Sounding Bored is my semi-regular column on the state of the appraisal profession. This week I notice some are now finally paying attention to the inflated truth in the real estate market: its apparent that failure to protect an appraiser from influence, results in meaningless reports and financial misery to innocent people. (Thanks for the head’s up, Jose!)
There is a great article written by Kenneth R. Harney of the Washington Post in his syndicated Nation’s Housing column called Appraisal Inflation. Kenneth’s writings are always a must read.
Appraiser inflation results because there is no check or balance in the power relationship between lending institutions and the appraisers who work for them. Like panting dogs, the appraisers who crank out this work are wholly dependent on their master.
I had a strikingly similar experience in the mid-1980’s when were just launching our appraisal firm, Miller Samuel.
and it goes like this…
Back in the mid 1980’s when I get into this profession, there was a pattern of mortgage fraud abound, that I dubbed “creating a false market” that bears striking resemblance to the fraud that occurred in the subprime market (and just about every market) today.
A particular mortgage broker (who went on to become national and successful) specialized in marketing co-op apartments to recent college graduates. If the apartment was actually worth $100,000, they would sell it for $125,000 to the student who was unaware of the market but enticed by the no money down, no closing cost package. It was really +100% financing.
The mortgage broker approached appraisers in the market and promised them heavy volume, or asked them to simply hit the number. Surprisingly, it was more the former and the appraiser never shared in the fraud on a financial level. These apartments were typically in 10 unit walk-ups and the sponsor (landlord) was happy because they were getting high prices for their apartments. Once the first unit closed, it became easier to perpetuate the fraud. The appraiser was provided sales that closed and relied on them exclusively.
When we were approached to provide appraisals for one of these firms in particular, as far as I could tell, they had no idea that this was fraud. In other words, these students were saddled with apartments that were worth $100k but the mortgage was usually well above that and they were in effect, creating a false market based on misleading information.
We were provided “comps” that closed as a result of the faud, but we used our own sales and “killed” the first few deals we were sent, not because we knew what they were trying to do, but because the value wasn’t there. It wasn’t even close.
This firm then complained to a large national lender they were sending a lot of this work through, and we went through a series of meetings, phone calls and visits to some of the apartments we had appraised with senior bank officials. We had the spectre of losing one of our major clients hanging over us (aka assumed guilty and had the burden of proving our innocence), just as we were getting our company off the ground. It was stressful to say the least.
But to our lender’s credit and because the appraisal department was protected from sales function pressure, we were exonerated as being competant (pretty degrading, really). However, the mortgage broker was still allowed to provide work to this lender and were allowed to avoid using us. But it effectively killed the mortgage pipeline for this mortgage broker through this national lender since the lender was now aware of what was going on and scrutinized every deal.
Of course the mortgage broker simply found someone else to do their deals.
The subprime mess worked essentially the same way. Find an incompetant or morally flexible appraiser to channel the deals through, and the system takes care fo the rest. The current mortgage does not allow ethical appraisers to thrive. In fact it is just the opposite.
It would be great if the lending system could be incentivized to provide collateral assessment that actually meant something, instead of creating paperwork to throw in a file.
Tags: Soapbox Blog, Appraisal Pressure, Mortgage Fraud, Jonathan Miller
Retired appraiser. I have maintained for over fifteen years that residetnial appraisers should be hired directly by home buyers to provide expert counseling to protect the buyers. The lenders should not have to provide appraisals for each loan. Only loan portfolios needs to be checked (appraised) for reasonable L/V ratios. In other word the lenders are supose to be able to look out for themselves and don’t need as much hand holding. Buyers unfortunately think the appraiser works for them.
Another idea would be to have the appraiser take on the valuation risk in return for a large appraisal fee (large portion of loan origination fee). that way if the appraiser is wrong too often he or she won’t be able to afford E&O insurance.
Never going to happen on all three accounts:
1) The borrower can exert more pressure than the mortgage broker. A rotating selection from a panel of qualified appraisers would be better.
2) Every loan SHOULD have an appraisal; otherwise we will have “stated value” loans just like those “stated income” loans that worked out so well. Loan originators are crooks who want to make a buck and run; don’t trust them to do what is best for the lender’s portfolios.
3) We are hired to provide a value, not invest in the loan. Is the lender going to provide me with the FICO score and financials of the borrower so I know the risk? I don’t think so.
Have another shot of tequila Jose and enjoy your retirement.