and the more time it takes, the less likely I am of being profitable.

As Joe Appraiser, I often find myself wishing the AMC business plan would quickly fail and long term trusted appraisers like myself would once again be compensated relative to our experience and knowledge. There is one big reason why this is not likely to happen, and I can explain the concept in one word: money. The appraisal industry has been dominated by small business for the history of the industry. Now, big business has found a way to take a portion of the valuation dollar. It is safe to assume the next 10 years in the life of Joe Appraiser will not look quite like the past 10 years. Technology and advanced computer solutions will redefine how values are estimated. The most effective of those changes will recognize that the valuation expert is best suited to “drive” the valuation vehicle. I expect future reports will not be limited to a 1004 style form but will rather offer a variety of acceptable report types with varying degrees of content. Short and sweet reports will be used when appropriate, and use of a “full” appraisal as we write today will be called for when the collateral poses a higher risk. What changes are necessary in the short term that will allow quality appraisal work to be completed under the current business environment? Under the AMC arena the most important change is transparency in how the process works. It is quite frustrating for a homeowner or loan officer to address how high the appraisal fees have become when I am being asked to accept below market fees. It is stunning to read over the web site of a management company and see a marketing comment that indicates “an AMC will cost you nothing out of pocket, as the appraisal fee is passed on entirely to the consumer.” There is cost to run any business and this type of marketing fails to recognize that much of the cost is born by the appraiser providing the

appraisal reports. Fair competition requires full disclosure of who is being paid what amount and for what service. In today’s business environment transparency is expected and will likely enter the AMC arena soon. Once this transition begins, lenders will be able to select an AMC based on cost comparison and also be able to make sure appraiser compensation is appropriate for that market. Lenders and AMCs need to work together to limit “scope creep” by considering the necessity of a requirement being added to the process in order to assist in developing a meaningful report with a well supported and credible opinion of value. The core scope of work should be the steps necessary to determine the value of a property. We need only to review appraisal history to demonstrate that adding “rules” for the appraiser to follow fails to make the dishonest appraiser become honest. To understand this point one must visit with the impact of some of the early guidelines such as the “one mile” or “12 months” rules. While well intended, rather than strengthening the appraisal, these became the rallying cry of dishonest appraisers and lenders. If there was a sale within one mile and 12 months it could be used as a comparable and would not be questioned by the underwriter regardless of how “comparable” it was. Appraisers need to recognize that the playing field has changed, and it will likely continue to change. Watch the future and embrace technology, as it may be the key to the next cycle in our profession. In the short run:

• Remember the reduced income does not reduce your responsibility. Do all that you are required to do and do it well.

• Keep in mind that there are management companies that pay fairly. Find them. • Always remember who the customer is. Don’t let your frustration cause you to fail to provide exceptional customer service. With the overwhelming number of AMCs recruiting right now, be sure to establish an effective method of determining which ones may be a match for you before you take the time to apply. I have 3 key questions I ask:

1. Are they active in my local market? Activity level in your local market may help you determine your interest in the relationship. 2. Is compensation based on reasonable and customary fees in my market? I recognize there is value to what an AMC does for me, but it us up to me to determine the lowest fee I will accept. Be sure the compensation is in your acceptable range before investing time in the relationship. 3. Do they have report requirements that exceed HUD or secondary market guidelines? If so, it may take you longer to do the appraisals. With patience and hard work, Joe Appraiser may be able to survive this cycle.

• Seek out relationships that treat you and the appraisal with respect. Web ad.half pg2.qxd:Layout 1

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LVM

CONTRIBUTORS

page ten Steve Papin Joe Appraiser.

Page 6

Steve Papin has been a residential appraiser since 1976. Steve owns Papin Appraisal in Cincinnati, Ohio. In 2005 Steve was one of 3 founders of the Appraisal Group of Cincinnati, a casual trade group. In 2009 Steve accepted a 3 year term as a director for the Ohio Coalition of Appraisal Professionals. Contact Steve by email: Steve@PapinAppraisal. com.

Larry Disney What Does The Future Hold For The Professional, Competent and Ethical Real Property Appraiser?

Page 12

Larry Disney is the Executive Director of the Kentucky Real Estate Appraisers Board and a licensed Kentucky Real Estate Sales Broker, Kentucky Certified General Real Property Appraiser, SRA designated member of the Appraisal Institute, 2005-2006 President of the Association of Appraiser Regulatory Officials (AARO), and is certified by the Appraiser Qualifications Board of The Appraisal Foundation as an instructor of the Uniform Standards of Professional Appraisal Practice (USPAP).

Elizabeth Green Data Standards Empower Appraisers.

Page 20

Elizabeth Green is a principal consultant with rel-e-vant, a consulting firm specializing in real estate finance technology and data-centric solutions. She is the Chairperson of the MISMO Property and Valuation Services Workgroup. Ms. Green has over 25 years’ experience in the residential mortgage industry in data analysis, system integration and software product development for sectors including property valuation, loan origination, loan servicing and secondary marketing. She can be reached at liz@rel-e-vant.com or by phone at 904.318.9900.

