“General” appraisers may not care about the 1004MC (market conditions addendum), or its replacement. But they should care about what happens next!
The 1004MC was created by Fannie Mae/Freddie Mac in response to the economic meltdown around 2009. Appraisers were blamed. Everyone else tried to avoid looking culpable. Especially those who had profited greatly. Our economy sunk like a rowboat in the wake of a battleship.
“The purpose of this addendum is to provide the lender/client with a clear and accurate understanding of the market trends and conditions prevalent in the subject neighborhood.”
It was neither clear, nor accurate. It was meant to make appraisers focus on market conditions. It also presented that the GSEs (Government Sponsored Enterprises) were doing something about it. Something like getting a pretty painted bailout bucket after the rowboat had sunk.
Unfortunately, it created confusion, was inaccurate, self-contradicting, and misleading.
(See my peer-reviewed article documenting the statistical ‘information loss’ and mistakes in the 1004MC in The Appraisal Journal, Fall, 2013, entitled Common Statistical Errors and Mistakes: Valuation and Reliability.)
What is needed to replace the MC addendum? What would be ideal?
I have a list. The replacement market conditions solution should:
- Coincide with any time adjustments, or at least be consistent.
- Be relevant to the CMS© (Competitive Market Segment©), not the neighborhood.
- Be more refined than checkbox coarseness, as this: detail
Property Values □ Increasing □ Stable □ Declining
- Help protect consumers (homebuyers) in an inherently uneven bargaining knowledge position.
- Help appraisers be more accurate and precise (trueness and sureness)
- Enable simple forecasting
- Enable risk assessment, not mask its measurement
- Integrate with other market analyses
- Provide data-stream input to GSE portfolio management
- Be compatible with and foster ensuing reproducible asset assessment practices[1]
10 bullet points. Whew! Is this remotely possible?
Yes. Data is accessible. Analytics are learnable. Appraiser market knowledge optimizes results.
WHAT IS POSSIBLE TODAY?
Market conditions are critical. The combination of field-related knowledge, use of algorithmic models, and dynamic visuals and data-stream delivery is possible. And practical movement towards this end requires a clear path for the GSEs. The starting point is the market price, as currently defined as ‘market value.’ Other measurables can be added in time. The starting point is the price indexing analytic model, as taught in Valuemetrics.info education and software solutions.
Actual measurement of a price index is possible. It’s inappropriate to force exact quantitative results into one of the three categories of ‘up’, ‘level’ or ‘down’. This is a discard of perfectly good market information. In addition, it solves the problem of clients who ‘disallow’ the “declining market” checkbox – because it reduces salability of the loan to the GSEs. In practice this is what happens – appraisers are trained by experienced, survival-oriented trainers to never check the “declining” box. Else ‘we’ will soon lose that client.
Forecasting can only start from numerical certainty, not just from ‘Increasing’ or ‘Stable’ categories.
WHO WILL BENEFIT?
Consumers need to know the actual measurable and forecastable trend to better plan for this life-changing purchase. They need to know real value, not pumped-up fake exchange prices. (See my blog on market-value-definition fallacies.)
Lenders, including banks, get clarity on salability, and ability to anticipate risk/reliability decisions and reduce or eliminate charge-backs.
GSEs, HUD, and VA will benefit from speedier processing, lower costs (related to risk and property), and far improved portfolio and risk measurement capability.
Regulators benefit. State agencies gain clarity on issues related to reliability measures, rather than issues of credibility (personal believability). Bank regulators benefit from simplification of key risk, portfolio, and compliance issues.
Appraisers can be trained to provide direct input into risk algorithms and seamless data-stream input to the lender using quantification based on primary data science analytics. The starting point combines appraiser training, and use of algorithmic analytics software – not canned forms software.
A SOLUTION
Market analysis is the core part of Evidence Based Appraisal©. Appraisal modernization requires a refocus on market and economic issues. It requires competent analysts with appraisal knowledge.
Valuemetrics.info education and software solutions provide the foundations for this modernization – revision of practices and new competence toward the above realities. Enquire within today.
[1] Valuemetrics.info curriculum and software solutions advance the methods and algorithms necessary to achieve reproducibility. For further information go to georgedell.com. Additional courses, livecasts, and ongoing TAAR© (The Asset Analyst Report©) papers are available.
October 30, 2019 @ 8:08 am
George I know that you are a very intelligent individual and very knowledgeable however you must live in your own little world.
You talk about the benefits to consumers, the purchaser or borrower in a mortgage transaction never gets to see the appraisal until late in the process and the only time it has any effect is when the value is too low to make the deal work. Do you honestly think that anyone in the mortgage industry really cares about the appraiser assessment of the market conditions? All of the tools you mentioned can be manipulated by the appraiser ( in the eliminating of outlairs process) in the selection process of the data to achieve the desired results.
The MC form was designed, poorly I might add, to show past trends in the market not future trends. You imply that with the proper tools we can project the future of the market and I don’t believe that anyone has a crystal ball and there is no process that will predict the future of the real estate market. All the information in the world will not eliminate loan losses. Lenders have a category called “Loan Loss Reserve” which is to mitigate the risks that are inherent in all loans. That figure is adjusted on a regular basis on their assessment of the market conditions and their loan portfolio and if you honestly think that senior management in the lending industry rely on the appraiser’s comments in appraisal reports for their decisions on risk management you are mistaken, I was there for several years.
October 30, 2019 @ 9:30 am
Thank you for your comments John,
The main focus of this post is What would be ideal? I certainly did not mean to imply that these ideal goals exist now.
Yes, there is a lot of negativity and even cynicism. What I don’t want to do is roll over, complain about how bad things and people are, and sot in resentments.
Change requires action. The first three steps are:
> Recognize the problem.
> Come to believe things can improve.
> Decide to do what IS in my power.
Yes, there is no crystal ball. Yet what appraisers do is predict to a value based on what is known. As an economist some of my training is around leading economic indicators. Each of these is more or less reliable. Yet in each case, they are USEFUL.
Where our industry has failed is in the very separation you speak of between the individual appraisal, and the risk analytics at the underwriting and portfolio levels.
In the Valuemetrics classes, we do enable individuals like yourself with market knowledge — to provide modernized services and products. We build the micro competencies of modern computation skills. This includes modeling for algorithmetic decisions, and building the knowledge base required for risk analytics direct feed into client risk decision/assessment systems.
WE DO WHAT IS POSSIBLE NOW.
The Community of Asset Analysts moves in this direction.
Valuemetrics.info classes provide training in both the modeling theory and algorithmic tools.
My weekly blog is available at no cost.
TAAR, my paid subscription journal provides in-depth coverage of the needed knowledge and tools.
October 30, 2019 @ 11:56 am
Great post George. Being unreasonable is the 1st step to being the best at what you do.
November 5, 2019 @ 6:57 pm
Hi George, I heard from Joe Lynch that you have an article on “anchoring” in relation to the contract price. If so, could you please provide the link to the article. Thank you so much
November 11, 2019 @ 12:15 pm
Bill, the article you are asking about is Why Do Appraisals Hit the Sale Price? Find it here: https://wp.me/p88Qau-1r0