The intersection of ethics and real estate meet again
As if WaMu didn’t have enough on its public relations plate, CNN Money reports:
Jeniffer Wertz, who is seeking unspecified damages, says WaMu stopped accepting her appraisals in mid-2007 a month after she reported that her local housing market in California was “declining.”
Evidently, Wertz claims that Washington Mutual wanted her to change her forecast to “stable.”
And on the other side of the coin
Bloomberg reporting that inflated appraisals causing significant losses to lenders.
`You started to see more and more loan products that would keep payments low, and I see that as correlating with appraisal pressure because those products only work in a rising market.”
(and, which loan products might those be I wonder tongue in cheek?)
Former guest at Inman Connect, Jonathon Miller, a sought-after New York appraisal and real estate consultant remarked:
“Lenders and mortgage brokers routinely pressured appraisers to boost values, said Jonathan Miller, a New York property appraiser for more than two decades who writes a blog about the problem.”
And more from the Bloomberg article….First American and WaMu working together?
“In New York, Attorney General Andrew Cuomo subpoenaed Fannie Mae and Freddie Mac, the two biggest buyers of U.S. mortgages. He also sued First American Corp.’s eAppraiseIT LLC for allegedly caving to pressure from Washington Mutual Inc., its biggest customer and the largest U.S. thrift, to inflate values.”
Ethics in real estate: oxymoron?
Anytime there’s a question of an ethical dilemma we would first want to stop and make sure we have all the facts. For example, were there other reasons why WAMU stopped accepting Jennifer’s appraisals?
Next we would want to stop and see if there’s a clear statement of the law that addresses each ethical question.
Down this path, first we would have to identify the person who is acting.
For example, on the state side, many states have added laws to their Mortgage Broker Practices Act that prohibit a mortgage broker/LO from pressuring an appraiser to influence the value.
I am not familiar with appraisal laws. We would start our search there to see if there are any laws that would prohibit an appraiser from succumbing to pressure from lenders or brokers.
If there’s a clear statement of the law, then we do not have an ethical dilemma, instead it’s a legal issue.
What will make all of these cases richer and more interesting is if either side calls upon an expert witness to testify as to the corporate culture at each of these companies.
How were managers and workers compensated? What kind of dominance and control were exerted over appraisers? For example, were the employees who were able to obtain maximum value out of appraisers rewarded and promoted? Were there any whistleblowing systems set up so employees (and appraisers!) could complain anonymously without the fear of retaliation?
Newer research (Post SOX) in the area of business ethics has shown us that employees will watch their managers and leaders very carefully and will often emulate the behavior seen….instead of following required laws and coroporate codes of ethics.
Three very interesting cases, Tim!
Here is another angle: From a business perspective, decisions to violate state or federal laws are often made at a high level. Risk calculations are made as to how much money will be made, the chances of being caught, and the possible maximum fines.
Often, business leaders make the decision, based on all the known possible consequences, to violate the law.
Tim,
Great for you to put some light on this topic… as it is an issue that is coming to play in your home area, it makes it that much more important to raise awareness. While it is not a problem just for the WA or west coast areas and is a national problem, still it sends the message that it is happening here and now. Good for you and please keep up the great work.
In response to Jillayne’s comment #1, there are countless issues that will cause a lender or investor to cease using an appraiser. Reasons stem from customer service to lack of documentation/general quality or even turn times. However most reasons do relate to the failure to meet a value, change a status of property condition or mark a box that in the end will meet the investor’s requirements/guidelines.
I can remember dealing with an appraisal management company (also owned by the lender) a few years ago who told me that they would no longer accept my appraisal reports based on a “poor turn time report
Tim,
Can we change that last line to ethics in LENDING: oxymoron? 🙂 Anyone know the percentage of cash out refi’s, that had nothing to do with “real estate” sales, that got pumped up?
Hi Ardell,
The Appraisers as a national trade organization have statistics that would not surprise anyone anymore. I believe the latest say that 90 percent of appraisers felt pressured to inflate the value of a home. Let me see if I can find the source of that quote. Hold a sec.
“Ninety percent of appraisers surveyed in a study published last year by Richfield, Ohio-based October Research Corp. said they felt pressure to make bogus valuations. Five years ago, that figure was 55 percent.”
http://bloomberg.com/apps/news?pid=20601109&sid=aKTGgOD1teG4&refer=home
“Almost three-quarters of the appraisers said that mortgage brokers asked them to bend the rules.”
“would not surprise anyone anymore”
If a property can only sell for what the last three sold for, then there would never be any appreciation. Clearly an up market involves a stretch up from the comps. I don’t know where appraisers get that factor, but I do know that any up market will involve an appraiser using a value higher than the previous sales.
