Real Estate Blog

The real estate contract is a hot topic today. In declining housing markets, it is not uncommon for a buyer to have second thoughts, rational or not. I heard of an example recently where an exasperated buyer called the broker with a solid contract to exclaim (paraphrasing): “Dammit, the co-op board approved my purchase!”

When the deal is signed, both parties are bound in good faith to see the transaction all the way through.

The implied covenant of good faith and fair dealing
between parties to a contract embraces a pledge that “neither
party shall do anything which will have the effect of destroying
or injuring the right of the other party to receive the fruits of
the contract”

In New York State, that’s now become a matter of semantics.

The New York Court of Appeals ruled today that lawyers can disapprove of a client’s real estate contract for any reason within the three-day attorney review period.

And the court ruled that it’s not bad faith, even if the lawyer simply nixes the deal because a client wanted to back out, Newsday reports.

Here’s the wording in the ruling:

We therefore hold that where a real estate
contract contains an attorney approval contingency providing that
the contract is “subject to” or “contingent upon” attorney
approval within a specified time period and no further
limitations on approval appear in the contract’s language, an
attorney for either party may timely disapprove the contract for
any reason or for no stated reason.

I always thought that the attorneys were involved to advise on legal aspects of the deal, not to provide a way to circumvent good faith intentions established at the time of signing. I think this actually places the attorneys in an awkward position.

Apparently, I have a lot to learn.

This Just In: Thanksgiving is tomorrow. Happiness will ensue.

Excerpted from:
[Under Contract] But I’m Not Buyin’ It

A survey found that despite all the gloomy economic news, 1/3 of Wall Street think their compensation will exceed last year’s levels.

If people think that, it’s a combination of human nature and the Lake Wobegon effect,’ he said — a reference to the mythical town in Garrison Keillor’s “Prairie Home Companion,” where “all children are above average.”

Don’t forget that “all the women are strong and all the men are good looking.” (I am long time podcast devotee of Lake Wobegon.)

One of the key reasons that the New York City metro area was one of the last residential housing markets to be impacted by the housing market slow down was the financial might - that is Wall Street bonus compensation. Last year bonuses accounted for just under 50% of total wages paid out in the financial services sector. It’s a long time annual economic ritual in New York.

It’s going to get painful for many in NYC over the next few years. I have many friends on the Street who work hard and make a decent living, but have or will lose their job as a result of a sector of Wall Street that went haywire. It’s simplistic reasoning to lump all segments of Wall Street all together. However, we do like to do that, especially when pointing fingers. Lower bonus compensation will impact the housing market in the New York region over the next few years with less income making it’s way toward mortgage payments.

Bonuses, which soared to record heights in recent years, could drop by 20 to 35 percent across the industry, according to a private study to be released on Thursday. Bonuses for top executives could plunge by 70 percent.

If 50% of your total compensation drops 50% or more, that’s a major decline in spending power. It’s very easy to be generic about all of this. The message given out is: Wall Street is BAD and all Main Street is GOOD. Yet, they are not mutually exclusive.

Is some of the logic for compensation crazy? You bet (no pun intended).

Should New York Attorney General Cuomo go after financial abuse and fraud? You bet. Of course it furthers the notion that bonus compensation is somehow criminal so he needs to walk the path very carefully. Judging by how Cuomo handled appraisers’ role in the mortgage crisis, I suspect he will do it right.

Somehow along the way, the word “bonus” has become another word for “greed”. Sure, there are upper bracket wage earners who make mind boggling compensation. But that is not the masses.

Main Street was pitted against Wall Street as an election theme (just like small town America was presented as the ‘Real America’).

Greg David, editor of Crains New York writes in his post “In defense of Wall Street Bonuses” He makes the case that:

The mayor gets 9% of his revenue from Wall Street, and the governor relies on it for 20%. Bonuses are key to spending on education, health care and police.

One of Greg’s students at the CUNY Graduate School of Journalism gives a more ground level perspective:

So, every time I hear about Wall Street cutting jobs or cutting salaries, all I think of is Eddie. A 25-year-old guy who works his tail off about 50 hours a week–and even more since the financial crisis made its landfall.

