Featured news — posted June 8, 2005

Last month, five federal agencies issued "Credit Risk Management Guidance For Home Equity Lending," to "promote sound risk management practices at financial institutions with home equity lending programs." The guidance includes some items of keen interest to appraisers.

The guidance cautions that for all their promise of quicker and cheaper values, AVMs must be accompanied by much more due diligence. "When AVMs are used to support evaluations or appraisals, the financial institution should validate the models on a periodic basis to mitigate the potential valuation uncertainty in the model," the guidance says. This includes back-testing a representative sample of valuations against market data of actual sales.

AVM "confidence scores," often supplied with the valuations by vendors, can mean almost anything. They "come in many different formats and are calculated based on differing scoring systems. Financial institutions that use AVMs should have an understanding of how the model works as well as what the confidence scores mean," regulators said.

The guidance gets to the heart of the biggest selling point for AVMs to commissioned brokers, correspondent lenders and other originators: "cascading values." Institutions should "[i]mplement policies and controls to preclude 'value shopping.' Use of several valuation tools may return different values for the same property. These differences can result in systematic overvaluation of properties if the valuation choice becomes driven by the highest property value. If several different valuation tools or AVMs are used for the same property, the institution should adhere to a policy for selecting the most reliable method, rather than the highest value."

Several AVM vendors tout "cascading AVMs" as a way to hit several automated values and then pick the "best" one for the loan. Coupled with the guidance's caution against meaningless "confidence scores," it's clear federal regulators are getting that AVMs are often more trouble then they're worth.

Last year at about this time we heard from a lot of appraisers on the subject of whether the Owner's Estimate of Value was a legitimate tool or a way to try to subtly influence the value opinion. See here. The regulators' guidance to banks actually prohibits supplying an Owner's Estimate to appraisers.

As part of an institution's "appropriate collateral valuation policies and procedures that ensure compliance with the agencies’ appraisal regulations," banks should "ensure that an expected or estimated value of the property is not communicated to an appraiser or individual performing an evaluation."

On the same day the guidance was issued, Washington Mutual notified its appraisers that effective May 21 the Owner's Estimate of Value field would be removed from its appraisal assignment documents. The information will be collected optionally and retained in the lender's system, but will not be provided to the appraiser.

"Credit Risk Management Guidance For Home Equity Lending," issued by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision and the National Credit Union Administration, can be found in PDF form here. WaMu's Appraisal Newsflash announcing its policy change can be found in PDF format here.

Aurora optimized for Windows XP

Your computer is probably already more powerful than you'll need it to be to get the most out of WinTOTAL Aurora. Some WinTOTAL users though are still running machines with Windows 98 or an even older operating system. Aurora is optimized for Windows XP and you'll get the most out of it if you're running XP.

You received an e-mail yesterday to let you know, among other things, that we won't support Aurora running on operating systems as old as Windows 98 or older. The reason for that is pretty simple. We're dedicating our resources to provide you with the most outstanding software and support possible.

Over 12 percent of our tech support calls are dealing with problems on machines running old operating systems, most often caused by those old operating systems. Yet only five percent of WinTOTAL users are still running Windows 98 or other older operating systems. That's time and attention we can't devote elsewhere, and time you wouldn't need to spend on the phone (or kicking your computer) if you were running Windows XP.

Microsoft doesn't even support Windows 98 anymore. That doesn't just mean it's outdated. More practically it means that if someone is having a problem with a Windows 98 machine on which they're running WinTOTAL, and the cause is the operating system, they call us — because Microsoft won't help them. That's the main reason so few users make so many calls.

There are a number of things you lose out on if you still run Windows 98, even before Aurora debuts. One is the time you might spend trying to get a very old system to keep up with today's demands on your business and technology infrastructure. Another is the efficiencies and speed you're missing without a newer operating system. XP does so many things better and faster.

Finally, there's the risk factor: Windows 98 came out before security in the storage and transmission of data was such a concern. Experts warned back before Microsoft even retired the operating system that serious security threats were present and would only get worse once Microsoft stopped issuing "hotfixes" for it. If you're connected to the Internet, and you probably are if you're reading this, experts agree you're risking your data and systems if you're on a Windows 98 machine.

When you weigh all that against the fact that a powerful new system can be had for less than your monitor probably cost when you got your Windows 98 system, it's a no-brainer. Learn more about Aurora system requirements here.

Strategies for employees vs. independent contractors

Recently we broached the subject of classifying your trainees, appraisers, or selves as employees or independent contractors. We heard from several appraisers who are dealing with the issue firsthand.

As we noted, the determination whether someone is an employee or independent contractor is not formulaic, it's made on a case by case basis looking at all the facts of a business relationship. The common law — the English legal tradition largely absorbed in this country — had 20 factors to consider to determine whether someone was an employee or an independent contractor. The IRS has pretty much adopted those "20 questions" and relies on that structure to determine individual cases. Some of the factors most relevant to appraisers include:

	Does the company employ assistants — typists, processors, coordinators — to help the appraiser?
	Are business or traveling expenses reimbursed?
	Does the appraiser work on the company's premises?
	Is payment by the hour, week or month, instead of per job?
	Can the appraiser be fired for reasons other than failure to complete a job?
	Can the appraiser terminate the relationship without incurring damages for work not completed?

A "yes" answer to any of these doesn't necessarily mean the appraiser is an employee instead of an independent contractor, but it will lead the IRS in that direction.

If you're an employer interested in doing everything you can to ensure an appraiser is an independent contractor, there are some strategies you can employ. None are a slam dunk, but following all or most of them will help. (Conversely, if you're an appraiser unsure of your classification, look at whether the company is doing some or all of these things.)

First, have the person sign an agreement acknowledging he or she is an independent contractor. The IRS isn't going to go by what you and the appraiser understand your relationship to be, but this is a big plus. Have the appraiser bill you for services rendered, per job, with separate invoices — that is, instead of a monthly statement listing all the jobs done that month.

Require the appraiser to carry his or her own worker's compensation coverage, if applicable in your state. Give the appraiser flexibility in hours worked, where the work is to be performed, etc. And have the appraiser use his or her own computer, transportation and supplies.

A rundown of the law on the subject — not prepared by us so we can't take credit or blame for it! — can be found on the Web here.