Leland Trice began his appraisal career in 1985. He currently serves as Principal of The Trice Group, a regional provider of residential and commercial appraisal services in the Mid Atlantic region. Trice holds a Bachelor’s degree in Economics from the University of Maryland. He is an active member of the Appraisal Institute and the Royal Institution of Chartered Surveyors.

Page 16 Meetings

Barry Bates wiretapped the Soviets in Berlin as an Army staff sergeant between 1964-68. After college, he was determined to destroy Forum capitalism from the inside; he failed miserably for 34 years, but has finally succeeded over the last three. He’s been chief appraiser for four national lenders and property valuation manager for two major mortgage securitizers. His email address is barry@remva.org.

Page 30

Strategy

Bill Waltenbaugh is a certified appraiser of 20 years. During these years, Bill witnessed and experienced first hand the many changes which occurred in the appraisal industry; from the advent of licensing to the implementation of HVCC. Recently, Bill joined AppraiserLoft, a nationwide Appraisal Management Company, as their Chief Appraiser and currently writes a weekly blog called, “For What It’s Worth”.

Commitment to REENGINEERING the appraisal process

The CRN is a group of dedicated chief appraisers, collateral risk managers, regulators, and valuation experts who are focused on resolving the many challenges facing our profession. The Collateral Risk Network is represented by Lending Institutions, Wall Street, Fannie Mae, Freddie Mac, Veteran’s Administration, the Federal Housing Administration, and Appraisers. With the inclusion of all stakeholders in the collateral valuation space to an open dialogue, we intend to find solutions to the current crises. Through our quarterly meetings and private email network the “thought leaders” within the appraisal profession act as counsel to each other, share experiences, and assist each other in solving mutual problems. www.collateralrisknetwork.com

Join

page eleven

Page 16

Bill Waltenbuagh For What It’s Worth.

Barry Bates The War on BPOs: I think I’ll Sit This One Out.

CONTRIBUTORS

Leland Trice FEATURE: Re-Engineering The Appraisal Process – Are We Ready Yet?

LVM

LVM page twelve

What Does

The Future Hold For The Professional,

Competent and Ethical Real Property Appraiser? Larry Disney

In my position as an appraiser regulatory agency official, I have been asked the above question often, certainly more times in

Although, I wish there was a crystal ball answer that would calm the concern and anxiety that the appraisers are experiencing today; there is not one. The following are four reasons that, in my opinion, have created cause for concern by appraisers and created the major cause for the above question: 1. The collapse of the mortgage lending process has created a significant decline in the demand for real property appraisal assignments of 1-4 unit residential properties. 2. The perceived need, or whatever reason, to have a report that contains less content than has been previously required and turn times that are often unrealistic for developing credible assignment results. 3. The mass confusion surrounding the HVCC agreement.

the past six months than ever before. New appraisers who have recently entered the program in a training function, as well as long time appraisers who have been designated by professional appraisal organizations for more than 30 years ask this question.

4. The failure of many users of appraiser services to understand or value the knowledge and competency of professional appraisers.

LVM page thirteen

“

Change is the one

factor that appraisers should understand as well as, or better than, the average person. What can the professional appraisers, the appraiser regulatory agencies, and the professional appraisal organizations do to turn the current mood from a negative to a positive outlook? Some relief can be gained by addressing the issues.

Item 1 - There is currently little the collective groups can do to correct the lending policies. However, the market will correct and the lending policies will change. When the change occurs, the orders for appraisal assignments of 1-4 unit residential properties will also increase. Until that time, this issue will continue to be a concern. But, in time the corrective change will result in an increase of appraisal assignments.

Item 2 - This issue is mysterious, especially with the recent qualifications criteria changes. Why have the users of appraisal services, many of whom suggested the increased criteria for qualification, made a decision that the appraisal process must be completed and a report delivered in sometimes less than eight hours, regardless of the assignment complexity? Often, the demand for turn time does not permit a reasonable search of data or the development of studies that can be used to support a meaningful opinion of value. >>

One primary concern of item 2 is the increased demand for Broker Price Opinion (BPO) orders in lieu of appraisal assignments. This, in my opinion, is viewed as a confusing request. Regardless of how the product is identified, the act of developing and reporting the result is an appraisal. Professional appraisers have broad f lexibility in complying with the minimum USPAP requirements when developing an opinion of value and reporting that opinion, regardless of how the order is labeled. Therefore, in the absence of a prohibition by a state appraiser regulatory agency, professional appraisers are not restricted by USPAP from completing BPO assignments. The appraisers must answer: is the service worth the effort and time? Whether to accept the BPO assignments or not is ultimately a personal business decision. Item 3 - The Home Valuation Code of Conduct (HVCC) has created more confusion and concern within the appraisal profession than I have heard since the inception of state appraiser licensing and certification. Appraisers, lenders, and loan applicants regularly call me with questions

