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Protecting Your Bank
Transcript of Protecting Your Bank
Protecting Your Bank From Appraisal Risk In The Ever-Changing Appraisal Landscape
Why may appraisal
fees be increasing?
Future of the Appraiser Profession
Supply vs Demand
1. Complexity of assignments
2. Review of appraisals
3. Cost of E/O insurance
4. Research databases
5. Gasoline cost
6. Volume of Business
Interagency Appraisal and Evaluation Guidelines
Who is responsible for adopting and reviewing appraisal policies and procedures?
Mainly, what should the board of directors or its designated committee consider when establishing policy?
Who may order an appraisal directly from an appraiser?
How do you know if someone is qualified to review appraisals?
The institution's board of directors or its designated committee holds the responsibility of having compliant appraisal policies and procedures.
The engager of the appraiser must be independent of the loan production staff.
Loan production staff is all personnel responsible for generating loan volume or approving loans, as well as their subordinates and supervisors. These individuals would include any employee whose compensation is based on loan volume.
The reviewer must be independent of the transaction and "insulated" from any influence by the loan production staff. Reviewers should possess the requisite education, expertise and competence to perform the review commensurate with the complexity of the transaction, type of real property and market.
Average age of residential appraiser: 51
Average age of commercial appraiser: 65
New Appraisers Entering Industry?
April 15, 2013
102,022 Total Appraisers
37.3% Certified General
51.37% Certified Residential
1341 Total Alabama Appraisers
571 Certified General
678 Certified Residential
Expected to decrease 25-35% in the next 10 years.
There were 16,000 less licensed appraisers in 2012 than there were in 2006.
Some of these appraisers went on to become Certified.
Questions Banks Should Ask Prospective AMCs
1. Describe the type of review you perform on the appraisal. Automated only? Manual? or both?
10. Do you maintain the appraiser's license and E&O insurance and ensure that it is updated annually/semi-annually?
2. Are personnel responsible for reviewing appraisals licensed or certified appraisers?
3. Do you require personnel reviewing commercial appraisal reports maintain a certified general license and have commercial real estate experience?
4. Are your personnel licensed in the states in which they are reviewing appraisals?
5. What type of training do you provide your personnel? Internal? External?
6. For residential orders, do you charge a set fee per order or does your fee vary based on the fee paid to the appraiser?
7. Are you responsible for paying appraisers and issuing the 1099s?
8. Will you use our preferred panel of appraisers?
9. Do you vet appraisers before adding them to the panel?
11. How do you view your relationship with the appraisers who perform work for you on behalf of clients?
12. Do you robo-assign orders, or do you assign based on the appraisers expertise, workload and geographical proximity to the subject property?
13. On residential orders, do you have limitations on the distance the appraiser must travel to appraise the subject property?
14. Will support personnel and reviewers be dedicated to our account, or will we be communicating with the next person in-line to take the phone call or email?
15. What is your average turn time? At what point does the "clock start ticking" - at the point the order is placed, or after the inspection has been scheduled? Do you "time out" orders for reasons other than the client asking you to put it on hold? If so, under what circumstances do you time out orders, and is the time included on your average turn time?
16. Can you provide customized reports for our use?
17. Will you upload our residential orders to the UCDP, clear any warning messages and deliver the SSR's to us?
18. What type of internal quality control/audit processes are in place?
For the most comprehensive review, an AMC should be conducting a complete, hands-on review of each order.
It is important that those reviewing appraisal reports possess the requisite knowledge needed to review for compliance and credibility and ideally, that knowledge was gained from having been professionally trained as an appraiser and having worked in the field. Appraiser-to-appraiser communication also tends to be more effective than non-appraiser to appraiser communication.
Commercial appraisals are often complex. Whether complex or not, the AMC should have staff that are experienced appraising commercial real estate.
Besides being a requirement in many states, it is a good practice to have reviewers become licensed in the states in which they are reviewing so they become familiar with state-specific appraisal guidelines.
The real estate appraisal industry is always evolving. AMCs should have adequate training resources in place, and require that their personnel participate.
