Appraising the appraiserJoe Amorosoappraisal issues
When I first addressed the topic of appraisers seven years ago,
the issues of appraisal fraud and pressure were boiling just under
the surface. Not anymore. You know a topic is hot when it pops up
in the Wall Street Journal and manages to actually get the
attention of consumers.
The flurry of recent media scrutiny around the appraisal process
has done two things. First, it has shed public light on a system
that is in need of serious reform. Appraisal fraud and
overvaluation is a systemic problem long overdue for some checks
and balances. Second, it has highlighted the love-hate or "us
versus them" relationship we as bankers and brokers have
traditionally had with appraisers. Few topics can actually silence
a room full of brokers faster than appraisals, and the time has
come for us to seriously rethink the way we structure our
relationship.
A two-way street
Appraisers are businessmen and businesswomen just like us, and they
have their own concerns about the way we do business. They serve a
variety of masters, including the lender, broker and borrower, but
in the end, their obligation is clearly to the lender. This sets
the stage for pressure on both sides.
The appraisal process has a direct impact on much of what we do,
as well as how much we earn. We know that if the appraisal doesn't
come in, there is no deal. We also know that appraisers are paid,
regardless of whether the loan closes. On the flip side, appraisers
can feel pushed, whether directly or indirectly, to deliver
valuations at the right level and turn them around as quickly as
possible.
Many appraisers feel that brokers and bankers want three things
out of them: fast, good and cheap. You can have two out of three,
but you can't have all three. If something is good and fast, it
won't be cheap. If something is fast and cheap, it won't be
good.
Clamping down
Just how pervasive is the pressure on appraisers? According to a
2003 survey by October
Research Corporation, 55 percent of appraisers felt they had
been pressured to inflate or overstate the condition or value of a
home.
The issue of mortgage fraud and inflated appraisals is now under
intense scrutiny by federal banking regulators and key members of
the House of Representatives.
Groups like the National Community
Reinvestment Coalition (NCRC) continue to lobby Congress to
enact stronger regulations and stiffer penalties to prevent
appraisal fraud.
In fact, members of the House Financial Services Committee
recently introduced two separate bills that would hold lenders
accountable for coercing appraisers to make predetermined values.
The bills would give independence to appraisers to do their jobs
without undue interference or pressure. The Ney-Kanjorski bill
includes an appraiser independence provision that is supported by
the Appraisal
Institute. The Miller-Watt bill is supported by the NCRC, and
contains whistleblower procedures that would allow appraisers to
report complaints to one central agency in order to detect and
investigate fraudulent claims quicker and more efficiently.
The stakes are high
Clearly, it is in our best interest as brokers and bankers to
ensure that appraisals are accurate. While homebuyers must order
and pay for their appraisals, they often pay little attention to
this critical step as they enthusiastically rush to close on their
home. Soaring numbers of homeowners have suffered from appraisal
fraud and are at risk of losing their most valuable asset as a
result.
First-time homebuyers and homeowners who refinance risk
defaulting on loans when they borrow more money than their homes
are really worth. Upside-down mortgages combined with rising
interest rates put both homeowners and brokers at risk. The
secondary market is more than aware of appraisal issues that
influence loan performance as well.
In most cases, the secondary market becomes aware of an
inaccurate appraisal when the loan defaults and they are making an
attempt to remedy it. This, as you would imagine, has an effect on
the big picture. The integrity of loans purchased by Wall Street
is, in many cases, directly related to the performance of those
loans. Performance dictates the price they will pay.
With so much on the line, it's evident that more serious
controls need to be implemented. While these controls may cost
money upfront, they will undoubtedly save money in the long run as
a means of avoiding foreclosures and/or having to repurchase bad
loans - not to mention tarnished reputations and ruined
businesses.
Taking the air out of inflated appraisals
While lobbyists push for increased government legislation and
regulation in this arena, it is incumbent upon us to self-police
our own industry. With a heated housing market and interest rates
on the rise, the best way to protect against inflated appraisals
and fraud is to be proactive and diligent during the origination
process. Additionally, there are a number of steps that we can take
to minimize the problem:
- Only partner with the best appraisers. We need to be pickier
about whom we do business with and increase the number of names we
add to our exclusionary list of overly aggressive appraisers.
- Choose a good AVM and use it. New technology and tools enable us
to automatically flag between five and 10 percent of questionable
appraisals that require additional or independent review. It takes
about 10 minutes and costs around $30, making it an option that
should be leveraged where appropriate.
- Two independent appraisals are better than one. Homes valued at
more than $1 million or loans made to buyers with lower credit
scores may be key candidates for getting a second opinion.
The road ahead
The biggest mistake we can make is to view appraisals as nothing
more than necessary evils. Appraisers are an important element of
the loan underwriting process. Much like fraud, inflated appraisals
are one of the greatest threats to our business.
Pressure on loan officers and underwriters may be subtle or
direct, but a "separation of church and state" between appraisers,
lenders and brokers would remedy a significant portion of inflated
property values. A good dose of empathy wouldn't hurt, either. If
we expect appraisers to understand our urgency to close loans, it's
only appropriate that we become more understanding of the realities
of the appraiser's job and the pressures that they face every
day.
Joe Amoroso is a senior vice president with Opteum Financial Services. He may
be reached by e-mail at
[email protected].
