Tag Archives: Federal Reserve

HEY ASB, STAY THE EXPLETIVE DELETED OUT OF THE EVALUATIONS WORLD!!!

August 1, 2019 – I was bombarded throughout the day with appraisers emailing me the ASB announcement that they are going to consider drafting standards for Evaluations.  Their announcement is full of blatant lies.  It is typical of what the Fake News Media puts out.  Therefore, I will list their lies and provide the actual truth below.  Too many people who have no to minimal experience with evaluations put out Fake News all of the time.  It is criminal.  I have ordered and performed evaluations since essentially the beginning of their existence in 1992.  The truth follows….

LIE #1 – “Currently, there are no uniform standards for appraisers to follow when conducting an evaluation, ” – THE TRUTH – Since October 1994, there have been uniform standards for appraisers to follow when conducting an evaluation.  These standards were updated in the December 2010 Interagency Appraisal and Evaluation Guidelines.  And get this, these requirements apply to not only appraisers, but NON-appraisers!!!  USPAP only applies to appraisers.

LIES #2 and #3 – “, which leads to greater risk to the safety and soundness of the real estate transaction and diminished protection for consumers….With the increased use of evaluations in the marketplace lenders and consumers are being exposed to an unnecessary level of risk not seen since the 1980s when national appraiser qualifications and appraisal standards had not yet been created….” – THE TRUTH FOR #2 – First, evaluations are only allowed in transactions that are lower risk than appraisals.  Therefore, they cannot possibly add risk to lending.  In my 27+ years of working for banks, I cannot recall a bad loan that originated with the use of an evaluation.  But, all the bad real estate loans I have seen did contain an appraisal.  Inflated appraised values alone do not make loans go bad.  That is not what I am insinuating.  But, I will confidently say that no bank has ever or will ever go under because of the use of evaluations.  However, many banks have gone and will go under with appraisals being a contributing factor.  THE TRUTH FOR #3 – ‘…diminished protection for consumers.’  Everyone loves to claim they are trying to help the consumer.  I guess we can call it using the ‘Consumer Card.’  The ‘consumer’ usually means the general public that buys houses.  The fact is FIRREA does not apply to 90%+ of residential loans.  Everything that Fannie Mae, Freddie Mac, the VA, HUD, and on and on are involved in is exempted from FIRREA.  (If you are honestly concerned about the consumer, it is Fannie Mae and Freddie Mac that must be stopped from loosening appraisals standards…and remember evaluations are not in their world, so don’t get the issues confused.)  The consumer BENEFITS from evaluations as they are cheaper and faster than appraisals.  It is a flat out, despicable lie to say that the ‘consumer’ is hurt by the use of evaluations.  Actual proof has been the real world since 1992.  Evaluation volume is estimated to be 4x-6x that of appraisals.  Has anyone ever said an evaluation caused a loan to go bad or a bank to go under?  NO!

LIE #4 – “This important development by the ASB shows how the Board has their ear to the ground, listening to the concerns of working appraisers in a rapidly evolving marketplace where there is an increasing demand for different valuation products,” said David Bunton, president of the Foundation.” – THE TRUTH – Ear to the ground?  What a ridiculous statement!  Evaluations were an option when the original FIRREA was placed into law in 1989.  30 YEARS AGO!!!  The ASB reminds me of the quote attributed to Mark Twain about one of my favorite cities, Cincinnati – “When the end of the world comes, I want to be in Cincinnati because it’s always twenty years behind the times.”  When it comes to evaluations, I want to be the ASB because they are 30 years behind the times:)  The demand for evaluations has existed mainly since 1992.  (Any of you remember BC-225:) )  Nothing has changed.  Except if The Appraisal Foundation will say the truth they are scared to death of a non-appraisal product.  They want to control their fiefdom.  Hey ASB, the first step is admitting what you are!

LIE #5 – “Currently, the Interagency Appraisal and Evaluation Guidelines for federally regulated financial institutions provide guidance on evaluations, but that guidance is directed at lenders, not appraisers.” – THE TRUTH – OMG, the misleading statements get more ridiculous.  This is like saying the 5 appraisal requirements in FIRREA are directed at lenders, but not appraisers.  Just not true.  Appraisers must provide Market Value ‘As Is’ per FIRREA, not USPAP.  That applies to both appraisals and evaluations, BTW.  Appraisals must be written per FIRREA, not per USPAP.  The IAEG requires the subject property be inspected for evaluations.  USPAP doesn’t even require an inspection for appraisals!  As a reminder, the IAEG requirements apply to BOTH appraisers and non-appraisers for evaluations.  Just imagine if USPAP applied to non-appraisers!  That idea is as ridiculous as the ASB trying to provide standards for evaluations.

