Battle over Bank Home Automated Valuation Modules & Lender Coercion of Real Estate Appraisers Heats Up
"Appraisers make a Thermopylaean Stand"
WOBURN, MA (August 15, 2001) Appraisers everywhere see the writing on the wall and are calling for Congress to step in before this irresponsible behavior by banks trigger another Savings & Loan fiasco; and this time they say it will include an awesome rate of home foreclosures and bank failures. Worrisome to many is how much this weakening of the lending process may have on the bond market. Hundreds of Billions of dollars of debt is backed by mortgages.
Most real estate appraisers are against any company that works with banks to provide them with data for what is known as an Automated Valuation Module (AVM).
Many appraisers feel that now is the time to make a stand against the demise of the unbiased third party system appraisers provide, and total control by banks of independent appraisers and their data. To fight both lender coercion and AVM's, the nation's 80,000 state licensed real estate appraisers are beginning to unite. Many appraisers are now Boycotting the oldest society of real estate appraisers, known as the Appraisal Institute (AI) and Washington Mutual Bank, because of what they feel is the AI's plan to sell out the unbiased system and residential real estate appraisers nationwide with the AVM now under development by the Appraisal Institute. This AVM is known as the Appraisal Institute Residential Database (or AIRD).
Automated Data Modules (ADM) are computer programs that foreshadowed todays Automated Valuation Modules (AVM), which are now used almost unhindered by many lenders in determining the value of a home. Both these modules pick a value based on what is called "fuzzy logic". Fuzzy logic means to an appraiser that some elements of the process are incorporated in this computer program such as data collection. But because these programs use outdated 10-25 year old local assessor data they are not germane at all.
Because a computer has no human senses like the ability to read and interpret relevant news stories, talk with brokers, neighbors, buyers and sellers, and to visually assess what's happening in and around a particular neighborhood -- that the use of these AVM's is detrimental to the public. Fuzzy logic programs have been tried numerous times as stock pickers in the past. ADMs failed in the stock market causing thousands of people to lose their life savings, and many appraisers think these highly manipulative AVMs will likewise fail as vehicles to estimate value in real estate --as they allow the lender to "fudge" any value they need to make any loan. A lot of appraisers think that it is those who have the most to gain from quick appraisals by a computer which can be manipulated that are pushing automated appraisals and are lying to the public regarding how well these programs work.
Particularly irksome to many appraisers is that the Appraisal Institute, is colluding with two large banks to get its AVM accepted. According to Steve Keohane, owner of Woburn, Massachusetts-based AppraiserCentral.com; "I think the Appraisal Institute has crossed the line. They are aligned with Washington Mutual, Inc. (WAMU) and Charter One Bank to create an AVM. It is for this reason AppraiserCentral.com has organized a national boycott of the Appraisal Institute, and any other companies that cooperate with the Appraisal Institute's AVM, Keohane said. "As a bi-product of this Boycott, we are also hoping to bring the nationwide issue of lender coercion to make appraisers meet value to the forefront. This widescale lender coercion of appraisers thing is something the U.S. Congress has so far been very unwilling to tackle for a decade now, possibly because of too much banking influence", he continued.
AVM's Have More Holes Than Any Market Analyst Would Allow:
Real estate appraisers say; Real Estate Valuation modules rely heavily on what is known as public data; which is mainly data available from sources such as a local assessor's office or county records. Way too many of these records may not have been updated in 10-25 years or more. Additionally, the way each town or city assessor measures a taxpayers home and calculates the data in that record varies immensely with each locale. Consequently, AVM data is predominated with a mish mash of incorrect and usually very out of date data. Among many other things that appraisers do better than computer programs are: AVM's can't tell you is if the local assessor included a basement or even a deck or garage as part of the gross living area, or even if the basement is finished, or if the sales comparable has a $50,000 ocean view. AVM's can't tell you if the 3rd floor was finished 2 weeks prior to sale. These computer programs can't say if the property sold low because of the presence of urea formaldehyde in the walls, or because tenants ransacked it. AVM's are silent when a comparable utilized in their value estimate sold very low because it was a sale between family members, or those that were part of a "flip" scheme. Computer programs can't tell you if the comparable house is across the street from a crack house; or next to a noisy metal grinding shop; or even if it backs up to a 4-lane highway. AVM's muddle into their value ranges oceanfront and those homes across the street from the ocean--as if they were the same.
