This article by “The Mortgage Professor” details the problems I’ve been reading and hearing about the appraisal process these days. The author is a professor (emeritus) of finance from Wharton so he wouldn’t appear to be a simple flack for the lending or real estate industry. Here’s an excerpt:
The objective of HVCC was to insulate the appraisal process from influence by any of the parties with an interest in the outcome. Mortgage brokers and realtors could no longer have any contact with appraisers, and lenders had to obtain appraisals in some manner that prevented them from exercising any control.
The problem with this well-intentioned rule is that it was issued in December 2008 to become effective May 1 of this year, or squarely in the middle of the worst housing market since the 1930s. With house prices declining, the upward bias in appraisals that had prevailed during the bubble had morphed into a downward bias. Many deals are not getting done because appraisals are coming in too low, and HVCC is seriously aggravating the problem.
To protect themselves from liability, most lenders are ordering appraisals from appraisal management companies (AMCs), which intermediate between the lender and the appraiser. The AMC selects and pays the appraiser, receives and evaluates the appraisal, and passes it to the lender, who has no direct contact with the appraiser.
Because AMCs operate nationally but do not have appraisers everywhere, more appraisals are being done by appraisers who are not familiar with the local market. Appraisers working for AMCs are also paid less per appraisal than independents, which may induce them to invest less time. Less knowledge by appraisers means more scope for bias, and in a declining price market, the prevailing bias is toward lower values.
Intermediation by AMCs also lengthens the period required to complete purchase transactions. People involved in the process tell me that it can add an extra week. In an increasing number of cases, the paperwork doesn’t get done by the contracted due date, or the buyer’s mortgage lock expires, either of which can derail the transaction.
13 Comments
September 8, 2009 at 12:32 pm
So where’s the beef? You mean appraisals were supposed to be accurate? Who knew?
Perhaps a pensioner from the New Mexico could send us his copy of the Putnam Green appraisal, and we could all have a good laugh. Except for Bob Tuthill.
September 8, 2009 at 1:27 pm
When I stopped doing mortgage appraising about 20 years ago, I charged the banks about $350.00. The banks did not tell the appraiser what the contract price was. No one tried to influence the appraisal. The appraisals were generally accurate and unbiased. The appraiser set the fee which allowed fees high enough to warrant proper research. I’m not sure what the appraiser gets now. The appraisal fee is set by the AMC and a portion goes to the appraiser. I wouldn’t be surprised if the fee is about the same as I charged 20 years ago. Yes, most appraisals were fairly accurate. Today, not at these fees.
September 8, 2009 at 1:47 pm
Seems smart to me to take the trend into account when doing an appraisal, esp in an illiquid market where there are often few recent comps. Funny that we didn’t hear many complaints about appraisals when they took into account the upward trend.
September 8, 2009 at 2:52 pm
I don’t get the objection to “out of town appraisers”. Doesn’t this blatantly admit parochial interests inflated appraisals? What exactly could a ‘local’ appraiser glean from the same comp data not apparent to someone from “out of town”?
I say again – I never heard anyone in the house sales business complaining in 2005 when “hit the number” was all the rage.
September 8, 2009 at 2:56 pm
Anon E. Moose, you haven’t lived until you’ve had an appraiser show up from, say, Stratford, with no access to the Greenwich MLS (they have to pay a fee to get that access and most won’t, considering they’re getting paid maybe $250 these days for the job) and who thinks that $900,000 is a heck of a lot of money for a house. It’s tough, and it’s inaccurate.
September 8, 2009 at 3:36 pm
And what did CF, the broker, tell our out-of-town friend the real value was, for what’s it worth?
September 8, 2009 at 3:46 pm
Dizzy, the point of “the Professor”’s column is that these days its forbidden to speak with appraisers.
September 8, 2009 at 4:11 pm
That was a serious question, “What’s its worth?” …in the context of the example given, both as to your hypothetical listing function, and your lame blogger function, for what it’s worth.
September 8, 2009 at 4:22 pm
Why would you possibly think I would try to seriously reply to an insult?
See you.
September 8, 2009 at 5:20 pm
I’m a ‘Just the facts’ type, CF. No data is a fair shot. What the appraiser thinks is or is not “a heck of a lot of money” is irrelevant. The data either supports the appraisal or it doesn’t. You’re saying someone from Greenwich would blithely throw in another $500,000 over a nearly identical house on the same land down the block three months ago, while a ‘foreigner’ would not? I guess the “Greenwich premium” shows up in other places besides contractor quotes.
September 8, 2009 at 7:38 pm
you have to admit anyone with the data should be able to come up with the same appraisal, no?
900k is a lot of money i don’t care where you are
September 9, 2009 at 6:15 am
If none of the data required adjustment, then all appraisers with the same data would come up with the same value. I have never found a comparable sale that did not require some adjustment. In a market with few sales, comparables are hard to come by and required adjustments multiply. Competent appraisers can disagree on the amount of an adjustment and incompetent appraisers can be way off the mark. Then there are the less obvious differences such as zoning, deed restrictions, subtle locational differences, wetlands, etc. While one adjustment may result in a minor difference in value, disagreement on several adjustments can result in substantial differences in appraised value. I could go on for hours, but back to work trying to figure out this adjustment between deep water frontage and tidal flats.
September 16, 2009 at 8:19 am
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