Real estate's dirty little secret
February 8, 2005
Part 1: 'Appraisal inflation' a major real estate problem
By Glenn Roberts Jr.
Editor's note: Bending the numbers on home valuations is often referred to as appraisal inflation, and appraisers say it's common for colleagues to do this in order to satisfy clients and stay in business. Appraisers nationwide say commission greed among their clients is feeding the corruption. In this three-part series, we examined the problem and what the industry is doing to try to stop it.
Verne Hebert, owner-operator for Ashwood Real Estate Appraisal Service in Kalispell, Mont., recalls one home appraisal he conducted where the appraisal came up $400,000 short of the number that was needed to close the transaction. For days, the mortgage broker, both Realtors and the underwriter at the bank called him, and one Realtor even offered to take him out to dinner to discuss the appraisal.
Hebert said he has also received some sobering advice from clients, "'Here's the deal – you straighten this (appraisal) up or you'll not ever get a strip of work from me again.' It's not even pleasant. I'm in a smaller market here. If nationally the same thing is going on – it's shocking."
Herbert's experiences aren't isolated. He and others say the pressure to inflate appraisals in order to "hit the numbers" that lenders, mortgage brokers and real estate agents need to close a deal is pervasive.
"Nobody wants an honest transaction, they just want to be paid," Hebert said. "Between the mortgage broker and the Realtor – they'll decide who is being hired and who's not."
Some appraisers willingly bend numbers on home valuations to satisfy their clients and get more work, a practice known as "appraisal inflation." In its most destructive form, appraisal inflation can assist predatory lending practices and can play a role in flipping schemes, in which properties are fraudulently assessed to win a high loan amount and then resold for even higher prices. Exaggerated appraisals can lead to inflated home prices, increasing the risk of loan default and foreclosure and placing homes out of reach for some prospective buyers.
Appraisers across the nation say commission greed among their clients is feeding the corruption.
About 55 percent of the appraisers who participated in a national survey reported that they felt pressured to inflate home values in appraisals, according to October Research Corp., which provides information and analyses for the real estate settlement services industry. A group of 500 fee appraisers, who each have at least five years of experience in the field, participated in the survey, which was released last year.
Thousands of appraisers have signed an online petition at http://www.appraiserspetition.com/ that is intended to draw attention to appraisal industry problems. The petition, which addresses state and federal regulators, states, "Lenders (meaning any and all of the following: banks, savings and loans, mortgage brokers, credit unions and loan officers in general; not to mention real estate agents) have individuals within their ranks, who, as a normal course of business, apply pressure on appraisers to hit or exceed a predetermined value."
The pressure comes in many forms, among them: the withholding of business if appraisers refuse to inflate values, refuse to guarantee a predetermined value, or refuse to ignore property deficiencies; the refusal to pay for an appraisal "that does not give them what they want"; and "blacklisting honest appraisers in order to use 'rubber stamp' appraisers."
Property flaws, such as required repair work, are sometimes overlooked at the request of parties requesting the appraisals. If they aren't able to match the property value suggested by their clients, appraisers can find that their services are no longer requested by those clients, and in some cases they say they aren't paid for the work they perform if the numbers don't meet clients' expectations.
Another Kalispell appraiser, Richard C. Vierzba, said appraisal orders from lenders typically carry an "anticipated market value" of the property. "We are expected to either meet or exceed that number or some lenders will refuse to pay for the appraisal, or will pay for it but will never use (our services) again," he said. Vierzba said this "subtle and indirect" pressure most often comes from mortgage brokers.
Tim Hicks, an appraiser in Texas, said unethical appraisers "are the busiest and most 'in demand' appraisers," which is discouraging for honest appraisers. "Loan officers or mortgage brokers are responsible for price-pressure. Appraisers have learned that they will get more work by hitting values and ignoring repairs. Many unethical appraisers reason that the lenders want this flawed system in place because it fuels the economy." Lorrie Beaumont Lorrie Beaumont
Lorrie Beaumont, a past president of the American Society of Appraisers, a professional organization formed in 1936 and incorporated in 1952, said there is "consistent pressure to hit certain numbers and/or fudge certain conditions of the property." Beaumont, owner of LB Appraisal Associates in Westwood, Mass., and a member of the state board of appraisers, said she has had requests from clients who ask not to mention certain problems with the property, or not to photograph a particular area. She's said she's heard the phrase more than once before, "Anything you can do to help out will be appreciated."
Then there are the requests for "free comp checks," which are essentially opinions of value, not formal appraisals, that clients ask for to gauge whether the appraised value will be in the ballpark of the value needed for the transaction. "They don't want the borrower to pay for something they can't use," Beaumont said, and she has been instructed to not go forward with an actual appraisal if this free check doesn't pan out.
That kind of request doesn't comply with appraisal standards, though, she said. In other cases, Beaumont said she has not been paid for services rendered. "I've had clients not pay at all. If the loan doesn't go through then you won't get paid (in some cases). Some lenders actually ask you to get payment from the homeowner."
