Securitized derivatives and interest-only loans notwithstanding, there's plenty of evidence that the collapse of the national and local housing market can be traced back to the foundation upon which all other assumptions relied - the actual value of the homes that were being bought and sold at a breakneck pace around Bend and other real estate hotbeds throughout the boom years of the last decade.
A quick glance at the most recent Multiple Listing Service (MLS) statistics confirms just how grossly inflated local real estate prices became before the fall. The median sale price for a Bend home was $347,750 in 2006, according to the Central Oregon Association of Realtors. By the first quarter of this year, the price had fallen to $190,000, a roughly 44-percent decrease - good enough to put Bend among the fastest-falling housing markets in the entire country. Florida condos and Central Valley spec homes got nothing on us.
Not surprisingly, the collapse has brought a significant degree of scrutiny onto appraisers and the lenders with whom they worked on the billions of dollars worth of loans that were issued during the housing boom, many of which continue to go bad at record pace. (Foreclosures reached a new high in Deschutes County in the first quarter of this year even as the national economy was beginning to show signs of recovery.) The revelation that some mortgage brokers and lenders were pressuring appraisers into artificially inflating values to facilitate transactions brought down some strong regulatory medicine. Under new guidelines that were adopted by the government-sponsored home mortgage behemoths Fannie Mae and Freddie Mac - and by extension, the entire home-lending industry - mortgage brokers and lenders are no longer permitted to communicate with appraisers. No phone calls, no letters, no e-mails.
Instead of picking up the phone and dialing up an appraisal from someone who may or may not have been a golf buddy, mortgage brokers and banks now rely on a third party to act as a go-between to ensure that they are complying with the new rules known as the Home Valuation Code of Conduct. Into this vacuum has stepped a previously obscure entity known as the appraisal management company, or AMC, which is essentially a brokerage connecting lenders and appraisers. While not technically required by the new rules, AMCs have proliferated because of the political cover they provide for lenders and brokers who have found themselves under the regulatory microscope. While the AMCs have helped to form a necessary wall between mortgage brokers and appraisers, questions are emerging as to whether the AMCs contribute to an overall decline in the quality of home appraisals, something that ought to be a concern to borrowers and lenders.
Redmond mortgage broker Angela Boothroyd said she has seen an influx of new appraisers from outside of the area who don't seem to have a solid grasp of the local market. She recently had an appraisal for a custom home come back through an AMC that used an Adair manufactured home as a comparable property.
But because lenders are no longer able to choose their appraiser, they have no way of avoiding those responsible for that kind of questionable work. Appraisers, in turn, say they have no way of distinguishing themselves from their peers other than by fees. The result is that some of the more-experienced appraisers are faced with the choice of working for less or not working at all.
"The appraisers that I stand up for are getting pushed out of the business," Boothroyd said.
Meanwhile, the rapid growth of the emerging AMC industry is posing challenges for regulators who are scrambling to keep up with the exploding market. So far, 20 states, including Oregon, have adopted new rules for AMCs that are designed to provide oversight in this growing industry. Veteran appraisers say the regulation is badly needed and welcome a thorough review of the AMCs' business practices, which they say are undermining the integrity of the appraisal process.
"We're seeing the very same habits that we saw with mortgage brokers inside the AMCs," said Richard Hagar, a Washington state appraiser who has taught seminars around the Northwest on real estate fraud and helped write Washington's law regulating AMCs.
Hagar said the AMCs, of which he estimates there are now 800 working nationwide, are just as willing to pressure an appraiser into producing a predetermined value that's been set by a broker. One of the biggest problems that Hagar and other appraisers see with the AMCs is a lack of transparency. Right now, a home appraiser has no idea of how much the consumer is paying for an appraisal and the consumer has no idea of how much the appraiser is charging. That information lies with the AMCs that are brokering the deals, and they guard it carefully. And for good reason. The difference between the two numbers is their profit, which can be hefty - as much as 40 percent by some estimates.
Ironically, some of the biggest offenders in the housing crisis, the banks who carelessly lent to overextended consumers, are profiting on the new rules. Bank of America (formerly Countrywide), Wells Fargo and Chase have all gotten into the AMC market. Rather than being stymied by reform, banks simply found a way to get a cut of the transaction, Hagar said.
More concerning, say appraisers, is the impact that AMCs are having on the overall accuracy of home appraisals, which some veteran appraisers say is suffering because of the low fees that AMCs are essentially requiring appraisers to accept. Local broker Brian Albrich said reports come back with more errors, forcing lenders to request revisions - a sometimes lengthy process that has to be channeled through the AMC to comply with the new rules.
In one recent case, Albrich said an appraisal report ordered through an AMC came back citing roughly $15,000 in improvements that would be required to obtain financing. After a series of e-mails and phone calls, the issue was ultimately resolved when the buyer (with the seller's blessing) installed a missing closet door.
The issue added another two weeks to the closing time, Albrich said. In the meantime, interest rates inched up, inflating the buyer's total purchase price.
Because almost all home lenders are funneling their business through AMCs to ensure compliance with the new rules, appraisers are faced with a take-it-or-leave-it scenario. The system essentially works like this: appraisers sign up with an AMC, or several AMCs, as is usually the case. When a lender or broker orders an appraisal, he or she dials the AMC. The AMC then contacts its list of appraisers, offering the job on a first-come-first-served basis for a predetermined fee, which in some cases is significantly less than the going rate. Veteran appraisers like David Skelton, who has been doing home and estate appraisal work in Central Oregon for more than a decade, often pass these jobs over, as a matter of economics and principle.
But Skelton and other appraisers say those jobs aren't coming back for re-bid, which means somebody is taking the work at a cut rate. There is no evidence, however, that those savings are being passed back to the consumer. To the contrary, the rate that AMCs are charging borrowers seems to be holding steady or rising, Hagar said. At the same time, both brokers and appraisers agree that the low-cost model is resulting in low quality appraisals that are creating problems for lenders and buyers.
"What you have is inferior work being completed... people like myself who have 11 years of doing appraising are not going to take a job for $250," Skelton said.
Still, Skelton said he's somewhat divided on the reforms. Like other appraisers, Skelton said AMCs aren't the answer, but some type of measure was required to stem the pressure that appraisers were under from lenders. The issue of "meeting value," whereby lenders told appraisers the minimum value necessary to seal a deal and appraisers obliged in order to keep the business flowing, was a national problem - and one that vexed ethical appraisers who refused to work under those terms. Skelton said that rarely a week passed when he wasn't pressured or propositioned by a broker to come in with a pre-determined number. Equally frustrating, though, was the fact that regulators seemed uninterested in cracking down on the practice.
Skelton said he turned in one broker who had repeatedly pressured him to the state division of finance and corporate securities for investigation. The state however, was less than enthusiastic.
"They could care less. They were not really interested in disciplining anyone," he said. "They didn't want to hear about it. They didn't even open a file."