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

[bellevuescoop]

very bad assessment and conclusion by this writer. the realtors are right. this writer is wrong.

inflicting more harm on buyers and sellers - while the greed machines at banks and wall street churn on is a slap in the face.

banks are frequently flying-in out-of state appraisers to handle assessments - who have no local knowledge. that's wrong - and the banks get away with it.

no one is asking for an inflated price - just a fair value.

realtors are right - this writer is wrong.

[mcmutter]

Inflated anything-goes appraisals. Thats what got us into this problem on the way up.

[Dystopic]

not all appraisers are crooked. There are good appraisers and then there are horrible appraisers,depends on who you "intern" with.

[norepublicanleftbehind]

Is this a conspiracy to commmit fraud?

[deadelephant2]

As a Realtor in Orange County in California, the entire process of HVCC I feel is a failure. AMC's take up to 30% of an appraiser's salary for doing nothing. I work in an area with HUGE demand in homes and VERY low inventory, and regularly have multiple offers ABOVE asking price for my properties, which are priced at or slightly above the last sales. I meet appraisers who, although nice, know NOTHING about the area, why districts, communities, even certain floorplans WILL get higher prices and always have. It's tantamount to pleading your client's case in court and not being allowed any evidence. On one sale I had five offers, one of them cash. The appraiser, from Bank of America, insisted to me that banks may do "review" appraisals just before closing and find the sales price was too high. The pendulum has swung SO far toward conservatism that it makes NO logical sense. I didn't create the demand, I merely showed the house to the buying market and had FIVE qualified buyers with a minimum of 20% down at least who wanted to buy it. As I told him, if I followed B of A's logic, housing prices would NEVER appreciate. HVCC is a total waste of time and unquestionably damaging to housing values.

[Carolab]

As a Realtor (and broker) in the Twin Cities, I concur. The pendulum has swung too far in the opposite direction. I have an offer on my house which I KNOW is under market value and the buyer's broker told me he is afraid it won't appraise. What a joke.

[Dystopic]

As an appraiser's husband, the HVCCs will fail. On average, the bank charges the client about $500, the HVCCs on average offer the appraiser $250. At my wife's office, a residential appraisal (1004) including the new market analysys page (ridiculous), a M&S, etc is $300, and has been for almost 20 years. We are headed by an SRA.

Any appraiser that can be had for $250, and can schedule an inspection that day is not a good appraiser. A good appraiser is busy, not matter what the market is doing. The HVCCs are by design looking for the cheapest appraiser. We did not accept at $250, and once the HVCCs realized that certain appraisers in this area are on most of the bank's do not use list, so they end up back with us for $350.

USPAP has a competency rule, meaning that before you accept a work order, you must be competent in the market you are appraising in. If you are in a town 100 miles from the subject, do not have access the the MLS, and have no idea about market conditions, etc you should refuse the appraisal.­.. Most appraiser rarely do. We have them come from about 40 miles north, our area is a tourist area, with no relation whatsoever to the area the appraiser comes from.

We charge more for any home that is 3000 swft above grade.

[Dystopic]

Bank of America is one of the biggest offender when it comes to getting the worst cheapest appraisers possible. The HVCC they use (LSI) are absolutely imcompetent. We used to do alot of work with BoA, but refuse to do appraisals at $200. On FHA and inhouse loans, it is upto the loan officer to choose the appraiser - we almost always get all of those.

We have been in the area for almost 20 years, and work with everyone.

We still have 6 staff appraisers in our office, quality counts. Not a single one of our appraisals is linked to even one foreclosure caused by an inflated value. People get in over their head no matter what market you are in, and end up in foreclosure.

The HVCCs must go

[ibsteve2u]

I'm guessing [he said, sardonically] that realtors still get a percentage of the sale price for moving homes...wh­ich might affect their desire to see home values grossly overstated, don't you think?

[deadelephant2]

NOTE: Realtors don't BUY houses, they market them TO buyers who determine value based on demand, as with any commodity. If you have no buyers for a commodity it has no value. If you have lots of buyers, the value goes up. You might remember that from Econ101.

