Appraisers still down for the count

Insiders see permanent shift in size of industry and type of work it's doing

Jun.June 30, 2011 01:09 AM

Appraisers — even compared to other real estate professionals — took a severe beating during the real estate downturn. And while the housing market just might be coming off the ropes to fight another round, the appraisal industry is still down on the mat. In fact, some professionals worry the shrinking industry may be in for even more dire straits ahead, thanks to new types of mortgage fraud (see sidebar, “‘House-flopping’ on the rise”) and new regulations.

“The sad thing is that there are many good appraisers who simply can’t afford to do business anymore,” said Jonathan Miller, CEO of appraisal firm Miller Samuel.

It’s now widely known that the housing crisis revealed systematic failures within the appraisal industry: Too-cozy relationships between brokers and banks habitually pushed appraisers to render higher-than-market appraisals. But legislation aimed at restoring the independence of appraisers only created new problems, leading some appraisers in New York City and elsewhere to deliver below-market estimates of properties’ value.

Now, those who have worked in the industry for years say it has been permanently altered. Not only has the number of people working in the appraisal industry in Manhattan declined in the last few years, but those who remain have drastically shifted the kind of work they are doing.

There are currently only 332 appraisal industry professionals in Manhattan –including certified and licensed appraisers and appraisal assistants — down 26 percent from the peak of 447 in 2007, according to the New York Department of State.

Meanwhile, more regulations are on the horizon, and many in the industry say these new rules are unlikely to help. In fact, some are concerned that the new regulations could strip appraisers of the value they bring to the table.

Reeling from reform

One such reform is the Uniform Appraisal Dataset, which is set to take effect on Sept. 1. The UAD will standardize the forms appraisers use for mortgages submitted to Fannie Mae and Freddie Mac, requiring all appraisals to contain identical information fields and superseding any local forms and standards.

Despite good intentions, the new forms could have an unintended side effect — removing any data that doesn’t fit into the standard boxes. This could strip appraisals of the more narrative, descriptive information appraisers collect during their property evaluations, explained David Wilkes, a New York-based partner of the law firm Huff Wilkes and a trustee of the Appraisal Foundation in Washington, D.C.

This could further erode the quality of work and devalue the profession Miller already worries has become “an army of form-fillers.”

“It’s creating a solution to appraisal quality that’s at the wrong end of the problem,” said Miller. “They’re trying to commoditize a profession.”

The UAD comes on the heels of previous legislation that many insiders have perceived as detrimental to the residential appraisal industry, such as the federal Home Valuation Code of Conduct. Passed in 2008, HVCC was intended to prevent lenders and third parties from influencing appraisals — it essentially prohibited stakeholders in a deal from selecting appraisers. (It was replaced by the Appraiser Independence Requirements in October 2010. AIP is considered the functional equivalent of HVCC, but with some clarifications of the requirements.)

The end result of these two regulations was that many banks turned to appraisal management companies for their residential and, to a lesser extent, commercial appraisal assignments. Such clearinghouses now drive a tremendous amount of residential appraisal business. But they’ve also turned appraisals into a volume business, slashed fees for appraisers and, according to some, driven appraisers into markets outside their expertise.

Now, “there’s continued pressure on appraisers, mostly residential, to turn out work quickly and more cheaply than ever,” said Wilkes.

New sources of revenue

In response to these challenges, some appraisers have quit after finding that they simply can’t make it work financially anymore. Other residential and commercial appraisers are increasingly working outside the scope of their traditional core business in order to survive financially.

Miller has found new clients outside mortgage lenders. He estimates 75 percent of his previous business came from retail banks. But in 2006 and 2007, he made a decision to shift the core of his business away from those banks.

“I reversed our business model,” Miller said. “The takeaway was finding clients who actually want valuation services, instead of just forms filled out with numbers on them.”

Now, banks drive only 25 percent of Miller Samuel’s business, but they are private banks focused on wealth management and portfolio evaluations. The majority of Miller’s work is now in the legal field, including litigation support, court testimony, trusts and estates, bankruptcy and divorce. Other common clients are co-op boards and condo associations.

Meanwhile, Steve Schleider, a commercial appraiser and president of Metropolitan Valuation Services in Manhattan, is building a niche as an expert in assessing environmental claims, as green initiatives and mandates become more of an underwriting issue than they were in the past. To that end, Schleider looks at weatherization, energy efficiency and other environmental claims a building may make to determine whether savings advertised by property owners or developers can be monetized. It’s a service he believes will become increasingly necessary as more buildings incorporate environmental components into designs, and lenders start to recognize the potential economic drains of non-green buildings.

Wilkes pointed to new educational measures and sources of revenue for commercial appraisals — like mark-to-market accounting standards, in which companies hire appraisers to assess the market value of their assets.

Yet each of these are outside the appraiser’s traditional meat-and-potatoes business — establishing valuations for lenders. That could be troubling for future growth.

“In this post-Lehman credit crash, you’d think the value of collateral would be extremely important,” said Miller. “And it’s not. There’s an incredible disconnect.”

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