Twice in recent months, federal financial regulators have imposed new rules and restrictions on banks requiring them to more carefully monitor appraisals on first mortgages and home-equity transactions.
The Office of the Comptroller of the Currency required banks and their subsidiaries to prohibit mortgage loan officers from being involved in the selection of appraisers to reduce the potential for conflicts of interest.
• Congress is debating new mortgage reform legislation that would ban lender interference with or influence over the conduct of appraisals.
Among the types of interference that appraisers themselves complain about are threats by loan officers and mortgage brokers to withhold future business — or even payment for completed work — when valuations fail to "hit the number" needed for a mortgage to go through.
Appraisers have complained to Congress about a practice known as "pre-comping," where loan officers send out faxes or e-mails listing the address of a home to be financed.
Only appraisers who are certain, in advance, that they can find "comparables" to justify the contract price — even if inflated — are then eligible for the appraisal assignment. Comparables are recent closed sales of homes similar to, and located nearby, the house the lender seeks to finance.
• Several research studies have found that high percentages of appraisers say they are frequently subject to lender or broker pressure to inflate valuations to suit sales-contract terms.
A national survey conducted in 2003 by October Research, an Ohio-based publishing and research firm, found that 55 percent of polled appraisers had been pressured to overstate property values.
All of this is getting heightened attention as mortgage economists and federal financial regulators look at spiraling local and regional housing prices and predict slowdowns in appreciation rates in the months ahead — if not actual declines in values.
Telltale signs
When the telltale signs begin to appear — houses remaining unsold for lengthening time spans, greater numbers of properties showing markdowns from the original listings — regulators want the appraisal process to be unbiased and open to changing realities.
"We are the bearers of any bad news out there — if and when it exists," said veteran appraiser Francois Gregoire of St. Petersburg, Fla., vice chairman of the Florida Real Estate Appraisal Board. "We have to value property accurately," not at what the seller thinks the property is worth or what the loan officer needs the property to be worth.
If, for example, a buyer in a highly competitive but slowing market is the top bidder for a house using an escalator clause in the contract that adds $50,000 or $100,000 to the seller's original listing price, an appraiser may well end up with the unpleasant duty of pouring cold water on the deal with a valuation closer to the original listing amount.
"We have to be the middle guy," said Tony Merlo, president of eAppraiseIT, a California-based national appraisal management and collateral-valuation firm. "We have to be independent."
Otherwise the bank — and later investors in the mortgage bonds that supply the actual capital for the loan — stands to lose money if the mortgage goes sour.
Homebuyers also have a huge stake in accurate appraisals, untainted by influence from a loan officer who will get no commission — or a smaller commission — if the appraisal comes in too low.
Problem of equity
After all, buyers in a once-hot but now-declining price environment stand to end up with lower equity — even no equity — in their property if they buy a house with a big mortgage based on an inflated appraisal.
Bottom line here: Follow the lead of the federal financial regulators and focus on the appraisal process.
Be aware of the range of appraisal tools available to lenders today — ranging from AVMs (automated valuation models) that can render valuations in a matter of seconds for $8 to $12 a pop, to combinations of AVMs and desktop appraiser reviews for $200, to full traditional interior and exterior inspection appraisals for $350 and up.
These methods frequently produce different valuations on any given home. Make sure the appraisal you pay for is not simply the one that spits out the number the loan officer needed to give you the biggest possible mortgage. |
