The FDIC has taken over more than 200 banks since the beginning of the mortgage crisis.  When the FDIC takes over a failed bank, it usually sells off the banking assets to an existing lender but retains all of the potential legal claims against the failed lender’s directors, officers, mortgage brokers, accountants, lawyers, appraisers, AMCs, etc.  The FDIC is now in the business of suing these parties, blaming them for its failed banks’ bad lending practices.

To show the wide scope of the claims that may be pursued by the FDIC, I have attached an excerpt from the FDIC’s agreement to sell the assets of failed Downey Savings to U.S. Bank in 2008.  In this agreement, which is very typical, the FDIC specifically retained the right to sue any person “whose action or inaction may be related to any loss . . . incurred by the Failed Bank.”  This means appraisers — and many others — to the FDIC.

At the conference for law firms interested in FDIC work, the FDIC made it very clear that pursuing professional liability claims is a major part of their intended course of action in the next two years.  The FDIC is hiring hundreds of law firms do this work and plans to award contracts totaling more than $2 billion in 2010 for its various recovery efforts (not just professional liability).  The FDIC’s in-house lawyers stated that their efforts are going to resemble what the RTC did in the early 90′s following the savings and loan crisis.  Suing professionals and blaming them for failed banks’ losses is such a significant part of the FDIC’s plan that the division within the corporation has a special acronym: they refer to it as “PLG” for Professional Liability Group.  At least from the conference, it was very clear that the FDIC has no conscience as to the impact that its “blame game” will have on the targeted individuals or, moreover, on the affected professions.  If it makes individual appraisers feel any better, however, when it comes to appraisal issues, it is not just appraisers who have targets on their backs — AMCs are on the radar screen too.

What can appraisers do?  In my lawyer, non-appraiser opinion, it comes down again to appraisers supporting professional associations such as the Appraisal Institute and NAIFA to apply organized political pressure.  It’s not just “bad apple” appraisers who are being affected by the FDIC’s actions — good appraisers are being entangled too and, if unrestrained, the FDIC will have a negative impact on the profession as a whole.  Regulators and lawmakers need to understand why it’s bad public policy for a quasi-government agency like the FDIC to be deputizing private law firms and launching unrestrained attacks on individual appraisers.  Appraisers are professionals who render opinions of value — they are not guarantors of collateral value or mortgage insurers for loans extended by the FDIC’s failed banks at the peak of the bubble.  The threat of draconian, high volume litigation by the FDIC hampers the present ability of appraisers to give accurate valuations.  In the current state of the real estate markets, the only sure way an appraiser can avoid a later FDIC claim about over-valuation is to “come in low” on value.  This is not advice on how to avoid lawsuits — it’s an observation of a normal reaction to the threat.

Answer the phone

ring…ring. ring…ring. ring…ring. ring…ring. ring….
“You’ve reached the voicemail of John Realtor. Today is Wednesday, June 9th and I’ll be in and out of the office all day at appointments because I’m a super successful agent. Please leave your name, phone number and a detailed message and I’ll return the call never. Make it a great day!”

This is by far my biggest pet peeve. I understand when you’re with a client and have to let the voicemail pick up. But the other times you just decide not to answer – how do you know I’m not a potential client? Maybe I want to buy that $1 million listing and you just lost out on a big commission check. As an appraiser, I’ve received orders simply because I answered the phone.

Learn how to measure

Listing the square footage based on the homeowner’s guess, then stating ‘buyer agent to rely on their own measurements’ is just lazy. Spend $100 and get a Bosch digital laser tape measure and learn how to use it by practicing on your own house. Then educate yourself on the difference between foundation and above grade square footage. I have yet to inspect a rambler with 1,000 sq. ft. foundation and 890 sq. ft. above grade, but I’ve seen it on the MLS before.

