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EJ
10-07-06, 09:33 AM
Housing Bubble Update: Price Deflation Risk Due to Overpriced Appraisals

iTulip Top Ten List of Price Pressure States

by Eric Janszen - October 7, 2006

For years we've been keeping an eye on the online petition (http://www.appraiserspetition.com/) by "concerned real estate appraisers seeking fair and impartial treatment, responsible representation and enforcement of the law." The site was launched in 1999. Here's the appeal by thousands of appraisers, pleading for regulators to enforce the rules.

To: Mr. Ben Henson - Executive Director
Appraisal Subcommittee (ASC)
Federal Financial Institutions Examination Council
email: benh1@asc.gov

cc: Other state or federal agencies with authority in the following matter

"The ASC's mission is to ensure that real estate appraisers, who perform appraisals in real estate transactions that could expose the United States government to financial loss, are sufficiently trained and tested to assure competency and independent judgment according to uniform high professional standards and ethics." From the ASC website.

The concern of this petition has to do with our "independent judgment" in performing real estate appraisals. We, the undersigned, represent a large number of licensed and certified real estate appraisers in the United States, who seek your assistance in solving a problem facing us on a daily basis. Lenders (meaning any and all of the following: banks, savings and loans, mortgage brokers, credit unions and loan officers in general; not to mention real estate agents) have individuals within their ranks, who, as a normal course of business, apply pressure on appraisers to hit or exceed a predetermined value.

This pressure comes in many forms and includes the following:
the withholding of business if we refuse to inflate values,
the withholding of business if we refuse to guarantee a predetermined value,
the withholding of business if we refuse to ignore deficiencies in the property,
refusing to pay for an appraisal that does not give them what they want,
black listing honest appraisers in order to use "rubber stamp" appraisers, etc.We request that action be taken to hold the lenders responsible for this type of violation and provide for a penalty on any person or business who engages in the practice of pressuring appraisers to do dishonest appraisals that do not provide for independent judgment. We believe that this practice has adverse effects on our local and national economies and that the potential for great financial loss exists. We also believe that many individuals have been adversely affected by the purchase of homes which have been over-valued.

We thank you for your cooperation and assistance.

Sign this Petition Your name and any comments you make will be added to those below.
Since the petition was posted, it has been signed by 9258 appraisers. Exact data are hard to find, but there are approximately 20,000 certified appraisers in the US. That means nearly half of them have signed this petition. Keep in mind that these appraisers are complaining about is getting black-listed for failing to "hit the number." By signing this petition, and including their name and address, the petitioners are taking a public position that is very likely to get them black-listed if they aren't already, and limit their income opportunities. Safe to say that the appraisers who did no sign are either not in a position financially to do so or are unwaware of it.

Here is a small sample of the hundreds of comments the petition signers have made to give you a sense of what they have experienced.
"I see this every day, and abhor the appraisers who support unethical conduct. It's a shame the state boards are so passive."

"Home listed items it did not have. Appraiser refuses to ammend report" (Apparently ratting on another appraiser.)

"The politicians do not really care about this issue as it does not help them get re-elected. The ASB is toothless."

"This practice is going to difficult to stop. You don't hit the number, you do not hear from the lender again."

"I've been blackballed by an entire branch office at a major bank and I'm the bank's appraiser! It has to stop!"

"This is a huge problem and someone needs to be held accountable."

"Appraiser/Broker black listed many times, requested minimum values, violate USPAP, comp checks violate MLS policy. Get it!?"

"I am the President of two CA appraials associations - The Sonoma County Appraisal Assoc., & Marin County Appraiser's Assoc."

"I have "lost" a few clients because I will not stretch values. At least I can sleep at night!"

"I fight this problem on a daily basis and have lost many clients over the years for simply doing what I am supposed to do!"

"Please fix our broken and fraud-ridden appraisal system now!"

"Without legitimate appraisals, we have NO idea of true market prices here... look out below!"

"There should be a way of reporting Agents that apply pressure in the Appraisal process."
And my personal favorite:
"Every fax has "Don't do this appraisal if you can't make this ____ value." Banking has become like selling used cars."
The petition went up and has been collecting signatures for over six years–not coincidentally, since the end of the stock market bubble and the start of the housing bubble.

Which states have the worst problems?

To try to answer this we took the petition data, counted up the petition signatures by state, and ranked each state by the number of petition signers. We then created an "P" for Price Pressure ratio using the petition ranking and population ranking of each state.

