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

[huffnpuff147]

Inflated home prices? Isn't that what got us in this mess?

[Prakosh]

Remember this--we can't look back; you don't want to turn into a pillar of salt do you??? We have to look forward better days are ahead, as soon as we get those home prices back up in the stratosphere!!!

[rabiddog6708]

You can not trust banks. I should know.....I used to work for a bank, which used to the 6th largest in the world years ago, but has since been acquired by another. Getting appraisers to inflate the value of the homes is an old trick.....bigger bonus for the loan officer and the appraiser gets a bonus as well. Easier to justify a loan if there is equity remaining in case the borrower defaults.

[Lorianne]

Not to mention a bigger commision for the realtors.

[blueeyedbull]

I had my home appraised by two different appraisers within 2 weeks of one another this past April. $75,000 difference.

[Dystopic]

It is not uncommon for 2 appraiser to come into different values. An appraisal is an educated estimare of value. One appraiser had much better information than the other, and maybe one should have resused the order based on USPAP's competency rule.

what is the total price of the home? $75K on a $1M property is not much, but $75K diff on a $200K house is a diff story.

a good appraiser will use a system like Marshall & Swift Residential Estimator as another approach to value.

[Mormon4Truth]

I am an appraiser, and we get pressure all the time. My response is if you want higher values, convince buyers to pay more. It is not our fault the banks are not willing to lend money. Believe me, the government's trillions in bank subsidies are not making it into the residential real estate market. It is hard to tell if the commercial borrower are finding it difficult. Those loans are not "expiring" after the terms like they are supposed to. It seems that mortgage contracts for corporations are being "modified", in that thier low rate loan terms are being extended, while residential owners with adjustable rate mortgages are losing thier homes.

[Prakosh]

That is exactly what is happening. All the deals and the largesse is going to the commercial customers to allow them to finish their condo, townhouse, and other large or huge projects. There are huge office buildings still going up all over the place around in my area. And I have heard several bankers say that they are giving great rates in some instances zero interest loans in order to get these projects finished. I guess the thinking is that as hard as it is to sell something--something left unfinished is impossible to sale. And the last thing a bank really wants to do is unload a half finished 40 story office building. Or a bunch of unfinished condos.

[Dystopic]

Commercial in most areas is about to CRASH hard.

[Synoia]

The NARs concerns are duplicitous. It would be better for them to campaign against "dual agency" where a real estate agent can represent both buyer & seller in a transaction.

Especially commercial real estate agent. Never met a more dishonest group.

[ThePeoplesKey]

Why would you ever get yourself into a "dual agency" arrangement? Are you saying you never received an Agency Relationship Disclosure from your Realtor? Or are you saying that you received one but didn't listen to your Realtor explain it to you? Or are you saying you received one but didn't listen to your Realtor explain it to you and you didn't read it either? If you received one and signed one but you never bothered to understand what you were signing or didn't think it mattered, well I'm sorry to tell you but it's YOUR OWN FAULT. If you didn't receive one, in most states that is illegal. If that's the case then you should contact an attorney to see what your legal recourse might be.

Next time, get your own agent who represents your interests. If you're the buyer, that WOULDN'T be the listing agent.

[muscleboundH]

The National Board of Realtors does not dictate state regulations regarding agency. THAT is set by the board of Realtors in individual states. For example: DUAL agency does not exist in Colorado and many other states. You have BUYER, SELLER or TRANSACTIONAL agency. NONE of them allow you to represent BOTH parties as a fiduciary. Transactional agency allows the broker to work on the transaction but does not allow the broker to exchange information between parties unless there is written consent.

I agree, DUAL AGENCY is a RIDICULOUS concept, there is no doubt about it. But put blame where blame is due. There are certainly SOME bad real estate agents, but most of them want repeat business just like anyone in sales. SO they will do their best. I know several Realtors. The bad ones are the drunks and the mindless consumerists who NEED to make the next closing so they can buy that 4th car. MOST Realtors earn an average American income. And MOST of them are fine people.

If you want to talk about evil business, lets talk about BANKS.

[jsgaetano]

So much for "industry self-regulation".

Another conservative pile of S hits the reality-based fan.

[Lorianne]

Barney the Underwriter
Telling Fannie Mae to take more credit risk. Now there's an idea.

http://online.wsj.com/article/SB124580784452945093.html

[muscleboundH]

CLEARLY most of the posters in here did not read the letter. Perhaps that also applies to whomever made up the headline for the story.