So it’s not a surprise EVER in an up market. “anymore” suggests someone was surprised in the first place.
Just to add to what Ardell stated, there are several ways and methods that appraisals can be done as it is really a tool to answer a question or provide a solution to a problem.
Most lender based appraisals are referred to as a “history based appraisal
Apella-
Thanks. Headlines over the past week have been interesting. Everyone in the real estate Orchestra plays a part.
Ardell-
I don’t know percentages per se, but the refinance transactions are closely correlated to existing sales price data.
What I think is sometimes unclear or not really understood to the average agent is that the ratio of closed transactions agents see vs. title/escrow is something like 80:1. Meaning that for every transaction an agent places in escrow, the title company is closing 80 transactions (refi & purchase). So, your average agent has very little idea what title companies are closing in aggregate. All that to basically say, (and I would bet many title co. staff would vouch for this) the sheer volume of loans originated, whether purchase or refi oriented, during our boom was beyond anything anyone has ever experienced to date—and that’s why we will see story after story of the aftermath. It is really interesting to observe this unfolding.
I had an appraiser out to my house some time ago and he was very ethical and accurate. The lender asked if I wanted a new appraisal when I decided not to refi at that time. I said why? He was excellent. Sometimes excellence is not appreciated unless the answer produces a desired result.
I think Ardell’s question is a good one. How much of the pressure was exerted in refi situations and how much in resale? What about new construction? The pressure I’d heard complained about was in the refi situations–where basically the goal was to get as much money as possible (typically to pay off other debt).
Also, the “declining” market issue strikes me as odd. The banks need appraisers to determine that? The appraiser is not only to determine value, but to predict the future? Those people are underpaid!
I wrote this piece a while back, when I was an expert witness up against an appraiser.
http://blog.seattlepi.nwsource.com/realestate/archives/124688.asp
The biggest issue seemed to be that the appraiser didn’t take into account sufficiently the condition of the kitchen (poor condition, poor layout, remodel hell). And I’d think that would be more of an issue with refi situations, since you don’t need to attract a buyer. There’s basically no one on the other side trying to hold the value down, and the owner may have done little to improve the property.
Tim wrote: “I don’t know percentages per se, but the refinance transactions are closely correlated to existing sales price data.”
I’m not exactly sure what you mean by that, but back in the days when I practices bankruptcy law if a client came in with a refinance appraisal that was a year old, I’d assume that such a value was inflated, and I never got bit in the butt making that assumption (no matter how strong the market was). I quit practicing about 3-4 years ago, and I did that most the 20 years I practiced, so it’s not a new phenomenon.
“The appraiser is not only to determine value, but to predict the future? Those people are underpaid!”
Yesterday when I was doing a training class on how to value the property we viewed at Broker’s Opens, someone suggested that a BPO would have come up with a different result. My response was that a BPO cost is $50 to $100. That method is not why we make the big bucks.
Knowing that a special assessment is coming down the pike, raising the monthly HOA dues from $200 to $530 for 15 years, will have a significant impact on the value of those particular condos for years to come.
Valuing property is very micro.
I cannot speak to any more than my experience in this regard, in the absence of other data.
When I worked for a direct lender, we were not allowed to have any contact whatsoever with the appraisers, and ran it thru a large servicer much like the WAMU situation. I assumed it was a way for the bank to manage risk, and lower costs.
Since we had no contact, LO’s could not pressure appraisers. It’s possible the parent company did, but I have no real reason to believe they did (unlike numerous reported cases like Ameriquest, etc.).
On the wholesale side, while I have been able to select from a group of approved appraisers, I have been allowed to discuss appraisals with them. I have been repeatedly told that it is illegal to coerce any appraiser to inflate value, so I never have.
I select the appraisers that I work with based on the quality of work, the service, and the price. Seems to have worked out well so far, as I have had very few appraisal reviews from the lender. Since I respect their work (based on the above criteria), it would seem out of place to coerce them to inflate value.
I have heard anecdotally that there are appraisers that will do more to push value than others, but my sense is that they risk being put on a “non-approved” list by the lenders, which would impact their future ability to earn business.
Finally, ALL lenders have sent out notices regarding changes in guidelines (primarily LTV limits) in areas they define as “soft” or declining values.
Ethics in real estate: oxymoron?
It shouldn’t be but the fact that one might think it is an oxymoron should be a huge red flag to any ethical people working in the industry.
I had a transaction recently where the agent only wanted to see the first page of the offer that kicked in her escalator clause. She said she didn’t need to see more because I’d burn in hell if there wasn’t really such an offer. My response was: “Sounds like a fair trade.”