[Veri]

Realtors gain commission from selling a house. The more the house is sold for, the better the commission. This introduces into the system temptation which is a very powerful motivator for fraud and over-appraising a house. Human psychology 099.

[JGBHimself]

What you forgot to mention is that the New, Improved legislation/rules will REQUIRE the lender/banks to USE their own "in house" appraisers. This will, of course, "institutionalize" the pre-subprime crisis "WaMu problem" - lenders forcing "independent" appraisers to return "good appraisals" that would enable them to make inflated RE loans.
Under RESPA the 'tying' of ANY services to purchasers­/borrowers was strickly forbidden.
Our new, improved program will REQUIRE that ALL appraisers will now be "tied" to one (1) specific lender.
Those who do not learn from history...­, well..., that obviously does not apply here.

[cavegal]

If a potential purchaser of a home suspects that the appraisal is ridiculously over inflated are they permitted to hire a second opinion? Like we can if we are unsure of a treatment a doctor is prescribing.

[Carolab]

The usual scenario is to get another appraisal if an appraisal is too low for the asking/offer price -- which these days is more of a risk because of a more "conservative" approach to lending.

[GTRich2004]

As the potential purchaser, you generally aren’t going to get an appraisal until after you have made an offer on the house. If you do get an appraisal first, you are going to base your offer on that appraisal. If it's higher than the seller is asking, life is good. If it's lower than the seller is asking, you'll probably make an offer in line with the appraised value and the seller will decide if they want to agree to that price. In most cases, the offer comes first and the appraisal comes second. Also, your mortgage will generally be based off the agreed price you come to with the seller. If the house suddenly appraises for 50K more, the seller usually isn’t going to back out of the deal. The problem occurs when the appraisal comes in 10, 20 or 50K lower than the agreed price. At that point, the bank isn’t going to loan you more than the appraiser said the property is worth. So as the buyer, you have to make up the difference with a larger down payment or you have to attempt to re-negotiate with the seller for a lower price. Since a lot of people are only putting 3% or 5% down, they can’t make up the difference on a low appraisal. So they are forced to try to renegotiate the price and that's when the seller walks away, gets a second appraisal or sucks it up and takes the hit.

[cavegal]

Back in 2006 I was approved for a loan that I would have never been able to afford and at the time the real estate agent told me not to worry about anything because the mortgage company would get any house I was interested appraised. Luckily my mother convinced me my single lifestyle was not conducive to home ownership, such as mowing lawns and constantly having to fix things yourself. I'm glad I took her advice because with unemployment continuing to go up around the country, I think we are going to be seeing an awful lot more of housing foreclosures and adjustments in pricing.

Like someone else pointed out regarding this article, if people aren't buying, no matter what you value something at it is only worth what the market is willing to spend. All my friends are clamping down and fiercely trying to save money in case their jobs are next to be axed. They are not looking to buy homes anymore. We think there is a lot farther to go before the bottom shows up.

[Antifascist-08]

Let the market solve all problems.

[steveAC10]

I do quality control for an AMC.. I get the dicey appraisals and the underwriter challenges on my desk. The brokers and agents just don't get that the playing field has changed. Appraisals are no longer about hitting their value. They're about hitting the actual value. The industry can bitch about third party supervision of housing values all they want, but, well...tou­gh sh*t. 99% of the value challenges­/reconside­rations/ap­peals that I receive from borrowers and brokers are met with a resounding thud by the appraisers (and underwriters) - and should be. Brokers, and many agents, still seem to harbor the illusion it's 2006. The only downside of the HVCC is for the longtime honest appraisers who are forfeiting a third or more of more of their fees to the AMC's (Appraisal Management Companies).

[ThePeoplesKey]

If a property is appraised at 10% of the cost of materials to replace it at today's prices, (which is what is happening) I'd say that the appraisal and the appraiser combined aren't worth the paper the appraisal is written on.

Sorry . . .

[Mrpbody44]

Many properties appraise at less than the cost of construction. The appraiser is just accurately reporting the current market.