about the HVCC. Typically, they want to know if some action they have committed has violated the Code. I am not aware of how you might specifically violate the Code, but I suggest that inquiring lenders consult legal counsel. I also inform the appraisers and the borrowers that I am not aware of any specific terms or conditions that bind them to the Code, thus without a binding requirement, one cannot commit a violation. Appraisers are also cautioned that clients, specifically Appraisal Management Companies, sometimes issue assignment conditions that require the appraiser never directly communicates with the lender or the borrower; if so, the appraiser must comply with the condition. Whether correct or not, other items of complaint often given the KREAB concerning AMC groups, include: 1. The AMC will not include qualified appraisers on their approved list, even though the appraisers have been practicing within a market for many years; instead appraisers that live many miles outside the market area are included on the list, and some are asked to travel from one end of the state to another in one day or less. 2. The fees charged for appraisals have been as much as three times the amount that was customary prior to the Code. Loan applicants believe that the appraiser received the total fee, and they in turn call the KREAB office to complain. What can the groups identified above do to combat this trend? In my opinion, the appraiser regulatory agencies, the lender regulatory groups, the appraisal management companies,

and professional appraisers must meet and discuss a reasonable process that will correct these and other perceived or real problems. Agreeable solutions can be and will be achieved. Until then, professional appraisers must decide if the assignment conditions afford them the ability to perform the assignment ethically and competently. If the answer is no, the assignment should be declined. Item 4 - What can be done to make the users of appraisal services understand the value of a knowledgeable, competent professional appraiser? In my opinion, just as other professions have worked diligently to build a reputation of honesty and competency, the appraisal profession must do the same. Positive change will occur only if and when all professional appraisers begin working together to do so. Change is the one factor that appraisers should understand as well as, or better than, the average person. In today’s turbulent economic times, change is happening at speeds beyond what we could have ever imagined. Therefore, the professional appraiser must be prepared and equipped to embrace the changes. Acceptance of change does not mean that one should cease demanding that every assignment be completed competently, ethically and compliant with USPAP. That basic demand should be amplified and rewarded by all parties named herein. Where does the practicing appraiser learn about the rapid changes? It has been said that no more than 30 percent of the licensed and certified appraisers are affiliated with a professional organization. If this is correct, by what method is the remaining 70 percent receiving up-to-date information? My advice to all appraisers is to organize and affiliate with other professional appraisers for purposes of promoting and enhancing the profession. Work with the state appraiser regulatory agencies in keeping abreast of laws and regulations that impact the profession. Respond to the ASB and AQB exposure drafts and remain abreast of the ever-changing policies and requirements of the users of appraisal services. You can make a difference, but only if you become involved. The Commonwealth of Kentucky motto applies to the appraisal profession: “United We Stand – Divided We Fall.” Continued inactivity and failure to become involved is a form of division. Once divided, no group can continue to be relevant.

LVM page seventeen

lmost two years have passed and I think it is time to revisit this topic and assess where we are as an industry today. I have been an appraiser for my entire adult life, having started while attending the University of Maryland. Real Estate is in my family genes and my educational background is Economics and Computer Science. All of this has inf luenced my passion to blend technology and analytics with traditional valuation processes. While I am impatient by nature and personally believe the necessary changes are way overdue, I do sense increasing consensus and recognition that the residential valuation system is broken. I also sense that given the historic financial and real estate meltdown we have witnessed, there may be opportunities to achieve deep and meaningful change in how valuation products are produced. However, one lesson abundantly clear to me is that change is hard and status quo is a powerful adversary. Sadly, the list of pain points is long: content, format, support, communication, transparency, and quality control. The deterioration of the appraisal process did not happen overnight but has evolved as mortgage lending has moved from local to national. Securitization has been a double-edged sword; one that provided powerful liquidity for the real estate market, but also created a disastrous belief that risk could be removed and that credit and collateral standards could be relaxed. As this deterioration accrued, the result has been a continual series of “band aids” for the appraisal process. Clients and appraisers now deal with the “addendum du jour” as lenders try to fix various problems. Another new wrinkle in the industry that has been born out of the crisis is the HVCC. To overuse the same cliché, the HVCC represents another double-edged sword. Clearly inappropriate pressure on appraisers has been a serious problem. The HVCC did effectively tackle that problem, but the f lip side of this “cure” is that long standing appraiser-client relationships have been broken. AMCs have rapidly gained market share. The rise of AMC usage has put serious financial strain on appraisers and many suggest the most educated and competent appraisers are financially penalized within that business model. Perhaps the time has come to “blow it up” and truly re-engineer how we, as appraisers, deliver products to our clients. That also requires our clients to ask the right questions so we clearly understand how to give them what they need. The new Fannie Mae Market Conditions form attempted to place much needed emphasis on analyzing markets on a micro level, but many suggest this should be part of a larger and more holistic exercise. Clients engage appraisers; appraisers produce an appraisal report by gathering and analyzing data, and using software to compile a report. Appraisers deliver their appraisals to the clients, and clients underwrite loans relying on their appraisals. Often, a secondary market will purchase loans and implicitly

