Real Estate Associations Want Appraisers To Inflate Home Prices

The housing market is still struggling because appraisers are being too tough assessing the value of homes.

That's the self-serving argument being made by realtors who are complaining that lower appraisal values of homes are delaying deals, ruining sales and prolonging the housing crisis.

Their solution? Delay reforming the appraisal industry for another 18 months, then we can worry about the real value of a home. Until then, they argue, what's wrong with a few inflated prices?

Well, as Barry Ritholz puts it:

Appraisal fraud was an enormous contributor to the unsustainable run up in prices during the boom period. Many (but not all) mortgage brokers and realtors referred buyers to appraisers that ALWAYS hit the number of the home purchase price.

New York Attorney General Andrew Cuomo, in an attempt to prevent this kind of appraisal fraud, instituted the Home Valuation Code of Conduct, which took effect May 1. According to the Wall Street Journal:

The code covers any mortgage that can be guaranteed by Fannie or Freddie, which means the majority of all home loans. It bars loan officers, mortgage brokers or real-estate agents from any role in selecting appraisers. The idea is that people who are hungry for commissions shouldn't be in a position to lean on the appraiser.

Now, NAR and other real estate lobbying groups, who are trying to maintain stay in business despite the total destruction of their market, are mobilizing a major effort to reach out to Congress and housing officials.

As NAR economist Lawrence Yun said earlier this week, "Lenders are using appraisers who may not be familiar with a neighborhood, or who compare traditional homes with distressed and discounted sales." Instead, Yun and his bunch want appraisers who won't be too tough. As Yun puts it, "There is danger of a delayed housing market recovery and a further rise in foreclosures if the appraisal problems are not quickly corrected."

With so much going on in Washington, it may be an uphill battle drumming up support for delaying reforming the real estate market in the wake of one of the worst housing crisis in modern history. Hey, but that's just us.

HVCC Moratorium Lockheart

Call to Action _June 4,2009

Comments

[grace14]

You know the Greatest Treasure we have is Love , gift of precious life, our peace period...when lobbyist lust worship of greed, capitalism comes first........... it destroys, kills, steals the our love, our precious life and our peace..so true and so simple---we have lost our common sense given to all..

[CrazyCJ]

As a Broker, I have problems with the appraiser pool system. It allows substandard appraisers a pass on their work. If they are not held to account for poorly researched appraisals, what is their motivation to do a good job? There is no process in place to appeal before wasting $400 of your clients money (appraisals are now lender specific and can not be used for a different lender).

The bigger issue comes from the fact that "real estate is local", meaning areas vary so much even mile to mile, that when Appraisers are sent to do appraisals outside of their area of experience, they don't have the ability to convey the details of a specific market to the undrwriter making the loan. This leads to deals being cancelled as the Buyer can not get a loan on the property.

Just as there was an effort to get appraisers to see the same value as a Buyer does, the banks who now "own" the appraisers are pushing to limit the appraisal value, especially in refinancing. This is further depressing the market, as maybe 25% of the deals inked are actually closed. Very frustrating and expensive for Buyers and Sellers!!!

What is the answer to all of this? Regulation of banks and lenders? Appraisal reviews? Education of Buyers and Sellers? All of the above...

I welcome your comments!

[justsaynosarahp]

Anecdote:
Last October, my mother-in-law, retired from 20+ years as an appraiser in a family business, sat next to a young woman from India on an Orlando-to-NYC flight. The young woman told her she and her 20-something husband had been recruited and trained -- in India -- by Countrywide, and had been brought to the U.S. expenses paid to work for various appraisal companies.
Scuttlebutt among those young Indians, is that they apparently worked in shell companies set up by Countrywide.
My mother-in-law asked the young woman how much training she'd had before coming to the U.S., and the young woman told her she attended a 6-week training class, and had was tested in India.
Neither the young woman or her husband had taken standard tests issued by the state of Fla., or were licensed in the state of Fla. as appraisers.
If fraud was committed by any lenders, mortgage servicing companies, or appraisal companies, I suggest criminal prosecution would also prove as much a deterent to nefarious activity as regulation, review and education.

[CrazyCJ]

Lets say I own an apple tree, and I have invested time and money into the tree in pruning and fertilizer. My apples are beautiful, and now sell for $1.00 each. One day, an apple falls on the ground and has a small bruise, and I sell it for $ .80... does that mean all of my apples are now worth $ .80... OF COURSE NOT! That apple was distressed, the bruise being a reason to sell it quickly, thus the discount.