Because home prices have been rising quickly in many markets in the country, it may be easy for some appraisers to justify matching the home value sought by their clients, she said. "If appraisers do hit that number they feel at least a little sense of confidence that the market will correct itself."
The growth of the secondary mortgage market has contributed to problems in the appraisal industry, said Francois "Frank" K. Gregoire, a Realtor and appraiser who is chairman of the Florida Real Estate Appraisal Board. "Almost no one is lending their own money. The originator often cares little if the loan is repaid or defaults -- they've made their (money) on the origination fee or the spread. Many loan originators care little about the quality of the appraisal or the qualifications of the appraiser, as long as the deal gets done."
Lee Ann Patterson, an appraiser in Topeka, Kan., said she believes that appraisal inflation "is the most underreported concern in our financial system." She added, "While our banking system may not collapse as a result of poor appraisals and bad banking policy in the short-term, I honestly believe that the potential exists for a banking fiasco that will make the S&L crisis look like a speck of sand against a child play-box full of 'bad business.' "
Robert G. Johnson, executive director for the National Association of Real Estate Appraisers, a professional organization with about 4,000 members, said he has heard from time to time that there is pressure on appraisers "to hit numbers" when conducting appraisals, though he said it is not the foremost issue for the industry.
"If you talk to a number of lenders, I don't think you'll find one that will say, 'We pressure our appraisers to hit those numbers – they're just not going to tell you that,' " Johnson said.
There are increasingly high barriers to entry in the appraisal industry, Johnson said, and new appraisers often end up serving in lengthy apprenticeships before they can go into business on their own. "People call me all of the time and say, 'I can't find anyone to go to work for.' I say, 'That's correct, you're going to have to work for nothing -- maybe they will pay you minimum wage.'" The association's membership, for example, has been roughly flat in recent years, he said. "But we should be gaining members."
Bill Apgar, a former Federal Housing Administration commissioner who is a senior scholar at Harvard's Joint Center for Housing Studies, said it is not uncommon for a bank to "be on both sides of the equation" these days – "making the loan and picking the appraiser," and this does not bode well for the independence of appraisers.
He said that the appraisal industry has changed rapidly since the 1990s, and the lending industry has evolved with "massive shops that have these production numbers to meet and call centers and the like. Appraisers, if they aren't seen as flexible, then they have a hard time getting the business," Apgar said.
Apgar, who is also an advisory board member for AMCO, an independent valuation management company, said, "Appraisal fraud has been kind of lingering in the background for a long period of time," owing in part to highly automated lending practices, a growth in financial services conglomerates, and house-price inflation. "This is a big black eye for the entire industry."
As interest rates rise, the problem of over-valued homes could harm the housing market and overall economy, he said.
Pamela Crowley, an appraiser in St. Augustine, Fla., said "way too many Realtors are demanding the mortgage loan officers use a particular appraiser they know will ignore necessary repair conditions and make whatever value is given on any contract. Many Realtors are also loan officers or mortgage brokers handling their own transactions -- or have someone within their company or offices who is doing this."
This, in itself, "has created a major conflict of interest," she said. "Appraisers being pressured by the loan officers, mortgage brokers and real estate agents has become normal to them and the way they now do business all the time. Along with this, appraisers are now constantly threatened with nonpayment if they don't make the value wanted, plus threatened with lawsuits and refund demands."
Ray Miller, an appraiser in Lyndon Station, Wis., said there are increasing time and fee constraints placed on appraisals, which restrict the quality of the work. "Lenders do not understand the scope of the work for an appraiser. They don't understand that it is not our job to 'get the value' by playing with numbers to 'make the loan work.' They even tell the borrower that it's our job to hit the numbers," he said.
New technologies, such as automated valuation models (AVMs), simplify the appraisal process through computerized property comparisons, though appraisers say such technologies can be dangerous because of the inherently unique value of individual properties.
"AVMs are and always will be skewed due to the fact that they do not actually compare properties do not ask questions or analyze markets for things like apparent owner satisfaction, excess improvements or sub-pay construction and increase or decline in neighborhood characteristics, nor do they define a neighborhood based on the actual market," said Doug Bingham, an appraiser in Readyville, Tenn. "They basically crunch numbers, without verification or consideration for actual differences between the subject and what could be considered as comparable properties."
Bingham also said he is aware of industrywide pressure to inflate appraisals. He said clients in some cases "fail to understand exactly what an appraisal is. They do not view it as a tool from an unbiased third-party to the transaction that provides the information necessary to make a lending decision. They view it as a necessary evil in order to get the loan closed and collect a commission. They don't mind, for one minute, asking us to break the law, put our reputations, our integrity and our livelihoods on the line for their commissions."
He added, "In a typical transaction, the appraiser is the lowest paid and least expensive part of the procedure, but has the greatest responsibility and the greatest liability within the whole transaction."
Copyright 2005 Inman News