Inflating Appraisals
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?
February 4th, 2007 at 10:15 am
I agree different parties to the transaction, at different times, have influenced appraisers to get the “Right” appraised value of the property, and that was very prevalent in the rising prices market. But in the falling prices market, buyers are not the ones doing this. Buyers do not even want the full price appraisal, they want the appraisal to be lower, so they can negotiate even lower price with seller.
Even lenders are being very cautious and are not ordering any re-appraisals to get the appraisal corrected, although they are caught between falling revenues and risks associated with funding overpriced property.
February 6th, 2007 at 10:18 am
I did real estate appraisals for a few years in the early 90’s and can tell you that the pressure definitely exists not to blow the deal. I also agree that this pressure comes from the mortgage broker who can always find another apraisal company. I disagree with your assessment that the buyer wanting a low appraisal has much influence on the final value. While the buyer may be the one paying for the appraisal he wasn’t the one who hired the appraiser. The mortgage broker did. With that said the final appraisal doesn’t have all that much to do with the sales price since, in all likelihood, it was performed after a price was already agreed on between the buyer and seller and a contract is in place. The appraiser knows what this price is and will consciously or unconsciously try to come as close to it as possible. Too low a value could cause the deal to fall through. Too high a value will piss off the seller, who now feels he should have gotten more for his house. He vents this anger at his realtor who didn’t provide competent advice. Since the realtor has some influence in steering business to the mortgage broker he will express his displeasure with the broker who will pass it on to the appraiser.
February 6th, 2007 at 2:44 pm
I am lost as to how to respond to this article. First Mr.Hummel wants pressuring appraisers to be a federal offense, how? What is pressure on an appraiser, who will define “pressure”? That is a slippery slope for sure and one I wouldn’t go down. Lenders created this mess with the boutique products and now that the piper needs to be paid they are pointing fingers. In the end the lenders will pay and a few appraisers and Mortgage Brokers will get slapped around a bit for show, but nothing more. History does tend to repeat itself and this time is no different than the last. I have heard all this before the last slow down we had, and it all ended well. Requiring a desk review on any loan with a high loan to value is just plain good sense. I realize it is not currently the norm but it will be soon. Having one person put together a report on Real Estate and then hanging them out to dry when thier opinion is second guessed is just silly. An appraisal is after all an opinion and there is no one correct answer. We need to put the blame right where it belongs on the executives at the Lenders who are introducing these high risk mortgages and expecting no issues to arise. Anyone in their right mind could have seen this coming and decided not to participate but most lenders didn’t do that.
February 7th, 2007 at 1:21 pm
I agree with Mr. Ahearn, and after spending 21 years as a retail mortgage originator (with either a bank, mortgage bank or mortgage broker) I have seen several of these market cycles. The “boutique” products have existed for decades, other then a name change when the Negative Amortization loan became the Option Arm; but the big difference is the higher loan to values allowed. So the same pressures have existed in times where sinking property values have met with a borrower who finds they need to refinance. It will be exacerbated this time around by those high loan to values - and that is where the focus should be placed. Not the same old exotic products, not the questionable refinance appraisal values - but the high loan to values. Right now those guidelines are being changed by a broad spectrum of lenders (A, Alt-A, Subrpime) - not because they have seen the error of their ways - but because the demand for that pool of loans has dried up on the Secondary Market. Meanwhile, the debate will rage in the media and, now, in blogland. Personally, I have originated only 3 of those loans in the last 5 years - one was my own and none were higher then 80%.
February 15th, 2007 at 1:33 pm
I have been in the mortgage business since 2000. Currently I am a loan processor w/ a broker in Florida and have a good relationship w/ several appraisers. We always tell them to get us the best value they can, without crossing any lines. The money made on 1 fraud deal is not worth the consequences when you get caught. Our appraisers appreciate us because we do not push them to inflate appraisals. The boutique loans will fade away and be resurrected when the markets recover. The competition of the refi boom provoked many lenders to loosen Underwriting Guidelines, appraisal review guidelines and credit grade guidelines. Those lenders are now feeling the burn of too much paper that they cannot sell on the secondary market. We lost a lender today and they made thier living on the high LTV, I/o ARMS and other hybrids that they cannot get rid of. Review my appraisals, they are solid, re-underwrite my files, they are strong… I am not afraid of this lull in the market.
March 6th, 2007 at 9:34 am
[…] karim March 5, 2007 Permalink Trackbacks 0 Marcie Geffner of Inman news has a great article about the conflicts and misaligned incentivesthat 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). […]
April 24th, 2007 at 3:02 pm
[…] 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. […]