Home A is for sale by a Seller who is not being forced to sell is bought by a Buyer who is not forced to buy, at a price agreeable to both, known as a "Fair Market Value" transaction. Home B is being sold by a Seller going through bankruptcy, divorce, foreclosure, or required job transfer and represents a "distressed sale", and as the sale occurs based on required timeline, which will probably sell at a discount. Which sale should be the correct reflection of market value?

Appraisers are no longer allowed to distinguish between these sales. This is what has caused the overnight drop in home prices. Appraisers should not set home pricing, Buyers and Sellers should. Lenders are now setting home prices using the Appraisers as a tool to push the prices down. This combined with the tightening of credit has brought us to where we are today.

[justsaynosarahp]

Comparable sales in the neighborhood set market value, not buyers, sellers OR appraisers, and market value reflects (or should reflect) supply and demand.

[CrazyCJ]

Comparable sales are a guideline for a range of what this particular property should sell for. No 2 properties are exactly alike, some have better location, views, amenities, exposure, etc.. The Buyer must agree to buy, and the Seller must agree to sell, for a particular price. If neither are under looming deadlines (BK, auction, relo, etc), that is fair market value.

Supply and demand only apply a perception of urgency of the transaction, they do not on their own determine price. If there are few homes available, then a Seller can ask for more as buyers have less choice. If many homes are available, a Seller may ask less dependent on his motivation to sell.

An appraiser interprets comparable sales for a party to the transaction, usually a lender or buyer. This is for verification that the buyers/lenders' investment is backed by a security of a particular value, not for setting a sales price.

[justsaynosarahp]

In other words, if your neighbors decide to sell their beautiful apples at 90 cents each, your beautiful apples are not worth one dollar.

[GravitonX]

That's the risk in a market economy.

[camanokat]

If buyers are willing to pay $1.00 for his particular apples, that is what they are worth.

[Threeve]

I'm not sure why banks would want housing prices to be low? You like when the market rises but not falls? Its kind of funny how its the market value when prices escalate, but when they decline "the appraisers are setting the market". What if there are a glut of "apples" on the market? the price comes down. The bottom line is the HVCC is not perfect but it does limit lender pressure. The realtors/mtg brokers are mad because they have no control anymore. Lastly if you want the banks money, I think the bank has a right to make sure they are not making a bad decision. Isn't that what they should've been doing all along?

[CrazyCJ]

I am very disappointed at this article, and the lack of understanding the author conveys. As a Real Estate Broker, I can tell you that the decline in home prices is a wholesale transfer of wealth from the middle class to the ultra rich. While I can understand the need to keep people honest, it is really a cover up by those who are profitting from this downturn. Let me explain...

1.)The recent Appraisal Guidelines which shorten the time allowed for use of comparables to only 3 months is pushing prices down as it narrows the range of historical data that can be used to show the long term value of an area. Many subdivisions are small, and do not have enough homes to have several sales in the past 3 months, so the appraiser is forced outside of the subdivision. This pushes valuations to the lowest common denominator.

2.)Appraisers must now put full weight on foreclosure comparables which used to be considered "distressed sales". This is the biggest problem we face as a country, as this is the rule devaluing our property. Your home is considered the same value as the foreclosure down the street... Why?

[GravitonX]

"Your home is considered the same value as the foreclosure down the street... Why?"

Because your home is competing for the same buyers as the foreclosed house down the street...

[CrazyCJ]

This is an incorrect assumption, and my comments refer to the lending side, not the sales side.

If there are 2 homes, same subdivision, same floorplan, one is foreclosure, one is owner occupied, the Buyer will probably choose the owner occupied unless the foreclosure home is much cheaper. Once that foreclosure home sells, you now have a current comparable(at a reduced price), rather than a distressed sale comparable(as it should be).

Many, if not most, foreclosure homes are sold "as-is" with no record of the maintenenance being done, and are in generally poor condition. Those who are losing a home generally do not maintain the home.

While there are buyers who will purchase this property(wholesalers and remodelers), many, probably most, buyers in the market today are looking for a more move-in ready home. They know the home has been kept, and they will not have to spend cash after closing to bring it to livable standards. While there is some overlap, these are generally 2 non-competing segments of the market.

