The time has come,’ the Walrus said,
To talk of many things:
Of shoes – and ships – and sealing-wax –
Of cabbages – and kings –
And why the sea is boiling hot –
And whether pigs have wings.’
Thank you, Lewis Caroll (from his classic poem, The Walrus and the Carpenter) for that introduction. So the end of this blog will make sense, you have to understand the walrus and the carpenter were glib con men (con persons? Loan officers?) speaking to some oysters of their acquaintance – young, plump, juicy, succulent, ripe, fresh oysters. Oysters who, for reasons the poem explains (but we won’t go into here), had come to trust the hungry pair, despite the disapproval of the oysters’ elders (read the poem). Clearly, the walrus and the carpenter did not have the oysters’ best interests in mind. Perhaps there are lessons here for appraisers to learn?
Really, the time has come to talk of why what used to be “the norm” in real estate appraisal no longer is. This is not to endorse or condemn those changes. Rather, it is merely to present them for discussion and analysis. Real Estate Appraisal has changed, yet we, as an industry, generally resist those changes. If something ain’t broke, there is no reason to fix it. But that assumes (1) something ain’t broke and (2) we are able to fix it, even if we don’t need to. Let us call both of those assumptions into question.
The first question to talk about is this: “Does the real estate appraiser have any ethical, moral, or legal responsibility to protect1 the consumer/mortgagor when appraising a property for a mortgagee/client?” To consult USPAP on this reveals its sole purpose is to “…promote and maintain a high level of public trust in appraisal practice by establishing requirements for appraisers” (2020-2021 USPAP, ll. 1,2). Note this is a requirement The Appraisal Foundation has placed squarely on the shoulders of the USPAP document. It does not place this responsibility on the shoulders of real estate appraisers. Appraisers merely must comply with USPAP.
A word search of the USPAP document for “protect” reveals but a few hits. Yet none of these is in the context of the appraiser (or the appraisal) somehow protecting the consumer/mortgagor2,3,4. AO-30 makes it clear that “…[FIRREA and other] regulations and guidelines are established to protect federally insured depository institutions…”, but, in that charge, says nothing about protecting the consumer/mortgagor, nor whose job that is. It says nothing about these, since that is not the appraiser’s charge.
In other words, there is absolutely nothing in the USPAP document (as of this writing) even remotely charging the appraiser with the protection (or championing) of the consumer/mortgagor. That the appraisal and report may, indeed, carry out this function, by showing the offeror the sales price of a residential property is too high, resulting in a re-negotiation and lowering of the purchase price, is but a serendipitous unintended consequence. The same sequence of events could have taken place had the offeror commissioned the appraisal (i.e., become the client), with the specific charge to the appraiser to conclude a reasonable sales price so that client did not overpay.
Therefore, to operate under the worldview that the appraiser exists to champion the consumer/mortgagor against the rapine of the seller, the broker, and/or the lender, while noble and altruistic, is to assume a stance the appraiser has no legal, ethical5, or moral reason to take. Simply put, it is not the appraiser’s job to look out for the consumer/mortgagor’s best interest. It is not the appraiser’s job to look out for anybody’s best interest. That is not a charge USPAP or Fannie Mae lays at our feet, nor is it one for which we are paid (nor for which we are qualified, for that matter).
Next is, “Does the real estate mortgage lending industry owe the real estate appraiser a living?” Many appraisers demand what they call “reasonable and customary fees”. Yet there is no definition of what a reasonable and customary fee is since there is no such animal as a reasonable and customary appraisal assignment. Each is different; each is unique. As a result of this, each appraisal assignment must command a different and unique fee (and the appraiser must demand it or , most assuredly, the appraiser will not receive it).
Despite the fact an appraisal assignment is not a “one-size-fits-all” proposition, lenders and AMCs strive to take this position, clearly to the appraiser’s detriment. This is in their best interests from a cash flow standpoint. From a cash flow standpoint, it is in the appraiser’s best interest to charge a unique fee commensurate with the assignment’s complexity, and be damned the lender/AMC’s cash flow goals and requirements. In other words, we mustn’t be as trusting as the oysters in the poem. We don’t look out for the lenders’ interests; the lenders do not look out for our interests.
Yet, that the lender/AMC business model is antithetical to the appraiser’s business model is (1) something appraisers should expect; and (2) something the appraisal community has done a lousy job of overcoming. To solve this problem, however, will not require a general strike on the part of appraisers – since that would not work: there are too many others out there who can take our place6 in a heartbeat (such as real estate brokers and evaluations).
Since it is not the lending industry’s job to support appraisers, the appraiser must, therefore, take the bull by the balls and quote fees commensurate with the assignment’s complexity and then hold out until we get them. However, this is a short-term strategy. then, somehow, we must convince the real estate mortgage lending industry that we are not merely a pleasant adjunct to what they do (i.e., we are not as mere the oysters in the poem). Rather, we have to convince them that we are an essential and irreplaceable component of what they do. Until then they have no incentive to pay fees commensurate with the complexities of any given job, thus will do their best not to. So far appraisers, and their national appraisal societies, have sucked at this. And, no, it is not the lender’s job to provide us with a living. We appraisers have to earn that – every day.
