Jeremy was a fascinating interview. I’d go so far to say the most articulate on this given topic: appraisal regulations. Who would expect such an animated interview on the driest of topics? His 2020 book, “Dispatches from the Cosmic Cobra Breeding Farm,” has sounded a clarion call – a throw down if you will. He exhorts appraisers to become activists.
He asks appraisers to see the Appraisal Foundation, a tiny 501(c)(3) nonprofit, as a Disney-like rights-management operation that has attached itself, along with its growing number of copyrighted products, to an entire profession. The organism then plows back some of its time and money into gaining further influence and further cementing its standing.
Buzz: Describe your book, “Dispatches from the Cosmic Cobra Breeding Farm.”
Bagott: It’s a romp through a target-rich environment of hubris and dysfunction. I wanted to give the outside world a glimpse of a remarkable, multi-headed, regulatory organism that has attached itself to our profession. It’s a cautionary tale.
Buzz: Where did the title come from?
Bagott: I chose a literary title. I thought it had a better chance of attracting a general readership – much better than “Appraisal Regulation: How Did We Get Here?”
Buzz: What’s a “cosmic cobra breeding farm?”
Bagott: If a government wants to increase the quantity of an undesirable thing, all it has to do is offer a bounty for that thing. As sure as the sun sets in the west, it will end up inadvertently increasing the quantity of the undesirable thing. That applies to dead prairie dogs, “regulation mills” – you name it.
The term “Cobra Effect” actually dates to the time of the Raj in India, when the Subcontinent was under British rule. Administrators in Delhi wanted to eradicate cobras that were causing an increasing number of fatal bites to townspeople. So, authorities offered a bounty for each dead cobra that someone brought in. At first, it did reduce the cobra population, but a few enterprising people began breeding cobras for the sole purpose of turning them in for the bounty. The government caught wind of this and discontinued the program. The breeders, unable to afford their overhead, released their breeding stock into the wild, creating a net increase in the overall number of cobras.
In 1968, the federal government wanted to reduce the size of the Federal Register. A bill signed by President Johnson allowed private standards and codes to be incorporated by reference into regulations, making them enforceable. By 2013, there were 9,500 referenced standards in the Code of Federal Regulations alone. The CFR grew from 4,369 pages in 1993 to the equivalent of 81,883 pages by 2012, so the opposite happened.
If government incentivizes a privately held organization to create, copyright, license, and sell regulations to a captive audience, it will change those regulations continually in order to keep selling copies. That’s pure Cobra Effect.
Buzz: Who are your literary inspirations?
Bagott: Tom Wolfe. “Bonfire of the Vanities” changed my life, as did “A Man in Full.” I’ve also been inspired by Joan Didion (“Slouching toward Bethlehem”) and Hunter S. Thompson for his remarkable essay, “Fear and Loathing on the Campaign Trail ’72.”
Buzz: I don’t think, as some have accused you, of vilifying Appraisal Foundation chief, Dave Bunton, in your book. Can you comment on that?
Bagott: I actually salute him for his technical bravura. The regulatory organism he’s created is a masterful system, and it’s doing everything the current arrangement incentivizes it to do – harvest government money; travel internationally; copyright and continually revise a growing number of proprietary products – standards, criteria, test questions, teaching materials. It teaches and credentials the teachers; teaches and credentials the enforcers; hosts foreign delegations; and charges what it can get for the standards. Rinse and repeat. He has mastered the art form.
Joan, you’re clearly way too young to remember the character of “Mr. Haney” in the show “Green Acres.” He was a local farmer-turned-salesman in Hooterville. The character was played by Pat Buttrum. He was always working an angle to sell something to the city slickers-turned-farmers, Lisa and Oliver Douglas. That’s the Appraisal Foundation. The only difference is it is able to coerce sales of its USPAP product from a captive audience. Lisa and Oliver Douglas often said no to Mr. Haney.
Buzz: Oh, but I do remember “Green Acres.” I am surprised you haven’t crafted some lyrics to the tune. I recall you referring to Bootleggers and Baptists in your book. Can you share with our readership what you mean by that?
Bagott: Baptists were working to get a dry law passed on Sundays in parts of the South. Meanwhile, bootleggers were also working just as hard to get the same dry laws passed because they knew it would help their business. Regulatory economist, Bruce Yandle at Clemson’s College of Business and Behavioral Science, put this model forth as a way of describing how one group may be in favor of a regulation and an ostensibly opposing group may also want to see the regulation be adopted for its ability to be subverted.
This is now happening in the regulation of appraisers. Both the state and federal appraiser, regulatory bureaucracies, and course providers – the Baptists – like the heavy regulation on appraisers for obvious reasons. While the banks and non-bank lenders – the bootleggers – also like the heavy regulation so they can point to the dysfunction and the dwindling, aging corps of appraisers, and allowing them to promote the use of so-called “evaluators,” hybrid appraisals, broker price opinions, “black boxes” and appraisal waivers for entire geographic areas.
Buzz: In your book, you also write about University of Chicago economist, George Stigler. What would he make of all this?
Bagott: Stigler believed that government regulations aren’t solely for the public good. He believed interest groups, over time, learn to exploit the coercive powers of government for their own benefit. If he were alive today, he would immediately recognize the relationship between the nonprofit Appraisal Foundation and the tiny federal agency that wet-nurses it with our money, the Appraisal Subcommittee.
The Appraisal Foundation has learned to tap into government’s coercive powers – that is, appraisers must continually buy its copyrighted code, learn from the teachers it sanctions using copyrighted teaching material, and interact with its proprietary products in many ways in order to obey the law and work in their chosen profession.