Know FHA rules

Not all houses (even newer ones) will pass an FHA appraisal inspection. Seems like an easy concept to grasp, right? I recently inspected a property built in 2004 that had four issues. They could have easily been fixed prior to my arrival, but now I get to charge $100 more for a re-inspection. The furnace didn’t ignite (propane was shut off), hot water heater didn’t work (pilot wasn’t lit), upper level patio door could open fully but there was no deck, and there was an electrical wire laying on the garage floor. Here are some more common FHA appraisal issues.

You talkin’ to me?

Although this article may seem a bit harsh, it’s meant to inform you about other difficulties appraisers face in today’s challenging market. How do you feel about these statements?

First, the Appraisal Subcommittee (ASC) maintains the National registry of appraisers and also monitors appraisal requirement standards.
Appraisal Subcommittee license lookup

All appraisers are regulated by a state department, so you can often find more detailed license information on that specific website.

Minnesota appraiser information
Wisconsin appraiser information

Finally, be like an employer and ask the appraiser for references from past clients.

Appraisers can be retained for many reasons, from providing appraisals for home purchases, refinances and construction loans to PMI reduction, estate planning, and litigation.

The rule regarding second appraisals to support a higher purchase price has also been modified. HUD now says that when a buyer is using FHA financing to purchase a HUD REO property, the appraisal that was used to determine the list price will remain effective when obtaining the FHA mortgage. A second appraisal can’t be ordered just to support a higher purchase price. It can only be ordered to support a higher sales price if there are material deficiencies with the current appraisal, or if the current appraisal won’t be valid on the date of contract ratification.

While it is not an official FDIC statistic, nor is it intended as a definitive predictor of the likelihood of bank failure, the troubled asset ratio apparently is a strong indicator of severe stress inside a bank because it shows the bank’s ability to withstand loan losses. Of the 92 banks that have failed so far this year, 84 had troubled asset ratios of 100 percent or greater in the final quarter they reported data before they closed.

Look at these recently failed Minnesota banks and notice how the asset ratio is well above 100%

• Appraiser changes are effective as of Jan. 1, 2010.
• Mortgage brokers and commission-based lender staffers will be prohibited from selecting the FHA appraiser.
• Lenders are not required to use appraisal management companies (AMCs), but may do so.
• When a borrower switches to another lender, FHA prohibits the second lender from ordering additional appraisals to obtain a higher value, unless:
  • The Direct Endorsement (DE) Underwriter determines the first appraisal is deficient;

  • The appraiser of first appraisal is on second lender’s exclusionary list; or
  • The first lender delayed the appraisal transfer to the second lender so as to cause harm to the borrower (e.g. missing a closing date or expiration of a rate lock).
• Appraisals are now valid for only 120 days for all existing, proposed or under-construction properties.

The second appraisal requirement will remain when a property is re-sold between 91 and 180 days following acquisition by the seller if the resale price is 100% higher (or more) than the price paid by the seller when the property was acquired.

“We haven’t noticed any benefit and it really slowed down the process,” FHA Commissioner David Stevens told Mortgage Wire at the (NAR) convention in San Diego.

I can’t recall the last time I saw an FHA borrower come close to the $417,000 limit, but it’s probably more common in New York, California, Florida, etc. Even though it took 1.5 years, it’s good to see that HUD realizes the second appraisal requirement didn’t help the process.

Many properties can exhibit some form of obsolescence – either functional, external or both. Don’t know what that it means? You’re not alone. Real estate classes often dart past these terms because real life situations that occur nationwide are difficult to cite. Yet as an appraiser I encounter homes with one or more of the following examples every week.

External Obsolescence

Easier to explain and observe, external obsolescence refers to an undesirable factor outside the property and is generally not curable. This can include:

• Highways: Unless you’re a NASCAR fan, having traffic buzz past your front yard at 55 mph isn’t the most desirable situation.
• Power Lines: Not the small feed directly to a home, but rather the high voltage towers that supply an entire town. Even if you don’t believe scientific studies they’re still unsightly.
• Commercial Buildings: Gas stations, shopping malls, 24 hour pharmacies – generally any business with non-neighborhood traffic.
• Railroad: Similar to highway traffic but without the NASCAR effect.