rely on that appraisal obtained by the client. What is so hard about that? The ingredients are simple and well established, but there are been few REAL advances in the appraisal process. We have moved from typewriters to PCs, from film to digital images, and from printed comp books to the internet. All of this may allow appraisers to do their jobs faster, but how about better? Faster was quite rewarding when appraisers were overwhelmed with work, but does faster solve any of the problems that are now painfully apparent during this financial services meltdown? Many well intentioned and successful companies have tackled pieces of the puzzle with respect to portals, forms software, data, AVMs, due diligence, etc. However, we are starting to see the birth of some new products, like Live Valuation and Comp Cruncher, which embrace the concept of a more holistic effort.

The problems are many and the solutions are not obvious. If it were clear, easy, and did not require so many constituencies to agree, then the industry would have righted itself. I will reiterate my thoughts on the appraisal industry framework through some “what if” scenarios:

AMCs offer a valid and desired business model. Many banks prefer to focus on their core competency: lending. While collateral risk management is a key ingredient to that lending process, it can be a major undertaking. Outsourcing that process to a third party who has greater scale and focus on that element is a legitimate decision. The problem is that a “for profit” collateral risk venture is incented to prioritize profit margin over quality. Many AMCs will stress that they spend considerable time, effort, and money on QC efforts. However, that does not solve the issue of adverse selection, whereby the best and brightest appraisers may choose not to work with a particular AMC because the fees are not acceptable. I would suggest the lenders are more at fault than the AMCs. It is time for lenders to acknowledge and deal with this problem by separating the fee paid to the appraiser from the fee paid to the AMC for managing the process. Lenders should establish the “fair and customary” appraisal fees for any given region. This puts every AMC on a level playing field on how they compensate their panels and makes them compete on the value added services surrounding the appraisal itself. >>

The current process is very fragmented and lacking in standards. There are many fingers in the pie and appraisers are increasingly kept at arms length from the client. Portals evolved to help facilitate more efficient and transparent communication between parties. However, the prevalence of so many portals has created more and more silos for the appraiser. What if MISMO or some other standard allowed appraisers to communicate electronically with all clients using a common standard? If ordering, accepting, status, and delivery were standardized, then appraisers could engage in e-commerce with their clients all within a single software product.

As noted above, standards are severely lacking. Vendors fear standards for competitive reasons and appraisers fear standards will accommodate data mining. Why do clients want data? Two reasons, mainly; data fuels efficient automated lending platforms and perhaps they also want data to overcome deficiencies in the appraisal reports themselves. How many realized that Fannie Mae and Freddie Mac, whose sole business revolves around buying mortgages secured by real estate, do so with almost NO KNOWLEDGE of the real estate serving as the collateral? The entire system is built on “reps and warrants”, a concept that utterly failed in the recent meltdown and has required the US government (i.e. taxpayers) to pump billions of dollars into these two GSEs to keep them operational. What if data standards allowed various technology systems to interact?

Imagine receiving an appraisal request with vast amounts of standardized data included, such as order data, public record data, prior appraisal data, AVM data, neighborhood data, and sales data. Imagine standardized data allowing appraisers to use the “wisdom of crowds” and benefit from their peers’ data. Meaningful data extends to neighborhoods as well as properties. Have you ever noticed there is no true definition of a neighborhood? Subdivision is an obvious delineation in many instances, but many properties are not in planned communities and not all data sources (public and private) do a good job of identifying a subdivision or a neighborhood. The new CDD portal forthcoming by Fannie Mae may be the first step towards this much needed standardization.

Appraisal software vendors have diligently worked to make appraisers faster at filling out forms. All of these bells and whistles and efficiency gains were quite valuable when appraisers were faced with huge demand for services. But the current mortgage crisis cannot be fixed with speed; it must be fixed with quality. What if appraisal software shifted its emphasis from “forms centric” to “appraisal centric”? Imagine appraisal software as TurboTax, a wizard-like interface that guides the appraiser through the appraisal process and driven by Scope of Work. This software wizard format could even provide intuitive help content for appraisers to illustrate relevant USPAP and methodology issues based on the Scope of Work and the actual appraisal data content. Forms change but appraisal protocols do not; the form should be the end result and not the focus.

