I spent quite a bit of time this week thinking about a topic for my first “real” blog. I wanted to talk about lender pressure in the current market. I wanted to talk about the importance of accurate values during a time when the homeowners are refinancing properties that are over-leveraged and the buyers are buying in a flatter market getting 100% (and sometimes higher) loans.
A large portion of my appraisal business comes from out-of-state lenders. These out-of-state lenders send over their requests with “estimated values” from who-knows-where. I get orders with “..please stop and contact me if the value is not obtainable.” Basically, if the value is not there, we don’t want to pay you. It is blatantly obvious that no one, or no organization is going to step in and do something about the lender pressure.
One of the things that FIRREA did was stop the homeowners from ordering the appraisals on all federally related transactions; maybe we should pass another act to stop brokers and loan officers from ordering the appraisals. Maybe that will stop the “please don’t charge me if the value is not there.”
In my research for this blog, I came across a story writted by a writer from the San Francisco Chronicle. After reading the story, I felt I couldn’t have expressed my feelings more accurately than they did, so I decided to post it here, in my blog. This story was written on Friday, March 16, 2007.
In the Current Real Estate Market, an Accurate Appraisal is More Important Than Ever
With the Bay Area real estate boom splitting into so many divergent microtrends -- some neighborhoods careening southward, others chugging along, with still others gaining speed despite all odds -- the necessity of an accurate appraisal has become more crucial than ever. Hired by lenders or mortgage brokers or sometimes attorneys, real estate appraisers determine the value of a property by looking at recent sales of comparable properties, doing inspections and analyzing the larger market. Unlike real estate agents, brokers and lenders, all of whom get paid on commission, appraisers are just about the only ones who have no vested interest in the deal going through. Instead, they get paid for their work by the job: usually between $100 and $500, but sometimes as much as $2,000 for a massive rural estate.
Yet in an era when people have increasingly used their homes as giant piggy banks through serial refinancing or are selling their homes with the expectation of early retirement, more appraisers are feeling the uncomfortable sensation of many parties breathing down their necks and pressuring them to keep home prices up.
Last month, a survey of the national appraisal industry conducted by October Research Corp. reported that 90 percent of appraisers feel pressure to inflate the value of homes to meet expectations -- be it a purchase price or an estimated value for a refinance.
Of course, this isn't the first time evidence of appraiser pressure has been aired. Just four years ago, during the boom, a similar study found that a full 55 percent of appraisers had had lenders, brokers or owners attempt to inflate their values. In 2005, Jonathan Miller, appraiser and bubble blogger, launched Soapbox to "vent" about the "pressure myself, my firm and my profession was under to make the number 'or else.'"
"It seemed that no one really cared about ethics or the risk placed on [the] banking system," he wrote recently. "Appraisers were fast becoming the enablers to fraud and a whole lot of 'gray areas' that I wanted no part of."
In a boom market, meeting the expected price was not as hard to do. Everyone was making lots of money and less anxious about each individual deal going through. But now that sales volumes are down, re-fi fever has cooled and some markets have softened, mortgage brokers and even lenders try to set their target value in advance of hiring their appraiser. This leaves the appraiser caught between a house and a hard place.
"Internet-based mortgage companies call all the time," says Curt Thor of Real Estate Appraisals Association of Northern California and a Marin appraiser with North Bay Real Estate Appraisals for over 20 years. "They're fishing for appraisers. They tell me what the number is and ask me if I can match it."
Thor says he typically won't even look at such offers because if he can't match the number once he visits that house, he knows he'll find himself battling with mortgage brokers over being paid for his time. Once when this happened, he filed a complaint about the broker with the Department of Real Estate and copied the broker's boss. "I got a check very quickly," he told me.
John Philipp, an appraiser based in Sonoma County, says that he's experienced similar "dialing for appraisals" when mortgage brokers routinely call and ask him to complete a "comp check" before offering the appraisal assignment. "[T]hey want me to research the subject property and based on county information do research thru the MLS and give them a value before seeing the property. Sometimes they tell me what value they need to make their loan go through, which is illegal. The appraiser is not supposed to be made aware of the owner's estimate of value, or the value that is needed to make the loan, so as not to be influenced or have a predetermined number prior to the inspection," he writes in an e-mail about refinance appraisals. "[B]asically, the broker wants an appraisal without having to pay for it."
Philipp knows from experience that these brokers are not a source of future business. "Once I advise these callers that I don't perform this service and that it is illegal to even ask, I don't hear from them again."
Indeed, all the appraisers I spoke to -- no matter their county -- mentioned that times were increasingly tough -- especially for ethical appraisers who refuse to cook the numbers. Also, the industry has recently been flooded with newly licensed appraisers (according to one expert, the number in California has doubled in recent years).
"The professionals are generally leaving the business or going into other areas of real estate appraisal -- like legal cases," explained Miller. He says that the pressure on appraisers has been growing since the 1990s, when banks began to eliminate their in-house appraisal offices and outsource the business of managing appraisals to appraisal management companies. Suddenly, mortgage brokers -- who may have the biggest stake in the deal going through -- were in the business of hiring appraisers directly.
Miller, who sometimes "reviews portfolios" for large lenders by looking at a pool of 50 to 100 appraisals and judging their accuracy, says that at least in his area --Manhattan -- the pressure on appraisers is working. "About 90 percent of the appraisals I've reviewed are about 10 to 11 percent inflated," he says. "It's amazing -- it gets me really angry."
From the looks of it, the profession faces an uphill battle.
Finally, even as it may become more necessary to get a professional appraisal of a house in a fluctuating market, "point and click" valuation services like Zaio -- which announced this week that it would add 100,000 homes a day across the country to its instant appraisal database -- may make consumers expect that getting an appraisal is as easy as a credit report.
How might the decline of accurate appraisals influence the consumer? It's hard to say. On the one hand, buyers, sellers and refinancing homeowners tend to be as impatient as anyone to push the deal through. And who really cares if the appraisal is done by a computer or a person, or managed by a middle man?
But in the long run a practice of lending based on inaccurate or inflated valuations could be dangerous to the banking system, a network of institutions whose mistakes the American people generally foot the bill for. The bad real estate deals that led to the savings and loan bailout of the 1980s were often founded on inflated appraisals. And if the largest lenders in the country don't know what they've got on their books, it corrupts the system as a whole. The investors -- like pension funds -- who buy the loans are not getting accurate information. Eventually, this could make it harder for lenders to sell them and thus reduce liquidity for new loans.
Or as Miller put it: "Garbage in -- garbage out."