[pito1956]

How do you know if the experienced area appraiser is utilized? The appraiser used should be an expert in this particular area. I agree with the NAR's beef with the selection process of a qualified appraiser. Appraisal Management Companies grade their approved appraisers on turnaround time and who has the lowest fees. The appraisers who do this receive a bulk of the appraisal orders. The appraiser is being enticed to make money but not for the right reason.

[merger]

Isn't over inflating prices of real estate one of the things that got us in this mess in the first place? I am still astonished at the high and over inflated prices of real estate. It won't help people move their homes if they price themselves out of the market.

[silvercreeklady]

Appraisers are so parinoid in my area they are pricing homes at less than the cost of materials to build it! That is ridiculous­..especial­ly when they are using short sales and forclosures as comps.
Insistaing on using only sales data in past 90 days!

IF your home burned down tomorrow..­..and you do not have replacement cost insurance you are unable to rebuild.

[Dystopic]

They should not be using foreclosures and short sales when appraising an arms lenght transaction. Those appraisers are incompent.

[vagabondvet]

House prices wouldn't have been artificially inflated for the past decade if it weren't for the artificially cheap credit which made affording the expensive houses possible.

[frantaylor]

If a house is appraised at a particular value and the homeowner is unable to sell it for that price, then the appraiser should be forced to purchase the property at the value they appraised it at. If they did a good job then they will have no problem doing this. This will get you honest appraisals real quick.

[Falconjim]

Do you know anything about real estate? Appraisals are usually done when a loan is being prepared for a sale AFTER an offer has been made by a potential buyer and accepted by the seller. The appraisal is usually mandated by the lender to protect their interests. Rarely, but sometimes, a seller will have a cheap "drive-by" appraisal done to get a ball park estimate of the properties current price range to ensure a realistic price in the current market conditions, as evidenced by recent comparable sales.

Your suggestion that the appraiser be forced to buy a house that doesn't sell at the appraised value does not make any sense. If a car does not sell for Blue Book value, do you think that the Blue Book people (or whoever estimated the car's value) should have to buy the car?

There are lots of sources for real estate industry practices and standards on line and at your local library - free and easy to find. There are lots of extension classes on real estate investments and appraisal methods and uses in most U.S cities. You could even call an appraiser and they might spend a few minutes explaining the profession to you. The idea being that you don't have to go on line and write about things you don't understand if you do just a little research.

[Veri]

You would not be suggesting this if you were an appraiser. It is so easy to inflict upon others something as ridiculous as this. The indignity you would express would be great if your profession was subjected to something as moronic as this.

There are better ways. You just have to really think hard about them and exercise common sense. Oh, and be ever vigilant against those who would harm you and seek to corrupt the system.

[Dystopic]

markets change. The appraiser give and educated estimate of value, on the effective date of the appraisal. If I appraise your home for $100K, and 10 of your neighbors with the identical home sell for $90K 1 month after the effective date of the appraisal, then that is your problem.

An appraisal is an estimate of value at a specific point in time.

You know nohting of what you speak

[ThePeoplesKey]

Good idea!

[frantaylor]

The value of a thing is what the thing will bring.

The only way to find the real value of something is to find out how much people are willing to pay for it.

Any appraised value is totally worthless unless it is accompanied by an actual person with the actual funds available who is actually willing to pay the stated amount for it.

Anything else is just an opinion or a wild guess.

[merger]

You are right on. People are always talking about what a"thing" is worth. The"thing", whatever it may be, is only worth what you can sell it for.

[pito1956]

I'm a property appraiser in Florida and I agree with the NAR's beef with the selection process of a qualified appraiser. Appraisal Management Companies grade their approved appraisers on turnaround time and who has the lowest fees. The appraisers who do this receive a bulk of the appraisal orders. The appraiser is being enticed to make money but not for the right reason which is the QUALITY OF THE APPRAISAL. Its always been like this and I don't think it should be the way an appraiser is graded by AMC's. There should always be 2 appraisals for each property when there is a difference in the opinion of value. The realtor should be given the opportunity to rebutt the appraisal with his or her comps when there is evidence to support their value.