Slowly but surely, I see an acknowledgement for the need for more sophisticated analytics. AVMs and appraisers should co-exist nicely and the current “either – or” scenario must converge. Appraisers must adopt statistical analysis in their toolkit. Many want this, but the challenge is a practical one. Appraisers need assistance in this because they cannot practically manage large data sets and valuation models, and the models must be more transparent and facilitate user interaction. Pushing an AVM result into a form and expecting an appraiser to simply endorse and sign is not interactivity. Appraisers should also be using statistical modeling to

The QC process is a serious point of frustration for many appraisers. The problem is not intent, but it currently treats the symptoms with no effort to cure the disease. Clients clearly need to validate the appraisal integrity. But the point of this re-engineering thesis would be to mitigate much of the time consuming, costly, ineffective, and inefficient QC done reactively and replace that with far better support, transparency, data standards, and business rule enforcement proactively. What if the appraisal included a brief one line summary of the 25 to 50 sales the appraiser DID NOT USE? What if those summaries could not be manipulated by the appraiser to mitigate fraud or error by omission? If the AVM was included on the front end, the appraiser would then have the opportunity to reconcile any differences. Wouldn’t it be far more efficient if the appraiser proactively told the client why an AVM result is not reliable for a given appraisal assignment? What if the unique business rules imposed by hundreds of different lenders could be enforced in real time while the appraiser was writing a report?

““

LVM I certainly am not offering a detailed blueprint to fix the system. First of all, there are many major stakeholders who must participate in any serious effort to re-engineer the process. Their needs and concerns must be heard and resolved. But the elements I have described do provide a credible roadmap: t

Business Relationships s Retain effective appraiser independent measures s Fix the obvious f law in the AMC model and separate the appraisal fee from the management fee

Consistent processes s Workf low standards s Data standards s Content standards

etter management of Objective versus Subjective B elements s Inclusion of objective data that cannot be hidden or manipulated s Maximize the value added by the appraiser for subjective analysis and opinions

More holistic use of technologies s Portals that do not create silos by use of standards s Statistical tools that empower the appraiser to provide superior results s Report production that is appraisal centric and not form centric

Transparency s Clients clearly need and want more information s We should be providing what they need or risk disintermediation

Proactive and not Reactive s A holistic use of data, transparency, standards, analytics and other technologies will eliminate much of the inefficiencies that result from multiple valuations and due diligence

Perhaps the silver lining in this horrible real estate and financial services meltdown is that the severity will allow us to replace the “band aid approach” with a fresh take on valuation services. Perhaps some of these “baby steps” will take root and our industry will finally move to a new evolutionary phase. Are we ready yet? Perhaps.

page nineteen

support adjustments as well as value opinions. One of my lines that resonated with the Valuation Expo audience suggested that the current process appraisers use to adjust comparable sales is akin to tribal elders passing on knowledge to the next generation with cave paintings. In addition to statistics, the use of GIS is very limited by today’s appraisers and the geo-visual reference can be very powerful. What if appraisers could visually demonstrate how values change based on proximity to a view amenity, to a busy highway, or to commercial inf luence? And why can’t we provide our clients with forward looking opinions of value? They need not be a single value point estimate they could be merely directional or risk oriented. What if we included a second value opinion that focused on a “stabilized value”, not inf luenced by some current boom or bust market condition?

DATA STANDARDS EMPOWER APPRAISERS Elizabeth Green

Do you think of the Universal Residential Appraisal Report (URAR) template as a technology standard? It was originally developed some 20+ years ago as a means of standardizing appraisal information for underwriters to read as a part of the adjudication of a mortgage. But underwriters don’t operate on paper loan files anymore, and unfortunately, most technological advancements for the appraiser since then have been limited to word processing capabilities to fill out form templates and PDF technologies to “harden” the appraisal report.

he electronic interchange of data in the appraisal industry has primarily focused on the transport of orders and completed reports between Lender/Clients and Appraisers. Appraisal management companies (AMCs) have carved out a niche as primary facilitators of appraisal order transportation. Along the way, systems have been developed to “crack” secured appraisal report PDFs after delivery from the appraiser to inspect and audit its contents with automation. Such systems rely on translating the extracted report data into a proprietary format known to the audit software program’s rules. The intention of these systems is to judge appraisal quality, compliance and acceptability; certainly reasonable and prudent business practices for consumers of appraisal services, particularly in today’s risk adverse climate. But all appraisals are not equal. The property appraised, the expertise of the appraiser performing the analysis, and the data available to the appraiser are all factors that affect legibility of the file to automation. This is further complicated by the individual writing styles of appraisers, geographically diverse terminology and client appraisal requirements. For illustration, consider the definition of “Neighborhood”. Depending upon whom you ask, you might get a different answer. The Neighborhood Description is described in sentence form and is unique to the appraiser’s professional judgment. This may seem like a competitive advantage to an individual appraiser because “real estate is local”. But, to the lending and secondary marketing community, mortgage banking is global. Unique descriptions that do not translate to recognized and accepted nomenclature run the risk of being discounted or ignored. To have safety and soundness in a mortgage-backed security, confidence in the underlying collateral’s value is paramount. Therefore, scaling the appraiser’s opinion to a global marketplace, and standardizing the language of how facts and opinions are expressed are absolutely paramount. The appetite for deeper information, analytics and the ability to correlate appraisals with other information sources to aid in risk analysis continues to grow and is being driven by investor and regulatory pressure. Case in point, in mid-2009, Fannie Mae announced that it would require the appraisal to be delivered electronically in a MISMO-compliant form, at least 24 hours prior to loan delivery on their purchases, effective not earlier than July 1, 2010. With this announcement, the broader valuation community has increasingly becoming aware of the Mortgage Industry Standards and Maintenance Organization (MISMO). However, questions and confusion over what MISMO is and why it is important still abound. Such as:

“ Does this require the appraiser to generate a data file and a PDF of a report?” If so, how are we assured the two are consistent with one another after the appraiser transmits them?”;

“ Will my data be tampered with, affecting my original results and creating liability for me?”; and

“ Will my data be harvested and used to power an AVM to put me out of business?”