Some AMCs negotiate the lowest possible fee to appraisers for residential order in order to receive a higher fee themselves. Nationwide, appraisers have been highly vocal and opposed to this practice. Fee transparency ensures that appraisers are being paid reasonable and customary fees for their market.
AMCs should be staffed and willing to handle payments to appraisers as well as providing the 1099s at year end.
Working with an AMC doesn't mean that an institution has to stop using the preferred panel of appraisers that they know and trust. The AMC should be willing to limit orders to only those appraisers on the institution's preferred panel, unless instructed to do otherwise.
AMCs should have the resources and expertise to vet appraisers prior to adding them to a client's preferred panel or their own panel. Understanding an appraiser's qualifications and quality of work should be the first step in developing an appraiser panel.
AMCs should have the resources to continually manage updating appraiser's records to include obtaining their most recent license and E&O insurance.
The AMC should have personnel who are responsible for enhancing the AMC's relationship with appraisers on their panel. Their response should speak to whether they view their relationship with the appraisers as a partnership, or simply another vendor on the list.
Many AMCs robo-assign orders without regard for the order details. This can result in delays and lesser quality reports if the assigned appraiser doesn't have the required expertise based on the property type, or the appraiser's workload.
Unless a property is rural and there are limited qualified appraisers, in order to ensure geographical competence, appraisers shouldn't have to travel much further than 30 miles to inspect the subject property.
Ideally, an AMC will have personnel dedicated to each of their clients. This serves many purposes, not the least of which is timely and quality communications. Each client is unique in their own way, and the process is most efficient when all parties are on the same page.
Some AMCs will quote a turn time that does not count the days an order is timed out. Orders are timed out for various reasons, thereby stopping the clock, and the days an order is timed out are not counted in the average turn times. Others will not start the clock until the order is assigned and/or the inspection has been scheduled. It is important to understand each AMC's practice so that you can compare apples-to-apples.
An AMC should be able to provide weekly, monthly, quarterly and annual reports that have been customized based on the client's specific needs.
Lenders making loans to be sold in the secondary market should partner with an AMC who can upload their files to UCDP on their behalf and should be staffed with reviewers with the expertise to clear any warning messages received back, and deliver the SSRs to the lender.
AMCs should maintain adequate quality control standards and have audit processes in place to ensure that the standards are consistently being met.
They should ensure independence in the ordering, performing and reviewing of appraisals and evaluations.
There should be an appraiser selection process and continued monitoring of the appraisers.
They should ensure that the reviews of the appraisals are completed by qualified, educated individuals who will ensure the appraisals are compliant with USPAP, Interagency Appraisal Evaluation Guidelines and other appraisal standards.
They should consider if the appropriate scope of work was utilized and the appraisal report contains sufficient information and analysis to support the appraised values.
Highest Performing Major Markets
Lowest Performing Major Markets
Builder Confidence On The Mend
Falling Residential Shadow Inventory
Refinance volume in 2012: $890 billion vs. $858 billion in 2011
Purchases virtually unchanged: $400 billion in 2012
Significant increases in purchases for 2013 reaching $700 billion
Refinances in 2013: $356 billion
Source: MBA NewsLink; Michael Tucker; "Hotel Fundamentals and Sales Improve," World Property Channel; "U.S. Hotel Sales Up 41 Percent in 2013"
Source: Colliers International Q12012; K.C. Conway, EMD
New Homes: Single Family
Source: U.S. Census Bureau Data
Increase in average square footage (2,480 in 2011 vs. 2,392 in 2010).
Increase in new homes financed by a conventional loan, and fewer financed by an FHA-insured loan.
Average sales price of new homes ($291,500 in 2012, $267,900 in 2011, $272,900 in 2010).
Average price per square foot for new homes sold was $83.38, with the highest price per sq. ft. in the Northeast ($111.37), and the lowest in the South ($76.73).
33% of new homes sold with vinyl siding as principal exterior wall material; 41% for attached and 32% for detached.
88% of all homes with air-conditioning; the highest percentage in the South (99%) and lowest percentage in the West (62%).
