Another sign of the times: appraisers are routinely prodded to sign off on a higher price than they are inclined to, but arm-twisting or bribery by the seller is becoming pervasive. National Appraisal Survey found that 90% of 1200 participants felt pressured to change their reports, up from 55% in 2003. In addition, there is evidence that buyers shop for favorable appraisals. 68% of the respondents lost a client and 45% were stiffed on their bill. New federal rules increase the training required of appraisers (which would limit the number of appraisers and give them greater leverage) and pending Congressional legislation would require that appraisers be selected randomly.
Predictably, the National Association of Realtors is shocked, shocked, to learn that that sort of thing might be happening. From MarketWatch:
The pressure on appraisers to “make loans work” — the industry parlance for hitting the number that a lender wants on a closing contract — has been ratcheted up as U.S. home sales and mortgage refinancing have tumbled. By law, appraisers are required to render impartial judgments.
Federal and state authorities are now pushing for tighter regulation, licensing standards and criminal penalties to keep all players in the real-estate transaction process on the level.
“Mortgage and real estate brokers are paid on commission, so they have a vested interest in seeing that loans get funded,” says Ted Faravelli, manager of the California Association of Real Estate Appraisers and an appraiser for 23 years who testifies as an expert witness in mortgage-fraud cases.
“If an appraiser speaks to the facts and indicates a market is declining and in oversupply, there’s a good chance deals won’t be consummated and referrals will dry up.”
The ways to inflate values are simple enough. Appraisers might overlook the extent of a property’s datedness or disrepair, use comparable sales of similar-size homes in nicer nearby neighborhoods or not call a seller’s agent to discover a comparable property’s sales price included tens of thousands in closing-cost assistance and escrowed repair funds, as has recently been the case, regulators and appraisers say.
Another dubious practice spawned by today’s sales slump: Citing comps close to six-months-old — the limit by law — and ignoring recent ones that would show a local market’s sudden turn for the worse.George Hanzimanolis, president-elect of the National Association of Mortgage Brokers, says some of the perceived intimidation may just be brokers challenging appraisers’ findings in a market where setting values is made tougher by fewer and more erratically priced sales.
“Is this just an appraiser saying, ‘I’m getting more people questioning my work than ever before?'” Hanzimanolis said.
Still, his 27,000-member trade group’s board tightened its code of ethics last May to warn against leaning on appraisers to get loans funded. “We felt very strongly about sending a message to our members that that’s an unacceptable practice.”
Pat V. Combs, president of the 1.3-million-member National Association of Realtors, was surprised to hear appraisers reporting undue pressure from real-estate brokers. Realtors routinely provide appraisers information to support the list price they assigned to a pending-sale property, including comps they used, and would be violating NAR’s code of ethics if they pushed for a value to support the offer price, Combs says.
Appraisals are viewed as an ancillary component of mortgage financing that went largely unquestioned by lenders when home values rose by double-digit percentages each year. Says Amorin, who’s in line to become president of the Appraisal Institute, a 22,000-member trade group: “In an upward market, an inflated appraisal is a nonissue because, by the time anyone realized it, the market moved so much the value might be even more than the appraisal.”
The 2007 National Appraisal Survey released in December said 90% of the 1,200 appraisers surveyed reported feeling pressured to restate, adjust or change values, up from 55% in the first such survey in 2003.
Seventy-one percent felt pressured by mortgage brokers to boost valuations and 56% reported such pressure from real estate brokers and agents. Those who refused to bow to coercion paid a steep price: 68% reported losing a client and 45% didn’t get paid for their work.
“Mortgage brokers will actually put it in writing and fax it to 20 or 30 appraisers: ‘Here’s the value I need. The first one who can get it to me gets the order,'” said T.J. McCarthy, chairman of the Illinois State Appraisal Board. “Or they’ll order multiple appraisals, take the highest one and stiff the others” on fees claiming their appraisals were inaccurate.
Given the decline in mortgage activity, appraisers are scrambling for work in a way that’s testing the industry’s moral fiber, especially in hard-hit markets such as South Florida. It’s getting to the point where, says Faravelli, with unusual candor for a trade-group official, “You show me an honest appraiser and I’ll show you a [financially] poor one.”
Appraisers serve a vital function in signing off on the soundness of lenders’ collateral and, by extension, ensuring home buyers aren’t overpaying and refinancers don’t over-borrow on their properties’ value.
Appraisers have fallen under federal regulation since the savings-and-loan debacle of the late 1980s when the profession became a scapegoat for the thrift industry’s deregulation-driven collapse. States retain policing power and can impose stricter guidelines, which several are now rushing to do.
Yet regulators find themselves in a bind because of the nature of what they’re regulating. It’s hard to prove an appraisal is bogus because the practice is as much art as it is math. Opinions may vary on the value of being in close proximity to all levels of public schools, or an ocean, lake or verdant valley view.
In Illinois, complaints against appraisers have risen about 30% in the past three years, says Daniel E. Bluthardt, director of professional regulation. Yet the 280 complaints filed in 2006 don’t begin to illustrate how widespread value manipulation is, Bluthardt says.
The vast majority of complaints come not from mortgage and real estate brokers or home buyers, sellers and refinancers — who all want to see loans funded. Rather, they’re filed by appraisal reviewers for diligent lenders who see certain appraisers’ names resurfacing in connection with mortgages that fall into default.
Some banks have taken to boycotting appraisers whose work is suspect, McCarthy says. Authorities, meanwhile, are tightening licensing standards and seeking to impose operational curbs and criminal sanctions. Among the initiatives:
* Beginning in January under federal mandate, certified residential appraisers must hold a two-year college degree or equivalent; certified general appraisers, who can value commercial properties, will need a four-year degree or equivalent. The new regulations also restrict the number of trainees that appraisers can supervise. Many appraisers quickly built their practices during the home-sales boom by relying on trainees for most of their field and property-records reporting and signed off on their findings — including setting the final determined value — under their own licenses, regulators contend.
* Rep. Charlie Wilson, D-Ohio, introduced a House bill March 27 that would create a “blind draw” to randomly select appraisers for FHA mortgage applications. The freshman member of the House Financial Services Committee’s stated aim: “Eliminating direct contact with the requester and reducing the risk of influence peddling” — at least on government-backed mortgages.
* A bill in the Illinois legislature would make it a misdemeanor to attempt to unduly influence an appraiser’s findings and a felony for a second offense. It also wouldlimit how long trainee appraisers can operate under a licensed appraiser.
The mounting pressure on appraisers “is like cholesterol threatening the heart of the mortgage industry,” Amorin says. “If we can’t act independently, it could undermine the whole economy. You have to have the courage to say no, but that’s easier said than done.”