The bottom line is that MISMO’s open standard can provide the needed precision and legibility in the appraisal at the data level for mortgage assignments. MISMO’s consistent, repeatable framework of data definition empowers the importance and impact of the local market expertise provided by the appraiser. This allows the marketplace to drive technology innovations at the implementation level to meet the industry’s needs for security, efficiency, accuracy and compliance. But more importantly, open data standards provide the key to moving the appraisal profession beyond data gathering to recognized, respected and rewarded valuation analysis experts.

WHAT IS MISMO? MISMO is an open data standards group that promotes consistency among mortgage transaction participants, which in turn reduce processing costs, increase transparency, and ultimately boost investor confidence in mortgages and real estate as asset classes.

WHO IS MISMO? MISMO is a wholly owned subsidiary of the Mortgage Bankers Association and is the current day incarnation of the original x12 EDI committee dating back to the early 90’s. MISMO’s mission is to foster, develop, promote, and maintain voluntary electronic commerce procedures and standards for the mortgage industry using an Open Standards approach.

WHAT IS AN OPEN DATA STANDARD? Open Standard implies there are no fees associated with the use of the standards and that the standard is governed by a formalized organization. MISMO enforces a strict anti-trust and intellectual property policies are in place to ensure it is not encumbered by copyright claims.

HOW IS THE MISMO STANDARD MAINTAINED? MISMO’s data standards are managed by an all-volunteer organization of workgroups and governance committees who work together to develop and maintain data definitions and information architectures. Day to day operations of MISMO, the corporation, are managed by MERSCORP, Inc. The MISMO Property & Valuation Services workgroup (PaVS) members are a cross-section of appraisers, collateral risk policy makers and technologists, many of whom hold appraiser credentials and have years of field experience.

WHO USES MISMO? Mortgage lenders, investors in real estate and mortgages, servicers and industry vendors use MISMO standards to facilitate information exchange in both loan origination and loan servicing. Services supported range from the submission of a mortgage loan application, request of services such as credit reports, appraisals, f lood certifications, and closings through investor reconciliation and reporting.

ARE THERE DIFFERENT VERSIONS OF MISMO FOR VALUATION SERVICES? MISMO Version 2 is a set of standard data elements and definitions managed at the format or DTD level per service or process. DTDs use a terse, formal syntax that precisely indicates where every data point may appear, what its contents and attributes are, and restricts usage such to be considered valid. V2 (.6 for Property Valuation) will remain available but supported in a maintenance mode for regulatory items only on a case by case until 12/30/2010. MISMO Version 3 is the latest standard and employs a common semantic reference model to XML Schema/ XSD, which is the successor to DTDs. XSD is designed with the intent that determination of a document’s validity would produce a collection of information adhering to specific data types; enabling more robust validation. >>

WHAT IS THE DIFFERENCE BETWEEN A DATA STANDARD AND FILE FORMAT? The first generation of standardization focused on cooperation at a format level. A format structure implies a level of rigidity in how the data elements must be ordered as well as named and syntax guidelines for how to express numbers, dates, currency and media. The current generation focuses on cooperation at a semantics level – the meaning of the data.

WHAT IS XML? Extensible markup language is a set of rules for encoding documents electronically. It is defined in the XML 1.0 Specification produced by the W3C and several other related specifications; all are fee-free open standards.

educing data translation and cycles removes R friction from the overall process.

I ncreased accuracy and precision in understanding appraisal results benefit the client and the appraiser, and all downstream systems and processes.

pen data standards encourage technology O innovation. Advances in technology and data access can be rapidly made available to appraisers and appraisal clients.

BENEFITS OF

A BRIGHT FUTURE

OPEN DATA STANDARDS IN APPRAISAL

he MISMO standard provides definition for all of the information required for reporting real property appraisals in the context of mortgage lending. MISMO’s Version 3 Reference Model is a semantic model that uses the mortgage loan as its foundation. When appraisers and their clients adopt MISMO’s standard, the communication and understanding of the appraisal content is dramatically improved. The need for data translation of the appraisal report content is reduced because the appraiser and the client are semantically speaking the same language.