No where in the letter does it state ANYTHING about inflating home prices. It simply calls for common sense when appraising property.

If you have a bank owned property that has been sitting vacant for 6 months and whose previous owners vandalized the house upon vacating due to foreclosure (which happens ALL THE TIME), you cannot reasonably compare THIS DISCOUNTED-by-bank house to one in average/pristine condition. Say both are under contract at the same time. Lets say the pristine home sold in an average amount of days, whereas the bank owned home had been sitting vacant for months. Lets say the pristine home's sellers are simply relocating, whereas the other property is just being unloaded by the bank AT A DISCOUNT. They are completely different products. One can easily compare bank owned to bank owned etc and an appraiser can compare these different properties, but MUST ADJUST valuation of each accordingly. The circumstances are an underlying valuation tool. You must ULTIMATELY compare apples to apples.

CLEARLY any one with any economic and business sense understands the continued problems this adds to the current real estate crisis in the USA. If you appraise the average house in a neighborhood at the same price as a property sold at what amounts to a DISCOUNT, you will prolong the average American homeowner's struggle.

[Prakosh]

There is obviously something else at play here. I have never known an appraiser who didn't enter the house and compare the fixtures inside condition etc. before making an appraisal. I don't know of any appraisals that are made simply by looking at the average price of the closest home or any other home in the neighborhood. Averages may have some effect but they are not what determines the price of a home. The market determines the prices of a home. In the current market homes are selling for a lot less than they were a few years ago. It's that simple and requesting that values should more accurately reflect the true value of the home or whatever your argument here is, is just silly. You sound like a real estate person or worse a banker.

I heard a banker complaining the other day that her husband couldn't sell his fancy dual wheel monster pickup because he couldn't get what it was worth. I laughed hard--the first law of capitalism is that any product is only worth what it will bring in the market. If you can't well it for what you think it is worth, that is different. That just means your thought is wrong. It is worth what it will bring in the market. Most houses today just aren't selling that fast and are generally selling for less than the advertised price. Unlike a couple of years ago when properties usually sold to the highest bidder.

[camanokat]

Prakosh said:
"I laughed hard--the first law of capitalism is that any product is only worth what it will bring in the market."

So, then if a buyer is willing to pay x amount of dollars for home, then it is worth that amount, correct?

[muscleboundH]

No, PRAKOSH I am just someone who knows a little bit about economics, macro and micro. And I have been a home owner off and on for 20yrs.

Indeed the market determines value. But DISCOUNTED products are not the litmus test for ALL homes. I never said the appraisers didn't go into homes etc. If you know anything about the TYPES of appraisals then you know what I am talking about when I say you have to compare apples to apples. Just as you wouldn't compare a house in Beverly Hills to a mobile home in Arkansas and expect to determine value of one or the other. There are MANY things at play here.

READ the LETTER attached in this article and you'll notice NO WHERE does anyone suggest pumping up value. Charles McMillan is just expressing his concern that DISCOUNTED homes are hurting the value of NON discounted homes.

Sorry but it's just not as simplistic as you'd want it to be. I share everyone's distrust of the banking system and know first hand the oppression of a sleazy mortgage (I had one of those at one point). But punishing the homeowners who are SOLID, by lumping in bank-owned, discounted and "PRICED TO SELL FAST" homes with ALL homes in the appraisal process only hurts the average person.

[Mormon4Truth]

You are correct that the letters don't say that. But what is occuring is that people with valid important information are currently banned from talking to the appraiser. Bankers, realtors, etc. -- anyone with an incentive to close the deal -- are prohibited by law with talking to appraisers. So what is happening is each loan now gets more than one appraisal at $400 a pop. the first one comes in low, then a new order goes out identifying the original deficinecies to a second appraiser. I am an appraiser and it is bizzaro world out here.

[Lorianne]

"You must ULTIMATELY compare apples to apples"

You might have a point, if that were the practice in the past.
But it wasn't.
So why start now comparing apples to apples?

