Home appraisers are usually selected and paid by commissioned loan officers and mortgage brokers, who have an incentive to close as many loans as possible for the highest amounts possible.
So it is almost inevitable that some appraisers would complain about pressure from originators to overstate property values. But several appraisers interviewed by American Banker said such pressure intensified during the refinancing boom of the last three years.
As more consumers sought to take equity out of their homes, the appraisers say, loan officers and mortgage brokers increasingly leaned on them to come through with values high enough to make cash-out refis worthwhile. If the appraisers held their ground, they said, they lost business to others who did not.
The perception appears to be held by appraisers nationwide, in both hot and lukewarm real estate markets.
Of the 500 appraisers October Research Corp. surveyed last year, 55% said they felt pressure to overstate home values. And nearly all the respondents said at least some of their peers "sometimes go along" with such pressure.
October, of Richfield, Ohio, conducted the survey from April through December. It polled appraisers in 44 states. The number surveyed in each state was proportional to the percentage of the nation's appraisers who were licensed in that state, according to Joe Casa, October's publisher.
This was the firm's first national survey on appraisers, Mr. Casa said, but many appraisers told October "it's much worse today than it's ever been."
Some critics have gone as far as to suggest that pumped-up appraisals heighten the danger of a national housing bubble. At the very least, lenders that sell mortgages into the secondary market risk being forced to buy defaulted loans back if the appraisals were overstated.
Searching For Solutions
Consumer activists have called appraisal inflation a predatory practice. Trade groups, including the Appraisal Institute in Chicago, have tried to call attention to the issue, and Congress has taken a look as well.
"Our members have told us that appraisers experience inappropriate pressure to deliver specific values from some lenders," said Don Kelly, the appraisal group's vice president for public affairs.
According to Mr. Kelly, some appraisers have been told by lenders, "If you can't come back with an appraisal that justifies this sales price, then we're not going to be able to use you."
The group wants "not only to call attention" to a "serious" problem but to "find a solution in the best interest of everybody," he said.
In 2001 the Appraisal Institute worked with a few lender groups to come up with a set of best practices, but the project fell by the wayside. However, the appraisal group is "intent on reinvigorating" the work this year, and this month it will co-host a conference call with the American Bankers Association and several federal regulators to discuss the problem, Mr. Kelly said.
Last year Rep. Jan Schakowsky, D-Ill., introduced an anti-predator bill that, among other things, would hold lenders accountable for appraisal values. Violators would be subject to criminal and civil penalties. The bill, which Mr. Kelly's group supports, has gone nowhere.
'Creating' Equity
As evidence that there is a problem, some appraisers cite foreclosure spikes in various parts of the country.
For example, foreclosures have more than doubled since 2001 in Gaston County, N.C., west of Charlotte. Bob Ipock, who runs the two-person appraisal outfit Ipock & Associates Inc. in Gastonia, said the closing of many textile mills in the county was only part of the cause.
Mr. Ipock, a 15-year appraisal veteran, said the local run-up in home prices over the past few years was hollow. "A lot of it was created" by demands on appraisers to put enough value on a home for the consumer to be able to get tens of thousands of dollars in extra cash by refinancing.
Brokers and loan officers will stop doing business with appraisers who get in the way of closing deals, he said.
"You get blacklisted," he said. "If we kill a deal, we've cost them thousands of dollars. If we're not able to 'hit the number,' we don't get any more work from them. They used to be more overt" about their wishes. "Now they're just not going to send you any more business."
Mr. Ipock said many mortgage brokers have stopped doing business with him in the past few years. His business has dropped 30% to 40% over the last six months, to about 15 to 20 appraisals a month.
He and other appraisers say loan officers and brokers subtly encourage inflated assessments by putting an "owner's estimate of value" on the appraisal order.
Consumers, and therefore the commissioned loan officers and brokers who pitch loans to them, "have unrealistic expectations," Mr. Ipock said. "Say someone has a house truly worth $100,000, they owe $90,000 on it, and they want to refi. They need $20,000 to pay off credit cards. They can't do the loan unless [the appraisal] comes in at $110,000 or $120,000."
Mortgage brokers have asked him to "create equity" where it does not exist, he said.
When local homeowners lost their jobs and flooded the market with houses for sale, the prices quickly dropped, he said. At the same time, other unemployed homeowners, whose houses had been overappraised, realized they owed more than their homes were worth, handed their lenders the keys, and compounded the price spiral.
"I would say locally our home prices have dropped 10% since two years ago," he said.
John De Nooy, the owner of De Nooy Appraisal Inc., in Knoxville, Iowa, 30 miles southeast of Des Moines, said the pressure from lenders intensified in 2000 and 2001 as debt-consolidation refis came into vogue.
