Last week we saw a chorus of “appraisers are killing our deals” stories in some major publications:

  • When Appraisal Hassles Tank a Home Sale [WSJ]
  • When Appraisals Come in Low [NYT]
  • Appraisals Scuttle Home Sales Where Prices Rise Fast[IBD]

I’ve long been a critic of my own industry. Like any industry there are terrific appraisers, average appraisers and form-fillers. Post-Lehman there are a LOT more of the latter.

The scenario that prompted these articles and others like them occurs when a sale is properly vetted in the market place and an appraiser enters the transaction and subsequently appraises the property below the sales price. It supposedly is happening in greater frequency now, hence the rise in complaints.

My focus of criticism has largely been centered on appraisal management companies (AMC), who have tried to convert our industry to a commodity like a flood certification or title search rather than a professional service. AMCs serve as a middleman between the bank and an appraiser and they have thrived as a result of financial reform. Most only require an appraiser to be licensed, agree to work for 50 cents on the dollar and turn work around in one fifth the time required for reasonable due diligence. Appraisal quality of bank appraisals has plummeted in this credit crunch era and as a result has prompted growing outrage from all parties in a transaction.

Of course, the market value of the property may not be worth it. But the real estate industry doesn’t trust the appraiser anymore so we point them finger at them automatically.

Yes, it’s a hassle. So let’s decide what the problem really is and fix it.

A long time appraisal colleague and friend of mine once told me before the housing bubble burst:

“Jonathan, you as the appraiser are the last one to walk into the sales transaction. Everyone involved in the sale is smarter than you. The selling agent (paid a commission), the buyers agent (paid a commission), the buyer (emotionally bias), the seller (emotionally bias), the selling attorney (paid a transaction fee), the buyer’s attorney (paid a transaction fee) and the loan officer or mortgage broker (paid a transaction fee) all know more than you do.”

The appraiser in this post-financial reform world doesn’t have a vested interest in the transaction like they did during the housing boom – some could argue they are too detached. The vested interest I speak of occurred during the bubble when mortgage brokers and most banks generally used appraisers who always “made the number.” Incidentally, many of those types of appraisal firms are out of business now.

Let’s clear something up. The interaction an appraiser has with a lender when appraising below the purchase price now is not that much different than during the boom. When an appraiser kills a sale, the appraiser is generally hit with a laundry list of data to review and comments to respond to questions from the AMC, bank or mortgage broker who use the “guilty until proven innocent” approach even though the bank likely won’t rescind the appraisal. The additional time spent by the appraiser is a significant motivator to push the value higher to avoid the hassle if the appraiser happens to be “morally flexible.”

And by the way, sales price does not equal market value.

The sources for most of these low appraisal stories I began this post with come from biased parties so it makes it clear that low appraisals are the problem. In reality, the low appraisal issue is merely the symptom of a broken mortgage lending process. The problem is real and becomes more apparent when a market changes rapidly as it is now. Decimate the quality of valuation experts and you generate results that are less consistent with actual market conditions and therefore more sales are killed than usual. Amazingly the US mortgage lending infrastructure today does not emphasize “local market knowledge” in the appraisers they hire no matter what corporate line you are being fed. This is even more amazing when you consider that most national lenders have only a handful of appraisal staff and tens of thousands of appraisals ordered ever month.

The cynical side of me thinks that rise in low value complaints reflects an over-heated housing market – that the parties are getting swept up in the froth and the neutral appraiser is the voice of reason. The experienced me realizes that financial reform has brought new appraisers into the profession that have no business being here (and pushed many of the good ones out) and that the rise in the frequency of low appraisals has only seen the light of day because housing markets are currently changing rapidly.

Here’s my problem with the mortgage lending industry today as it relates to appraisers:
• Most of the people running bank mortgage functions are the same as during the bubble, only see appraisal as a cost, not as eyes and ears.
• Banks love the current state of appraisals because the values are biased low (banks are risk averse) and they fully control the appraiser.
• Appraisal Management Companies themselves have no real oversight (some are very good, most are terrible).
• Banks no longer emphasize local market knowledge in their appraisers or they pay lip service to it.
• Short term cost savings trumps emphasis on quality and reliability.

Every now and then (like now) everyone seems surprised and feels hassled when appraisal values don’t match market conditions. However the bank appraisal process has largely morphed into an army of robots on an assembly line – either because we are unaware of the problem until it affects us directly or we just want it that way.

Let’s focus on fixing the mortgage lending process or stop complaining about your appraisal.

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23 Responses to “The Low Appraisal “Hassle” is a Symptom of a Broken Mortgage Process”

  1. Mark says:

    If sellers understood the market and listened to their Realtors advice in the first place this would not be a problem. A financed home purchaser will only get a loan at the appraised price, not more, not less. Why can’t sellers accept that fact, listen to Realtors who bring the research and work within a real world scenario? This way properties would be priced right at the time the listing agreement is signed.