Buzz: How does the theory of Concentrated Benefits and Dispersed Costs relate to what appraisers go through?
Bagott: The late economist, Mancur Olson, from the University of Maryland, was a genius. His theory of Concentrated Benefits and Dispersed Costs explains, in a very logical way, why people become such sheep. Say every American is forced to pay a penny a year. That sums to about $3.2 million. Those who pay the penny don’t think much about it. After all, it’s just a penny, and the recipient of the concentrated benefit knows you probably won’t fight the penny expenditure. Even if you fight it, and let’s just say you’re successful and you get a judge to rule that the penny tax is unlawful, then all you’ve saved is one penny a year.
But the recipient of the concentrated benefit – the party that gets the $3.2 million every year – will fight tooth and nail to keep that concentrated benefit flowing. Maybe he plows $1 million a year into hiring lobbyists and PR firms to influence lawmakers to keep the tax going.
Olson’s theory predicts that appraisers won’t bother to try to claw back their National Registry money if the money is not fully used. For example, after much shaming, the Appraisal Foundation agreed to forego its annual grant from the Appraisal Subcommittee during the pandemic. The Appraisal Foundation applied for and received PPP money and can’t travel around the globe during the pandemic. Plus, it has reserves of about $6.5 million. There is no reason for it to accept its grant.
Buzz: What are some of the things that a mom-and-pop appraisal shop need to prosper?
Bagott: Time and again, we see there are two things small businesses need to thrive: predictability and the rule of law. A large company can afford to have a dedicated compliance department. Big business actually likes heavy regulation because the regulation keeps small businesses at bay. Heavy regulation stifles creativity and competition and keeps start-ups from ever starting up. I have heard versions of this comment from appraisers like Eric Kennedy in Mt. Olive, North Carolina; Ashley Wolthuis in the Salt Lake City area; Marcy Rodgers in Bonita Springs, Florida; Michael Shank in Vancouver, Washington; and Jim Miller in Ventura, California. Regulations attempt to anticipate the moves of bad actors. They address the lowest denominator and penalize the honest.
Plus, there is no deity – no magic wood nymph – that will tell regulators when they’ve gone too far, when the regulatory burden will begin driving practitioners from the profession, when the barrier to entry is slightly too high and young people stop becoming interested in joining. When an organization and its paid panelists are handed a Congressional franchise to sell a set of standards into a captive market at the price of its choosing, you can bet those standards will change frequently to maximize sales.
Buzz: What’s an “incorporation by reference”?
Bagott: I talked about this earlier when describing the Cobra Effect. Way down in the Marianas Trench of federal and state government is a mechanism by which private, copyrighted standards and codes can be referenced in statutes and regulations and made enforceable. Prior to 1968, the practice didn’t exist. A provision in the Freedom of Information Act of 1968 permitted the practice at the federal level. Today, local, state and the federal governments allow copyrighted codes and standards to be incorporated by reference into a law. The practice has incentivized nonprofits to write private regulations and push to get them adopted into statutes by lawmakers and into regulations by executive branch agencies. It explains why the privately held Uniform Standards of Professional Appraisal Practice has legal force.
Buzz: Do you believe Fannie Mae and Freddie Mac should have an active role in setting appraisal standards?
Bagott: Yes. I think we should convene a panel made up of Dick Fuld of Lehman Brothers, Jimmy Cayne of Bear Stearns, Angelo Mozilo of Countrywide and bring Roland Arnall of Ameriquest back from the grave and allow them to draft a set of national best practices on risk policy for banks.
Of course, I jest. Freddie and Fannie lost the moral high ground many years ago. A three-year investigation by the Office of Federal Housing Enterprise Oversight charged top Fannie Mae executives of manipulating, accounting, and deceiving shareholders in order to inflate their bonuses. That was in 2006, I think. Let’s not forget, they purchased and guaranteed stated-income and Alt-A subprime loans during the run-up to the 2007-2008 Financial Crisis. Fannie also once purchased negatively amortizing loans. Probably Freddie, too. Fact: Fannie and Freddie, between them, were backstopping every type of toxic and exotic subprime loan the private-label firms were securitizing.
I hate to pick on Fannie Mae, but it alone required a $120 billion government bailout, according to Propublica’s Bailout Tracker. That’s a great tool, by the way. Fast-forward 15 years: Fannie is backing cash-out refinancing with appraisal-free mortgages and loans relying on so-called “black-box appraisals.” Also, let’s not forget that Fannie Mae has been promoting the use of “property data collectors,” keeping licensed appraisers from inspecting the properties they appraise.
Buzz: You recently filed a petition of some sort with the California Office of Administrative Law?
Bagott: Yes. Thanks for asking. The California Office of Administrative Law accepted my petition on the first of this month. I’m trying to compel a required rulemaking for the 2020-2021 USPAP. Without a rulemaking, the current version of USPAP is a so-called “underground regulation” in California, and the Bureau of Real Estate Appraisers is in violation of state law. This is going on in other states, too. My petition is now officially under review. This is about more than a technicality. Rulemakings can take two years or more in California. The USPAP’s two-year change cycle is why the California agency ignores state law. It hopes you won’t notice.
Buzz: What do you hope to achieve with the book?
Bagott: Ultimately, I’d like to slow the 2-year change cycle of USPAP. It may not be immediately evident, but in my opinion, the frequent change cycle is the white-hot core of the rot. The Appraisal Foundation has every incentive to continually revise its products. The revision cycle feeds into an eco-system that has its tentacles everywhere. It’s a cautionary tale, and I wanted a general readership to be equally horrified in a “this could happen to you” way – not just those who are forced to underwrite the current arrangement.
Buzz: Thank you for spending your time with us today.
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