39% of homes with 4+ bedrooms; 48% with 3+ bedrooms.
57% of homes with 4+ bedrooms had 3+ bathrooms.
19% of homes sold with a 3+ car garage.
30% of homes with a full/partial basement, 53% with slab/other foundation, 17% with crawl space.
54% of homes with 2+ stories.
48% of new homes sold with 1 fireplace, 5% with 2+ fireplaces.
Average new home sold built on 16,663 sq. ft.; average lot size for new homes sold in metropolitan areas was 15,616 sq. ft.; outside metropolitan areas was 28,768 sq. ft.
56% of all homes completed had a warm-air furnace as primary heating source; of those, 88% used gas, 11% used electric; 1% used oil.
Appraisal Red Flags to Utilize in the Commercial Review Process
Detailed market analysis
Extraction of rates from actual sales
Multiple methods to conclude CAP rate
Reconcile market expenses with actual expenses
Entrepreneurial Profit should be addressed in the Cost Approach
Appraiser accepting cost(s) from developers and not considering/researching its reasonableness
Consideration given to market conditions (i.e. decline or appreciation, etc.)
Condition/quality of photographs
Spread of adjusted values
No current listing info
Excessive absorption time frames
Date of sales
Dodd Frank Act
Interagency Appraisal & Evaluation Guidelines
Vicky Thompson is the president and CEO of Valuation Management Group, LLC (VMG). She holds over 35 years of valuable professional expertise within the mortgage and appraisal industries. Since its inception in 2006, Valuation Management Group continues to grow tremendously, but remains steadfast by taking the appraisal process from ordinary to extraordinary while ensuring both appraiser independence and the delivery of quality appraisals.
President & CEO
In 2012, VMG was ranked 29th by Inc. magazine on its annual Inc. 500 list, an exclusive ranking of the nation’s fastest-growing private companies. In 2011, VMG was 22nd on the Inc. 500 list. VMG ranked third amongst Atlanta’s 50 fastest-growing private companies by the Atlanta Business Chronicle for its 2011 Annual Pacesetter Awards, and ranked 14th amongst fastest-growing companies in 2012. VMG was also honored by CobbWorks as a 2011 Outstanding Business of the Year. In 2010, VMG was recognized by the Cobb Chamber of Commerce as a Top 25 Small Business of the Year.
She has been featured in the Wall Street Journal, Atlanta Business Chronicle, Inc Magazine, and has acquired several article placements in Georgia Real Estate Magazines. She has been honored by the YWCA Northwest Georgia as a “Woman of Achievement” and is the past president of the Georgia Real Estate Fraud Prevention and Awareness Coalition. Additionally, she is an active member of several industry organizations which include: Cobb Executive Women, Cobb Chamber of Commerce, American Business Women’s Association, YWCA Academy of Women Leaders, National Association of Professional Mortgage Women, Georgia Bankers Association, Georgia Mortgage Bankers Association, National Association of Appraisal Management Companies, Southeast Credit Union Real Estate Networking, and an affiliate member of the Appraisal Institute. Vicky is also committed to involvement in the community. Valuation Management Group is a proud supporter of the Juvenile Diabetes Research Foundation and won the Golden Sneaker Award for its fundraising efforts each year from 2010 to 2012 for the Walk to Cure Diabetes.
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Hotel technology from Pegasus Solutions in Dallas reported that hotel average daily rates continued upward in 2012, setting near-record growth margins over 2011 rates.
The number of hotels sold in the U.S. was up 41 percent year-over-year in the first two months of the 2013, according to Real Capital Analytics' latest hotel trends report.
North American corporate hotel rates set a new year-over-growth record, increasing 9.3% over last April, beating February’s previous record increase. Overall rates, including: corporate, business travel, and leisure travel, increased 7.3% year-over-year.
Average price per key for single-asset transactions rose 5% in 2012, compared to full-year 2011 levels, to top $194,000, which “far exceeds the average price per key recorded over the past several years, and emphasizes the strength of hotel fundamentals and high level of investor interest,” according to Arthur Adler, America’s CEO of Jones Lang LaSalle Hotels.
