Bank lending risk comprises borrower credit and liquidity,  and those related to the interest rate, operational, business) issues, and market reversal.  Market (trend) problems typically only become important when other risks trigger foreclosures.  But trend declines can trigger the other four main risks.

Market risk is now the highest it has been in many years.  Repeat the repeat.  Here we go.

The cost of inadequate or late-reported risk falls back on the taxpayer, you and me.  Here we go again.

This Modernizing Appraisal series is about the analysis process, not FannieMae and FreddieMac reporting requirements. The process is identical:   1) The problem;  2) The data;  3) Predict or adjust;  4) Communicate.  We continue here on #1 – defining the  problem to be solved.     Read the earlier parts of this series here.

The benefit of inadequate or delayed risk-loss insight goes to those who gain commissions, points, bonuses, options, continued employment, and prestige — and even goes to those who own property, but can “get out” (or die) prior to the next downfall.

While public policy can be (or should be) to counter cycling up and down, it does not.

The question is:  How can we “modernize” to create a counter-cyclical economic system?  A system which:  1) recognizes the cycle; and 2) acts concurrent with, or in advance of downturn.

Before we can “modernize,” we need to understand why this happens, and again happens again.

My experience is that a few aware appraisers are the first to draw attention, albeit unsuccessfully.  The first-hand contact with agents, and retold anecdotes, and sales and price reductions, and extended market times, and price reductions – tell a story.

Then soon, a few stories become a pattern, becomes a predictive data set.  Appraisers are in a position to report this information.  Unfortunately, current practice, standards, regulations, education, and expectations of clients – effectively preclude appraisal work from such intelligence.  Appraisers are required to use historical “comparable” data, then “adjust” to the date of value, usually a week or two prior to any risk usefulness.  It’s the law, peers do it, and clients require it.

The data is there.  Just nobody uses it.

In fact, a recent FHFA (Federal Housing Finance Agency)* report stated that only 20% or fewer appraisals had any “time” adjustment at all!  Unfortunately, this report also investigated some connection with potential bias issues.  This report was quietly censored as a whole.

After the predictive data set becomes available (some 1 to 3 months later), larger compilers of data publish the “news”.  “Home prices are declining!”  News.

Then “non-financial” news raises loud alarms.  It believes and regurgitates this news. More time passes.

And there is resistance to bad news.  “Let’s be positive.”  This is temporary.  “A good time to buy.”

Then our government, through our representatives, begins to realize this is an issue constituents may care about.  “Something must be done!”  It turns out it is “not a good time to buy” after all!

Those darn appraisers.  Everything was ok – until they cried wolf!  Once.  Once.  It was grandma all along – until it turned out to be the wolf with the big teeth.

Those darn appraisers.  All was well – until they started saying those bad things.

We have to fix this appraiser thing.  Gotta debate,  regulate, mandate and mitigate and educate.  Those pesky appraisers again.  Again.

*FHFA Link