LIE #6 – “Under federal regulations, evaluations may be performed by non-appraisers who have not demonstrated a level of expertise through education, training, and examination.” – THE TRUTH – Do you ever wonder why people tell a lie that can easily be proven wrong?  Here is what the IAEG says about who can complete an evaluation – “An institution should maintain documentation to demonstrate that the appraiser or person performing an evaluation is competent, independent, and has the relevant experience and knowledge for the market, location, and type of real property being valued. Further, the person who selects or oversees the selection of appraisers or persons providing evaluation services should be independent from the loan production area.”  The requirements are the exact same for appraisals and evaluations.  Shouldn’t the ASB be made to retract their lie?  Shouldn’t they have to issue a new announcement with truths, instead of lies?  How does a group of people look themselves in the mirror each morning knowing they published numerous lies to the public they love to claim they protect?  I have never understood how people live like that.

LIE #7 – “If appraisers are not completing an evaluation, there is no recourse for a lender or consumer to appeal a bad evaluation.” – THE TRUTH – Why not?  I have asked for evaluations to be revised.  I have rejected evaluations.  I have done both for appraisals, also.  There is no difference in how these products are treated in this regard.  Whoever did the evaluation can be sued as easily as one of us appraisers that did an appraisal.  And it is likely an evaluation doesn’t contain that funny limiting condition that many appraisers put in appraisals about their liability being limited to the appraisal fee:)  That one has always cracked me up.  I am sure lawyers have been stopped in their tracks when they see that clause, not!

Those are what I would label as bald-faced lies.  (I learn something every day….there are bald-faced and bold-faced lies and they are different….interesting.)  Below are just statements that are hyperbole or unsupported or such.

“Appraisers are valuation experts. When hiring a licensed or certified real property appraiser to develop and report market value, the client should expect the work to be performed in accordance with USPAP,” said Wayne Miller, chair of the Appraisal Standards Board” – COMMENT – No, they should not.  USPAP is not a law, as we all know.  USPAP has never been the only set of standards for valuation.  Many states do not require USPAP for all appraisals.  (Read my blog post of a few years ago where I contend that all ‘Mandatory’ laws are in violation of Federal Law.  I believe this issue was settled by a Federal Court ruling in 2004 in Pennsylvania.)   Many large clients do not either.  The Yellow Book (UASFLA as the word police are now wanting it to be referred to) is its own set of valuation standards.   USPAP says the following:

“USPAP does not establish who or which assignments must comply. Neither The Appraisal Foundation nor its Appraisal Standards Board is a government entity with the power to make, judge, or enforce law. An appraiser must comply with USPAP when either the service or the appraiser is required by law, regulation, or agreement with the client or intended user. Individuals may also choose to comply with USPAP any time that individual is performing the service as an appraiser.”

It is NOT needed for all assignments.  Appraisers do NOT need to comply if it is not necessary.  Clients do NOT need USPAP appraisals all of the time.

“The Board is eager to receive stakeholder feedback from the planned concept paper and public hearing on the impediments, if any, to appraisers completing evaluations in accordance with USPAP.” – COMMENT – This one is simple.  The lone impediment are the state laws that require licensed appraisers to meet USPAP for ALL appraisals, including those for financial institutions.  As I note above, I believe these laws are unconstitutional and have ignored them my whole career.  Federal law trumps state law.  My grass roots campaign since 1994 to get the Tennessee Law, as I refer to it, passed in all other states has gained traction in the past few years.  Numerous states now allow us licensed appraisers to perform non-USPAP Evaluations.  That is the solution.  Change the state laws, one by one.  And keep the ASB the heck out of the Evaluation world!  The banking agencies already set the standards for evaluations and they can enforce them.  Probably much better than the states have enforced USPAP!  People who violate FIRREA are subject to civil money penalties and jail time.  That applies not only to lenders or credit people or anyone else in a bank or credit union, but also to appraisers and evaluators!

In closing, let me point out the obvious….remember what the ‘A’ stands for in USPAP, TAF, ASB, et al.  Evaluations are NOT appraisals.  Appraisals are NOT evaluations.  They may coincidentally have some similarities, but they also have significant differences.  They each have more than adequate standards.

Some facts that I have had to share over and over for 25+ years….Evaluations have been around as long as appraisals in regard to FIRREA.  They are not something new.  They have not negatively affected the appraisal industry.  The volume of appraisal work has increased significantly over the past 25-30 years – evaluations have been done all along.  Mostly by non-appraisers.  Passing state laws like TN and GA and FL and LA and VA and others now have is all that is needed to open this world to appraisers.  Those who do not want to do them, don’t do them.  Your business decision.  But, don’t stop your peers from making a living that includes doing them.  That is selfish.