The first five months of 2012 represented the second-highest start to a year since 2008, only exceeded by the first five months of 2011, when total transaction volume reached $6.4 billion, largely because real estate investment trusts dominated $100-million-plus prime urban asset purchases.
Hotel acquisitions by institutional investors rose 15 percent in 2012, compared to 2011. Their acquisition cap rates averaged 6.4 percent compared to the overall average of 7.9 percent as institutional buyers have targeted the highest quality properties.
U.S. manufacturing renaissance combined with growing agriculture and energy exports fuels demand for industrial real estate.
Proximity to intermodal infrastructure, ports and resources influence investor demand for industrial space. Mobile - Savannah.
High vacancy rates in some markets are propped up by functionally-obsolete warehouses with low clear heights or lack of rail access, which mask the need for new bulk warehouse construction.
East Coast industrial is poised for demand growth, with port traffic growing faster than the Gulf or West Coast, and a Panama Canal expansion just around the corner.
Investor demand in non-core industrial is growing, as demonstrated by the 2012 $770 million DEXUS Property Group portfolio sale.
Independence in appraisal engagement
Would like to sell but can't until more of a price recovery
Positive Recovery - Occupancy & Rents Increasing
Individuals who lost their homes
Gen Y & Milennials (footloose)
Seniors (selling their homes)
Fully executed contract
List of all improvements & cost (last 3 years)
Sales agent considered in BPO
Info on backup offers (if any)
Info on other properties currently under contract
Office Market Recovery
South registered largest year-over-year vacancy rate decrease
Growth in technology, energy & healthcare sectors
Markets dependent on financial service or governments were negatively impacted by announced downsizing and spending reductions
New Rules for Appraisals & Appraisal Delivery
Under the new rules, if the lender receives an application for a loan to be secured by a first mortgage, it must provide the applicant a notice within three business days after receipt of the application that the applicant may request a copy of any appraisal or other written valuation that the lender obtains. Then, if the lender obtains an appraisal or written valuation, it must provide a copy thereof to the borrower promptly after its receipt but not later than three business days before the closing.
January 18, 2014
If the appraisal is not delivered to the borrower three business days before the closing, the closing must be delayed unless the borrower waives the three day requirement. However, the borrower's waiver must be received by the lender at least three business days before closing.
The rules apply even if the loan is denied, or the application is incomplete or withdrawn.
The lender may require that the borrower pay the cost of the appraisal, but it may not charge or upcharge the appraisal for the copies or mailing of the appraisal.
Appraisals for Higher Priced Mortgage Loans
The lender must first obtain written confirmation that if the seller purchased the property within 180 days of the proposed sale to the borrower, that the price at which the seller purchased the property is not less than 20% of the price that it is being sold for or if the seller purchased the property within 90 days of the sale, that the price at which the seller purchased the property is not less than 10% of the price that it is being sold for. The lender may not rely on the written confirmation or certification of the facts from the seller. It must obtain independent documentation of the sale date and the selling price, such as the HUD closing statement, a copy of the deed or the seller's casualty insurance policy.
The lender must obtain 2 appraisals
Only charge the borrower for one of them
At least one of the appraisals must analyze the difference between the two prices, the changes in market conditions between the time of the two sales, and any improvements made to the property by the seller.
14 Best Markets for the Next 5 Years
14. Brunswick, GA
13. Wilmington, NC
11. Columbus, GA (tie)
11. Yakima, WA (tie)
9. Niles-Benton Harbor, MI (tie)
9. Tucson, AZ (tie)
7. Poughkeepsie-Newburgh-Middletown, NY (tie)
7. Yuma, AZ (tie)
6. Reno-Sparks, NV
5. Glens Falls, NY
4. Gulfport-Biloxi, MS
3. Panama City-Lynn Haven-Panama City Beach, FL
2. Santa Fe, NM
1. Medford, OR
14 Markets Struggling with Foreclosures
Tampa-St. Petersburg-Clearwater, FL
Myrtle Beach-Conway-North Myrtle Beach, SC
Las Vegas-Paradise, NV
Miami-Fort Lauderdale-Pompano Beach, FL
UAD Warnings Become Automatic Fails, June 2013
Effective June 22, 2013, appraisals not in compliance with UAD required formatting for these fields will fail when submitted to Fannie Mae's and Freddie Mac's Uniform Collateral Data Portal (UCDP):
Appraisal effective date
Subject contract price and comparable sale
Above grade GLA (subject and comparables)
Sale type (subject and comparables)
Appraisal Effective Date
The appraiser must enter the date of inspection, which is also the effective date of the appraisal, in mm/dd/yyyy.