Noteworthy in the MISMO V3 schema is the built-in “SMARTdoc” framework that enables the paperless mortgage. This framework provides easier application of e-signatures with the ability to tightly bind data to documents. And, the ability for the XML message package to be wrapped with a truly digital signature such as PKI. This means that the receiver of the appraisal file in v3 format can programmatically read the hashed signature on the file and detect if the file has been tampered with. Further, MISMO v3 provides a new level of security by enabling encryption at the data point level, such as an Appraiser’s License Number. Currently, multiple forms and formats from various sources have created unintended consequences, which inhibit and constrain the appraisal process of residential property. Unfortunately, many form templates currently in use are deficient in today’s complex market environment. Also, form templates cannot easily be kept current and propagated to the field fast enough to address rapidly changing business conditions. The common reference model in MISMO Version 3.0 eliminates the data redundancies challenges in Version 2, but also simultaneously enables the ability to create a more detailed communication of the appraisal. This change benefits appraisers and their clients alike by removing format barriers and establishing the foundation for the future of appraising, which transcends from keying data into forms to communicating the appraisal as data-centric professional analysis and opinion. More than 150 subscriber organizations, including mortgage bankers, lenders, servicers, vendors and service providers support MISMO’s efforts in the following areas:

Moving the appraisal industry beyond the struggles of data translation will create a new level of technological advancement that will improve the appraiser’s professional capabilities and relevance. Not the least of which is the ability to electronically deliver vital appraisal expertise more rapidly and directly to their clients. This will mean instead of manually collecting and translating data and keying it in to form templates, appraisers can focus on analyzing and interpreting data to deliver improved valuations and a create a higher level of professional services. In summary, MISMO data standards for residential mortgage appraisal assignments offer the following benefits:

n n n n n n n n n n

roduct and pricing P Property appraisal Underwriting Credit reporting Flood and title insurance Mortgage insurance Closing & settlement Loan Delivery Loan Servicing Secondary mortgage market investor reporting

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I think I’ll watch the War on BPOs from the sidelines; it’s more fun watching everybody nut up, anyway. Plus, it’s hard to choose sides when you’re working as a mole for both. On top of everything else, when you’ve been observing the preliminary skirmishes for 38 years, you already know which side God’s on and that the whole war is a waste of life, time and precious natural resources.

a. They had no enemies prior to the S&L debacle in the early 80s and were winning armament contracts all across the field. When they were suddenly attacked by the press and the government for having started the S&L catastrophe through wanton value inf lation, they rolled over and accepted licensing without complaint instead of vigorously pointing the finger at the real culprits: their own clients. Thus, their abdication was interpreted as an admission of guilt. (Footnote: Licensing isn’t working anyway; the states don’t have the money to enforce regulations.) b. W hen, around the same time, Wall Street decided to make mortgage-backed securitization and whole loan trading a global business, the appraisal profession had the opportunity to bid on the prospect of hundreds of thousands of future valuations for trade underwriting purposes as long as it could do them at the feasible economic level of a hundred bucks. NOW the appraisal forces united! Uh… behind the wrong banner: “We get $300 per appraisal and will not dirty our manicured nails with a quickie valuation!” So Wall Street went to the Realtor® community, figuring they would have to deal with them on the REO side anyway. And guess what: 25 years later, those appraisers are still getting the same three hundred bucks, only now it’s about a hundred in real terms (in 1984, I could make my house payment with one 1004). Meanwhile, BPO providers are swigging Moët Chandon while driving their Ferraris to the race track. c. Now, partly as a result of (a) and (b) above, the economy is in shambles again (worse than any recession in this warhorse’s memory). Has the appraiser bravely leapt into the breach in a

y favorite joke at speaking engagements: An appraiser is just somebody who didn’t have enough personality to become an accountant. Of course, that joke is designed so that you can insert any occupation into the first half. But jokes are funny because they contain surprising truths. In the case of us appraisers, these truisms are:

• Appraisers are introverts who don’t play or share well with the other children; • One of the attractions of fee appraisal work is that there’s little to no dependence on the work of others; • The great outdoors beckons the fee appraiser away from other office workers who probably have cooties; • An appraiser (even a commercial one) never has to deal with any given property owner more than once; • Personal contact with the appraisal client can be minimized or avoided entirely; and • An appraiser’s persecution complex can not only be nurtured, it can be justified. (My other conference joke is that appraisers are rarely abused as children. They are abused as adults.) These statements are ridiculous generalizations, but they contain enough truth to ensure that appraisers are at a distinct disadvantage when watching out for their own social welfare. When threatened, appraisers will nearly always circle the wagons instead of sending out scouts.>>

“

Historically, whenever the battle has turned in favor of appraisers, they stop what they’re doing and proceed to shoot their own toes off.

LVM

new set of shining armor, to defend his or her tarnished integrity? Hell, no. The profession is fighting a side distraction (the evil BPO empire) while rolling over to yet another ill-conceived solution: the loading of fee appraisers into the cattle cars of AMCs. Why? For the same reason the fee community has shot the rest of its toes off: fear of losing the dwindling revenue it has instead of taking a reasonable risk of earning greater revenue that it could have.

