AVM SAFEGUARDS
There are issues that must be addressed and understood by those who depend upon the services of others to make educated decisions for a third party. The trust and integrity of the investment community must be held in high regard by all who contribute to this end. For the most part these events are very rudimentary. The originator has little concern for anything beyond servicing his or her client in a timely manner.
Most loan originators have good intentions and somewhere along the way, temptation may filter in to the equation either by design or deceit, to get the job done and get paid. It seems like a small thing that doesn't amount to much and after all, the bills need to be paid. Fudging here and there with the verifications, credit information and appraisal, will allow the would be borrower to get the results desired. Referrals will be born from these seemingly impossible loans that were made possible by an aggressive loan originator. What harm could there be in that?
The entire economic structure of our core is based in the real estate market. There is no other investment in the United States that could cause stability or disaster in quite the same way as a good or bad portfolio based in real estate. The S&L crisis was due to the deregulation of the Savings and Loan Industry. The S&L industry wanted desperately to have more latitude to make decisions that could increase the bottom line. Seemed like a good idea at the time. How could that be harmful? Well, history has proven that it was not such a good idea after all. Investors lost millions and the economy was seriously threatened.
Safeguards were supposed to be in place to prevent major problems. The proponents of the deregulations were “factoring in” the fallout of bad loans due to the lack of standards. The factoring didn’t seem to cover the human element of desire and the rest is history. We must learn from history or relive it.
Now there are those that want to use AVMs (automated valuation models) in order to save time. We are in such a hurry to fund loans that safety is a nuisance. Those silly appraisers just take too much time confirming the information that has been gathered in the process of determination. We need these things done in a matter of minutes, even though most home purchases have at least 30 day closings. Keep in mind that if there are people that commit fraud and robbery, why wouldn’t a lack of safeguards create yet another way to rob people?
The crash of the stock market and the great depression in our nations’ history was caused by faulty accounting practices. This brought about regulation and created the CPAs or certified public accountants. With the government relaxing some of the “standards” for the accountants, we’ve had problems recently with the collapse of Enron and other major companies that have stockholders to answer to. But, it’s so inconvenient to have to follow all the standards and rules of these professions. If we promise to behave, that should do it, right. Wrong!
Appraisers are vested with the awesome responsibility of keeping the strength of our economy sound and secure. It is difficult to determine a value of a definable nature, even when all the necessary steps are taken. If location, size and age were the only criteria needed, AVMs would be just fine and anyone could do a property appraisal. We wouldn’t need an ASB (Appraisal Standards Board), and AQB (Appraiser Qualification Board), the Appraisal Foundation, USPAP (Uniform Standards of Profession Appraisal Practice) or anything else with regard to FIRREA (Financial Institutions Reform, Recovery and Enforcement Act) also known as the S&L bailout.
The standards that are set forth by all the users of appraisals are there to ensure stability and quality. The primary purpose of USPAP is to elevate the profession by promoting public trust. Developing trust has been a long and arduous process. It seems now that desires of a few are threatening the security once again under the clever guise of expedience.
If speed is the goal, why have and implement standards? An appraiser could have no standards at all and get the “job done” much faster. The results would be questionable, sort of like the toss of a coin. Should it take another crisis for the safeguards to be taken seriously again? Who will take the blame? Perhaps FNMA, who appears to be pushing the new concept of AVMs. Will FNMA provide the federal government with a PMI (private mortgage insurance) policy, similar to MMI (mutual mortgage insurance) in case the losses elevate beyond acceptable. Perhaps this is the route that should be pursued.
Protecting the public is the bottom line and no organization has the right to interfere with that goal. Many experts have testified that the losses of about 10% are taken into consideration for the AVM fraud. Many experts testified before congress prior to the deregulation of the S&Ls prior to the failures. That didn’t seem to prevent it from being a problem. If failure is a possibility due to a lack of safeguards, it will become a reality in time. How much time are we willing to say is acceptable for this failure?
AVMs have a place in society. If a homeowner wants to borrow less than $50,000, an AVM should suffice. This is more like a personal loan with the added security and trust of a lien. Liens are only good if the security is there to cover any possible loss. Lenders don’t want to be in the real estate business. Lenders want to loan money, get interest on the money and then get the money back. The security is just that a security blanket to ensure that the transaction is sound.
An appraiser gets what is known in the industry as “conditions” almost everyday. These conditions are usually due to additional information required by the investor or an omission of something necessary to make a sound decision on the part of the lender. If an educated appraiser armed with USPAP and any supplemental requirements, has conditions, how can we as a society rely on anything less?
In conclusion, someone needs to step up to the plate now and be willing to take full responsibility including a willingness to be incarcerated and fined for allowing such things to be a possibility. Rules and standards are always tested and someone is always trying to do away with them to benefit their needs. Be aware, be very aware.
Dan Tosh,Ph.D.,MSA
PS: I sent this to the chair and vicechair of the congressional banking committee and received no response.
shihan