Sounding Bored is my semi-regular column on the state of the appraisal profession. This week I talk to a wall.

In Today’s Inman News, there was an article written by a pretty sharp real estate reporter named Marcie Geffner, called: Real estate appraisals are outmoded. (If the link is expired and you don’t have access, I have included the salient parts.)

At first I was in agreement with the article because it addressed the pressure appraisers are faced with every day. Its what I have been preaching for more than 20 years. Lenders, agents and appraisers are all to blame in the process because the appraiser, in their unique position in the transaction, is vulnerable (willingly or not) to outside influence. Quite often their only sources of business systematically apply pressure.

The fundamental problem is the conflict of interest among the lender who selects the appraiser, the borrower who pays for the appraisal and the investor who relies on the adequacy of the appraiser’s opinion.

Here’s where 90% of all consumers, lenders, agents, appraisers and the reporter for this article miss the boat.

The fundamental problem is the conflict of interest among the lender who selects the appraiser, the borrower who pays for the appraisal and the investor who relies on the adequacy of the appraiser’s opinion.

  • A mortgage appraisal has nothing to do with the borrower — The appraisal for a home purchase that is ordered by a lender or mortgage broker for a mortgage has nothing to do with the borrower. It is purely an assessment of the collateral (the asset) of which to lend against. It makes no difference what the buyer wants the value to be or to feel comfortable about the purchase. This issue needs to be reinforced with loan officers and underwriteres, as well as real estate agents.
  • An appraisal ordered by the buyer, by law, can not be used by the lender for the mortgage — If the buyer wants to feel more comfortable about the transaction, they can hire their own appraiser to get an estimate but they need to make sure the appraiser is getting their data from an independent source and has limited contact with the agents involved in the sale.
  • A client is not defined by who pays the appraiser — An appraiser’s client is determined by who engaged the appraiser for the assignment. Just because a borrower pays an appraisal fee for their mortgage application doesn’t mean they have any right to speak with the appraiser directly.

The author’s solution to the credibility problem is more about enforcement and an update of current laws. This is not likely to happen, nor will it effect change. Licensing actually made the quality of appraisal work decline because it lowered the bar on the entire profession. With a few classes and some simple training, anyone can get a license and all appraisers are on a even playing field.

Enforcement is virtually impossible unless the report is out and out fraud. Licensing departments in most states are understaffed and lack adequate resources despite best intentions. Plus, its tough to deal with subjectives. Boy, that value was a little too high – let’s get ’em on that.

Most of the substandard work that gives the profession a black eye is done by ten-percenters. Those are typically appraisers who always seem to be a little high on their values which coincioedntally gives their clients more flexibility. This practice was reinforced to me today as I reviewed an appraisal today done for a mortgage broker by a ten-percenter and the appraiser used no real logic but kept using the phrase…based on my vast experience… in his text.

The solution has to be regulatory needs to be resurrecting that Chinese Wall between the sales function and the underwriting function of a bank.

Until then, we might as well keep talking to a wall.

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One Response to “[Sounding Bored] What About The Chinese Wall?”

  1. TheHomeAppraiser says:

    Jonathan, On my God, I have been using the term “ten-percenter” for two decades now to describe our local good old boy appraisers that are always 10% over a reasonable value. You owe me for copywrite violation, just kidding.

    One of the ten-percenters who went out for drinks with our local bank president every Friday night, was recently dumped by the bank for an out of state “Skippy” appraiser (not my term) who will rubber stamp any number the bank gives him. I call that “bringing in a ringer”. I guess ten percent is no longer enough. These banks are going to wish they had a wall when all of the loan buybacks start crashing in.