Here is the original:
[Bonus Thinking] All Children Are Above Average

The insanity of CEO compensation in the lending industry continues even as many of those institutions have run out of money. WaMu is paying $20M to CEO Alan Fishman for 17 days on the job (my guess at the hourly calc - $20M/17 days/15 hour days). To be fair, I can only assume he worked long hours without a break for the past three weeks due to the dire situation of his employer.

According to filings with the Securities and Exchange Commission, WaMu threw a $7.5 million bonus at Fishman when it hired him on Sept. 8, and guaranteed him an immediate cash severence of $11.6 million — both of which he gets to keep.

He also was eligible for annual bonuses of up to 365 percent of his annual base pay — set at $1 million — to go with millions of shares of company stock.

Fishman does lose out on a big bonus that would have kicked in had he remained on the job through 2009.

I am not saying he shouldn’t be paid this salary if the contract was proper. I know the amount is ridiculous. But he’s not the bad guy here. He was courted heavily to come in and keep the lender from going under even though, in fairness, WaMu was out of business and simply didn’t know it. Who wouldn’t want to make that rate of pay?

Incidentally, this was the largest US banking failure in history.

What I do have a problem is the board and their accountability to its shareholders. Remember their previous CEO?

Personal feelings: While I feel sorry for the hard working people who lost their jobs at WaMu who didn’t deserve to, there is no love loss within the appraisal industry from the way WaMu sandbagged their appraisers a few years ago.

Here’s a sampling of the anger they caused:

• WashingtonMututalSucks.org
• WashingtonMututalSucks.com.

Go here to read the rest:
Whoo Hoo! WaMu Pays $78,431 Per Hour

A lot has been made of the lack of moral hazard on Wall Street, festering into the current crises.

Michael Lewis, author of a number of great books, including Liars Poker comments in his recent column titled: Bright Side of a Total Financial Market Collapse:

No sooner did Greenspan shuffle off the stage and sell his memoir than the financial system he helped shape fell apart.

He’s left not only a mess but a void. No matter how well- educated we become in our financial affairs, we still need public officials to look up to, unthinkingly.

Slate’s new The Big Money is an excellent resource for financial news commentary. Martha White’s article: What Is a Moral Hazard? The economic reasoning behind bailout or no bailout is a good read.

While bailout seems to be the financial term du jour, right behind it is the more ambiguous “moral hazard.” Treasury Secretary Henry Paulson cited moral hazard as the reason not to swoop in to save Lehman Bros. and Merrill Lynch. Puzzling to many, though, was that while moral hazard was discussed in conjunction with the rescues of Bear Stearns, AIG, Fannie Mae, and Freddie Mac, it wasn’t a deal breaker in any of those cases.

…moral hazard is the idea that insurance in any form makes people riskier.

When I was 15 years old back in the Bicentennial summer of 1976, I rode my bicycle 4,400 miles zig zagging across the US with a group formerly called Bikecentennial. Of 4,000 people who participated, 3 people actually died riding that summer, and within our own group of a dozen riders, those who did wear helmets experienced wrecks and those who didn’t wear helmets (like me), were fine.

I often wondered if wearing a helmet made the riders more prone to take risks. I don’t think so - they represented a cross section of temperaments in our group. In fact, I bought a helmet when I got home and have worn one ever since - and no wrecks.

Perhaps it is more as an argument of convenience. Throw it in if it helps make the case?

The absence of moral hazard of the current situation was created by the GSE structure to begin with. Investors assumed the US would bail out ‘Mac & ‘Mae if they ever ran into trouble because they were “government sponsored”. I can only imagine what would happen to the financial system if the former GSEs were allowed to fail. “Faith and credit of the US” would have meant nothing forever, or at least as long as the current Yankee Stadium is old.

And the system seems to be unraveling quickly judging by more actions this weekend.

Paulson and Bernanke have been making moves faster than Congress or the President can seemingly comprehend. Expect Congress to start fighting the changes once they get it.

“There are no atheists in foxholes and no ideologues in financial crises,” Mr. Bernanke told colleagues last week, according to one meeting participant.

