The Wall Street Journal does a brief piece on what will likely prove to be a significant issue for many property owners down the road (getting big air): inflated appraisals. Its encouraging only because its on the front page so hopefully it will get attention from the regulators. The article New Headache For Homeowners: Inflated Appraisals Rosy Valuations, Common In Boom, Now Haunt Sellers; It’s ‘Pay-the-Piper Time’ [WSJ] however, uses the same cast of characters in its coverage.
Here’s why the problem doesn’t get reported as extensively as it should: There is no smoking gun.Â
Any new stories about inflated appraisals these days seem to originate from the National Community Reinvestment Coalition, a Washington-based nonprofit that supports low-income housing who last year came up with a novel solution to the appraisal problem. I have covered the efforts of NCRC before [Soapbox].
Why does the appraisal inflation issue get so little play in the media? Likely because most real estate mortgage industry people close to the issue downplay the problem since there has not been a quantifiable cost to be held accountable to. Here are samples of the typical mortgage industry response.
National Association of Mortgage Brokers, says brokers shouldn’t pressure appraisers to distort value estimates. But he advises appraisers to create and enforce their own ethical standards.
Their recommended solution of self-policing is a cop-out and rarely works in any profession. The appraisal industry is one of the most fragmented of all.
This don’t ask, don’t tell attitude has created the appraiser mantra -Â Get work.Â Hit number anyway you can.Â Do it Fast.Â Get more work. Talk a lot about servicing the clients needs. Repeat.Â If the appraiser doesn’t take this path, then they need to find other types of clients.Â A whole generation of experienced appraisers have been forced out of the business.Â Its the era of the appraisal factory.Â Inexperienced personnel cranking out the reports is the norm of today.Â Some firms have appraisers that can generate 40-50 reports per week.Â Think about the time spent coordinating the appointments, travel to and from the property, inspect, visit all comps, confirm data, write up report, review, deliver, follow up on client questions and concerns, field irate calls from clients or borrowers if the appraisal is too low to make the deal, re-work report, re-send new final version…times 40 in a week?
Lenders often play down the issue. Tim Doyle, an official of the Mortgage Bankers Association, says he sees no “broad” problem with inflated appraisals, outside of criminal rings engaged in fraudulent mortgage deals. Even though mortgage lenders typically sell loans to investors shortly after making them, the lenders have an incentive to ensure those loans are backed by property valued at least as much as the loan balance, Mr. Doyle says. Investors can force the lenders to buy back a loan if it goes into default and the appraisal was fraudulent, he says.
So the MBA is saying, if it becomes a problem, then leave the risk assessment to the buyers of the mortgages on the secondary market and then the lenders will reimburse them. However, if poor quality is so widespread, then how does this solve anything? The banking industry, at least at the upper levels, who tend to be detached from these sort of front line issues, like the way things are. Lenders will only start to complain when poor quality begins to affect profits or there are other economic incentives or federal regulations for enforcement.
To summarize the players in the appraisal process who are happy or at least satisfied enough to stay with the status quo with the process:
- Banks/Mortgage Bankers – they want to keep costs down and as long as someone with an appraisal license says the value is ok, then there is nothing to worry about.
- Mortgage Brokers – they want to continue to retain control over the appraiser, after all, mortgage brokers are paid only if the transaction goes through and this is a way to ensure that continues to happen. They say that appraisers should self-police themselves.
- Appraisal Management Companies – The less quality concerns by banks there are, the more business they are able to generate, so of course they are happy with the status quo.
- Many Appraisers (Usually large firms aka ‘Appraisal Factories’) – High volume appraisal firms are happy with the way things are and have figured out that the secret to additional revenue is simply volume with no problems for their clients to deal with. Its easy to find those appraisers – just look and see if their client base is nearly 100% mortgage brokers.
The WSJ sights the seminal October Research study from 2003 which says that 55% of appraisers are pressured to change a value. Of course that is a wildly conservative number if reality is factored into the process. If an appraiser refuses to change the number or bend, they simply don’t get work anymore and therefore the occurrence of the pressure goes away (if their appraisal practice doesn’t go away first).
There is virtually no appraisal oversight of appraisers on a state level (which is responsible to administer the federal law) because there is limited funds available for it and to make matters worse, many states take a portion of the revenue from licensing fees and allocate it to other purposes.
The notion that appraisal management companies (AMC) create a ‘Chinese Wall’ so the bank does not control the appraisal process is incredibly misleading and disconnected from the realities of lending. AMC’s are usually only able to attract the bottom of the barrel (my apologies to the few exceptions). They are the worst element in the appraisal industry because of the low fee structure and unrealistic turnaround time requirements. They have nurtured an army of form-fillers. AMC’s are only able to competently rate this vast army of form-fillers by how quickly their turn around time is. In other words, since these appraisers generally can’t afford data services or don’t use what is available, the AMC appraisers often rely on data from the broker involved in the sale – a tainted data source in lending parlance – to generate a quick value to get more work. If they do get data from public record, they are unable or simply do not confirm details like condition, view, concessions, etc.
The person determining which appraiser gets the work, isn’t the one who has their collateral at risk – and aren’t those lending institutions the ones at risk, and aren’t they federally insured?Â Licensing initiated in the early 1990’s after the S&L debacle has built an army of form-fillers who are simply rating on how fast they are.Â Why? If you have a license, thats all you need to be in compliance. Speed, significant negligence and short cuts.Â This system worked fine as long as the market was going up if you subscribe to the don’t ask, don’t tell theory.Â Well, the market isn’t rising now, or at least not as dramatically.
The appraisal inflation problem is much more serious than reported yet it can’t be proven by stats since the market has kept rising, hiding the problems.Â Most of the players connected to the process are generally happy.
The appraiser has no independence in the appraisal process, in any way shape or form. The entire structure of the mortgage appraisal system is seriously flawed. I find it absolutely amazing thats its been able to go on this long without some sort of regulatory concerns raised.