Subject Contract Price
The contract price for the subject must be entered in whole dollars and must match the sale price entered for the subject in the sale price field of the Sales Comparison Approach section.
Comparable Sale Price
The sale price for the comparables must be entered in whole dollars. If the contract price for the comparables is not a whole number, the appraiser must round the sales price to the nearest dollar. If comparable properties are listings or pending sales, the appraiser must enter the offering price or contract price as applicable.
Above Grade GLA - Subject
The appraiser must enter the total square footage of the above grade living area in whole numbers up to 5 digits. The square footage entered in the improvement section must match the total above grade living area entered for the subject in the sales comparison grid.
Above Grade GLA - Comparables
The appraiser must enter the total square footage of the above grade living area in whole numbers up to 5 digits.
Room Count - Reporting format
# of rooms, bedrooms & bath(s) - Numeric to 2 digits, whole numbers only
Separate full bath count from half bath count with a period (.).
Robust review by trained, qualified individual
As proposed requires AS-IS
*Cheaper is not always better.
Source: Clear Capital, May 7, 2013
Source: Clear Capital, May 7, 2013
According to NAHB, construction will start to reach historically "normal" levels by 2015.
Source: CoreLogic Case-Shiller Indexes
Source: CoreLogic Case-Shiller Indexes
House Price Appreciation by State
Percent Change in House Prices
Source: FHFA HPI 2013Q1
Rankings by Metropolitan Statistical Areas and Divisions
Percent Change in House Prices with MSA Rankings
Myrtle Beach-N. Myrtle
Panama City-Lynn Haven-
Panama City Beach, FL
Source: FHFA HPI 2013Q1
Decrease to 8.3%
Decrease to 18.6%
Decrease to 11.3%
603,291 sq. ft.
Industrial Vacancy Rates
END Q1 2013
Patrick McMillen is COO at Valuation Management Group, LLC (VMG). In this role, he is responsible for the overall operations and risk functions at the company, including such areas as IT, HR, Internal Audit and Business Development. He is also focused on strengthening the risk management processes throughout the company, as well as working on regulatory reform changes (at state and federal levels) affecting banks, lenders and appraisal management companies.
Chief Operating Officer
Sharon Lynn is vice president of client relations at Valuation Management Group, LLC (VMG). She is responsible for understanding and managing clients’ needs to ensure their satisfaction. In this role, she works with client specialists and quality assurance reviewers on complicated situations to accomplish a positive outcome for the client and the company, manages new client implementation, and establishes partnerships with new clients.
Vice President Client Relations
Sharon worked with a privately owned financial institution in Birmingham, Alabama for 26 years, serving the last 6 years as vice president and regional manager. She managed 13 mortgage branch offices and joint ventures in a multi-state region. She then worked with the FDIC for 7 months, spent a year originating single-family mortgage for a large regional bank, and then joined VMG in July of 2011. Outside of VMG, Sharon is involved in the Community Bankers Association of Alabama.
Mr. McMillen worked as a commissioned bank examiner for the OTS and the OCC for over 13 years, serving as both a consumer compliance and safety & soundness examiner. From there he entered the private sector and worked as a chief risk officer for several banks in the Atlanta area, including Riverside Bank, Synovus Financial Corporation, Silverton Bank, and The Brand Banking Company. He has a BS Degree in Finance from Murray State University in Kentucky. He has served on the Board of Directors for the Georgia Affordable Housing Corporation and the Gwinnett County Habitat For Humanity.