The Current Spring Appraisal Environment

In this article based on a recently given talk I had given at the CT Property Owner Association's monthly meeting, I was asked to give the investment community some thoughts and ideas of how local investors view the marketplace, how the appraisal community is being viewed and what steps appraisers are undertaking in such a hostile lending environment. I was asked to prepare some remarks about the current state of the appraisal profession, how loans are fairing, the current valuation process and how it affects all of you, as investors, property owners and the general public, in doing business in this presently uncertain economy.

Uncertainty has been in the air since the beginning of 2008 and rapidly became more present with the collapse of Lehman Brothers and when Bear Stearns was taken over. The collapse then became more apparent when the sub-prime loans that were going bad were more fully exposed and how these banking instruments brought down so many economic safety factors. Escalating foreclosures, less credit-worthy borrowers, both personal and corporate/business, and many of these financial institutions have further halted the growth of the economy. So much has changed globally, with our real estate world being a dominant part of the banking world.

If we study a particular niche of the market through research, (town records, Multiple Listing Services or other data resources),we can look at market trends for single and multi-family housing, land, larger properties, net-leased properties and the various other types, in context with safety, liquidity and various rates of return. Then, we may feel confident to invest in that particular market.

What facet or interest do you own, want to own or invest in the market? That question is addressed in the timing of the market.

It is Spring and what affect is the banking crisis bearing on the market and its appraisal process? Effective May 1, 2009, the rules and regulations changed for ordering and obtaining appraisals for lenders. Under the newly created HVCC Home Valuation Code and Conduct process, lenders and mortgage brokers are to be "hands off" when requesting an appraisal, such that an independent appraisal management company (AMC) will order, obtain and render payment, and distribute the appraisal report. The guidelines are such that appraisals for FHA, HUD, FNMA and FNMC can be completed by any certified approved appraiser and ordered fairly by anyone, versus a conventional loan which must be ordered through an AMC. What expertise do the AMCs have and why were they given the responsibility to monitor the appraisal quality that we, as appraisers, must follow and adhere to under USPAP (The Uniform Standards of Professional Appraisal Practice)? Does the public, mortgage lenders, appraisers and you, the reader, understand what these new rules and regulations are going to do to the mortgage process? Is the mortgage money being given out or is it reluctantly being given out to mostly FHA guaranteed loans? Or, do the public and lenders feel the same and agree with having the government guarantee the money, which is slowly being doled out because the large banks, that are recipients of the TARP money, want to continue to hold onto their money to look good financially. This is why they are being careful as to how they allow mortgages to be provided.

How has the appraiser changed his or her work in doing an appraisal assignment? Effective April 1, 2009, appraisers in a federally regulated financing transaction are required to provide a 1004MC Addendum. This addendum is to illustrate what trends have happened in the real estate market within the past 3 months, 6 months, and 6 months to 1 year of the date of the appraisal. It demonstrates what has occurred as to the number of listings, sales and marketing days, if any changes in listing and sales prices, a discussion on foreclosures and commentary of what has happened in this market, and if foreclosures are the "norm" and/or should they be weighted as to the valuation process.

As appraisers, we are to be even more objective, while conforming to our uniform standards, so that we step back further and ask how the weighting of value is determined. In the case of a single family or condominium, typically the comparable sales method is the only method weighted. When appraising a different type of property, a multi-family or an income generating property, we need to objectify the income approach and review the limited amount of comparable sales to decide the weight and recapitulation as to value and use the appraiser's expertise in determining what we are really appraising.

For your thoughts, comments and questions as to where do we go from here, please feel free to respond to this article with your ideas. Thanks...

Marc Gottesdiener
RCG.246, Certified General Appraiser
Hartford, CT

May 2009

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