It has been brewing for a while, this latest real estate imbroglio, and, in a
real twist, it is the reputed perpetrators who have been screaming the loudest
to alert the public to the crime.
Appraisers have complained for years, decades in fact, about the pressure they
state they sometimes get from real estate agents and lenders to bring in
a property value that supports the purchase price against which money is to
be lent.
I can certainly speak with experience about the appraised values of
properties that the FDIC inherited as bank after bank failed in New
England in the early 1990s. Some values were so outrageous as to be comical
if so much had not been lost. There were many victims - depositors
(remember - FDIC insured up to $100,000 - try telling a small businessman
that he may have lost the other $300K in his business account); bank employees
who saw their careers and retirement plans evaporate; and debtors who
had to scramble to refinance loans that the banks’ receivers (FDIC and
the Resolution Trust Corporation (RTC)) made very clear they were going to sell
to the highest bidder. There were neighborhoods, even entire towns, where property
values plummeted as the air went out of appraised property values. And don’t
forget the billions of dollars that taxpayers paid out to depositors in failed
savings and loans insured by RTC which did not have the fund reserves of the
FDIC.
At that time a lot of appraisers were investigated, some were indicted, but
I am not sure whether, as the cases dragged on, any were ever convicted of appraisal
fraud. Many, however, claimed that they had inflated the value of properties
at the insistence of the mortgage lenders who had hired them. There was a fair
amount of evidence of that in the bank files.
In one particular case involving what was commonly known in Boston as "The
Mob’s Favorite Bank" the lead loan officer had, by all accounts,
been unable to coerce suitable values from the bank’s regular list of
appraisers and had taken to doing "windshield appraisals" of properties
that the bank was hell-bent to lend on. The values resulting from these drive-bys
were worthy of some kind of fiction-writing award.
During those dark days, however, there were so many people to blame and so
much work to do to put Humpty Dumpty back on the wall that the complaints of
appraisers went pretty much unheeded.
Well, 15 years or so later, here we go again.
The Office of Housing Enterprise Oversight (OFHEO) in its
quarterly same-house market report last January, stated, sort of in passing,
that the rate of housing appreciation declines as the rate of refinancing rises.
The report does not offer a reason for this phenomenon, nor does OFHEO, which
has regulatory oversight of Fannie Mae and Freddie Mac, appear particularly
concerned, but the reason seems fairly transparent. Many people who are refinancing
have sufficient equity so that, even if with a cash out for debt consolidation
or other reasons, may not have a critical need to hit a value point (the amount
of the desired mortgage). However, in many home purchases buyers are being qualified
based on a certain amount of down payment. For someone putting 20 percent down,
a low appraisal might reduce the loan to value (LTV) to 85 percent
and force the buyer to pay for Private Mortgage Insurance (PMI).
For buyers with only 5 percent to put down, a low appraisal may end their homeownership
dream and the lender’s commission. In many refinances an appraiser doesn’t
have to push very hard to find comparables that will allow a comfortable loan
to value for the proposed mortgage
Recently Demos, a New York City based think tank, issued a "briefing
paper" titled How Widespread Appraisal Fraud Puts Homeowners at Risk.
The introduction to the paper, written by David Callahan says in part:
While many U.S. households have benefited from the recent rise in real estate
prices, homeowners who have bought at record high prices are vulnerable to a
fall in property values that could leave them owing more on their mortgage than
their home is worth. This risk is aggravated by the fact that many Americans
have reduced the equity in their home to pay off credit card debts and cover
day-to day-expenses. More troubling still is evidence that many appraisers fraudulently
inflate property values during the buying or refinancing of homes.
We will return to the Demos report, which deserves an article of its own, at
a later time. However, it is only fair to state that no other sector of the
housing industry has been screaming louder about appraisal inflation
than the appraisers themselves.
A reader advised us of a popular website/blog for appraisers. I won’t
mention the URL since it is not something one can casually log onto and read.
Your participation has to be approved and this is not an instant process. I
was, however, able to spend considerable time there today. The various blogs
are filled with complaints and tales about pressure from lenders and real estate
agents to inflate values, revise appraisals, or promise to hit a predetermined
price. And these posts were from all over the country.
On some of the individual "threads" (for example one dealing with
VA loans) appraisers were graphic and, one could say bitter, about some of the
marching orders they had received before conducting appraisals, some of the
reactions following the appraisals, and some of the repercussions they had encountered
when they refused to violate standards of good practice. It would be inappropriate
to quote from individual postings without permission, but the site is sponsoring
a petition directed to the Executive Director of the Appraisal Subcommittee
of the Federal Financial Institutions Examinations Course with copies
to be sent to an unspecified list of "other state or federal agencies
with authority in the following matter."
The petition states in part "Lenders have individuals within their ranks who,
as a normal course of business, apply pressure on appraisers to hit
or exceed a predetermined value," and lists six of what it terms "many
types of pressures" that are brought to bear on appraisers:
- The withholding of business if we refuse to inflate values;
- The withholding of business if we refuse to guarantee a predetermined
value;
- The withholding ob business if we refuse to ignore deficiencies in the
property;
- Refusing to pay for an appraisal that does not give them what they want;
- "Black listing" honest appraisers in order to use "rubber
stamp" appraisals, etc.
The petition requests that "action be taken to hold lenders responsible
and provide for a penalty on anyone who engages in the practice of pressuring
appraisers to do dishonest appraisals that do not provide for independent judgments."
As of April 21, the petition had 8,326 signatures.
As stated above, the Demo report is worthy of its own article as are some of
the claims and statements made by the people on the firing line - the
appraisers themselves. We will continue this in later columns.