"There were a lot of people doing refis. They had boats and campers and credit cards," Mr. De Nooy said. "That's when I think the lender was trying to get as much value out of the home to consolidate other debts. They just weren't being realistic."
Rich De Heer, who owns the Knoxville appraisal firm De Heer & Associates, said many questionable appraisals arise out of refis, where the appraiser "doesn't have a sales price to work off of."
They are also prevalent in rural communities where "you can go five or six blocks and be in a 20% higher real estate market," he said.
"A lot of these [overappraised] loans are being sold to secondary lenders," Mr. De Heer said, "and if they're selling these loans to somebody in Chicago, they don't know."
Client Pressure
Mr. De Nooy bought his residential business in April 2002 from Mr. De Heer, who still does commercial appraisals.
When Mr. De Heer used to appraise homes, he said he felt "client pressure," mostly from the Des Moines mortgage unit of Wells Fargo & Co., which was the top retail originator in the third quarter, and the largest over all, according to National Mortgage News.
Mr. De Heer had a long-standing relationship with Brenton Bank, a Des Moines lender that merged with Wells in 2001. He said the Benton loan officers he had dealt with in the past stayed at Wells, but when their compensation shifted to commissions from salaries, they became more aggressive in their demands for higher appraisals.
When his shop refused to play along, "we saw a real slowdown in orders, and they stopped altogether for two-month periods," and Wells was slow to pay for appraisals on loans that did not close, he said.
Mr. De Nooy, who does not appraise homes for Wells, said he did in mid-2003 a "field review" of a home in Knoxville. The noteholder had bought the loan from Wells, which had used a different firm for the original appraisal.
"We found that the comparables used in the original report were not comparable. The houses in the area were not as 'kept up' as the comparables," he said. "The first appraisal came in at $130,000. Our field review came in at $92,000. I sent it on, and I haven't heard anything since. Normally I don't hear anything."
Wells' Policy
Todd Bjorklund, Wells Fargo Home Mortgage's senior vice president of settlement services, working out of Edina, Minn., called the two Iowa appraisers' comments "inconsistent with what we know to be true in experience and practice."
In an interview, Mr. Bjorklund said Wells thoroughly checks its thousands of approved appraisers. He and David Bialzak, Wells' division manager of credit risk management in West Des Moines, described the three-step process by which the company checks out appraisers' work.
Wells first reviews appraisals on all of its loans during the mortgage underwriting process. Mr. Bialzak said it then analyzes a "statistical sample" of the loans, as well as a sample of loans that are $1 million or bigger. Finally, both executives said, the corporate credit administration group at Wells' corporate headquarters in San Francisco conducts "periodic reviews" of appraisals.
The executives said they did not know the percentage of loans that get double- or triple-checked. Both said Wells' foreclosure rates were below the national average, but they would not release the figures.
In addition, Mr. Bjorklund said that in the "last few years" Wells has not had to repurchase any loans with inflated appraisals that have gone sour.
Making accurate appraisals is a discipline, and appraisers should not be swayed by anyone seeking a certain value, he said. "I would simply go back to the training and ethical piece of what that profession is asked to stand behind."
Natural Balance
Reports of overstated appraisals have not been limited to places like Gaston County or Knoxville.
"It's not just on rural property; it's nationwide," said Greg Hansen, the president of Fidelity Hansen Quality Inc., a San Diego unit of Fidelity National Financial Inc. that reviews appraisals for secondary loan buyers. "We look at appraisals all over the U.S. As a whole, 15% to 30% of them appear to be significantly overappraised, over 15% of what the property is really worth, including in metropolitan areas like New York and Los Angeles."
However, pressure from originators is probably not the only cause of inflated assessments, Mr. Hansen said. New appraisers with little expertise in their markets could also play a role, he said.
In his several decades as an appraiser, Mr. Hansen said he had never been "pressured" by brokers or lenders.
In his view, disagreements are inevitable between appraisers, who tend to be conservative, and originators, who tend to be more aggressive out of a desire to close deals. "It's like going to Vegas. A developer at the craps table is going to be much more aggressive in betting than an appraiser will be. It's that balance that everybody is working for."
Asking a broker to appraise a home for a certain value is "a natural level of pressure," Mr. Hansen said. "It's necessary, and if appraisers understand that and still give their real opinion of value, that's what they're supposed to do."
Appraisers are quick to say they are being pressured, and lenders and brokers are just as quick to deny it, but the truth is "really in the middle," he said. "If appraisers hold their ground, it creates this balance that there needs to be."
Adding Buffers
One way lenders can control the quality of appraisals is by centralizing orders, either with an outside firm or an in-house vendor management shop. Aside from the benefit of cost savings, this practice creates a buffer between the loan officer and the appraiser.