A bit unnerving but the Bush administration has been disconnected from the crisis until a few days ago, when it began to back Paulson’s actions. In fact, that was a requirement of Hank’s acceptance of the position to begin with, unlike his predecessors in the current administration.

And the candidates, until a few weeks ago, didn’t discuss the issue directly - and still don’t seem to get and at the very least, didn’t see it coming. Paulson and Bernanke need to move fast.

The lesson learned from this bailout of epic (trillions) proportions, was best said by Floyd Norris in his Reckless? You’re in Luck

If an activity is important enough to justify a government nationalization to prevent a default, it is important enough to be regulated. The regulators need to know what risks are being taken, and by which institutions, in time to act before a crisis develops.

Had the government bothered to do that in years past, it might not have faced the decisions it faced this week. First, it let one big firm go down, and then it became scared enough to nationalize another one to keep it afloat.

Now, showing no sign of embarrassment over how badly they failed before, the current crop of regulators seem to be unified in their determination not to let the markets force them to make a similar choice on some other big financial institution.

It’s not about more regulations, its about regulations that deal with today’s markets.

Paulson and Bernanke will have to wrestle with these issues later, right now, they are suggesting we all wear a helmet.

Read more from the original source:
[Moral Hazard] No Atheists In Foxholes, No Ideologues In Financial Crises

About a week after 9/11/01, seven years ago to this very day in fact, I remember a real estate broker telling reporters that the market had fallen 30% over the prior week and was expected to fall much further. I got calls from several reporters to confirm or to provide empirical evidence to support or disprove the claim.

Falling 30%?

I basically said:

How can someone describe a market as “falling” only days after a significant event occurs when there is no activity to base such a conclusion? What is the basis? A client conversation concerning one deal?

When someone loudly calls a market (up or down) based on anecdotes rather than evidence, it’s irresponsible. Everyone is entitled to their opinion, but it should not be presented as fact.

At that moment back in 2001, who would have anticipated one of the biggest housing booms in US history (and we are painfully unwinding from that expansion right now) was soon to follow?

Fast forward 7 years.

A high end Manhattan broker did the same thing today. Without empirical evidence (no data), who can state the market is instantly is down 25% a few days after the Lehman bankruptcy?

Was this pronouncement based on a handful of conversations with past clients? A gut feeling after years of experience?

Quick, call the SEC!

I suspect this was simply extracurricular media commentary by the individual because the brokerage firm is one of the big three in New York and has a great reputation.

Don’t get me wrong, I like Brian Ross’ work and ABC, but he falls short with headline…”Top Broker: NYC Real Estate Already In Steep Decline” …is considered “investigative journalism“? It’s more like entertainment journalism, no?

Better yet…

Good grief.

Continued here:
[Crackin’ The Crystal Ball] Short Selling Real Estate

Perhaps one of the most misused phrases in the history of literature is the reference to a quote in Shakespeare’s play “Henry VI”, “First lets kill all the lawyers.”

The line is from The Second Part of Henry VI, act IV, scene ii, line 86; spoken by Dick the butcher, a follower of Jack Cade of Ashford, a common bully who tries to start a rebellion on which the Yorks can later capitalize to seize the throne from Henry.

The plan would be to take away the rights of common citizens but that would only work if they “killed all the lawyers.”

In the wake of the subprime crisis, there will be plenty of opportunities in litigation, foreclosure and bankruptcy actions over the next several years. We are all (or at least I am) screaming for action on going after those that overstepped rule of law.

But what about those who were hurt who can’t afford legal advice? With so many law firms working with financial institutions in the wake of the crisis, there is a potential conflict of interest.

That hurdle is “issue conflict”—the potential conflict of interest for any law firm that has lawyers representing banks, savings and loans, and other financial institutions.

But the need—arising from the subprime mortgage debacle and exacerbated by skyrocketing food and fuel costs as well as rising layoffs—is great. Mark Schickman, a partner at Freeland Cooper & Foreman in San Francisco who chairs the ABA’s Standing Committee on Pro Bono and Public Service, says one in every 160 homes is subject to foreclosure.

