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Published by OREP, E&O Insurance Experts | August 21, 2013


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Editor's Note: This story by Tim Andersen, MAI is long but worth the read.

Home Builders White Paper: Appraisers are Idiots 
by Tim Andersen, MAI


As you are likely aware by now the National Association of Home Builders (NAHB) published a white paper on housing finance system reform in February of this year.  It is 18-pages long, so you can read and digest it in about an hour (find a link below).  All appraisers need to read it.  This is simply because the NAHB has a lot more clout in Washington, D.C. than does any single appraisal organization.  Therefore, Washington will listen to NAHB before it listens to us. 

Given that appraisers are not in the position to slush the good folks in Congress with campaign contributions, our voices are rarely heard above those who can – and NAHB does.  It’s also because what NAHB proposes makes it obvious that this organization operates under numerous delusions about how the mortgage lending functions and the part of appraisals in it. Plus it expects honest appraisers to buy into those delusions and Congress to institute them.

First, NAHB is biased when it comes to anything that will prevent it from building and selling homes. Frankly, this is how it should be. NAHB has the responsibility to advocate in its own best interests.  And so do appraisers.  We appraisers also have the right to expose NAHB’s lapses (or absence) of logic.

For an example of this lapse or absence of logic, from the white paper’s language, it is clear NAHB thinks real estate appraisers are an impediment to the mortgage loan process (a position others hold too, see footnote below). 

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NAHB's white paper, under the main heading of “Correcting the Operational and Structural Problems that Produced the Housing Boom Bust,” then under the sub-heading of “NAHB recommends reforming the appraisal system,” it proclaims which profession, all by itself, caused the last housing bust:

“Many housing industry participants believe the current appraisal system is fundamentally flawed. This view has garnered increased support as the ongoing turmoil affecting the housing and credit markets has brought greater focus to the importance of fair and accurate appraisals. In response to criticism that lax appraisals contributed to the crisis in the financial industry there has been an industry-wide effort to reform the appraisal system. The effort has resulted in lenders, secondary market participants, and banking regulators all implementing new, more restrictive appraisal policies which have become a major impediment to the housing market recovery. On top of this, an extreme downward bias has been imbedded in the home valuation process.


“Rather than apply more restrictive appraisal policies, the industry should explore ways to improve the quality of appraisals – particularly as they are applied to distressed markets. Home builders are concerned with appraisals that solely use comparable sales to determine value rather than also considering the cost or income approaches. In particular, it is important to consider giving greater weight in distressed markets to alternative means of valuation, such as the cost-based approach. Using comparable sales to determine an appraised value in distressed markets too often is leading to homes failing to appraise at the sales price or even construction cost.”

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What Did They Say?
These issues need to be addressed one at a time.  This will make it clear that NAHB does not deem necessary a restructuring of the mortgage finance process in the U.S. Rather, NAHB deems necessary a reform of the entire appraisal process in the U.S.  If NAHB has its way, that reformation would be one that is in the image of whatever it takes to dictate to the remainder of the stakeholders in the financing process that builders must be able to sell homes at whatever price pleases them, those prices as compared with the market’s indication of their value be damned.

First consider this sentence from the white paper: “Many housing industry participants believe the current appraisal system is fundamentally flawed. This view has garnered increased support…”  The question NAHB does not answer is support from whom for what?  Who are these many housing industry participants?  Are they all NAHB members?  Carpenters?  Landscape architects?  Plumbers?  Who?  Upon which analyses, and by what metric, do they conclude it to be flawed?  Have they studied it at length?  Are they familiar with appraisal ethics and USPAP? Are they familiar with NAHB’s code of ethics?  Is it merely an oversight that NAHB omitted these details from its complaint?

It is also interesting that NAHB has assigned to appraisers the ability to determine market value.  If only we had that power! We are merely honest brokers and analysts of information.  We do not and cannot determine value, nor have we ever been so potent. We merely form an opinion of value based on what the market tells us (assuming its participants- among which are the members of NAHB- tell us the truth).  Further, if it is up to us to determine market value- as the NAHB concedes to us by its own declaration, by what authority can NAHB tell us we have determined it incorrectly?