[ThePeoplesKey]

It's called "Matching Pairs." Appraisal is not a science. I've seen appraisals done at the same time by different appraisers differ by as much as $100,000.00 on the same real estate. It's also not that difficult. Go to your local big box home supply center and see what their kit homes are selling for. That's the cost of the materials for an average home. Add in the labor to assemble it, add in the infrastructure materials & labor. There's the cost of the improvement. The rest of the value is in the land which is mostly affected by it's location and scarcity. That's why a new 1800 square foot home in the mid-west costs $150,000.00 and the same home in California costs $450,000.00. The difference is land value. Now take the improvement off the land. What's the improvement worth now?

Less than zero. Why?

Because you have to pay to haul it away.

How do you like me now?

[Beernuts]

I moved to an island off the coast of Washington in 1976. The only real estate offices on the island were "Mom & Pop" or second-generation famly businesses. Somehow they had managed to make a living for years and years Three years later all the big Seattle players opened offices on the island and what do you know??? That $78,000 3 bedroom rambler suddenly became "worth" $125,000.
Overnight. Then the rumors began. Gonna be a big real estate boom on the island. Retirees coming in droves, they said. Why see this here vacant lot ? "Appraised at $95K now, worth $165K in two years. What a view" As soon as the first piece of property sold under the new "guidelines'"(phony appraisals) there was no looking back. My once pastoral, peaceful paradise is now covered with tract homes, 30% of them with for sale signs, another 10% abandoned. Paradise lost.

[camanokat]

ARE YOU ON THE DRIVE-ON ISLAND?

Because it sounds a lot like my island.

[Beernuts]

Fidalgo---same story as Camano

[TrueSense]

Here we go again ! I guess we have learned nothing. Unfortunately, the Obama Admin. is not going to teach us any lessons and does not care to learn them themselves. It's ok you all; let's have a new bubble.

That is what the accounting rules for the banks allowed for them to fakely reinflate themselves.

[vrod]

I have been an appraiser in Michigan for 25 years. This article is incomplete and misleading. Appraisers now have to register with appraisal management companies and wait for work. There is no way we can market our services. The fact is that most of these appraisal management companies are owned by big banks and mortgage companies. They charge more than the previous going rate for an appraisal, and pay the appraisers less than they used to make. Their primary concern when choosing an appraiser is how low they are willing to charge for the appraisal, not the appraisers work quality or experience. There is no appeal process for a bad appraisal. The borrower has to pay for a new one. In my experience, the past problems with appraisers is that they had nothing to fear for over-appraising houses. The States (at least in Michigan) did nothing about punishing appraisers for fraud. I sent several fully documented cases of appraisal fraud to the State of Michigan. Nothing was ever done. My solution is to have the Federal government fund appraisal fraud investigations in all States through the licensing process.

[leia3652]

I couldn't agree with you more! I'm a loan officer and the new HVCC guidelines are not helping my clients one bit. We recently had someone pay over $800 for an appraisal ($405 for the appraisal, $50 for a rush - because it can take 10 day now!, $300 for a review because the appraisal was waaay off, $50 to rush the review) The review for this appraisal in Houston was preformed by a desk jockey in Minnesota!! $800 for what we could have done before for $275 in 2 days.

We are wasting peoples time and money with this new appraisal system. It benefits banks, not consumers. And we're getting many bad appraisals - not value wise, but errors with missing information or incorrect information.

All of you who hate loan officers - please tell me how this was a benefit to the client??

I'm so sick of hearing people listen to the idea that realtors and mortgage brokers made this mess. MORTGAGE BROKERS HAVE TO FOLLOW THE GUIDELINES OF A LENDER!! A LENDER LIKE BANK OF AMERICA, WELLS FARGO, ETC.
Mortgage brokers and real estate agents were NOT the ones telling people to buy houses they couldn't afford. I'm sure there are plenty that allowed people to make bad choices, but none the less - banks approved it and the consumers had all the paperwork spelling everything out that they chose to sign and the risks they were taking.

[camanokat]

I agree too. With HVCC, the appraisal management companies are choosing appraisers based on price...the cheaper the better. My last appraisal was done by what I could tell was a rookie and was chock-a-block with errors and I am not allowed to dispute it. My market is very unusual. It is not at all surprising to have a McMansion next door to an old single-wide mobile home.

I think HVCC COULD work if it specified that appraisers must have expertise appraising homes in the subject's market area. The system worked better when the lenders had an approved appraiser list and we could choose from that list.

As leia points out, the HVCC is very inefficient and expensive for the consumer.

