The appraiser's perspective: The truth about appraisals and foreclosuresCharlie W. Elliott Jr., MAI, SRAappraisals, foreclosures
If we are to believe what we read in the news, foreclosures on
homes are escalating at an alarming rate. There seems to be no
shortage of statistics to back up this contention, so I accept
it.
It is disconcerting to me to think that families who aspire to
have a piece of the American dream find that they lose it because
they are unable to pay their mortgage payments. There would surely
be few of us who would not find it within our hearts to find
compassion for these people. That being said, there has been a lot
written in the news and elsewhere concerning the root cause of
foreclosures and who is to blame. Many of those offering opinions
and positions on the subject are apparently not well informed or,
for whatever reason, consider it their job to twist the facts
and/or inject politics into the equation.
Given the above and in an attempt to offer a fair and balanced
analysis of the situation, listed below are a few concepts and
perhaps some misconceptions having to do with property foreclosures
as they relate to appraisals of the property.
First, it would be unfair to paint all appraisals and/or
appraisers with the same broad brush in developing a picture of how
appraisals relate to property foreclosures. There are undoubtedly
many cases where appraisers have performed poor appraisals
involving foreclosed properties. There are also many cases
involving foreclosed properties where appraisers have done good
jobs.
To listen to some, all foreclosures are the responsibility of
the appraiser, and the poor people who lose their homes are
suffering because of those who prey on the weak and call themselves
appraisers. This is not true and, in my opinion, is born out of a
lack of education and understanding.
The Charlotte Observer recently ran an article offering five
ways to cut foreclosures. These points of view are apparently a
composite of information provided by what The Charlotte Observer
refers to as experts, including builders, borrowers, defaulters,
community advocates, academicians and government officials. Among
the five points was, "Name the broker and the appraiser on public
mortgage records in addition to the mortgage company, allowing
regulators and the public to identify the source of problems."
I have no problem with full disclosure when necessary; however,
to imply that the broker or appraiser is guilty of some misdeed
without due process is inappropriate. The lender has a record of
who the loan officer and the appraiser are on a transaction, and
this information is readily available to anyone needing it for
investigative purposes. To try and convict the loan officer and
appraiser in the court of public opinion because they participated
professionally in a loan transaction whereby a borrower did not
make mortgage payments is misguided logic.
In the not too distant past, the U.S Department of Housing and
Urban Development posted national appraiser rankings online in a
registry that attempted to measure skills according to claims and
defaults. This lasted only a short time because it unfairly singled
out appraisers on transactions that went south through no fault of
their own. The root causes of foreclosures are numerous, and many
foreclosures occur for reasons outside that of the underwriting
process, such as the loss of a job, unforeseen health problems and
divorce.
The appraiser is responsible to his client - the lender. The
lender's first and primary line of defense in evaluating a loan
under consideration is the ability of a person to repay the loan.
While the appraised value of underlying collateral may be used as a
secondary tool to limit the amount of a loan to protect the lender
in the event of a foreclosure, it in no way should be misconstrued
as causing or contributing to a foreclosure.
In conclusion, it would be fair to say that some appraisers have
been and are responsible for improper appraisals. Here, we are
talking about violations of the Uniform Standards of Professional
Appraisal Practice, as well as state and federal laws. In some, if
not many, cases, appraisers have been and are guilty of loan fraud.
These people, in my opinion, should be dealt with appropriately,
whether it be the suspension or revocation of their appraisal
certifications and/or civil and criminal penalties up to and
including serving of prison time.
However, it is fair to also note that appraisers have little, if
anything, to do with the foreclosure of properties - even in cases
where they are guilty of violations of appraisal standards and
violations of the law. The approval of a borrower's credit and his
ability to make payments is a completely separate function from
that of the appraisal and an appraiser who takes it upon himself to
get involved in an individual's credit or ability to service a
mortgage is out of bounds. Said another way, the appraisal process
is designed not to prevent foreclosure but to aid the lender in
recovering as much as possible from a loss due to a foreclosure in
the event that it becomes necessary. The appraised value of a
property in no way determines a borrower's ability to make mortgage
payments; however, it may serve to direct the lender as to the
maximum amount the lender will lend on a given property.
Furthermore, if the appraiser is found to be liable for
preparing a fraudulent appraisal, he will be subject to sanction
whether or not there is a foreclosure involved. In other words, if
the appraiser commits fraud is he not guilty unless there is a
foreclosure.
If we in the lending community have a responsibility to
borrowers to help protect them from the woes of foreclosure, my
vote goes to better informing and educating them as to how the
lending process works and of the serious responsibility they
undertake when they obtain a home loan.
Charlie W. Elliott Jr., MAI, SRA is president of Elliott and
Company Appraisers, a national real estate appraisal company. He
can be reached at (800) 854-5889,
[email protected] or
through the company's Web site at www.appraisalsanywhere.com.
Previous columns he has written for The Mortgage Press can be seen
on the Elliott and Company Web site.
