October  2008

APPRAISER PRESSURE CONTRIBUTES TO BANKING CRISIS

There is mounting evidence that inflated appraisals, caused by client pressure, have significantly contributed to the current banking crisis.

During the savings and loan crisis of the early 1980s, much was said about appraisers not performing objective appraisals. Those events lead to our current real estate appraisal laws, requiring appraisers to be licensed. While licensing has helped by offering improvements in education, training and regulation, it has not adequately addressed the issue of the client pressuring the appraiser.

This problem is not simply an appraisal industry problem, but rather a financial services industry problem. As long as individual appraisers are selected and influenced by a system that is tied to the success of a loan transaction, human nature dictates that a conflict of interest will likely exist. Even the most highly trained and ethical appraisers and bankers will find themselves subject to conflict in such situations. The system must be changed.

If we, as a country, are to save the integrity of our financial infrastructure, the time has come for banking regulations to ensure a system whereby the appraiser is selected and employed independently. Such a system would help protect the reputations of both the appraisers and the bankers, while saving the homeowners and taxpayers from the bloodbath that we are currently experiencing.

                                                                                                                                    Charlie W. Elliott, Jr., MAI, SRA
                                                                                                                                     President
                                                                                                                                     Elliott® & Company Appraisers

NEW HOMES MAY NEED FIRE SPRINKLERS BY 2011

At a conference in Minneapolis, the International Code Council, an organization that sets the building code used in 46 states, voted to require fire sprinklers in new homes by January 1, 2011. This mandate will be included in the 2009 International Residential Code.

“This is just the most wonderful step forward because it’s going to ensure that more families have access to the one technology we know can save lives in a devastating home fire,” said Meri-K Appy, president of the Home Safety Council.

Leaders of the National Association of Home Builders (NAHB) respectfully disagreed, as they pointed out that the average cost of a sprinkler system in a home is $1.61 per square foot.

“We disagree with this mandate, but our members will continue to advocate for cost-effective construction and life-safety measures through the model code process,” said Sandra Dunn, president of NAHB.

HOUSE SELLS FOR $1.75 ON EBAY

A woman from Chicago won an auction for a house with a bid of $1.75. There were seven other bids for the foreclosed and abandoned house in Saginaw, MI.

Joanne Smith, the winning bidder, had not visited the property or visited the house. By purchasing the house, she will be required to pay $850 in back taxes and for the city-ordered cleanup of its yard.

“I’m going to try and sell it,” Smith told The Saginaw News. “I don’t have any plans to move to Saginaw.”

ASK MARTITIA

QUESTION:  A commercial developer plans to build an office tower and has obtained a loan commitment that is based on the value of the property with the building complete and the offices with a stabilized occupancy. Due to current economic conditions, several years are predicted to pass before the occupancy of the building becomes stabilized. The developer wants an appraisal that assumes a current opinion of value and a completed building with stabilized occupancy. Can an appraiser do this in compliance with Uniform Standards of Professional Appraisal Practice?

MARTITIA: No. The current market conditions should indeed reflect the value of the property being appraised. The appraiser, however, could provide the client with a prospective value opinion, with an effective date of appraisal as of the date when the building is projected to reach stabilized occupancy.

Martitia Mortimer, Elliott’s executive vice president, answers appraisal questions on a regular basis in Elliott Real Estate News.

HVCC IMPLEMENTATION POSTPONED

James Lockhart, director of the Federal Housing Finance Agency (FHFA), said that the Home Valuation Code of Conduct agreement between Fannie Mae, Freddie Mac, the FHFA and New York state Attorney General Andrew Cuomo will probably will not take effect until some time in February or March of next year. It was originally scheduled to take effect on January 1.

Now that the comment period is over, Lockhart said details of the new agreement would be announced soon.

“We strongly support the independence (of appraisals),” Lockhart said during a hearing in the wake of the failure of IndiMac Bancorp.

QUOTES

“If you want to make peace, you don’t talk to your friends. You talk to your enemies.” -- Moshe Dayan

“Democracy is a process by which the people are free to choose the man who will get the blame.”
                                                                                                                                      -- Laurence Peter

“An honest politician is one who, when he is bought, will stay bought.” --Simon Cameron

“Knowledge and timber shouldn’t be much used till they are seasoned.” -- Oliver Wendell Holmes

“Education is when you read the fine print. Experience is what you get if you don’t.” -- Pete Seeger

“An economist is a surgeon with an excellent scalpel and a rough-edged lancet, who operates beautifully on the dead and tortures the living.” -- Nicholas Chamfort

 

Newsletter Editor: kevin@elliottco.com
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