Wisest of the crowds

The Washington Post has a hilarious (but real) article discussing the inside of New Century Financial - the sub-prime mess to end all messes that is now bankrupt. I first read about the article at Inman blog, entitled You WILL play ball. Below is a WP sampler:

“The stress in that place was ungodly. It was like selling your soul,” said Hardiman, who worked for New Century in 2004 and 2005. “There was instant notification to everyone as soon as you rejected a loan. And you dreaded doing it because you paid for it. Two guys would come with a bat, and they were all [ticked] off because you cut their deals.”

I have posted several times about the conflicts between the appraisers, lenders, and agents here, here and here. Bottom line is that it may be time for buyers to hire their own appraisers. This doesn’t represent a new expense but rather a disaggregation of a current expense. If a buyer uses cash, rather than having the costs buried in other transaction costs, than the buyers can control quality and appraiser can get on with their jobs with conflicts.

Also, we might consider the conflicts from the lending side as to communicating affordability to consumers. Does it make sense to expect a lender, who is commissioned based on the number of closed transactions, to actually protect the customers side of the equation? I suppose the logic is that its the banks money but in truth, lenders sell loans and loan agents get new jobs. So the buck gets passed, Wall Street just play the odds (and gets a commission), and the financially illiterate get stuck holding the bag. Nothing new from “big business” but certainly NOT something part of the new business models powered by the internet - including ours.

The solutions to these and other vexing consumer problems are being addressed by market forces. Entrepreneurs like us see this problems as opportunities to add value to people by being open and transparent about our businesses. We put people at the center of our model and drive everything to satisfy this focus. Gone will be the days when trapping and or tricking a customer into a piece of business is THE model. Gone will be the oligipoly’s upon which many incumbent industries are based. Power is being pushed down to people and the economics will follow. Selling your soul in sub-prime, or any other industry, is a dinosaur waiting to happen. A lot of other charts will look like the one below over the next few years.

Kenneth Harney pens another interesting piece entitled How ’systematic inattention’ led to subprime fiasco. My favorite line:

Ninety percent of the appraisers in a 2006 national survey by October Research Corp. said they had experienced threats, nonpayment of fees and other forms of coercion. Many said they had lost business by refusing to play the game.

Harney also details a few scams worth a read but perhaps the key point is that the commercial incentives of banks and other intermediaries are wrecking havoc on the reputations of appraisers. Is it time to re-examine incentives and better structure the industry? Should buyers hire appraisers rather than bankers and agents? I discussed this earlier here.

Marcie Geffner of Inman news has a great article (subscription) about the conflicts and misaligned incentives that appraisers face today. I discussed this in an earlier post entitled “inflating appraisals” but essentially I agree with Marcie’s assessment about the state of the industry. Appraisers get pinched from all sides because those people that hire them are incented to get it wrong. A bank lender gets paid on volume. A real estate agent gets paid upon close of a transaction. A seller get more money. A buyer gets a loan, a house, and a sense of fairness (admittedly a false sense of fairness).

That is not to say that all appraisals are suspect or that there is malicious intent at work. But when relationships in the ecosystem are structured such that there will be implicit or explicit pressure on appraisers, the weakest ones will likely fold putting greater pressure on the vast majority who work hard to get it correct. So it is really about shielding the analysis from the commercial motivations of others.
Marcie doesn’t quite get our model correct but that’s ok because it gives me the opportunity to pitch it. Marcie is right to suggest that buyers are probably in the best position to fix the situation by hiring their own appraisers. This is where My-Currency comes in because we identify the experts. If you are an appraiser, how will you ever reach consumers? Through an agent? No, that doesn’t quite solve the incentives issue (”get me the value or I’ll find another appraiser!”). Through a mortgage lender? No, same problem!

My-Currency gives appraisers a way to demonstrate their skills; talk about what you know; answer questions; and make value predictions about houses for sale or zip code indexes (value per square foot or days on market). My-Currency enables appraisers and other housing professionals to show the world what you know and help you connect with these customers. We offer a platform where professionals can build professional currency and hence virtual reputation.

Please let us know what we can do and stay tuned because we have new things to announce that will further our goal of serving housing professionals and consumers.

Today the nationally syndicated Kenneth Harney in the Washington Post and San Francisco Chronicle pens an arrticle entitled “Feeling pressure to inflate appraisals” and sites research done by the October Research Corp:

“A new survey of the national appraisal industry found that 90 percent of appraisers reported that mortgage brokers, real estate agents, lenders and even consumers have put pressure on them to raise property valuations to enable deals to go through. That percentage is up sharply from a parallel survey conducted in 2003, when 55 percent of appraisers reported attempts to influence their findings and 45 percent reported “never.” Now the latter category is down to just 10 percent.”

This is a pretty damning stuff. The incentives to get valuations right are stacked against everyone. The buyer wants the house. The seller wants the price. The agent/broker wants the commission. The mortgage broker wants their piece. The lending officer at the bank wants to make a loan.

So there is a lot of pressure to buy into the illusion. The people whose reputation is on the line is the appraiser and the credit officer at the bank. I am guessing that they get lots of pressure to align their motivatins with commercial needs (money) rather than unfettered due diligence (the truth). In Harney’s article he interviews Alan Hummel of Forsythe Appraisls who states “I call it a perfect storm…You’ve got a situation where sales are down so everybody in the deal needs it to go through”

Hummel and Harney go on to say that the largest offender of this is the Mortgage Brokers who will blackball appraisers if the values do not support the transaction. Furthermore, the flood of new entrants into the appraisals industry means lightly trained appraisers, hungry for business, are easily manipulated.

Hummel concludes that Congress needs to pass legislation to make pressuring appraisers a federal offense.

At this point I must differ with this as legislation can make it both more expensive for consumers and probably not solve the problem effectively. Additionally, with nearly the entire ecosystem aligned with keeping the illlusion alive, who is really accountable? Consumers need to own this issue and engage a market solution. My-Currency is directly addressing transparency of valuations and professional capabilities. Can others be far be behind?