From a small northwestern observatory…

In December, 2010, a whole new set of mortgage lending regulations went into effect — the first major change since 2004. Given the recent pronouncements from the Treasury Department, it’s clear that future changes will come in rapid-fire form.

The various discussion groups I review — particularly the ones involving real estate appraisers — are filled with comments about “scope creep”, that is, how the mortgate lending community is requiring more and more information from appraisers and yet paying less and less. As one commenter put it, “If I’m going to lose money at this, I’d rather stay home and drink beer on my porch.”

Let’s face it, folks, the mortgage lending business has undergone a HUGE sea-change in the past 3 years, and will continue to evolve rapidly for the remainder of this decade. The ONLY reason to order an appraisal on a property to be financed is to confirm — or deny — the value of the collateral.

At the core of the issue is that, historically, the people inside the banks probably knew the local appraiser, understood appraisal methodology and terminology, and frequently were trained in appraisal practice. In the future, this will no longer be the case. Appraisal Management Companies (AMC’s, as they are commonly called) are intermediating the process, and all of this is screaming “lowest bidder” with no communications between the underwriter (who may not even be in the same country) and the appraiser. Unfortunately, appraisal methodology has changed little in recent decades, and automated valuation models speak a language that the new generation of underwriters understand better (cheaper, with known error rates, and predictable levels of statistical validity).

I wish I had a quick and simple answer to this. The appraisal profession frankly let the S&L crisis of 20 years ago dissipate without the sort of professional consolidation that they should have pushed for (what the CPA’s did during the Great Depression). Clearly, the appraisal profession is letting THIS crisis go to waste, too. This was probably their last chance to save themselves from marginalization.

At Greenfield, we’re VERY heavily engaged in the Gulf Oil Spill mess. When property owners turn in claims for property damage, guess who reviews those? Appraisers? Nope. CPA’s, who have a very different expectation regarding methodology, terminology, and statistical support. I wouldn’t at all be surprised to see the accounting profession emerge on top of the real estate valuation heap in the not too distant future.