“It’s almost a losing battle trying to provide legal services to the poor,” he says. “Every time we think we’re making headway, something like the foreclosure crisis comes in and pushes us from the goal. Pro bono attorneys are coming out in droves for this. It’s really heartening.”

In the ABA Journal article Prime Aid, Subprime Crisis there is already a surge in such activity.

In April, the Association of the Bar of the City of New York’s standing Committee on Professional and Judicial Ethics issued an informal opinion (PDF) regarding homeowner representation by firms that represent financial institutions.

The Federal Reserve Bank of New York and the City Bar Justice Center are sponsoring a pro bono legal services effort called the Lawyers’ Foreclosure Intervention Network that pairs homeowners at risk of foreclosure with attorneys and certified law students.

It’s an encouraging development as well as good public relations effort for the legal profession.

I’ll have to crack open that dusty copy of Hamlet.

Here is the original post:
[Shakespeare On Subprime] “First Let’s Kill All The Lawyers”

I think the future holds more licensing requirements in store for real estate professionals. After entering a credit crisis like we are currently experiencing, all professionals connected to the real estate industry may face new licensing or additional requirements.

In an interesting piece written by two economists—Fed visiting scholar Morris Kleiner, of the University of Minnesota, and Richard Todd, vice president of Community Affairs at the Minneapolis Fed called Licentious Behavior:

On the face of it, this makes perfect sense: If incompetent or dishonest brokers have encouraged borrowers
to take out loans beyond their means, then targeting
these abuses through stricter governmental requirements on brokers should help prevent future problems.

But a recent empirical examination by two Fed econ-
omists casts doubt on that solution. In the first compre-
hensive assessment of relationships between mortgage
broker licensing and market outcomes, the economists
find that most regulatory steps appear to have no clear
connection to consumer outcomes, but one financial
regulation (surety bond and minimum net worth
requirements) is consistently related with conditions
that seem worse for both brokers and borrowers.

Deja Vu

The appraisal industry faced new licensing requirements in 1991 as a result of the S&L crisis of the late 1980s. Think Vernon Savings & Loan and property values being appraised higher every few hours by appraisers who must have possessed incredibly precise and masterful valuation skills and adequate supporting data (yeah, right).

Appraisers ended up being licensed, waiting in line with other professionals in the testing centers such as pool cleaners and hair stylists.

Appraisers were part of the problem in the current credit crunch as well. Licensing did not prevent bad appraisers from crossing the line then or now. In fact, I would venture to guess that the quality of the average appraiser (not the median) declined sharply after implementation of licensing 17 years ago.

Was it licensing that created the deterioration in quality of appraisers?

No. It was a bigger systemic problem but it did play an unintended role. Licensing of any profession provides a false premise of quality. In this case it was presented to the mortgage industry, but more importantly, allowed a shift in liability to the appraiser who had a freshly painted bullseye on his or her back.

Licensing alone does not promote better quality work.

Quality only gets noticeably better by an incentivized private sector who is enticed through regulation to require better quality reports. It is not enough to say you “can’t do something.”

Is licensing a good thing?

Absolutely. It provides a minimum barrier to entry and a process to allow for the removal of bad appraisers from the business.

Licensing alone won’t improve quality, however. An example would be a town whose police department cracks down on speeders - this alone doesn’t make everyone a better driver, but it does play a role in improving safety. People still get into accidents when they have a drivers license.

A side benefit to municipalities becomes an important revenue opportunity for the licensing bureau, especially with a weakening economy in most of the country. Revenue funds some enforcement for blatant violations, and provides some oversight and regulation. I am fairly certain that a portion of earmarked licensing revenue ends up channeled to other departments, essentially defeating a primary argument for licensing.

What about mortgage brokers?

So for mortgage brokers who are on the verge of being licensed in New York state, with a economic slowdown already being felt, I think it is a long shot that this effort will be defeated.

Will it increase the quality of mortgage brokers in New York state? I doubt it, only on the lower fringe.

I saw first hand the basic financial conflict in their role as commissioned provider of mortgage business, paid only if the loan closed. As in every profession, there are good and bad “professionals.”

