Wall Street Player Questions Accuracy of Appraisals

As the chief appraiser for a Wall Street conduit, Brad Davis doesn't have much time to review valuations on huge bulk purchases of single-family loan pools.

So he relies on automated valuation models and fraud tools, market trends, a long list of "high-risk" markets, plus his instincts.

The Morgan Stanley appraiser is wary of loans with high loan-to-value and debt-to-income ratios and loans seasoned six to eight months he figures the originator had problems selling the loans elsewhere.

"We also are focused on new construction," Mr. Davis told an Appraisal Foundation symposium.

Builders in South Florida are offering free gourmet kitchens and free in-ground pools but these concessions that are not being reported in the loan package.

"Of course, the [comparable properties] on the appraisal never had those options, so the appraiser makes upward adjustments for it," Mr. Davis told the symposium. "It is amazing some of the stuff we are seeing in the new home market."

And then there is the condominium market that everyone is concerned about. In Las Vegas, Mr. Davis said some condo developers have falsified the documents on conversion projects.

In South Florida, thousands of pre-sold condos are on the market and some are still under construction. "They will never be able to sell those units," he warned, and the condo owners are going to lose money.

But even in a lousy market, "appraisers don't want to admit market values are declining," he said. "Everyone is saying it is stable because they are concerned the underwriters will reject the loan."

The chief appraiser said he is even suspicious of 80% LTV loans because he knows appraisers will go along with the sale prices just to get the next assignment and their $300 appraisal fee.

"It is amazing to us how many appraisers are doing fraud without even profiting from it," Mr. Davis said. "It is just dumb."

In reviewing property valuations, Morgan Stanley is focused on the following high-risk markets: Georgia, Michigan, any major city in Ohio, Indiana, Texas, Tennessee, Baltimore, Kansas City, New York, Chicago and, of course, South Florida and Las Vegas.

In high-risk markets, he recommends using the fraud tools before the AVM because the AVM will support a higher value if a lot of flipping is going on.

"Be very cautious using the AVM alone. But in combination with a fraud tool they can be very powerful," Mr. Davis said.

Fannie Mae director Mark Simpson also told the Appraisal Foundation symposium that a combination of AVM and fraud tools is effective in spotting inflated appraisals prior to closing a loan.

Lenders processing loans through Fannie's Desktop Underwriter receive messages if the appraisal "materially exceeds our value for the property," according to Fannie's director for property standards.

DU also issues messages if it catches certain loan characters or patterns associated with inflated appraisals.

Through experience and testing, "we find that we are right about two-thirds to three-quarters of the time," Mr. Simpson said. "We are seeing more of our customers paying more attention to this information." (c) 2006 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com

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