This is my point. While a home is a home, there is a real difference between a move-in ready home and one that is being repossessed. Appraisers are not given the option to specify this in any meaningful way other than to give minor credits for condition. This does not allow for the substantial difference in pricing , rather just looks like a declining market, affecting every other home in the subdivision.

[grace14]

are Lobbyist, insurance companies ... the rich running the country of America r our government? Is Capitalism greed worship of money, like their g*& running America? The Government holds our tax dollars ---our tax dollars....but lobbyist want our money --what 2 governments now?

Capitalism is not good nor was it ever good period....all is greed and we and all have been brained washed for generations....Who "destroyed" capitalism First? G*& did and ever great Empire of greed of capitalism that ever fell starting with King Pharoah.

..G*& "did not" chose the "Rich" of this world, but G*& for his "Beloved Chosen People"chose the "POOR" ---like us, ALL held in bondage controlled by Leaders. Human Beings be used as slaves to the rich ...cheap labor, their children to be used, in unjust wars of greed, Rich, lust for power over other nations, jealousy and their unjust wars that made them richer..

I pray for we too will fall....and are started 8 years ago...all is greed...Do lobbyist rich control America and the rich followers like King Pharoah ..G*& destroyed his kingdom his land with 10 curses one after other and his rich followers and their paid critics..

[rabid dog]

Since this crisis was created by "the housing market" as if it were day trading rather than buying a home, why don't we let the market work itself out without attempting to price fix at higher values so as not to market your debt with your home. No one's interested in buying the debt you incurred from buying your over-valued property. The fundamentals didn't change. Practices and motive did. How about we just go back to, oh say, 2004 prices, appreciate at the standard rate, usually 3-4.5% per year. Look at the local economy in the area, employment, wages, home availiblity, etc and adjust for inflation. Now we have the actual "true value" without market manipulation. The days of watching home values increase 5k to 10k per month was an anomaly, and are over. The market will correct, like it or not. The sucker pool has dried up. If home values truly doubled every ten years, as the NAR loves to claim, our children would never own a home. You have every right to sell your home. But no one wants to purchase your debt, that belongs to you and it adds no value to your home. Nor should it affect new home prices. What we should be concentrating on is to make sure this never happens again, because it affects everyone.

[ThePeoplesKey]

The NAR has never claimed that you should expect your homes value to double every ten years. However, that has happened at times historically. Based on historic rates of appreciation you should reasonably expect that your home MAY increase in value by 1-3% per year depending on the state of the economy during the period of time that you own it.

That doesn't mean that it WILL increase in value EVER. In fact, if you choose to buy a home that over the years you own it becomes a drug infested, crime ridden, cesspool of a neighborhood, it's very likely that its value will go DOWN.

There are no guarantees in real estate ownership/investing or any other kind of investing for that matter . . .

[rabid dog]

"The NAR has never claimed that you should expect your homes value to double every ten years."

No disrespect, but yes they have.

[rabid dog]

Since you're going to bat for the NAR, you might want to keep up.

http://www.youtube.com/watch?v=AyZpNIyVKQk

[ThePeoplesKey]

Yes, she said, "On Average" meaning "Historically" home prices have doubled every 10 years just like I stated in my post. And at the end she cautions that "every market is different." Meaning; that might not be true in the market you live in. Just as I stated in my post.

So what's your point?

[RoloTomassi]

I have commented in recent weeks that the Geithner / Summers plan is all about re-inflating the housing bubble; and even though this article portrays this lobbying effort as unlikely to succeed, I happen to believe that this or some other means of circumventing the rules will emerge [much in the same way that mark-to-market pricing was allowed to segue seamlessly into mark-to-model pricing so that the banks could hold up the illusion of solvency].

Undoubtedly real estate agencies have self-serving motives. But like many other issues, I believe the Obama administration will at the very least not try to prevent it, and may even encourage its success through back channels. Such would be yet another seemingly inexplicable case of needed intervention that appears to be overlooked by Obama’s financial team [I almost wrote ‘economic team,’ but clearly Geithner & Summers are concerned strictly with the success of the Wall St. financial industry, and not the real economy].

If this approach does ‘succeed,’ one wonders what success will look like; have no doubt that such will NOT benefit the average US citizen, but will greatly enable the financial industry to recoup some the ‘lost’ value on their worthless derivatives, and also heal some of their stock/stakeholders who are now in a sort of limbo.