All who touch the mortgage should to be licensed, at the very minimum.

Original post:
Licensing Doesn’t Really Work, But A Necessary Revenue Opportunity

Few would argue with the proposition that different licensing requirements are called for if a person is going to drive a school bus or an eighteen wheeler as opposed to your standard four-door sedan. What about real estate licenses? Does one size fit all, or should some special certification be required for those who are going to sell commercial buildings or engage in property management or concentrate on vacation rentals, etc.?

Read more from the original source:
Does One Size Fit All When it Comes to Real Estate Licenses?

The Federal Reserve finished crafting their subprime mortgage rules regarding Truth in Lending called Regulation Z. I am doubtful that this rule would have been updated if we weren’t experiencing the current mortgage market turmoil.

Because this is such an important issue, it will take effect on October 1, 2009 (more than a year from now.)

“The proposed final rules are intended to protect consumers from unfair or deceptive acts and practices in mortgage lending, while keeping credit available to qualified borrowers and supporting sustainable homeownership,” said Federal Reserve Chairman Ben S. Bernanke. “Importantly, the new rules will apply to all mortgage lenders, not just those supervised and examined by the Federal Reserve. Besides offering broader protection for consumers, a uniform set of rules will level the playing field for lenders and increase competition in the mortgage market, to the ultimate benefit of borrowers,” the Chairman said.

Ask anyone whether they thought these types of rules would already be on the books (for high priced mortgages - 1.5% above the “average prime offer rate”) - here are some excerpts:

• Prohibit a lender from making a loan without regard to borrowers’ ability to repay the loan from income and assets other than the home’s value.
• Require creditors to verify the income and assets they rely upon to determine repayment ability.
• Ban any prepayment penalty if the payment can change in the initial four years.
• Require creditors to establish escrow accounts for property taxes and homeowner’s insurance for all first-lien mortgage loans.

And here are rules for all loans, not just high priced:

• Creditors and mortgage brokers are prohibited from coercing a real estate appraiser to misstate a home’s value.
• Companies that service mortgage loans are prohibited from engaging in certain practices, such as pyramiding late fees.
• Creditors must provide a good faith estimate of the loan costs, including a schedule of payments, within three days after a consumer applies for any mortgage loan secured by a consumer’s principal dwelling, such as a home improvement loan or a loan to refinance an existing loan.

Is it just me or do these rules seem crazy obvious? Why aren’t they on the books already? Why on earth do these rules only apply to subprime mortgages? Not Alt-A or Prime?

Speaking of scapegoating subprime, and something about the squeaky wheel getting the grease, lets talk oil and the evils of the dreaded speculation.

And the tale of two economies…

Highlights of Regulation Z [Federal Reserve]

The rest is here:
[Subprime Truth In Lending] From A To Regulation Z

Sometimes it’s the little things that give you a sign that something is amiss.

Our firm had been approached by IndyMac to perform appraisals for their growing mortgage presence in our market.

Over the weekend, IndyMac was seized by regulators.

As many as 150 banks may fail in the next 12-18 months. IndyMac was the second largest failure in history.

We we wary of IndyMac because of a previous experiences 5-7 years ago when we found them to be primarily focused on paying below market appraisal fees, much like an appraisal management companies did and still does. There were some good people at IndyMac who moved from other banks who recommended us back then, but the low fee mentality prevailed.

Of course, It’s obvious top everyone that the cost of doing business in Manhattan is EXACTLY the same as Bismark, ND, no? [tone: sarcastic]

Last summer, after American Home Mortgage imploded, IndyMac hired most of their sales force. I repeat: IndyMac hired the sales force of a lender that went out of business.

We proceeded to perform appraisals for IndyMac but soon after we began, they wanted our turn times to be 48 hours - I am paraphrasing:

“We’ll give you a lot of work if you can turn the reports around in 2 days.”

Sigh.

We were unable to comply - the market average is 5-7 days so we simply had to give up on what could have been a lucrative relationship. Think of a 3-5 day appraisal turn time differential to a lender in the context of a 30 year mortgage. Today it’s a reasonable argument to suggest that IndyMac was not reasonable. One year ago that would have been described as progressive thinking on their part.

