For this month’s Master Class Interview, we talked with Stew Heller, the founder of the Society of Chief Appraisers (SCA) and learned more about the volunteer organization that connects Chief Appraisers, Credit and Real Estate Officers, and other industry professionals.
SCA was founded in an effort to promote collaboration and continued education among Chief Appraisers, representing both commercial banks and savings and loan associations, that were a tradition in the 1970’s and 1980’s. This has been achieved through SCA’s meetings where those in the industry can meet, share common experiences, new regulatory requirements, and support professional growth and advancement.
In our candid interview, Mr. Heller discusses the lessons he has learned through these meetings, the current market conditions, and the scarcity of individuals entering the appraisal industry, just to name a few.
What inspired you to create the Society of Chief Appraisers?
In 2009, in the darkest days of the Great Recession, I, among others, was becoming increasingly alarmed by reports from chief appraisers and regulatory colleagues of the, almost daily, attrition of the last few, and already inadequate number, of remaining staff bank appraisal managers. This was leaving the barn door wide open to an inevitable repeat of the recession, the kinds of unsafe and unsound valuations being produced that led to the crisis itself.
Unfortunately, despite the wave of new appraisal and evaluation regulatory tools, the very appraisal experts needed to enforce those regulations and prevent another crisis were not being put in place.
As study after study confirmed, the system was and may still be at great risk. Myself with a few old friends and colleagues, chief appraisers and regulators, decided to revive the old tradition of chief appraiser meetings in California and do something about it. At bare minimum, we wanted to work and learn together to stop the depletion of chief appraisers and God willing create enough new positions to make a difference in preventing the next crisis. Restoring and maintaining the integrity of the appraisal and evaluation system is critical, as it will provide a foundation that will support the safety and soundness of our real estate mortgage lending institutions and the federal deposit insurance system. This could be the difference between a Great Recession and a Great Depression.
What are some surprising lessons you’ve learned through SCA seminars?
I have learned that the chief credit officers, who are not appraisers, but must serve as “chief valuation officers” at 95% of the remaining 6,300 banks, are eagerly seeking guidance and training from professional chief appraisers. They sincerely want to protect their banks, avoid losses, thwart regulatory criticism, and prevent supervisory agency sanctions.
What are the greatest challenges facing chief appraisers and reviewers today?
Chief appraisers and appraisal reviewers are facing a decline in valuation quality reports within a glut of outsourced appraisals and evaluations that come across their desks. Often times these are inadequately prepared and misleading in their conclusions. To improve the accuracy of these deficient valuations, these errors must be communicated to the private sector appraisers and evaluators who perform virtually 100% of all valuation reports. They must also take the time to report egregious errors to the appropriate state licensing authorities for disciplinary action. They need to do all this despite being inundated by loan department requests for quick and passive appraisal approvals.
Given current market conditions, do you see lenders scrutinizing appraisal reports more closely than they have in the past?
Greater scrutiny is certainly happening at more banks than in the recent past as a result of pressure from regulators and concerns about loan losses. Unfortunately, the absence of appraisal expertise in real estate valuation at over 90% of all banks places limits on the effectiveness of these efforts toward greater scrutiny.
What is one discussion that needs to be had about the current state of the appraisal industry?
The $250,000 deminimus rule on FIRREA should be severely reduced and limited. This is a completely failed program (according to a recent OCC 12 Bank Study) and an open invitation for fraud which technically allows “experienced and trained” but non-appraisers to perform evaluations on transactions below $250,000. If the deminimus rule were to be established at a much lower figure, around $25,000 for residential loans and eliminated entirely on commercial portfolio re-examinations, it would still be helpful to many borrowers and banks and it would prevent a large proportion of the bad loans which led to the recent crisis, which was based, lest we forget, in the residential loan sector.
If there was one class that reviewers could require appraisers to take, which one would it be and why?
The Appraisal Institute offers review classes which appraisers can take in furtherance of their pursuit of both a residential and commercial review “designation.”
Are lenders working more closely with specialist firms? Why do you think this is the case?
Lenders are beginning to realize that certain types of special purpose properties, like gas stations, hotels, self-storage, medical, and restaurant, in other words properties designed for a certain type of business, cannot be adequately appraised by the average good appraisal generalist. It’s happening because of losses suffered by banks, which obtained non-specialist appraisal reports. They failed to recognized the unique valuation aspects of the “as is valuation” of the real property and the going concern value of the business in place as defined by federal regulations governing mortgage lending.
How can we best address the scarcity of individuals entering the appraising profession?
The Appraisal Qualifications Board of the Appraisal Foundation must change it’s “trainee” rules to more closely match the appraisal process itself and the successful appraisal training programs of the now, defunct large appraisal departments of once famous “training institutions.” For example, the current rules require a trainee to have a college degree and for them to spend 50% of the time training towards a license with a supervisor who is only allowed to have three trainees. This has proven itself to be, more or less, an unworkable, “pie in the sky” program. In large part this accounts for the decrease in new and younger trainees entering the system.
Is there palpable concern among chief appraisers of an interest rate hike in the coming year, even as soon as December (specially given the tone of the latest FOMC minutes)?
Absolutely the answer is “yes!” Most chief appraisers view the upturn in market activity to be a direct result of the FED’s no interest prime rate and by corollary the 3.5%- 4% fixed rate for a 20 -30 year mortgage for residential and commercial properties. This is the prime stimulus needed to keep the affordability of profitability indices open to a broad range of investors, which then underpins the rise in values. Since there has been hardly any rise in real income, the resulting change in long term fixed rates and the re-emergence of tricky adjustable rate mortgages (to help borrowers qualify), ends up having a negative impact on the real estate recovery and the number of transactions.
What can we do as a community of appraisers to further educate our peers in an ever-evolving industry?
Cross-education between common purpose groups such as The Society of Chief Appraisers, the Risk Management Association, and federal supervisory agencies. This will hopefully lead to special cross education certifications that will make communication of real estate valuation issues more understandable and create a more efficient lending environment.
You can find out more about The Society of Chief Appraisers at: http://www.societyofchiefappraisers.org/