Some states, such as Indiana, have the same rank by population and petition signers–14th in signatures and 14th in population–resulting in a ratio of 100%. Other states, such as Florida, have a rank by petition signers that is twice the state's rank by population, resulting an ratio of 200%. Other states, such as Texas, have a rank by petition signers that is a third of the state's rank by population, resulting in a ratio of 30%. At these extremes, where the ratio diverges far from 100%, is where we find our Pressure or "P" states. At both extremes there is a lot of pressure, but at extreme there is also a lot of appraisers going along with it–and thus few petition signers–or fewer going along with it–and a thus lot of petition signers. The exception is NC. NC has its own petition drive that skews its petition signer rank.

The result is the iTulip State Appraiser Pressure "P" Chart, below.


http://www.itulip.com/forums/../images/repressurequotient.png


Today, Moody's Economy.com, released a report that forecasts a serious decline in several markets in the US.
Forecast: Home prices to tumble (http://www.recordnet.com/apps/pbcs.dll/article?AID=/20061005/MONEY/610050314)
Oct 5, 2006 (BRUCE SPENCE - RecordNet.com)

A new economic forecast released Wednesday projects that housing prices in 133 of the nation's 379 metropolitan areas will see price declines over the next few years, and Stockton ranked fourth in metropolitan areas expected to see the biggest price drops.

According to the forecast by Moody's Economy.com, a private research firm, home prices in the Stockton area will fall by 15.7 percent through the end of 2008, when the price plunge is expected to bottom out.

http://www.itulip.com/forums/../images/bilde.png


What does this mean for housing prices? The practices that the appraisers petition signers have been complaining about have been going on for years, contributing to home price inflation caused by other bubble factors, such as artificially low interest rates; suicide, liar and deathbed loans; and loose lending standards. We add 10% to 20% of additional downside price risk to housing prices in "P" states.

If you live in one of the areas in Florida identified by Moody's Economy.com report as a top ten town due for a major correction, you likely paid too much for your home or condo because the appraiser was trying to "hit the number" for the lender. Add another 10% to 20% "P" premium to the price decline predictions made by Moody's.

What does it mean for the banks that participated in this large scale over-pricing? Let's ask the petition signers, the experienced pros on the front lines.
Donna M. Christman from Allentown, PA, said, "Pressure is becoming more frequent. What is happening is very reminiscent of the pre-savings and loan crisis of the early 1990's."

Stan A. Skowronek of Carlisle, PA said, "Another 'crisis' resulting from overvaluing real estate will result if this situation persists."

Charles R Reimers of Saginaw, MI said, "To prevent another lender crisis such as that occurred with S&L's, ASC and others in leglislator authority better act."

William J. Riffel of Moberly, MO said, "If this practice is not stopped the country will be in much worse shape that it was after the S&L Crisis."

Frank V. DeAndrea Sr., of Hazleton, PA said, "Eventually the government will revisit the Savings and Loan Crisis if this practice continues."
And on and on. You get the idea. Think S&L crisis writ large.

That was five years ago.

What does all of this mean? It means get ready to get out your checkbooks, folks. Soon enough it'll be bank bailout time again.

It also means that when it comes time to vote, don't forget who was running the country while all of this was happening.

Special note to the pension funds and others holding the securities behind these loans: Good luck!

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SeanO
10-07-06, 01:42 PM
Great stuff Eric!

As the market turns and heads down, it is interesting to note that a new appraisal issue is emerging. Since residential appraisals are primarily based on comparisons to recent sales, they tend to come in high as markets decline.

Many of the deals that I see getting done today can be characterized as follows: a) unsophisticated buyers (Eric correctly predicted that real buyers would disappear), b) 100% financing, c) huge commissions and fees to the Realtor's and lenders that managed to find and qualify the unsophisticated buyer. The huge fees are possible because, unlike in the up market, the home will now easily appraise for more than the seller is willing to take.

So even though competitiion in the real estate business is at an all time high, per deal compensation is going through the roof... at least for those who can sleep at night after putting someone into a house that is significantly overpriced due to commissions and fees, with 100% financing and negative equity from day one.

The lenders appear to be perfectly ok with this. While early deals were clearly fraudulent side deals, most of this is completely in the open. $10,000 bonuses to the selling Realtor AND $10,000 in closing costs (lender fees) are becoming commmon. The new home builders have FULLY embraced this as well. Many builders offer agents double commissions for just bringing someone in the door. All these fees end up financed as most buyers today are using 100% financing.

I see two significant implications. 1) greater downstream default risk as buyers start out upside down, 2) meaningless sales price data as it includes a rapidly increasing amount of commissions and fees that have little to do with the value of the home - and which is difficult for appraisers to extract so it will continue to support over valueing properties.

The number of data reporting problems seems to be compounding. The Moody's chart above projects a 15.7% decline in Stockton, CA by late 2008. I believe the real decline there is already near 20%. Unfortunately as negative as the housing news has been, I think we'll find that it is still way too optimistic.