Now, on to the third question it is time to ask ourselves: “Are the accommodations the lending industry is asking us to make, and over which we have essentially no control, beneficial to any party other than the lender” (i.e., to other than to the walrus and the carpenter)? This is likely the most perplexing of the three since we have essentially no control over those changes, nor the speed with which they are taking place7. As a result, the blog centers here.
As the first example, consider the desktop appraisal. This is really a misnomer since, in one, there is very little different from the traditional appraisal, other than the appraiser does not visit the subject or the comps. The first is a common occurrence in drive-by appraisals. The second really ought to come as a relief to the appraiser since visiting/photographing comps more than once is both a bore as well as a monumental waste of the appraiser’s time for which the client does not compensate the appraiser. Nevertheless, the accommodation the lending industry is asking us to make is in the reporting of the appraisal, not so much the appraisal itself.
In the past, the appraiser reported the so-called desk top appraisal to the client on the appropriate form (e.g., the 1004 form for a single-family residence). However, the lending industry, in its zeal to speed up the mortgage loan process (thus efficiently to shovel in more lending fees) has created its own reporting forms. These forms are likely more efficient than the totally archaic 1004 forms. Yet (1) are they any better than the other forms? And (2) does their use make the appraiser’s compliance with USPAP more difficult? Let’s be honest: the lending industry would not have created these forms unless it concluded they were somehow “better” than what came before. Appraisers already understand that lenders do not care a rodent’s furry patootie if those forms do or do not foster USPAP compliance on the appraiser’s part or the appraisal’s part. This latter responsibility falls totally on the appraiser’s shoulders, as it really should.
Really, in a blog such as this one, there is no way to answer question (1). So, we won’t try. We will tackle question (2), however.
Since a lender designed these forms, the form uses the lender’s database of sales to populate the statistical analyses and comparable sales portions of the report. This, frankly is not particularly different than proprietary programs to which any appraiser can subscribe. The appraiser can even vet the sales to determine which of them are really comparable. Thus, from the list the computer chooses, the appraiser can present only those that will yield a reasonable indication of value to the subject. So far, so good.
Yet, the issue may be the statistics and the universe of data available to the lender’s algorithm. This algorithm chooses the sales in the in the subject’s delineated neighborhood from the lender’s own database, but may include in that choice some properties that really are not comparable to and competitive with the subject, something only the well-trained and well-experienced appraiser can ferret out.
For example, is a 3/2 with 2,200 square feet of GLA, in a luxury gated community, really comparable to and competitive with a 3/2 of similar size not located in a luxury gated community? Yet, if the lender’s algorithm included both of these similar, yet highly disparate properties in the statistical analysis of the neighborhood, the result is an “apples-to-pickles” comparison. In a macro-analysis of the neighborhood, this may be an acceptable protocol. But in the micro-analysis of a particular property, in a particular neighborhood, on a particular day, under a particular set of assumptions and limiting conditions, as is common in a real estate appraisal, an “apples-to-pickles” comparison is unacceptable. In fact, under USPAP, it is misleading; and to Fannie Mae, it is using unacceptable comps, one of its 16 unacceptable appraisal practices.
Now, on to some other, but related, matters. It is common in appraisal reports the lenders were kind enough to design for us, to find boilerplate language such as this: “[t]he scope of work for this appraisal is defined by the complexity of the assignment and the reporting requirements of this appraisal report” (emphasis added). Yet, the concept of scope of work refers solely to the appraisal. Under USPAP, it never applies to the appraisal report. Nevertheless, this is exactly what this sentence implies, thus it is misleading since it is trying to palm off on us the client’s choice of the appraiser’s scope of work. It is also an attempt by the lender/client to influence the appraiser’s scope of work (to benefit the lender, as well as to throw the appraiser under the bus).
It is also common to find in such appraisal report language such as, “[t]he client and the appraiser agree that …” It is not up to the client to agree with the appraiser’s chosen scope of work. It is not up to the appraiser to engage in a scope of work (or anything else, for that matter) to garner the client’s agreement. Rather, it is the appraiser’s responsibility to choose a scope of work that results in credible assignment results, the client’s agreement or disagreement with it be damned.
What about built-in statistical analyses common in many desktop appraisal reports? It appears to be a commonality among desktop appraisal forms to include various statistical analyses from the sponsoring entity’s database, even if a specific analysis has no bearing on the appraisal question. One example of this is a desktop appraisal that, with the assistance of the sponsor’s database, included an analysis of the number of bathrooms per house there were in the subject’s delineated neighborhood. The answer was -2-. Really!? Exactly two? Not 2.2?
The point is, why/how was this statistic relevant to the subject’s marketability or market value? If it was not important or relevant, why was it in the report? If there is a statement of fact in a report (e.g., the average number of bathrooms there are per house in the subject’s neighborhood), then the appraiser is saying that statement is both true and correct. Was -2- really correct, or was it really 2.2? The difference between two and 2.2 is middling, to be sure. But how can the appraiser be sure it is true and correct if the appraiser has no way of vetting the data on which the statistical analysis has its base? And, yet, the client/AMC wants the appraiser to certify that this (as well as other) statements of fact are true and correct, when the appraiser has no way of knowing if/how they are. Does this look as if that AMC/lender might be preparing to throw somebody under the bus?
