The Center for Public Integrity released this week a report on the role appraisers may have played in inflating the housing bubble. The report says lenders pressured appraisers to inflate home valuations.
Here’s an anecdote involving an appraiser from eAppraiseIT, a unit of Santa Ana-based title insurance giant First American:
In 2004, years before plummeting real estate values turned Fort Myers, Florida, into a top five foreclosure capital, appraiser Mike Tipton faced a dilemma.
Tipton’s employer, eAppraiseIT, sent him to value a two-bedroom home in a new subdivision built by the developer D.R. Horton. Paperwork given by the appraisal management company to Tipton included a $245,000 estimated value.
But after inspecting the home and comparing it to five similar houses that had recently sold, Tipton set the value at $237,000, $8,000 less than the estimate. He knew the difference might disappoint DHI Mortgage, the prospective buyer’s lender, which is a subsidiary of developer D.R. Horton. And indeed it did.
The lender, in a process appraisers say was common in the boom days before the housing bubble burst, asked Tipton to redo the appraisal. It sent paperwork through eAppraiseIT asking him to reconsider the value. It gave him different homes to use for comparisons.
“If you read between the lines, they wanted a larger value,” Tipton said. “I told them no, I wasn’t changing my report.”
Tipton, who like many other appraisers is paid by the job, says he was never given another appraisal for a D.R. Horton home. “All I can say is D.R. Horton has remained an active developer in Lee County,” Tipton said. “I didn’t see any further appraisals for DHI Mortgage. So you tell me.”
Carrie Gaska, a spokeswoman for First American eAppraiseIT, declined to comment on why Tipton received no further orders from the company for DHI Mortgage properties.
In the example, the lender is a unit of a home builder, which is a special case since builders want to sell their properties at the highest value buyers will pay. But the report says other lenders also pressured appraisers.
Appraisal pressure is a byproduct of securitization. Lenders who hold loans on their books want an honest appraisal so that there is sufficient collateral backing their loan. (Collateral is one of the three Cs of lending; the other two are character and buyer capacity to pay.) But if the loans are sold to investors via mortgage securities, then lenders just want bigger values and the bigger commissions derived. Lenders thought they were freed from default risk.
Interestingly, such behavior may not be a crime:
Depending on the state where the homeowners purchased, the scheme may or may not have been against the law. Pressuring an appraiser to inflate the value of a property is a crime in at least 20 states and the District of Columbia, though it is often a misdemeanor punishable by a fine, a slap on the wrist that appraisers say does little to prevent the exertion of undue pressure.
In any case, not all appraisers were as steadfast as Mr. Tipton:
The Center also found many appraisers who say they bowed to lender pressure to “hit the numbers” in order to remain in business. These appraisers, along with the lenders who pressured them, helped pump air into the housing bubble that led to widespread economic devastation, according to dozens of appraisers, lenders, and others with intimate knowledge of home loan practices.
I asked the Appraisal Institute in Chicago for comment on the report, and Bill Garber, director of government relations and external relations, said in an e-mail:
“Appraisers were very small players among the cast of characters who contributed to the mortgage meltdown. We (the Appraisal Institute) have been exposing pressure on appraisers and educating Congress on loopholes in mortgage regulation that perpetuated pressure on appraisers. As an organization, we have a zero tolerance policy for appraisers that cave to pressure. We strongly feel that they (appraisers who give in to pressure) deserve to be sanctioned by the appropriate regulatory or enforcement agencies.
Competent and ethical appraisers were shunned by many in the mortgage industry. Unfortunately, similar practices are being perpetuated today, with lenders and their agents disregarding appraiser qualifications from the appraiser hiring process altogether. What we need to start doing is to build incentives to use competent and ethical appraisers.”
In fact, according to the Center for Public Integrity, if appraisers didn’t play ball they were blacklisted. For example:
Amerisave, one of the largest online mortgage lenders, has close to 12,000 appraisers on its “ineligible appraiser list,” which was removed from the Atlanta-based company’s website after the Center made inquiries about it. In December, appraiser Tom Woolford found his name on Amerisave’s list when the list also appeared on a popular online appraisal industry forum. Woolford said he has never done an appraisal for Amerisave, and the address they used for him was at least 10 years old. He doesn’t know how he ended up on the list, but he says it could be a matter of reputation: He says he never gives in to lender pressure.
“I think you will find a lot of the people on these lists do not hit numbers,” Woolford said. “I won’t lie, and I won’t push a number for nobody.”
After conferring with top management officials, Martin Wilhelm, an Amerisave vice president, declined to answer questions about how it compiles its blacklist.
So where do we stand now?
In fact, Congress had struggled with the issue of lender pressure on appraisers since the savings and loan crisis of the 1980s. In recent years, Congressman Paul Kanjorski, a Pennsylvania Democrat, has been the most vocal proponent for stronger regulation, proposing legislation in 2007 that would have set stiffer appraisal independence standards. The legislation, which would have prohibited lender coercion of appraisers and established penalties for it, was folded into the 2007 Mortgage Reform and Anti-Predatory Lending Act. The legislation faced stiff opposition and lobbying by the banking and mortgage industry, which argued it would adversely impact credit availability, and the bill was not taken up in the Senate after passing the House. In March, the legislation was reintroduced in the House as part of the Mortgage Reform and Anti-Predatory Lending Act.
…
Since the bubble burst, the FBI has focused most of its real estate efforts on appraisers and other fraudsters who developed intricate schemes to defraud banks. The Justice Department is not going through the wreckage looking at the institutionalized lender pressure on the appraisal process. An FBI official, asking not to be identified because the agency has no official position on the matter, said they view the matter as a regulatory issue to be addressed by Congress not a matter of law enforcement.…
Instead, the highest-profile investigation of the appraisal industry has come from New York Attorney General Andrew Cuomo. In 2007, Cuomo filed a lawsuit against First American Corp. and its subsidiary First American eAppraiseIT, charging that eAppraiseIT allowed loan production staff at Washington Mutual to pressure appraisers to inflate home values. The suit is pending.
