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Appraiser Ethics Violations

March 28th, 2006

Dear Mark Kohn

This is my response to your request(s) for specifics and additional information.

I filed 20 complaints against 15 appraisers in September of 2005. As I prepared these complaints, I faced many choices about what to leave in and what to leave out. Each of my complaints could have been 20 pages long.

In general, I assumed the reader of my complaint would know the basics of the mortgage industry, the basics of the appraisal industry, and have a good (detailed?) understanding of the appraisal rules (USPAP) both in theory and in practice. As a practical matter, the investigator, prosecuting attorney, and ultimately the administrative law judge have likely never prepared an appraisal report.

In processing an appraisal complaint, it is critical that everyone understand what a “seller concession” is, how the seller concession affects the home buying process, how it affects the mortgage, and how it affects the role of the appraiser.

In any purchase transaction, the single most compelling piece of market data is the dollar amount paid by the buyer to the seller. In today’s market (in Denver), over 50% of all purchase transactions involve a seller concession. For 100% of these transactions, the contract price is an artificial (contrived, hocus pocus) number that exists for the sole purpose of asking the appraiser to help “sell” a loan amount higher than the amount paid to the seller.

In plain non-technical language:

USPAP says an appraiser must be 2 things:

Ethical, AND
Competent

IMHO, an appraiser must:

know the real estate market, AND
tell the truth

An ethical appraiser sets out to answer the question: What will the house sell for (“most probable price...”) ?

An unethical appraiser sets out to produce a report to be used to sell the loan package to an investor.

note 1 – see detailed example of how an unethical appraiser builds selective data to support a predetermined value.

Looking at the “big picture” – Denver appraisal problems are generally not about competence and technical issues. Metro area appraisers consistently demonstrate all the skills necessary to produce an appraisal report that will allow the loan to close. (note 2) Nearly all appraisal problems are a failure of ethics.

I have observed -- given a specific appraisal report, the discussion is always about technical issues (competence) and never about ethics. There is a widespread belief that it’s necessary to be a mind reader to “know” an ethics violation has occurred (see clairvoyant). Nothing could be further from the truth. It is necessary to read the report.

Every appraisal assignment involves choices about what to put in the appraisal report, and what to leave out. I have no desire to make a stink about typos and technicalities. However, if the appraisal report fails to mention the contract price is $10,000 more than the asking price, this is a failure to tell the truth. It is a violation of the USPAP ethics rule. Nearly all of my 20 complaints involves some variation on this theme.

And to be clear, simply disclosing the concession and the asking price is not enough. USPAP says the appraiser cannot ignore the “agreed amount”. USPAP AO1 says "the appraiser must take into account all pending and recent sales of the subject property itself".

It’s not up to me to provide analysis, explanation, supporting documentation, or any other kind of evidence or “proof” of a conspiracy. It’s up to the appraiser to justify, explain, analyze, theorize, hypothesize, etc, how the market value can be different than the agreed amount. There needs to be some kind of plausible explanation of how the appraised value reconciles with the compelling market data to the contrary. The evidence of the ethics violation is in the report. Specifically, the ethics violation is what got left out of the report. It's an error of omission.

When the appraisal report hits the requested number, and offers nothing in the way of analysis or explanation, it constitutes a serious violation of the USPAP ethics rule. It goes to the very core of why the appraisal profession exists.

Phil Rice

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