I am hopeful that the small amount we have in arrears ($1,800 - happily we received payment today for a bunch of other outstanding invoices). Hopefully FDIC will pay their bills.

Monday morning quarterbacking (literally)
My first instinct was to get down on IndyMac for their old school, rush the appraiser approach. Then it dawned on me - the employees we were dealing with in May/June likely knew that the bank was going under very soon.

Based on feedback from our last appraisal completed and the urgency to complete the appraisals faster as of late, I would bet mortgage processors and loan officers were pretty confident that IndyMac was headed for troubled real and needed to get the deals in faster in order to make their commission.

I am so glad we got that bad vibe early on and opted not to continue the relationship. I guess those decision makers are out of the picture now. Still, their depositors are worried.

FDIC is trying to help homeowners out a bit.http://blogs.wsj.com/economics/2008/07/14/fdics-bair-halts-some-foreclosures-in-indymac-portfolio/?mod=googlenews_wsj

How about paying back the little ‘ol appraisers?

[Other Shoe Drops Dept] IndyMac Needed Appraisals Done Before Judgement Day

Sometimes it’s the little things that give you a sign that something is amiss.

Our firm had been approached recently by IndyMac to perform appraisals for their growing mortgage presence in our market.

Over the weekend, IndyMac was seized by regulators.

As many as 150 banks may fail in the next 12-18 months. IndyMac was the second largest failure in history.

We were wary of IndyMac because of a previous experiences 5-7 years ago when we found them to be mainly focused on paying below market appraisal fees, much like an appraisal management companies did and still does. There were some good people at IndyMac who had moved from other banks who recommended us for work back then, but the low fee mentality prevailed.

From IndyMac’s perspective, its pretty obvious that the cost of doing business in Manhattan is EXACTLY the same as Bismark, ND, no? Appraisal fees should be the same across the country, no? [tone: sarcastic]

Last summer, after American Home Mortgage imploded, IndyMac hired most of AHMs sales force. I repeat: IndyMac hired the sales force of a lender that went out of business.

This go ’round we could charge our standard fees and turn appraisals around in our normal times for IndyMac. But eventually (in May) they began to want our turn times to be 48 hours - I am paraphrasing:

“We’ll give you a lot of work if you can turn the reports around in 2 days.”

Sigh.

Since we were unable to comply, we had to give up on what had been a steady client.

Think of a 3-5 day appraisal turn time differential to a lender in the context of a 30 year mortgage.

Today it’s a reasonable argument to suggest that IndyMac was not reasonable in their appraisal turn time expectations. One year ago that would have been described as progressive thinking on their part.

I am hopeful that the small amount we have in arrears ($1,800 - happily we received payment today for a bunch of other outstanding invoices). Hopefully FDIC will pay their bills.

Monday morning quarterbacking (literally)
My first instinct was to get down on IndyMac for their old school, rush the appraiser approach.

Then it dawned on me - the employees we were dealing with in May/June could have known that the bank was going under very soon and that is why we were being rushed. Admittedly I am reaching here but it makes sense.

I would bet mortgage processors and loan officers were pretty confident that IndyMac was headed for troubled real and needed to get the deals in faster in order to make their commission.

I am so glad we got that bad vibe in May and opted not to continue the relationship. I guess those decision makers are out of the picture now. Still, their depositors are worried.

FDIC is trying to help homeowners out a bit.

How about paying back the little ‘ol appraisers?

Note: I must have been half asleep when I posted last night (correction: I was). So many typos, bad links and grammar errors (ok, I know this is not far from my usual delivery) that even I was mortified. I revised keeping the same message, but easier to follow.

See original here:
[Other Shoe Drops Department] IndyMac Needed Appraisals Done Before Judgement Day

My business partner John Cicero, of Miller Cicero, our commercial appraisal firm ran across a pretty interesting book released by McGraw-Hill last year, a well respected publisher.

Here’s an excerpt from the book: The Complete Guide to Financing Real Estate Developments (Hardcover) by Ira Nachem (2007, McGraw-Hill, New York), List price $79.96.