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et as a patriot and all-around swell guy, I thought I would enlighten the embattled warriors on both sides of the conf lict regarding some well-known but generally ignored terms of engagement:

My favorite joke at speaking engagements: An appraiser is just somebody who didn’t have enough personality to become an accountant.

“

The only billionaire I ever met posed this question to me at a cocktail party:

“

Can an appraiser really provide a completely unbiased opinion of value? I had to think about the answer for a while. Then I had to say no. Think about it.

• An agent’s job is to be biased (I mean, dude, it’s, like, the definition of the word “agency”!);

e can make a start at improving our lot as appraisers if we first abandon the old notion of geographical competence. Thirty years ago, it made sense; today, the availability of data is making this a demonstrably silly defense of the profession. The second notion is to abandon the position that appraisal is similar to neurosurgery or law in its complexity and in its dependence on abstract thought. Neurosurgery and law have millions of potential data fields; real estate appraisal may have a thousand. C’mon. Seriously. Keep insisting that you can’t automate appraisal, then examine what you’re doing for a living in 10 years. We should also admit to the world that, despite being in a position to provide the most unbiased assessment of real property, we are still subject to bias and need to exercise more controls against its perhaps inevitable creep into our work. AMCs are not the answer. Why? Because an AMC can be bought by a lender in its entirety; a fee appraiser can only be bought one appraisal at a time, and even then, s/he needs to be hungry. (The only billionaire I ever met posed this question to me at a cocktail party: Can an appraiser really provide a completely unbiased opinion of value? I had to think about the answer for a while. Then I had to say no. Think about it.) By now, you’re probably thinking that this old curmudgeon is going to defend BPOs. Not so.

hey totally suck.

• Not only are agents and brokers untrained in valuation, but some salespeople have IQs only slightly above room temperature; • If an agent has to value a new house in an old neighborhood, s/he will decide that s/he has to find another new house in a different old neighborhood;

• M LS contains erroneous data (misstated closings, prices that sum land and construction costs, listings understated to create REO bidding wars, etc.); public record data may be scarce, but it’s at least accurately recorded even if the contract tricks are still hidden; • Salespeople should not be evaluating loan collateral (well, duh!); • The agents most active in the BPO business never sold a house in their lives; and • A bunch of other freaking awesome reasons that I can’t think of right now.

n 2001, I was ordering $100,000 in BPOs per month on behalf of my employer, who was by no means the biggest player in the field; sometimes the only upside the BPO provided in due diligence for securitization or whole loan trades was the MLS data. But the fact is that the value conclusions reached by agents and brokers only suck about 35% more than those reached by appraisers, while the price is 65% lower and the turnaround time is 100% faster. Unless appraisers devise a product that is superior in quality, price and turn time, the war on BPOs is lost at the outset. Okay, I’m now seeing all kinds of new appraisal products (CVRs, VCRs, RVCs), some with great data enhancements and MLS comps; but their AMC purveyors are saying to clients, “See what you could have in ten days for only $160?” The client may say, “Wow, that’s cool!” But they would be crazy to buy it when they can get a BPO for $90 in five days.

LVM

• The appraisal PTBs should rewrite USPAP in something clearer than weasel words; I could write a 3-page set of house rules for appraisal, then we could pull the license of every slime-bunny or doofus that breaks a single one of the commandments more than once (example, Commandment #13: Thou shalt not include finished attic space in base GLA.);

page twenty-seven

eah, you say, but what about those great Institute lobbyists that have gotten BPOs outlawed in 23 states? The answer is that the anti-BPO statutes and codes in every state but West Virginia are unenforceable and probably unconstitutional. (And the only reason they work in West Virginia is because them appraisers done got shotguns.) The biggest consumers of BPOs pay absolutely no attention to them. Furthermore, continuing the pursuit of such legislation in a f lood of starving agents and brokers is an invitation to a devastatingly successful lawsuit, very convincingly alleging deprivation of livelihood and restraint of trade. There are slightly more agents and brokers in the U.S. than real estate appraisers. In boom times, the NAR doesn’t want its agents and brokers doing BPOs; now it’s starting to squeal, and the anti-BPO measures are starting to have an effect completely opposite of their intent: the GSEs and even Treasury are beginning to take the side of the broker.

• Design a low-cost, fast-turn inspection and valuation product that is reviewed and stamped by a certified appraiser; • Give up old ideas to embrace new ones; and

I’ve suggested some peace measures above, but, lest it be said that I am merely a pessimist (which means that I’m right even though the optimists have more fun), here’s what I’d love to see happen but which probably won’t:

• The Powers That Be should quit making proclamations and regulations like the HVCC that apply only to conforming loans; it was the subprime sharks that caused the problem, not Fannie, Freddie, FHA or VA (likewise, do not allow legislators to use lenders, BPO companies or AMCs as legislative consultants in appraisal matters);

• Get honest about the susceptibility of our own opinions to conscious and unconscious bias, so that those who are not will stick out like a sore thumb (or a blown-off toe).

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