Both sides of the same street are treated the same and considered to be equal in location by an AVM program. A house on one side of the street that floods every spring is treated by these computer programs the same as a home on higher elevation, but across the same street--just 30 feet away. Another common problem an AVM can't handle is the border property problem between city, towns and even states. A public record may show to the computer that the comparable home had say a 6,000 square foot lot. Yet because 50,000 more square feet of the lot was over the border in a different town or in a different state--this comparable sale most likely shows up with only 6,000 square feet to the computer and is incorrectly used by its program to compare homes with 6,000 square foot lots.
Many appraisers are outraged that federally chartered lenders who are supposed to be on guard against another huge Savings & Loan bailout began using these very faulty and highly manipulative automated program tools, Keohane said. What is actually happening now is a lender in California is using a computer program to determine the value on a home (both home & neighborhood unseen) in Massachusetts he continued.
AVM's Are Junk. AVM Companies Need To Be Sued By Home Sellers Who Have Been Taken In By These:
Keohane says; most appraisers think AVM's are junk. He thinks companies telling the public they are as good as an appraisal should be sued in his opinion and the opinion of many appraisers he says - for misleading the public. According to the AppraiserCentral.com owner; "It's the public who will begin to take huge loses. AVM' links are everywhere on the internet. Far too many of the unsuspecting public use these $39.95 programs to save the cost of a real $250 appraisal. The end result can be devastating. Depending on the home, mistakes made by AVM's and losses to home sellers who rely on these fuzzy logic computer programs--could easily be within the $10,000-$100,000 range; some even higher."
Together with 125% mortgages, AVM's may already be having a negative impact on our economy and on individual homeowners. According to Mortgage Information, a San Francisco-based mortgage research firm that tracks a database of about 29 million loans, in the first quarter, the number of home mortgages in foreclosure increased 9% to about 142,000 homes. Appraisers in rural areas are reporting that they have been kept constantly busy doing foreclosure work. Some appraisers say there is so many foreclosures that they are 4-6 weeks behind getting to them. Keohane says; "We think that Freddie Mac, and those bank and lending institutions who use this "fuzzy logic" to make loans is not acting in the best interest of homeowners, buyers, sellers, realtors, or even the bank's own investors that lend them their funds. AVM technology being pushed by certain mortgage companies and banks appears to be being done as part of a "boiler plate" way of speeding up the loan process and eliminating the only unbiased third party from real estate transactions." He ended with, "Fast loans mean fast commissions to many lenders."
Why Do The States Permit AVM's
On the heels of the Savings and Loan Bailout of the late 1980?s, Congress enacted the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA). This Act was expected by many to go a long way towards protection of the consumer by mandating state control and licensing and mandatory education of its real estate appraisers. And all states are under pressure from the banking community to remove this check in balance. Governor Locke of Washington State just buckled to this lender pressure Keohane says. Governor Locke just signed Senate Bill 6169 allowing a dubious "3rd Party Evaluator" (this could even be a pizza delivery boy) in addition to state licensed and state certified appraisers.
Most appraisers will tell you that FIRREA fell short when it allowed the institutions who make the commissions on real estate loans to control which appraiser gets which job. The states have been strangely silent when thousands of appraisers nationwide have over and over complained about bank coercion to make value. Nothing has been done until recently in this regard by the federal government or the states. It?s been over 10 years since the Savings & Loan Bailout, and some states are just now beginning to take a hard look at the problem. In January 2001, a Bill (#234) was introduced in the General Assembly of Pennsylvania prohibiting bank coercion of appraisers. A similar Bill (#1066) was introduced in North Carolina in June 2001. In truth though, Big banks, including Fannie Mae & Freddie Mac are now defying the wishes of the 1989 Congress by inching towards elimination of the independent appraiser-- the only unbiased 3rd party standing between another Savings and Loan bailout.
Steve Keohane thinks; Big banks have just about thrown off any check and balance remaining by inching towards automated valuation modules. He also says; "the Congress has shown no desire for maintenance assurance in 10 years.
In most states only licensed or certified real estate appraisers are allowed to do real estate appraisals/valuations. Yet the once again the states and the federal government are silent when it comes to banks planning on letting highly inaccurate computer programs do real estate appraisals. Appraisers say that not only is the information these programs use highly incorrect, but these programs are more easily manipulated to allow the banks to make value. "An AVM is NOT a real estate appraisal! Any company that tries to push these off as such are being less than honest", t