And as with everything else that heals Wall St., a successful re-inflation of the housing bubble will greatly hamper the so-called recovery of the real economy.

[ThePeoplesKey]

If a property is appraised at 10% of its actual cost of replacement value at today's prices, (which is what is happening in some cases) I'd say that the appraisal and the appraiser combined aren't worth the paper the appraisal is written on. That isn't fair to current real property owners who may still be paying on a mortgage amount in excess of an inaccurate appraisal amount and need to sell their real estate. That's what the NAR is trying to address with this campaign.

It has nothing to do with re-inflating the housing bubble and if it succeeds, will benefit the average US citizen real estate owner. Not the banks.

Sorry . . .

[Artos]

Right, it benefits the homeowner and does nothing to help insure that Realtors get to keep their percentage of the profit up. You can't get into the Million Dollar Club if you ain't makin' millions, eh.

[RoloTomassi]

Right...ALL of the homes so severely over-priced and repossessed by the banks wouldn't be affected at all by rule changes that allow appraisals to be inflated...sorry, but perhaps YOU should try again....

[nomorebarry]

Here we go again!
The very man who helped get us into the housingmessisback at it
The Purpledinosaur is now wanting FannieandFreddie ot relax standards again

http://www.reuters.com/article/GCA-Housing/idUSTRE55L39120090622

[ShinjiIkari]

Here we go again, brothers and sisters. The same geeks whose fast-and-loose practices contributed to the real estate meltdown want the status quo to continue, just so they can make a few bucks more this year than they expect to next year.

Delay implermenting the law? Let's face it: the only way this will work is to start prosecuting some of these bankers for fraud. Serious trials, serious jail time.

[nomorebarry]

Better yet, let's look at the man who helped cause thismess. The purpledinosaur himself.

Barney is once again asking freddieandfannie to ease restrictions.
http://www.reuters.com/article/GCA-Housing/idUSTRE55L39120090622

[BushequalsDeath]

They didn't complain about inflated prices and a bubble. They also hire inspectors who rubber stamp a house without doing a proper inspection. Congress should have a hearing and those of us who
got screwed should testify.

[nomorebarry]

And Barneyfrank asking for relaxed standards AGIAN from freddieandfannie don't concern you?

[BushequalsDeath]

I find it interesting that the realtors didn't complain when prices were inflated and thus a bubble formed.

The scams they are running are amazing:
. They are hiring inspectors (the buyer's and seller's agents together) who will inspect the house and give it a passing grade no matter what.
. They are making sure the tax assessment is low so the new buyer pays low taxes but has the appraiser of the house make it higher.
. I have no sympathy for them. 90% are crooks. Congress should have people come in and testify.

[ThePeoplesKey]

You are clueless about the real estate brokerage business. Based on your comments, if you got screwed, you have no one to blame but yourself . . .

[bushisanAhole]

I was part of the mortgage/real estate industry for 14 years. I can tell you why the NAR is fighting this so bad. They are simply paid lobbyists for the real estate industry. Their only purpose is to fudge the laws so realtors close deals. They've been saying for two years what a great opportunity it is to buy a home, while prices tanked. As for most realtors and mortgage brokers, they will do anything to close a deal. If an appraiser did not hit a value, they did not get any business. The busy ones were busy because they could be depended on to come in at the sale price, or whatever price the lender needed to make the deal work. That's part of the reason prices were so inflated. This is a step in the right direction and realtors will fight this all the way. If they aren't closing deals, they aren't making money, they don't care what happens to the people who get stuck with an overvalued home.

[ThePeoplesKey]

I just bought a duplex in Grand Rapids Michigan for $32,500.00. After one month of ownership and hardly even paying any attention to it, I've rented both units without even putting up a sign. Forgetting what the land and the infrastructure costs (Or value) might be, if I went to a store and priced out the materials to determine what it might cost to replace the structure at today's prices, I'd be looking at approximately $82,000.00 for the materials alone. No labor, no land, no foundation.

When I'm finished with this property my payment will be approximately $110.00 per month plus taxes and insurance of approximately $185.00 per month. If the property never appreciates in value again I'm still making $855.00 per month assuming I can keep it rented all the time. Based on how easy it was to rent it at the price I'm charging, that probably won't be a problem.

It is indeed a GREAT TIME to buy real estate . . .