Functional Obsolescence

This occurs when the interior of a property suffers from reduced usefulness. It can be cured as long as the cost is less than the added value.

• Odd Floorplan: I inspected a single family home recently that had no bedrooms and only a half bath above grade. There was a room with a bed but it lacked a closet. That room was only accessible through another den, which in itself was only accessible through the half bathroom. Can you say ‘remodel gone horribly wrong?’ Plus the only shower in the home was in the lower level laundry room, which had a sink but no toilet so it wasn’t considered a bathroom.
• One Bedroom: A condo in a building where many units have one bedroom doesn’t apply. But a one bedroom single family home in an area where others have 3 or 4 is not typical.
• One Bathroom: Again, this might be ok for a property with only two bedrooms. However, just imagine the joy of getting ready in the morning when you share the 1 bathroom with 10 people.
• Poor Design: Many 100+ year old homes have character but often lack amenities of newer construction. Small closets, only 4 kitchen cabinets, the kitchen sink not actually IN the kitchen but around the corner in the laundry room. Unfortunately not only did I see this house – I purchased and lived in it for three years.

While functional obsolescence is a real thing, it can be easily overlooked by someone who doesn’t live in the home. It’s also more difficult to find a similar comparable for an appraisal.

Let There Be Light

Having a home show well isn’t only for buyers. Open windows to let in sunlight and make the house feel bigger. Get rid of any unwanted odors as it could lead the appraiser to believe there are underlying issues.

Cleaning Up

Appraisers can easily look past minimal clutter or boxes being packed. But having storage areas or entire bedrooms that aren’t accessible just won’t fly. A clean and de-cluttered home will leave a good impression, which can translate into a higher value.

Not Fixing Problems

Depending on the type of loan the home may need to be checked for additional items. Generally speaking for an FHA loan, anything that represents a health or safety issue will need to be remedied. In today’s market a lot of foreclosed homes are missing pipes or have broken windows. Some even have the utilities turned off but these need to be operable. The loan won’t be approved without these issues being handled prior to closing.

Minor cosmetic issues won’t usually be a problem. But peeling paint might be lead-based if the home was built prior to 1978. To see all the FHA appraisal guidelines visit HUD’s website.

Annoying the Appraiser

Yeah I said it – just leave them alone. Many homeowners feel the need to follow the appraiser around like a lost puppy. Asking a few questions is fine, just don’t go overboard by trying to learn the entire appraisal process in 30 minutes.

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“A primary reason government-insured loans have retained a high share of the purchase market is that these loans typically require lower down payments than conventional loans,” said Orawin Velz, MBA’s Associate Vice President of Economic Forecasting. “In addition, lending standards tend to be tighter for conventional loans, especially for loans that require private mortgage insurance.”

“While the government-insured share of purchase applications has remained elevated, the government-insured share of refinance applications has been volatile. The share hit a record high of 38.4 percent in October 2008. As mortgage rates fell sharply between mid-November through early May, refinance activity surged for conventional loans. This surge in conventional refinance applications dominated the market, causing the share of FHA refinance applications to fall below 20 percent for most of this year. Recent increases in mortgage rates have caused conventional refinance activity to drop much more sharply than government-insured refinance activity due to a combination of credit and LTV requirements. As a result, the government-insured share of refinance applications climbed to 33.6 percent in June,” Velz said.

While this may all be true, I suspect the MBA is omitting another reason these applications have increased.

The Home Valuation Code of Conduct

The HVCC has greatly impacted the way lenders and appraisers work together. However, at the time of the press release the code didn’t apply to FHA or VA loans.

Obviously these loans have their pros and cons and not everybody (or every property) qualifies. At the end of the day I hope the LO’s are doing what’s best for their clients and not pushing these programs because they have more control of the appraisal process.

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