  2. Thanks for your feedback. You sound like a thorough broker. However the reason sellers are wary of Realtor’s advice is: 1. The Realtor is not neutral no matter how honest and knowledgeable they are – they are paid upon sale of the property and therefore are tainted by definition. You can’t expect the seller to ever be fully comfortable with that. 2. NAR itself has not been a reliable provider of housing market messaging to the public over the last decade. ie EHS monthly report commentary, TV commercial etc.

  3. Lee says:

    Jonathan – your point about bias is dead on. I cannot count how many times property owners or Realtors have called to discuss my “incorrect” or “bad” appraisal simply because it is lower than some other appraisal. I love to ask why mine is assumed the wrong one based solely on being the lower of the two? The answer is usually silence.

    • Thanks Lee. The default response is that the appraiser is “low.” One of the disconnects in the sales process between agents and appraisers is how they view value. A selling agent’s job is to get the highest price for their client and the appraiser’s job is to provide a reasonable estimate of value. Two very different viewpoints.

  4. Kevin says:

    I too noticed the recent uptick in appraiser-bashing articles in the news recently; it’s nice to have someone of your stature speaking out about what are the real underlying causes of these problems that plague our industry.

    Wouldn’t it be great if real estate appraisers had a mouthpiece that was as vocal and effective as the NAR is on behalf of realtors?

    I suspect we wouldn’t have many of these problems if we had an advocacy group which was that powerful and aggressive.

    It seems as if our profession is powerless.

    • We never had enough representation as an industry because the money is far bigger in the sales, banking and mortgage space yet the value of the collateral should be sacrosanct to lending. The Appraisal Institute and other trade groups don’t have enough resources with declining membership to boot, and in the past decade AI has lost it’s focus and is morphing into a teaching entity.

  5. Jonathan, So many points of agreement. The form filling, and UAD method of reporting, contributes to the appraiser’s emphasis on aspects unrelated to current market conditions. Appraisers spend way too much time making the determination which code to use, did I describe the comparable sale the same way in the last report, and have I obscured all the human beings, religious symbols and black cats from the photographs.

    Just once, it would be pleasant to hear an appraiser complain that the lender/underwriter/AMC rejected the boilerplate offered, and asked for more specific details about the current market conditions, supply/demand, and price/value trends. We can all dream.

    • So true – the conversion of the industry into a commodity rather than a professional service has caused the proliferation of boilerplate…hundreds of checkboxes properly checked but no additional insight conveyed to the reader.

  6. Patti says:

    Our profession has become ‘boilerplate’, which makes our job more difficult. I feel we are also under the microscope more than anyone else involved in the process. Realtors, buyers and sellers do not fully understand (or don’t want to understand) that we do not represent them. We are an impartial, unbiased representative of the lender. We really do need an advocacy group for appraisers. Realtors are definitely not an advocacy group for us, even though we are forced to join them in order to access MLS.

    • Well articulated Patti. Our industry has not conveyed it’s “value” to the mortgage process because 1. we don’t have a voice equal with our involvement with the process and 2. because the parties we serve are still not incentivized to require high quality (or even reasonable quality) appraisals. In bank appraisal work, our client is the bank but it is demoralizing because many banks don’t really care or don’t understand enough to care because the people who sign off on the current system are too many steps removed from the process (how the sausage is made). And remember, most banks have outsourced to AMC’s so the institutions have little or no in-house valuation expertise (in proportion to their mortgage volume) to demand higher standards. And even worse, the in-house experts have ZERO political clout within their institutions because valuation experts (ie Chief Appraisers) are NOT running a department that is seen as a revenue source. Appraisal quality is seen as a long term function and with bank employee turnover at a high level, the corporate memory is very short.

  7. You’ve hit on so many good points. I’d add that the form-filling robots and the push for quick turn-times has resulted in very little actual market analysis. What is the market doing? and What has the market been doing leading up to the effective date? are questions sometimes left unanswered and maybe unanalyzed, but are so important.

    • Thanks Joshua – so true – and as they say in police movies as the officers start to chase the bad guy “No time for back up!” The appraisal industry version is “No time for research!”

  8. Jonathan: I agree with your points and the spirit of the blog. No matter how boilerplate the profession becomes, the impetus is still on the appraiser to write a well-supported report. That is hardly ever done. When the market was teetering, I sold my firm, and ended up in the assessment world. The result is that I now review hundreds of reports a year and see very low quality work as a whole. There are exceptions, and I do come across a well-written report, but that is the exception.