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The Home Valuation Code of Conduct, an industry standard which came about as a result of Cuomo’s investigation, is slated to go into effect on May 1, makes deep changes to the appraisal industry.The code, which affects all loans eligible for purchase by Fannie and Freddie, bans lenders and brokers from pressuring appraisers to hype appraisals by threatening to withhold future business as punishment. Lenders must inform appraisers when they are removed from qualified use lists and allow them to appeal. It also bans loan origination staff from ordering appraisals directly — instead, the lender must use other in-house staff or go through a middleman appraisal management company. Even so, the incentive to pressure appraisers still exists, even for supposedly independent appraisal management companies.
…
Appraisers who work for themselves or small businesses say the code will end their careers since mortgage brokers and other loan generation staff can no longer contact them directly. Instead, they say the code in effect directs all business to appraisal management companies, the unregulated middlemen that are often subsidiaries of lenders.Appraisers say the management companies passed on pressure from lenders in the past, including in Cuomo’s case against eAppraiseIt, and see nothing in the new code to stop it from happening.
“It’s a bit of irony that the solution is the same thing that got us here,” said Bill Garber, director of government and external relations at the Appraisal Institute, a trade association representing appraisers.
The Home Valuation Code of Conduct, Garber added, is lip service to cleaning up the industry. Appraisal management companies “are just as capable of pressuring appraisers as anyone else.”
And these are just the highlights from the Center for Public Integrity’s report, which you can read HERE. I recommend reading it.
In other news…
- O.C. foreclosures drop to 22-month low
- Huntington Beach man named in crackdown on predatory lending
- Mortgage insurer fails to get bailout money
- Behind the profits at Wells Fargo
- Missouri AG sues O.C. loan-aid company
- Bailed-out banks face scrutiny over fee hikes
- The Fed and mortgage rates
- Fed economists say foreclosure relief ineffectual
- Loan doors open for serial housing investors
- Is Wells Fargo the smartest of the big banks?
- Wells Fargo projects record $3 billion profit
- Economy to get limited boost from lower mortgage rates
- The Fed’s thinking on rates
- Feds plan mortgage fraud task force
This is very common, especially at the single family level. The individual appraiser depends on lenders or brokers for assignments, so when he/she is asked, “can you work with me?” there is enormous pressure to comply. If he/she says no it can cut off the flow of work.
The appraiser was off less than 3.4% of the value. What would the builder have done if the appraiser came in 3.4% over value?……No problem. Appraising is not an exact science.
The naive on this board will blame this whole mess on realtors, when in reality you can blame appraisers, banks, wall street, “speculators”, and a plethora of other irresponsible people/parties.
The Esteemed Naive Anonymous SHOULD blame this whole mess on insatiable greedy realtors, who (contrary to appraisers) schemed in order to inflate the values. But the greediest by far were the unregulated mortgage companies to which the “good faith estimate” became an inside joke that cannot be told here.
I’m going to set up a web site with blank appraisal paperwork. You fill in the info the way you like, send me a check for $350, and i will put my stamp of approval on it to make it official.
An appraiser that bows to pressure from a lender to “hit a value” doesn’t deserve to be licensed. A lender that pressures an appraiser to “hit a value” shouldn’t be licensed either. It’s as simple as that.
I have been in the mortgage business for 20 years. I’ve worked for giants banks, and then opened my own business 5 years ago. I work with a terrific appraiser - I never push him to hit a value. Rather, I push him to do a thorough job and ask him to explain things to me when if the value comes in low, so that I can tell my client.
As a result, I get high quality appraisals which are never questioned by my lenders.
But since my business has gotten polluted by crappy loan officers and spineless appraisers, here comes the HVCC.
When my customers complain about the high costs and the terrible qualify they’ll be receiving, I’ll give them Andy Cuomo’s phone number - after all, he is the self-appointed Federal Mortgage Expert now.
the appraisal isnt the final value, even during the boom time even the subprime lenders would cut values all the time. Every appraisal goes through a review, not by the broker, but by the underwriter or an independant 3rd party that the lender uses.
This happened to us last year when we tried buying a PUD.
Bank came back with an appraisal $30K below the purchase price and wouldn’t fund the whole loan. Seller wouldn’t budge so we got a 2nd appraisal. First mistake.
We believed the selling agent since we kinda’ knew him. Second and last mistake. So we used his guy and the appraisal magically came in exactly at the number we were purchasing at. Hmm, sounds a little fishy.
Obviously the bank stood by their appraisal so we’d have to get financing from another bank. At that point, I was over it. I actually believed the banks assessment as the comps used by the sellers appraiser weren’t even close to what the property represented.
We ended up falling out of escrow and the place sat for 3 months with no action. It came off the market and turned into a rental but word is it’s coming on the market again. Curious to see what it’ll be priced at.
So, in fact, for a inflated appraisal to get through the system, its the bank/lender that would also need to be in on the “scam” - it would be impossible for a broker, on there own, to inflate appraisals…..
Just a thought. Webster’s Dictionary defines appraiser as someone whose profession is to estimate the market value of something. And they define appraisal as the act of appraising; a judgment formed by appraising. And last but not least Webster defines appraised as to judge the quality of, to give an expert opinion on the value or cost of. The key words in all of this are “estimate”, “judgment” and “opinion”…..Never does it mention, like I’ve said before, that an appraisal is “exact.”