Since appraisers want to continue to receive assignments, they generally have a desire to satisfy you, their client. You sometimes can play on that desire and get the appraiser to produce a report with values a bit higher (or lower) than he otherwise would report….If you want to make sure that the appraiser is not undervaluing the property, you should tactfully indicate your concern up front…

In other words, its important to pressure the appraiser - in fact, it is part of a strategy to be a successful developer. Of course with the changing credit market landscape, I would think the lessons learned from this book are now limited. Still, it is quite shocking to me how cavalier this quote is and how commonplace it probably was.

For more details, take a look at John’s post over at my other blog Soapbox.

See the original post:
Even Storied Book Publishers Didn’t See The Pressure

Location, location, location as the mantra in real estate has never rung so true as it does in today’s market. With fewer and fewer new homes being built and builders trying to minimize losses on land they bought at premium pricing just a few years ago, times are tough.

The rest is here:
New Homes: Housing in the Boondocks Get No Respect

Imagine you have invited a small group of your best friends, Realtors

In one of the more poorly thought out layers of legislation being proposed in Congress to help the housing market and credit problems pertains to the appraisal element within the Homeownership Preservation and Protection Act of 2007. This bill is being championed by US Senator Dodd. The whole concept of bonding the appraiser demonstrates a lack of understanding of how we fit into the lending process.

I’ve touched on this legislation in a previous post about how the act misses the mark because it provides no tangible solution to the appraisal element of the mortgage lending process (emphasis added: no). The legislation seems to be stuck at the moment but I am not so sure how long that will last.

Because I am familiar with the topic (it’s my profession), it really scares me to think of the thousands of pieces of legislation that are crafted in bills by Congress every year that are probably just like this one. I am sure Senator Dodd’s intentions are honorable, but the bill completely misses the issue at hand.

A key concern brought up by this bill is the cost of bonding an appraiser. As if obtaining a bond makes an appraiser suddenly ethical and/or not subject to intensive, economically incentivised pressure?

Since I have never had to obtain a bond, I am not completely confident of my thinking here, but I suspect I am on the right track:

The Dodd legislation says:

Appraisers must obtain bonds equal to one percent of the value of the homes appraised.

Ok, so if I say Miller Samuel appraises $5,000,000,000 worth of Manhattan real estate in a year, that amounts to a $50,000,000 bond (1%).

I couldn’t find any published quotes for appraisal surety bonds, but if we say the cost is 2% of face value of the bond, then $50,000,000 x 2% = $1,000,000. In other words, our firm will need to spend $1,000,000 this year in order to comply with legislation that does nothing to address the problem (insulating appraisers from pressure).

Issue 1: If appraisers wish to remain in business, they will have to pass along the costs to their clients (ultimately the consumer in most cases). Common sense says that most appraisers will be forced out of business or no longer perform appraisals for lenders if this interpretation is correct.

This means I have to pass costs of $1,000,000 to my clients (appraising is a razor thin margin business). That really means I am going to have to raise my fees many times just to break even and I am doubtful that my client base will readily absorb the significant increase in fees. As I mentioned in the prior post, I think this will actually make more good appraisers leave the profession.

Issue 2: Appraisers may have to obtain these bonds individually, not in lump sum as in the example above. Try doing this thousands of times in the course of a year. Additional staffing costs, paper work and time has costs associated with it. Total it up and the bill makes appraisals cost prohibitive and will lengthen the appraisal process.

Issue 3: Appraisers may have to violate their appraisal license when obtaining the bond for each assignment. In order to get mandated coverage, they have to provide the value before doing the appraisal (it’s called “cart before the horse”), a direct violation of the licensing law mandated by Congress in 1989 via FIRREA/USPAP. I would think the appraiser’s value estimate for the bond would error on the high side to make sure the property is covered, adding even more costs.

Admittedly I am not familiar with the cost and process of obtaining a bond so I would welcome feedback and insight on this. I am amazed how little information exists out there. Nothing of significance has been written about bonding appraisers that I am aware of.

Appraising is my profession. Lack of common sense is now my bond.

View post:
Establishing A Bond With An Appraiser Is Expensive