The End Is/Must Be Near: Advancements in the Art of Blacklisting

Tuesday, March 25, 2014

If you are a real estate professional, please read this, especially if you fear your own business is being damaged by all of the new regulations designed to “help” the real estate industry recover.

Imagine you, a hardworking, law abiding taxpayer, are sitting at home one evening watching television when there is a knock at your door. Somewhat surprised by the late hour of the visit, you get up and open the door and three IRS agents barge into your home and declare, “We are from the IRS and we are here to help.” I think it’s safe to say you would be both shocked and concerned. If you are involved in residential real estate, what has happened to most of you since the market collapse began in 2007 is similar to this scenario. You see, most professionals working in residential real estate were doing the right thing all along so many of the knee-jerk decisions made after the market collapsed are about as useful and helpful as three IRS agents showing up on your doorstep in the middle of the night.

There’s TARP I, TARP II, HVCC, Dodd-Frank, CFPB, AMC, UAD, UCDP and AVM, and now there is something new called AQM. In typical government fashion, the medicine being administered may actually be killing the patient. In this case, the patient is the residential real estate market. Thanks to the power ($$$$) of lobbyists representing the financial services sector, and thanks to the lack of backbone of those you elected, the government did almost nothing to go after the real root of the problems that caused the market collapse. Instead, the government held hearing after hearing and then passed new, confusing, watered-down regulations with cute acronyms so you would believe things were being fixed and improved.

Why does this matter? Well, if you feel your job as a real estate professional has gotten easier, better, more secure or more profitable, then you should stop reading now and go back to sleep. On the other hand, if you think the current world of residential real estate is as crazy as it has ever been, then by all means read on because if the banks and GSEs can put real estate appraisers out of business using computer models to “judge” competency without any due process, who knows who will be next. Can you imagine a more frightening world than one where “guilty until proven innocent” becomes the norm and there is no appeal if the computer picks you?

For the past 5 or 6 years, banks have been using what are called do not use/blacklists to “judge” real estate appraisers’ competency. The biggest problem with these lists is that once your name appears on the lists, it is next to impossible to get it removed…even if it gets on the lists by mistake. Starting this year, Fannie Mae (FNMA) will also be using a new AQM (Appraiser Quality Monitoring) system to assess and determine appraiser quality. Here is a simplified version of how the AQM system will work. Using data gathered from real estate appraisals submitted to FNMA and other GSEs using UAD/UCDP over the past few years, FNMA will now “judge” an appraiser’s level of competency. How ironic: FNMA will be using your own data and the AQM to determine if you are competent. In what we will call Level 1, if the AQM finds you have a pattern of minor inconsistencies, inaccuracies, or data anomalies, you will be advised your appraisals will be selectively monitored. If your errors are determined by the AQM system to be more egregious (FNMA’s word, not ours), you will be placed into Level 2 and every appraisal you submit will be on the 100% review list. Finally, if somehow your errors are determined to be more severe than egregious (not sure what that word would be), you get to Level 3 where your name is put on a blacklist. If you are a real estate appraiser doing residential appraisal work and your name gets on this blacklist, your appraisal career is pretty much over.

You may wonder why this is an issue. Isn’t it good to remove incompetent appraisers from the system? Doesn’t the system benefit over the long run by improving data quality? The simple answer to both questions is “yes.” The hidden problem surfaces when your name appears on one of these lists and you try to prove the decision was not correct. You see, while the banks and GSEs say they will accept “appeals,” there are no rules governing the appeal process. There are some cases where an appraiser was blacklisted by a big bank and it took over 5 years to get the mistake corrected. You need to urge the banks and GSEs who use do not use/blacklists to voluntarily develop an appeal process, which requires some kind of formal review and decision within 90 days of an appraiser being placed on any of the lists. Absent that, what you really have is a guilty until proven innocent system with no time limit for a review and no consequences for an error made by the banks or GSEs.

Remember the irony noted above. The data used by the AQM to assess competency comes from the appraisers themselves. If this data is so reliable and can be used to improve the overall quality of the real estate market, then why can’t appraisers and other real estate professionals access the same database powering the AQM to provide better work product?

If you are not an appraiser, you may be wondering why any of this should concern you. Aside from the obvious fact that most real estate transactions involve a loan of some sort and require an appraisal, the fact is that if the big banks and GSEs can use computer modeling to blacklist appraisers, then why couldn’t they also come after you and your profession the same way? It’s time to let your elected officials know there is no room for Star Chamber justice in the good old US of A. If you do not draw a line in the sand now to protect appraisers, it may be too late to do so when your name turns up on the list.

Now It’s Your Turn

What are your concerns regarding the GSE’s new AQM system? Share your thoughts in the comments below.

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