The first line of this section of the white paper fixes the blame for the “…ongoing turmoil affecting the housing and credit markets…” directly on the real estate appraiser.  It’s a given that no real estate broker (or private seller, for that matter) ever tried to sell a house for more than it was worth; that no loan originator ever tried to put a borrower into a loan whose monthly payment was so high over “typical” that the loan originator got part of that premium back as a commission; that no loan officer ever tried to “up-sell” a borrower so that the bank booked extra fees (part of which eventually went to the loan officer); that no mortgage broker ever tried to roll the value of personal property into the purchase price of the real estate so the commission from placing the loan was higher than it would be otherwise; that no mortgage broker ever “churned” a property to strip it of its equity (and put all that equity into his/her pocket); Wall Street's scamologists would never have chopped up and then sold packages of mortgages for 200% of the value of the underlying mortgage instruments; Congress would never do anything to inflate artificially the value of real estate.  No, none of that would ever happen.  So the NAHB must be right: appraisers (and nobody else) are to blame for the market’s current turmoil.

In the second paragraph of that subheading, the white paper goes on to conclude that “…lax appraisals…[have]…contributed to the crisis in the financial industry…” and that, to combat this crisis (the one caused solely by appraisers) there has been “…an industry-wide effort to reform the appraisal system.”   Yet the white paper conveniently leaves some definitions to our imaginations.  For example, what is a lax appraisal?  Google defines lax as “not sufficiently strict or severe” or “careless.”  Is it possible that a lax appraisal is any appraisal that impedes a builder from selling a house at whatever price the builder thinks is reasonable?  Is it possible that a lax appraisal is one in which the appraiser, after proper market and highest and best use analyses, communicates the market truth to the appraiser’s client, thus proving the builder’s asking price is too high relative to current market conditions?  Since NAHB is sure appraisers determine market value, a lax appraisal - and nothing else - must be at the root to those two problems.

Via NAHB’s definition, therefore, an appraisal of sufficient strictness and severity is one by which the deal gets done and the builder, broker, and banker all get paid, market evidence and the results of the appraiser’s analyses notwithstanding.  Sounds like bringing on those strict and severe appraisals is a reform to the system NAHB et al could really love.

The second sentence in the second paragraph makes it clear that, in light of these problems with flawed appraisals, “…[mortgage] lenders, secondary market participants, and banking regulators [have implemented] new, more restrictive appraisal policies which have become a major impediment to the housing market recovery.”

It is clear that these stakeholders in the mortgage loan process have implemented these changes because of lax appraisals. It is just not possible that the stakeholders in the mortgage-lending continuum could have implemented these restrictive policies due to the past abuses, excesses, and flagrant corruption of the mortgage-underwriting, -financing, -syndicating and -lending industries.  It is just not possible that underwriters/lenders ever could have made low-doc, no-doc and liar-loans or that Wall Street’s grossly-overcompensated fertilizer-peddlers could have syndicated them.  To make unsupported and/or undocumented loans would violate tried-and-true loan underwriting procedures that have been in place effectively and efficiently since the Great Depression (not to mention violate numerous Federal banking laws).  No, clearly the past and still-ongoing turmoil in the financial system is totally the fault of the real estate appraisal industry, its intolerable ethics, and its lack of effective NAHB supervision. 

Downward Bias?
The last sentence of that paragraph emphatically declares that now there is “…an extreme downward bias...imbedded in the home valuation process” (emphasis added). NAHB’s use of the term downward bias is interesting here. To an appraiser, when any party uses the words bias or biased to describe either the appraisal or the appraiser, that bell you hear tolling in the distance is the appraiser’s death-knell.  Ethically, appraisers must avoid bias (or advocacy) as proactively and vigorously as they would avoid endangering their own children. So the NAHB’s use of it in their white paper is a warning to all appraisers: if you’re biased (against NAHB) we’ll turn you into your state (as well as your designating society).  Actually, the use of the term downward bias is more than interesting- it is pure hypocrisy. The reason it is pure hypocrisy is that during the boom years of 2003-2007 NAHB never accused appraisers of upward bias – indeed, they thanked us for it and came to expect it.  Can anyone hear the sound of stones crashing thru glass houses?  Of course not; real estate appraisers are solely and uniquely responsible for the turmoil in the financial markets today.

