Wisest of the crowds

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.

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?