Despite '89 law, many appraisals are of dubious quality.
Should you worry that the last time financial institutions failed on a wide scale in this country -- the savings and loan crisis of the 1980s -- Congress determined that inflated appraisals on real estate were key contributors to the problem?
Should it bother you that home appraisers, state regulators and national appraisal groups all say lender interference in the quality of appraisals is their biggest problem nationwide?
On all counts, you should. Under the 1989 federal legislation designed to reform the real estate system in the wake of the S&L bailouts, Congress set tough new standards for appraisers. In addition to state licensing and tougher educational requirements, appraisers were strictly prohibited from performing appraisals based on "predetermined opinions and conclusions" or influences by any parties with an interest in a real estate transaction.
Yet barely a decade after that reform legislation, appraisers across the country can document -- with faxes, letters, recorded phone messages and personal testimony -- that mortgage loan officers routinely pressure them to hit home sales prices, rather than conduct the independent evaluation that is their legal duty.
Mortgage brokers confirm the practice as well: One loan officer based in the Washington, D.C., area said such pressure is part of the system that developed during the 1990s.
"We (brokers) originate most mortgages, and we choose the appraiser. Think about it," he said in an interview. "If your commission depends on the appraiser supporting the price that's already on the contract, are you going to send your business to somebody who's going to be understanding or somebody who might kill the deal?"
Appraisal group leaders say the problem is almost invisible in a strong economy, where home values are rising steadily. But what happens when national or regional economies enter their next cyclical cooling-off phase, and home resale values go soft?
"We already know what happens," says Stewart A. Leach, chief of the Colorado state appraisal board, "because we saw it during the S&L crisis" that was particularly harsh on real estate owners in Texas, Colorado and Oklahoma. Homeowners who lose their jobs and can't make mortgage payments discover that they overpaid on their homes, and have negative equity -- loan balances larger than the value of the property.
Leach and other appraisal regulators worry that fallout from inflated, lender-influenced appraisals in any new economic slowdown could be intensified by recent trends toward minimal down payments. Whereas 15 percent to 20 percent down payments were the norm in the 1970s and 1980s, now lenders and giant investors, including Fannie Mae and Freddie Mac, promote zero to 3 percent down as standard terms.
Stewart Heller, a California appraiser who wrote a widely circulated critique of lender-influenced valuations for the Foundation of Real Estate Appraisers, says the problem could become especially acute in the fastest-appreciating, higher-cost markets. The combination of low down payments and made-to-order appraisals, he says, could be really disastrous in a recession.
How can pressure on appraisers to rubber-stamp contract prices be relieved? Sam E. Blackburn, executive director of the Kentucky Real Estate Appraisers Board, believes one solution may be at the state legislative level.
"We need to make it illegal for anyone to intimidate, threaten or interfere with a licensed appraiser," says Blackburn, the incoming head of the Association of Appraiser Regulatory Officials, the national group representing state licensing boards.
Colorado appraiser Fred Rossiter, who has lost "significant" revenues by refusing to cooperate with lender demands, says that the law should define "any request to hit a predetermined value to be fraud." He adds that mortgage brokers typically are subject to little or no regulatory oversight, unlike appraisers.
Frank Gregoire of St. Petersburg, Fla., says appraisers need to "stand up to (intimidation) and just say no." An appointee to the Florida Real Estate Appraisal Board, Gregoire provided facsimile copies of attempts by national and local mortgage companies to "order up the number they need."
But other appraisers say a just-say-no solution would bankrupt them. One said she lost a $70,000-per-year lender client because of a single, honest appraisal. "I can't afford many more (losses) like that," the appraiser said. "We need help" from Congress or state legislators.
Terry Turner, a Georgia appraiser who was stiffed for a $275 fee by a lender when he failed to hit the desired contract price, takes a different tack: Besides federal and state enforcement, he wants the home-buying public -- "the people who pay for the appraisals" -- to better understand the current system.
When loan officers regularly reject or refuse to pay appraisers who don't "hit" the right number, "then the appraisal you get may not tell you a thing, other than that the market is in for some extra big trouble" in the next economic downturn.
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|Title Annotation:||real property|
|Author:||Harney, Kenneth R.|
|Publication:||New Hampshire Business Review|
|Article Type:||Brief Article|
|Date:||Dec 15, 2000|
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