The last paragraph in the White Paper's subsection is one appraisers need to memorize since it succinctly summarizes how appraisers have corrupted the mortgage lending continuum (pretty much all by themselves): “Rather than apply more restrictive appraisal policies, the industry should explore ways to improve the quality of appraisals– particularly as they are applied to distressed markets. Home builders are concerned with appraisals that solely use comparable sales to determine value rather than also considering the cost or income approaches. In particular, it is important to consider giving greater weight in distressed markets to alternative means of valuation, such as the cost-based approach. Using comparable sales to determine an appraised value in distressed markets too often is leading to homes failing to appraise at the sales price or even construction cost.”

Clearly, since appraisals are lax, they are of low quality; thus, their quality merits improving.  Obviously, when their quality improves, the entire mortgage-lending continuum will recover to pre-bust levels since the entire mortgage-lending continuum has its foundations (a) on the bedrock of less restrictive appraisals and (b) the fact that appraisers determine market value. 

Since “…home builders are concerned with appraisals that solely use comparable sales to determine value rather than also using the cost or income approaches…” it is obvious that appraisers need to vacate the protocols they (and every other valuation expert in every other valuation field) have used for nearly a century.  Those valuation professionals need to transition to a system of real estate appraisal protocols that satisfy the needs of the NAHB’s members and their affiliated bankers and real estate/mortgage brokers. 

As an example, well-trained, highly-educated, and long-experienced appraisers will candidly admit (if plied with enough adult beverages) how right-on NAHB is when it comes to valuation of a newly-constructed home via the protocols of the Cost Approach.  They will admit the little-known fact that buyers and sellers generally sit around the kitchen table when negotiating the sale and purchase of a home to discuss over a cup of coffee the facts behind the replacements costs of a home, it’s accrued depreciation (especially when there is an external obsolescence component to the accrued depreciation), and the contributory dollar-values of landscaping, sidewalks, and the use of 2 x 4s instead of 2 x 6s.

And how about NAHB’s insistence that residential appraisers use the protocols of the Income Approach to determine the value of a newly-constructed house?  Appraisers have to admit that the good folks at the NAHB have hit the valuation nail on the head with this proposed reform to the appraisal system. When it comes to determining the market value of a newly constructed house, nothing screams market value louder (or more accurately) than an analysis of that property in light of the gross monthly income it will generate.  We purchase our homes to have places to nurture and raise our families, have a refuge from the stresses of the world, get out of the elements, and of course, to generate a sustainable monthly income. 

In the last sentence of the white paper’s third paragraph we learn that when appraisers “…[use] comparable sales to determine an appraised value in distressed markets too often [such a step leads] to homes failing to appraise at the sales price or even at construction cost.”  Please, far be it for appraisers ever to fail to appraise a property at its contract price, especially when that contract price is that of a newly constructed house of one of NAHB’s members.  It should be an article of faith that a new home has a market value of whatever the developer/builder decides to charge for it.  When an appraiser so fails, it becomes ever more important to remember that a newly constructed home has a market value of whatever the developer/builder says it is worth. 

That same paragraph also makes it clear that, even in a declining market, a house must be worth more than its construction cost.  To the zealous helots of NAHB, it is evidently a market verity that a market can never fall to the point that it makes no sense to build new houses. It is beyond debate that, in the worldview of NAHB, markets never decline; indeed they never even flatten.  They ever advance to the beat of NAHB’s drummer.  It is simply not possible for a newly constructed house to appraise at less than the cost of its construction.  All of that information we heard on the news from 2007 to 2011 about how poor the residential real estate market was, how overbuilt the markets were, how unemployment was increasing, how foreclosures were increasing, etc., was obviously nothing more than poppycock, if not downright prevarication.  We know these adjective are true because, per NAHB, markets do not decline, appraisers determine market value, and the highest and best use of a vacant site is never to let it sit vacant until the market decides it makes economic and financial sense to develop it.