    Most reports will indicate three or more opposing points in the market analysis. The HBU is hardly ever addressed with any adequacy, it is simply checked and that is it. The sales approach is rife with factual errors and pulled out of the air adjustments with no support at all. The cost approach has been rendered useless my misapplication by appraisers that cannot do them. The income approach is usually not done, even when data is readily available to do it.

    My point is that the appraisers that are rewarded with work are those that should not be used. They are, at best: under trained, at worst: intentionally unethical. Either way, AMCs use them simply because they are less expensive than appraisers that are competent. They cost less because they have no idea how much work is needed to write a well-supported report that will stand on content. The AMCs do not want that, the banks have never wanted it, yet we are surprised when we hear hyperbole from the land of commissioned professionals.

    Fifteen years in the business and all I can state with confidence is that the lenders always get what they want, and in this case, it is incompetent appraisers. That is all they are willing to pay for.

    I am designated with the AI, and the majority of the fee work that I still do is non-lender related. I still have a few lending clients, and three AMCs that I will work with. They end up using me on the harder stuff so they are less fee-sensitive and they know that I can work through atypical properties.

    • Thanks so much Woody for such a thoughtful response. In many ways the AMCs truly are the middleman because the banks will only pay so much and they are caught in the middle or a cheaper AMC will come along. If the banks were motivated for a reliable valuation product, the AMCs would respond (some would). AMC as a concept is fine – there are good AMCs out there. My issue is how many of them do business and they are shaped by the clients they work for. I find it absolutely amazing to get periodic work from AMCs on high end complex property paid my full fee and agree to my timing because they don’t trust their regular staff? 20 crappy appraisals on the low end can have the same exposure as 1 good appraisal on the high end of the market.

      No incentive for quality => no emphasis on quality.

  9. Lori Noble says:

    Jonathan, There’s been a sell-out by the powers to be who’ve ultimately discredited, via perception alone, a perfectly functional and applicable process to monetarily benefit themselves. We’re in a society where values, beliefs, and norms are no longer (strengths). Markets are unique to their own and that’s a dynamic that’s failed to be noted.

    Thank you for sharing these important observations.

    • Thanks so much Lori – couldn’t have articulated that any more clearly than you have. Quality is now only a measure of speed and price (because it’s easier than qualitative).

  10. Maria says:

    You’ve hit on so many good points. I’d add that the form-filling robots and the push for quick turn-times has resulted in very little actual market analysis.

    • Thanks Maria – after all we’ve been through with bank failures, a global credit crunch and financial reform, there is no incentive to demand a reliable analysis from a credible source. Who would have thought?

    • Joshua Walitt says:

      Maria… We must be on exactly the same page… word for word! ;)

  11. Wonderfully written article Jonathan. As usual, you have hit the “nail” right on the head. I have been an appraiser for over 20 years, was with the NYS Attorney General’s Office of Real Estate Financing (regulating coop and condo conversions), Director of Operations for a nationwide title & appraisal company & the exclusive appraisal consultant for the largest residential brokerage firm in Manhattan proper. Those of us with extensive regulatory and “hands on” appraisal experience are being discounted based upon an offered fee schedule (from the majority of the available AMC’s) that is insulting to any qualified professional in the industry. I recently reviewed an appraisal completed for an AMC on a historical property whereby the appraiser was ~$2 Mil below what the fair market value represented. As you well know, aside from the implementation of standard appraisal methodology, many select valuations in Manhattan proper are as just as much an “art” as they are dependent upon an individual being technically competent. What comes to mind is the movie Wall Street and the Gordon Gekko comment that “Greed is Good”, well it appears that the regulators and principals to the establishment of the AMC profile were watching and listening!

    • Thanks Augie! It’s one of the biggest disappointments of the promise of financial reform – the systematic removal of actual quality from the estimation of collateral to be used for lending purposes by federally related transactions, exposing the taxpayer to greater risk in the future. If we see this disconnect so plainly within our industry, what other issues with financial “reform” are so blatantly overlooked? It’s incredible.

  12. BarbP says:

    As a homeowner who has been through the refinance mill several times over the last couple of years, all I can say is that my home has been appraised 5 times by 5 different appraisers, and NOT ONE of those appraisals was correct. I’m not referring to the low value given, I’m referring to the blatant mistakes: claiming that a separate structure on its own separate foundation was “attached” to my manufactured home when it clearly is not if one LOOKS … claiming this separate structure does not have its own heating system when in fact it does, the 5-ton unit was POINTED OUT to the appraiser when he was there … and so on. I had to pay for these appraisals in spite of the obvious errors. The appraisers refused to correct their reports although evidence was provided to them that the reports were wrong.

    • Fees below market rates paid to an appraiser by an institution lowers overall reliability of the reports because it’s just a hop skip and a jump to low quality. Your comments don’t surprise me.