I am 100% positive that evaluations have not negatively affected the banking industry or our economy over the past 30 years.  They will not over the next 30 years.  If you understand the transactions they can be used on, you understand that almost always, if not always, evaluations are involved in lower risk loans than appraisals.  If you are concerned about the banking industry, the economy, the consumer, then figure out how to provide appraisals that are more accurate than the plus or minus 20% minimum range of accuracy that numerous studies have proven them to be!  How do you convince the public that a professional doing a valuation is adding something of value (no pun intended…or is it) when their appraisal on a $1,000,000 property is not more accurate than $800,000 to $1,200,000?  Do you not think that most of the public knows to a smaller range than that what their property is worth?

I am sworn to secrecy about a similar professional study on the accuracy of evaluations that showed the range to be plus or minus 5%.  Now, tell the world that there is more risk when using evaluations than appraisals.  See how that flies with people that know that plus or minus 5% is far superior to plus or minus 20%.

Folks, know what the facts are versus the Fake News about evaluations that is passed around by individuals and organizations with a bias.  I try not to have any bias as I have made my living off of both products in one way or another for 27+ years.  I have spent 25 of those years trying to help the appraisal industry see the light and get their state laws passed so they can access the non-USPAP Evaluation world.  That is what will help appraisers.

What will not help appraisers is the ASB putting out their own standards for evaluations.  Who is going to follow them anyway?  The banking/credit union world already have evaluation standards.  Why would they want to amend Federal Law to require that evaluations follow some new ASB standards?  Hopefully, the ABA, MBA, and others will be sure to squash that idea.  The Federal Agencies that have examined banks all along can factually say that although evaluation programs can be improved overall, they have not added any risk to banks or the economy or consumer.  They know the most.  If there was a concern, it would have been made public already.

What will not help appraisers is appraisers wanting to only provide the Black Model T Ford.  If you think evaluations will lower the quality of appraisals, you have been proven wrong for 30 years.  If you think evaluations will lower appraisal fees, you have been proven wrong for 30 years.  (The continuous decline in appraisal fees is due to many other factors, but I am certain it has nothing to do with evaluations.)  If you think evaluations will add risk to the financial industry, you have been wrong for 30 years.

If you think appraisers like yourself are the best people to provide non-USPAP Evaluations and have been missing out on a ton of revenue for 30 years and that clients would prefer to be using licensed appraiser to do non-USPAP evaluations, YOU ARE RIGHT…..

mic drop

The Mann

(Obviously feel free to share the above…it is out on the web, not like there is any taking it back lol  I will post something new if an error is pointed out or I hear lies about what I said or misinterpretations et al…so check back now and then….and be sure to let the ASB know what you think when they open this up to public comment.)

NEW INTERAGENCY ADVISORY ON EVALUATIONS

March 7, 2016 – For the first time since December, 2010, the Agencies have issued a statement on Evaluations.  I will include the FDIC link below, albeit the Federal Reserve and OCC have similar links.

My feeling is nothing new has been added.  There is a bit more talk about how to use tax assessments – hopefully, this will once again become more common now that The Great Depression II has run most of its course.   Also, they make it clear that market value must be of real property only.  FF&E in apartments and going concern properties must be valued separately, just like in appraisals.

Please pass the link below along to your bank contacts so everyone can stay informed.  Thanks.

https://www.fdic.gov/news/news/fi

nancial/2016/fil16016.html

A GUEST POSTER’S VIEW ON THE ECONOMY

February 1 – Following is my first guest post.  Bruce Cumming, Jr. is the author.  He can be reached at 941.926.0800 or bcumming@hettemasaba.com.

We would like to note that from an academic-business perspective real estate is viewed as a sub-discipline of finance, finance as a sub-discipline of economics and the classical economist such as Adam Smith and David Ricardo referred to their discipline as “political-economy” linking economies with the political mode of a country, state, county, or municipality.  The following is some economic theory and emerging issue that could impact real estate values.

According to the Austrian business cycle theory, central banks (such as the US Federal Reserve System and specifically its Federal Open Markets Committee) can set interest rates too low for too long, which can create an artificial boom and distort the accuracy of data on a trend line basis, often causing what is termed “malinvestment.”  According to an article by Mauldin Economics, based upon a graph of the US 10-Year Treasury Rates going back to 1790, 10-Year Treasury Rates over the long-term averaged just less than 6% and the average over the last 50 years was 6.58%.  The current 10-Year Treasury rate according to the US Department of the Treasury is 2.06%, or about 394 basis points below the 200-plus year average rate and 452 basis points below the 50-plus year average rate.  The Federal Open Markets Committee just increased its rate for the first time since December 16, 2008, on December 17, 2015.  The Federal Funds Rate has been between 0% and 0.25% for 7 years.  The Federal Funds Rate is now between 0.25% and 0.50%.  The US stock market has been in rapid decline so far in January of 2016.