In the White Paper's next paragraph we learn that “…NAHB believes it is urgent to implement reforms in the following areas of the appraisal process:

  • Strengthen education, training, and experience requirements for appraisers of new home construction.

  • Improve the quantity and quality of data for new construction.

  • Develop new appraisal standards and best practices for conducting appraisals in distressed markets.

  • Develop a process for expedited appeals of inaccurate of faulty appraisals.

  • Strengthen oversight of appraisal activities.” 

Whew!  That’s quite an agenda.  But since NAHB knows what appraisers need to do to make the builder’s deals close successfully, as well as how completely it understands what is broken in the appraisal process, it is equally transparent that NAHB is the entity to fix what ails the appraisal industry. 

NAHB does not provide any details when it says that appraisers’ education, training and experience requirements need to be strengthened when it comes to the appraisal of new homes.  Since it does not provide details of this fortified education, training, and experience, that omission must mean NAHB has all of those details worked out, is keeping them a secret, and will disclose them when the time is appropriate.  Nor does it make clear what the difference is between appraising a new home and appraising the one-year old home just like it across the street in the same development; or why the appraiser must understand that difference to appraise either of them properly. 

The same holds true for the need to “…improve the quantity and quality of data for new construction.”  Ignore the fact this sentence is utterly meaningless from the standpoints of both syntax and logic.  Its total lack of meaning is its glory!  NAHB can wait to interpret it until the proper time, and then reveal its hidden meaning to an anxious U.S.  Then NAHB will help appraisers to “…develop new appraisal standards and best practices for conducting appraisals in distressed markets.”  Since, according to NAHB, markets never decrease (supra), the internal inconsistency of recognizing declining markets is easily to be overlooked by a patient home-buying populace, as well as the appraiser-analyst community. We appraisers are to be relieved that NAHB will be glad to provide us with the necessary analyses and data to adopt new appraisal standards when it is necessary to appraise in a declining market- although, per NAHB, markets do not decline.

The folks at NAHB do not detail how or why appraising a one-year old house in a declining market is different from appraising a newly constructed house in a declining market.  But, hey, ours in not to reason why, ours is but to do and die!  It is likely that all of us understand the fact that these new standards and best practices would never inure solely to the benefit of NAHB, nor could they ever be detrimental to the lender, consumer, appraiser, or the entity that eventually ends up with the lender’s paper.

Finally, NAHB calls for a strengthening of appraisal oversight activities.  Since the sentence containing this proposed reform is either ambiguous or meaningless, it apparently means NAHB has its details under wraps until the market is ready to handle them.  That is planning and foresight personified!

So we appraisers should be pleased, if not downright grateful, that NAHB, that one unbiased organization that speaks for the entire residential mortgage lending industry, has gone to the time and trouble to tell the other organizations in that process what we appraisers need to do in order to change and set our lax house in order. 

There are, unfortunately, those who would consider such a step on the part of the NAHB to be meddling or interfering in a process that is not theirs to influence. Some might consider NAHB’s white paper to be presumptuous, even arrogant.  It is possible that some might dare whisper it is self-serving or even biased.  However, any and all of those scenarios are impossible. NAHB clearly knows (a) what is out-of-whack with the entire new home appraisal process and (b) how to set that process aright.  Even to mention (or think) NAHB cannot do so is to cast aspersions on an organization that has only the best in its heart for the American home buyer, as well as all of us who play a secondary and unimportant role in that process.  NAHB, just as the government, is here to help us – especially we lowly dullards, the real estate appraisers.

To view NAHB's white paper, please click here.

Footnote: See Housing America's Future: New Directions for National Policy; 2013 Bipartisan Policy Center, as well as http://www.aei.org/files/2013/07/30/-linville-are-appraisers-and-appraisals-up-to-the-challenge_155549401860.pdf. 

OREP/WRE Webinar Series: Author Tim Andersen, MAI, presents: Complaints: What to do When the State Board Comes Calling. See how to protect your license and your livelihood. Go inside the investigation/complaint process with an expert to see how to protect yourself should the state come calling! "Excellent webinar. I could not write notes fast enough!" -P. Murphy. Enjoy this recorded webinar at your convenience.


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