I hope everyone reads this as a cautionary tale. The polls, all of the them, in the presidential election were wrong, bigly wrong. All of the models were wrong as well. You know… those sophisticated statistical models created by quants. Most of the journalists were wrong and failed to report in an unbiased manner. I think appraisers understand, like no one else, what happens when personal bias and lack of independence influence outcomes.
I love data. I think access to better information leads to better decisions. But let’s not forget that human beings interpret data. And humans, with all of their flaws, write algorithms. Algorithms are nothing more than an opinion cloaked in a mathematical formula. Big data in the absence of experts can be a dangerous thing.
Isn’t it a bit ironic that Fannie Mae and Freddie Mac are relying on “big data” to waive appraisal requirements in the wake of the largest mortgage crisis in history. Does anyone remember the appraisal waivers WAMU was afforded? How did that turn out? Give me some more of that! Should the GSEs be bending to political pressures? Personally I think the GSEs reaction is quite normal. They have something to sell. Should their regulator allow this to happen? Maybe not. When Fannie and Freddie begin to compete with each other over who can loosen standards it becomes a race to the bottom. We’ve seen this movie before and we know how it ends.
Actually I do not have a problem with waiving appraisals for a rate and term refinance under most circumstances. What truly frightens me is the general widespread hue and cry to get rid of the appraisal altogether. It is that “slippery slope thingie” that keeps me up at night.
Let’s summarize:
- What do you suppose this mythology of the shortage of appraisers is all about? “We cannot find one at the right price and with the right turn time so let’s get rid of them altogether”. That’s the mantra. So for AMCs that means when the “baby gets thrown out with the bathwater” you are sharing the same tub with the appraiser. Is there a general shortage? No, the numbers just don’t bear that out. Is there a shortage in some micro markets? Yes. And they are called bubbles. Why would anyone want to fuel the bubble? Or put another way look at who cares and why they care.
- Where are the regulators? “The Interim Final Rule on C&R was the most heinous piece of insider politicking ever ” according to one former CFPB regulator. At the most recent AARO meeting, the regulators on the FFIEC panel said it really needed to be addressed as an “interim” rule should not remain on the record permanently. No duh. But exactly when? Meanwhile, appraisers in those micro bubblicious markets are behaving rationally to market forces and lenders are crying foul. This is such a simple fix. Lenders, had you converted to a “cost plus” model when Dodd Frank was introduced you wouldn’t find yourselves in such a predicament. The lack of enforcement of C&R is punishing consumers. Shame on those who are not doing the right thing.
- Simultaneously there are forces in play to raise the de minimus value threshold to $500,000 for FRTs (Federally Related Transactions). And let’s not forget that quietly FRTs got redefined from its original intent to exempt all Fannie and Freddie and FHA loans from appraisal requirements. Yes, and this from the bank regulators who are charged with safety and soundness of housing finance.
- Speaking of FRTs, several pleas have been sent to the FFIEC agencies to clarify the definition. Crickets. They don’t want to admit to the world that they have perverted the intent of FIRREA.
- Everyone is exploring alternatives to the conventional appraisal. Just a reminder that the appraisal process ideally is to develop all three approaches to value. It is a three legged stool. Let’s return to fundamentals not further erode the appraisal process.
Timing is everything. Serendipitously, just before I left for Las Vegas for Valuation Expo I was invited to testify before the Housing and Insurance Subcommittee on November 16. I now have total clarity on what to say.
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