[Jim Michael]

This was a poorly researched and presented post. The problem with the lending and underwriting entities who now control the choice of the appraiser, is that they are neither qualified or impartial in property valuation. They have an interest in keeping values, and hence their loan amounts, artificially low in order to limit exposure. They also have little or no geographical cred that would allow them to defend a low appraisal done by an appraiser 500 miles away .

There are two big problems with this plan:

1) ALL the big lenders are complicit in this so if they thought they were bolstering the equity position of their total loan portfolio to the detriment of their competitors, probably not.
2) Smug lenders and appraisers on a crusade to drive prices down are the real joke here. Their practices enshrine a market culture that moves only one way - DOWN. Guess what the real estate market moves up as well. Just ask any first time homebuyer diligently accessing President Obama's $8000 credit and see how many homes they've lost due to HVCC appraisals and the very competitive segment of the market. Oh, yes Mr or Ms. Appraiser-on-High, who ended up buying these houses? Investors, often with cash and with no need for an appraisal at all.

[MadAppraiser]

The cornerstone of the real estate appraisal process is neighborhood recognition. Competent real estate appraisers interpret recent market sales activity in the subject market (neighborhood). Authentic appraisers do not actively create market appreciation or depreciation! The appraiser's primary objective is to obtain a realistic, supportable final estimate of market value for the subject property as of the report's effective date.

In complex, high-end residential properties I write a litigation grade appraisal to bring realtors, review appraisers, and underwriters immediately into focus with very detailed addenda. When you come after me, bring your “Marshall and Swift Cost Manual” with the knowledge to apply it in terms of calculating improvement depreciation (extended life), and defining the market sales comparison adjustment process with more than boilerplate comprehension!!!

[MikeKNY]

Well, as Barry Ritholz puts it:
Appraisal fraud was an enormous contributor to the unsustainable run up in prices during the boom period. Many (but not all) mortgage brokers and realtors referred buyers to appraisers that ALWAYS hit the number of the home purchase price.

FBI FINCEN & MARI consistently reported that during the run-up 2003-2007, 10-22% (depending on year) of fraudulent mortgage applications had NOTHING to do with the appraisal. ie. 78-90% were the result of intentional fraudulent actions by many of the same members of both MB and RE associations mentioned in the article.

"if it ain't broken, don't fix it". It WAS and IS (the SAME subprime players have INFESTED FHA) Fix it.

[Veri]

Definition of fraud courtesy of http://www.thefreedictionary.com/fraud

1. A deception deliberately practiced in order to secure unfair or unlawful gain.

The U.S. Financial sector is a fraud. American capitalism of less regulation and less oversight is a joke. American businessmen and women are jokes. The NAR wishes to aid and abet legal fraud because their association members are not making as much. One group wishes to use unfair advantage to defraud the majority.

Is this a correct assumption? And why are Americans so eager to cannibalize each other to the detriment of all?

[VivaZapata]

good post. we got into the mess by deception but strangely these guys think we'll get out of it through deception. hopefully, people now have better sense.

[ThePeoplesKey]

Part Two:

There are easily identifiable determining factors that indicate approximately what the value of an improvement attached to a plot of land is worth and they're being ignored in favor of what a bank tells you your property is worth, based on appraisals by non-local appraisers and inaccurate software programs unfamiliar with the markets they're appraising. And the costs of buying this useless information is being passed on to innocent buyers trying to buy homes and causing sellers not to be able to sell their homes because the appraisal completed on the property being purchased is wrong.

Get it?

[ThePeoplesKey]

Part One:

No this is not a correct assumption!

This issue has nothing to do with what Realtors make!

FYI the average full time real estate agent in America makes $36,000.00 per year. About what the average wage earner makes. That's when times were good. As I've stated in other posts here. The vast majority of the NAR lobbying dollars go towards lobbying for private property rights for real estate property owners, at no cost to American real estate owners, unless they happen to be Realtors and dues paying members of NAR.

This issue has nothing to do with what real estate agents get paid!

The letters included with this article are aimed at notifying congress that their new rules are penalizing property owners and indirectly buyers because inaccurate appraisals are being conducted by incompetent appraisers who know nothing about the markets they're appraising being hired by banks through appraisal management companies and passing on the increased costs of performing valueless appraisals this way to buyers.

That has nothing to do with what Realtors get paid!

See Part Two . . .