Thus, the problem with the desktop reporting form is not that the appraiser uses a form to report the appraisal. Use of a form to report the appraisal is a tried and true appraisal office technique. The problem is that, when an appraiser uses one of the available desktop appraisal forms, the form itself gives every impression of attempting to limit the appraiser’s scope of work to favor the lender, as well as to limit the appraiser’s ability to report the findings in a non-misleading way.
So, we have spoken of many things. Despite the scope of our discussion, however, two characteristics emerge: while the appraiser has many responsibilities, one of them is not protecting the public from the rapine of brokers and lenders. The appraiser’s sole responsibility is to comply with Standard 1 in developing the appraisal and with Standard 2 in reporting the appraisal. If the public benefits from this, so be it. But appraisers are not the consumer/mortgagor’s champions, nor the vehicle of their protection.
Next is that if we let the client dictate to us about scope of work and the quality of the appraisal report (especially if that client is a lender/AMC), that client will, insofar as possible, try to influence the appraiser/appraisal in such a way that the appraisal report favors the lender, the broker, et al (i.e., that the appraisal report most definitely closes the deal, not necessarily that it complies with USPAP).
Since it is not our job to protect the lender, et al, then the appraisal must be the result of the appraiser’s independent, impartial, and objective analyses. In turn, we must then write the appraisal report in a manner that is clear and not misleading, even if that is not what the client wants. Our client’s objectives in these two areas should neither interest nor influence us. Yet, our independence, impartiality, and objectivity are qualities that lenders generally do not actively seek, and most assuredly would persuade us to abandon (if they could. When you read the poem, you will see not only how the Walrus and the Carpenter persuaded the oysters to abandon their caution and ignore the tut-tutting of their elders, but how easily they accomplished this task).
Remember the poem starting this blog? It has a sad ending (spoiler alert): the walrus and the carpenter eat all of the oysters.
I weep for you,’ the Walrus said:
I deeply sympathize.’
With sobs and tears he sorted out
[oysters] of the largest size,
Holding his handkerchief
Before his streaming eyes.
O Oysters,’ said the Carpenter,
You’ve had a pleasant run!
Shall we be trotting home again?’
But answer came there none –
And this was scarcely odd, because
They’d eaten every one.”
There is nothing inherently evil or benign in a desktop appraisal or a desktop appraisal form (or in a lender/AMC for that matter). Yet, do we ignore the tut-tutting of our elders when we perform our appraisals per the lender’s scope of work, or use the lender’s desktop reporting forms uncritically?
Do we ignore the tut-tutting of our elders when we think we can make both the appraisal and the reporting form USPAP compliant without a great deal of extra work (for which we likely do not get paid), thus also for a great deal of extra risk (for which we also do not get paid)? We have the choice to elect the proper scope of work and reporting formats, as well as to reject them to favor those amenable to us. But, given the propensities of walruses, carpenters, and lenders/AMCs, are we appraisers, as were the oysters, about to become a succulent lunch? Who is the first one the lender/AMC is going to throw under the bus when the loan goes south? It damn sure won’t be the loan officer who booked all the big fees!
1 Protect the consumer from what? From whom? How? Why? When?
2 AO-16 speaks of “…protected group(s)…”; but this is in the context of non-discrimination, not in the context of protecting the consumer/mortgagor.
3 Footnote #2 to AO-21 states: “The PREAMBLE states that the appraiser’s responsibility is to protect the overall public trust and it is the important role of the appraiser that places ethical obligations on those who serve in this capacity”. But the context of USPAP’s Preamble is to preserve the Public Trust in appraisal practice by giving that Public a metric against which to measure an appraisal and report (i.e., Standards 1 and 2). There is nothing in the Preamble to make the appraiser the consumer’s champion.
4 An appraiser must protect the confidential nature of the appraiser-client relationship. Yet, in the typical appraisal of a single-family house, in which the lender/AMC is the client, that protection extends to the client, not to the consumer/mortgagor. That protection applies to confidential information. It does not require the appraiser to protect the client (or the consumer/mortgagor) from or against anything.
5 Remember, by definition, an appraiser is “…independent, impartial, and objective”. If the appraiser were to be the consumer/mortgagor’s champion, then these qualifications would not function as the backbone of the definition.
6 Remember what the state of North Dakota did.
7 See e.g., Fannie Mae’s December 2019 Appraiser Update newsletter, specifically the entry called “How are you modernizing?”. The lending industry, under the auspices of Fannie Mae and the other GSEs, has told appraisers to “modernize”. Yet this modernization is for the benefit of the mortgage lending industry, not the real estate appraisal industry. And this modernization serves merely to shovel closing and banking fees to the industry much faster. There may be benefits to the consumer. There are no obvious benefits to the appraiser.