[Synoia]

In Orange County, CA, appraisal costs have risen from $350 to $495 per home duee to the new "cond of conduct".

Why to go to protect consumers. Increase the appraisal fees.

[ejbSF]

The economy isn't fixed until every last real estate agent is fired, forced to dump their Lexus and is pushing burgers to get by.

[leia3652]

You're an idiot. Learn a little before you make comments like. Would you prefer Wells Fargo sets you with their realtor, their loan officer, their underwriter, their title company? I'm sure they would have your best interest in mind....

[ejbSF]

Let me guess, Leia3652: you're a realtor.

I've dealt with RE agents and I've dealt with banks and title companies, underwriters et al. Hands down the most manipulative and self-interested parties are the realtors. It's a lousy, parasitic profession that exists only by manipulating laws and creating fears in buyers and sellers.

Good luck at Burger King.

[CloseToTheEdge]

I am an appraiser. The HVCC has a lot of very good things to protect the independence of appraisers, but it also has one HUGE fatal flaw: It encourages the use of so-called appraisal management companies (AMCs), which are simply a middleman adding cost to the consumer and further eroding the appraiser's independence by forcing them to deal with these management companies or go out of business.

These AMCs frequently put improper pressure of all sorts on the appraisers, including gutting the fees the appraiser receives and keeping the difference for themselves, so no one can make a living wage. This arrangement encourages the most experienced appraisers to leave the business and leaves us with the inexperienced or the ethically-challenged.

Loan originators should be licensed and regulated the same as appraisers are, and should be subject to losing their license and livelihood for exerting value pressure on appraisers.

Until the LENDERS are also regulated properly, we are just kidding ourselves about true reform.

Case in point: I recently completed over 25 appraisals for a new client. They were very happy with my work, but with 3 of those 25 jobs, the homeowner was unhappy that the value was too low in their opinion. No more business for me from that lender.

Since I don't inflate the values, now I will just have to find other clients to replace them. So it goes.

[iplaw]

Seems like there is a clear conflict of interest when interested parties can choose an appraiser. The whole system of appraisal shopping would of course lead to manipulation of valuation. You do not need to be an expert in real estate to figure this out. The most logical fix would be for the bank issuing the mortgage and/or the buyer to pick the appraiser. They are the ones holding the bag in the end.

[Synoia]

Except the worst recent violators were WAMU who put the appraisers under pressure to bring in high appraisers so WAMU would earn fees from originating mortgages..

[emmld]

My house had 2 offers close to listing price, we went with one, and everything was smooth sailing until the appraisal came through, $61, 000 less than the offer. The appraiser compared my house to homes that were 20 years old, my house is 6yo, that had tax assesments of over 100k less, and made numerous mistakes (ie: 2 car garage listed vs house has 3 car). This, obviously cost the sale- and the bank would have made more money in the end b/c my mortage rate is much lower than what the buyer would get today.
I am all for reform on a number of levels, but it sure does sting when it happens to you.

[CloseToTheEdge]

I think there is a big difference between a proper appraisal that accurately estimates a property's value and a poor job of appraising. Sounds like you are describing the latter.

[GTRich2004]

I was worried I was going to run into a similar situation with the house I just sold. I made the stupid mistake of building a house in the final section of a subdivision the builder had been developing on for about 20 years (didn’t know the area at the time and I liked the floor plan). What made it worse was that my street was in both the 7 year old section and the 20 year old section. The difference in price between the two sections was easily 50K. So every time I met with a realtor or an appraiser, I had to point out that they couldn’t just pull the comps for my subdivision or even my street (which they all initially did). They had to pull the comps for my section or for the subdivision next door that was built at the same time my section was built and had the same features in the houses. Thankfully the appraiser listened to me and got the appraisal correct the first time.

What some people don’t understand is the ripple effect that occurs when a correctly priced house gets mis-appraised. A mistake that kills my sale also kills the sale of the person whose house I'm going to buy which kills the sale of the person whose house they were going to buy ...

[noneIn2008]

They do it for the banks, big business and pension accounts. Why not also cancel mark to market for homes and let some one make up numbers or use the 2006 numbers?

[TraderMark1]

Those who do not learn from history are doomed to repeat it.

Ugh.

[iplaw]

Not sure what history is relevant to the current housing value inflation. Perhaps the comic book over valuation of the late 1980s?