The McKinsey Global Institute’s report, Debt and (Not Much) Deleveraging, dated February 2015, reports that between 2007:Q7 and 2014 worldwide debt have increased from $142 trillion to $199 trillion, an increase of $57 trillion, or 40.14%.  Debt has not been liquidated during the so called Great Recession, but has been increased, thereby potentially distorting asset values.

It should be noted that the Green Street CPPI:  All-Property Index (which was started in December of 1997) was 22.7% higher in December of 2015 than in December of 2007, its previous peak.  Green Street tends to focus on investment grade real estate and is tightly tied to the capital markets.  The Moody’s/RCA CPPI, which focuses on repeat sales of properties greater than $2,500,000 in value, saw its last peak in 2007:Q3 (165) and reached that same level in 2015:Q3 (165).  The trough reported by this index was in 2009:Q4/2010:Q1 (96), so the index has increased 71.88% from trough to peak.

Austrian economists theorize that the artificial monetary boom ends when bank credit expansion finally stops, which is when no further investments can be found which provide adequate returns for speculative, or “Ponzi” borrowers.  The Austrian business cycle theory asserts that the longer the artificial monetary boom goes on, the more speculative and “Ponzi” the borrowing occurs, the more errors and waste committed, the longer and more severe the workout period (e.g., bankruptcies, foreclosures, and short-sales) until equilibrium is achieved through market-based price discovery.

The Austrian business cycle theory is one of the precursors to the modern credit cycle theory, which is emphasized by Post-Keynesian economists at the Bank for International Settlements and by mainstream academic economists such as the late Hyman Minsky (PhD/economics, Harvard).  Post-Keynesian Minsky taught at Brown University and the University of California at Berkeley among others.  Minsky’s financial instability hypothesis is translated to real estate markets by borrower type.

Minsky theorized that a key mechanism that pushes an economy toward a financial crisis is debt accumulation by the private sector.  He identified three types of borrowers:  hedge borrowers, speculative borrowers, and “Ponzi” borrowers.

„      Hedge borrowers:  can pay both interest and principal loan payments from current cash flows (e.g., traditional mortgage).

„      Speculative borrowers: can pay interest only loan payments, but must regularly roll over the principal (e.g., interest-only loan).

„      “Ponzi” borrowers:  cannot pay interest or principal, and depend upon asset price appreciation sufficient to refinance the debt (e.g., negative-amortization loan), only asset price appreciation keeps the “Ponzi” borrower afloat.

If “Ponzi” borrowing is widespread enough during a credit boom when asset prices stop raising rapidly the “Ponzi” borrower can no longer operate profitably (or at all) and once asset prices start to decline the speculative borrower may not be able to roll over their loan principal and could face a technical, if not a real default.  The final financial domino is the hedge borrowers who are unable to find loans despite the apparent soundness of the underlying assets.  The market begins to unravel, that is to say, a “Minsky Moment” occurs.

Former PIMCO managing director Paul McCulley (MBA, Columbia) is credited with coining the phrase, “Minsky Moment,” when referring to the point in any credit cycle, or business cycle when investors begin having cash flow problems due to the spiraling debt incurred in financing speculative assets.  At this point, a major sell off begins because no counterparty can be found to bid at the high asking prices previously quoted, leading to a sudden and precipitous collapse in prices driving market clearing asset prices down as well as a sharp drop in market liquidity.  The “Minsky Moment” comes after a long period of prosperity and increasing asset values, which has encouraged increasing amounts of speculation using borrowed money.

Austrian economist Ludwig von Mises (PhD, University of Vienna) who taught at New York University theorized that a financial crisis emerges when consumers seek to reestablish their desired allocation of saving and consumption at the prevailing interest rate.  The ensuing recession or depression is the process by which the economy adjusts to the errors and wastes (malinvestment) of the boom, or bubble.

It remains too early in the current cycle to confirm that a “Minsky Moment” has occupied, or if the current stock market activity is a short-term correction that will rebound in a few weeks, or months.

It should also be noted that during that during the last downturn vacant land decreased in value at a far greater rate than improved properties that could be income generating.  A paired repeat sales analysis study that we conducted indicated that vacant land was declining at a rate of about 1.35% per month (rounded) versus improved sales that were declining at a rate of about 0.75% per month (rounded).  Land was declining in price at an 80% greater rate than improved property.

Generally, entitlements are only worth about what they cost during a normal market and are “usually worthless” during a downturn, such as we recently experienced.

The current macro-level economic activities have not yet impacted real estate values, they may and they may not.  Time will tell…