Fortunately she laughed.
Hi Alan,
I teach the “Ethics in Lending” class to mortgage brokers and LOs.
On a very simplistic level, folks in lending can be classified (ethically) into three catagories.
1) People who will always find a way to break all the rules and laws out of maximizing self interest (this is the segment that government is designed to regulate.)
2) People who are ethically gifted and who always know how to come to an ethically reflective decision, 100% of the time.
I believe the majority of people in lending do NOT fall into the above two catagories. Instead, the majority of folks are in the third catagory:
3) People who want to do the right thing (ethically) but they just don’t know what the right thing is, short of their own subjective opinion.
There are a wide range of ethically justifiable ways of acting to any ethical dilemma.
One of the reasons why we are currently facing a national mortgage lending crisis is because the loan originators (no matter where they work) have no ethical guidance for their industry.
The folks in the industry who have the hardest time understanding this are the people in catagory number two.
We all have to help each other. This means giving up some of our own time (self interest) so that the entire group can grow.
People can’t grow ethically in a vacuum, reflecting by themselves. They need to talk to other people about their ethical dilemmas.
The other ongoing problem is the corporate environment which feeds on profit maximization at the corporate and the individual level, which, on the surface, appears to be in conflict with the needs of the consumer.
Jillayne, I think you could say the same thing about just about any profession as far as the groupings.
For real estate agents there’s a particular need for education because not all of the rules are things that are what I would call even semi-obvious. For example, rules against undisclosed variable rate listings, rules requiring new offers to be presented on pending properties, rules regulating gifts at open houses, etc.
But what you’re describing is largely human nature. I’d add a fourth group however. Those who make decisions without regard to the rules. It’s not so much that they want to break the rule, as that they’re looking for the best result, and ethics or rules never get considered. If someone points out the issue, they’ll then consider it and probably react properly. But their thought process just isn’t complete without third party intervention.
Sorry Jillayne, but I think your categorization of people into ethical categories is a little simplistic. I think there is a 4th, and much larger, category – people who would like to be ethical but are willing to push things to the edge if that’s what it takes to make a living. Unfortunately, things get very blury along that edge, and it can be hard to tell when you’ve went over the line.
For example, an appraiser who is finding herself threatened with black-listing from lenders due to unfavourable estimates may decide that it just doesn’t pay to be conservative. If the choice is leave the business altogether or give estimates using the most optomistic assumptions (which isn’t necessarily “lying”) then many people will choose to give in and compromise their integrity.
The same thing applies to all these investment bankers who are now viewed with such disdain for allowing their firms to rack up such massive losses. At the height of the credit bubble these investment bankers had a stark choice of either playing along with the insane game of securities alchemy (pawning off risky debt as “safe” securities to investors) or leave the banking business. Any investment banking executive would have been fired if they let some other bank get the rich fees from securitizing debt. If investors are stupid enough to want to buy toxic credit instruments, why let someone else make all the money in creating them? I am sure the board of directors at Citigroup or Merrill Lynch would have replaced their CEOs years ago if their counterparts were reaping big profits, and growing market share, while they stayed in the conservative doldrums.
In short, it is far better to follow the crowd and make a big mistake along with everyone else rather than pursue a path of your own convictions. If you fail along with everyone else, then you can always claim that “how could I have known? everyone made this mistake”. The ultimate sin is to let your peers outstrip you in performance. So long as you are doing as well (or bad) as everyone else, you will keep your job. But, if your conservative financial instincts lead you to underperform your industry peers, you will be out of a job very quickly.
When your choice is to be ethical and lose your job, or bend your ethics and stay employed then no amount of “education” is going to matter.
I find the ethical issue to be more of a right vs. right as opposed to right vs. wrong. Truth vs. Loyalty. In attempting to accomplish the objective of their “client” and be loyal to them and their goals, they sacrifice truth.
If your child will go to jail if you lie, are you loyal to your child or do you tell the truth? If you lived in a country where the penalty for theft was to cut off the child’s hand, would you be loyal to your child, or tell the truth? Each is equally right, but in that instance many would pick loyalty over truth.
When sitting in front of someone who really, really wants to buy this house, choosing between disappointing the person in front of them or telling a lie to a big corporate giant, often lands squarely in helping the person in front of them succeed in their goal of buying the home.
Self interest aside, many will help the borrower lie in order to achieve the borrower’s objective.
What would happen if there were no appraisers? Where would we be today if owners, buyers, sellers, mortgage brokers, etc. decided the value of the collateral?