"Salespeople are always trying to get the deal done," but inflated appraisals are not a big problem right now, Angelo Mozilo, the chairman and chief executive of Countrywide Financial Corp., said in an interview.
Countrywide keeps close tabs on the appraisers it hires, including those registered with Landsafe Inc., its Plano, Tex. online settlement services unit, he said.
Using Landsafe helps Countrywide to maintain its integrity, Mr. Mozilo said. Because Landsafe is a Countrywide unit, "we control the appraiser; they work for us."
According to Landsafe's president, Steve Boland, the unit orders "the majority" of the appraisals on loans originated by Countrywide's retail channel.
In addition, Mr. Boland said in an interview, Countrywide has "a lot of controls in place to make sure we are comfortable with the collateral valuation."
However, many lenders that have vendor management shops do not mandate their use when ordering appraisals or other services.
"What We Need"
And, critics say, lenders have even less control when loans are arranged by mortgage brokers, who are free agents.
A senior manager at a national wholesale lender said it is "typical policy" for a broker to "send out appraisal requests" and tell appraisers "'This is the value we need. If the requested value is not there, do [an analysis of comparable sales] and then call us.' "
The executive, who requested anonymity, used to work at a large Los Angeles-area mortgage brokerage that had its own "in-house appraiser."
The appraiser "was just our pet," the executive said. "We had him in our pocket. He showed up every morning, we were one of his only clients, and if we got our values knocked, he would do a value review" - and the brokerage would get the value it wanted.
Lenders are "trying their best to catch these things," but with the volume of loans that were being brokered during the refi boom, they did not have the resources to thoroughly review appraisals on all the homes they finance, the executive said.
Recommendations from originators are encouraging appraisers to be more creative in their value assessments, the executive said. For instance, an appraiser who cannot find the "correct" home value by searching through comparative neighborhood sales data from the last two months will look for comparable sales in "surrounding neighborhoods."
A home that would have been worth only $530,000 when compared with other homes in its immediate neighborhood could be inflated to $600,000 or $610,000 by doing a wider search, the executive said. "Now the next person is going to see comps in the $600,000 to $610,000 range, and all of a sudden you have this whole new overinflated neighborhood."
Many lenders do very few field reviews, or secondary appraisals, on properties, the executive said. "They're turning a blind eye and trusting appraisers." But "if they go to sell" the loan, "they're going to be in trouble," because investors can force lenders to buy back loans that have inflated appraisals.
Not A Science
Chuck Reed, a senior vice president at ABN Amro Mortgage Group of Ann Arbor, Mich., the nation's largest wholesale lender, acknowledged that the problem of inflated appraisals exists.
However, it is limited to "less than 10% of the market," Mr. Reed said. "We have some good processes in place" to combat appraisal fraud.
The ABN Amro Holding NV unit tightly scrutinizes appraisers before it will work with them, and for the past year and a half it has run every single loan it originates through an automated appraisal checking system, he said.
If the system detects any abnormalities, ABN Amro Mortgage has a vendor management firm send a real estate agent to do a field review of the home, Mr. Reed said.
Amro also uses an automated valuation model to randomly review 10% of its loans, he said. It does field reviews on "less than 1%" of the loans it funds.
Instead of complaining, appraisers should do more "self-policing," Mr. Reed said. "Where are their ethics?"
He also disagreed with the popular argument among appraisers that they risk losing all their business by refusing to do inflated appraisals.
"In the refi boom there has been so much business, such huge backlogs," that the average appraiser "has had so much business they don't know what to do with it," he said. "You can't get business elsewhere? That's pushing the envelope."
Appraisals are "not a science," Mr. Reed said; they depend on local markets and a lot of detailed comparing of neighboring properties. It is not wrong for lenders to put on their appraisal requests what they think the house is worth, as it has become a custom, and appraisers even ask for it, he said.
Spiritual Issue
A.W. Pickel 3d, the president of the National Association of Mortgage Brokers, said brokers and loan officers should not be singled out. "Appraisers feel this pressure from realtors and consumers as well."
Inflated appraisals are a "short-term" fix, but "long term, they hurt everyone," he said - consumers lose equity, brokers lose clients, and lenders lose collateral value.
Brokers get a bad rap, because they are originating "close to 70%" of the nation's mortgages, Mr. Pickel said. "I don't think you're looking at a crisis. There are a few bad apples there, and they don't get better, they get rotten," but other, more conscientious originators "can turn ripe and become great companies."
His solution: Educate originators and form a national registry that would enable consumers to check up on their lenders, as they can with stockbrokers.
The mortgage brokers group has been backing mandatory broker licensing and education requirements for a couple of years, and has gotten requirements enacted in some states.
However, Mr. Pickel does not advocate regulations that would go further than licensing or education.
"I can't change someone's heart," he said. "I can educate people and show them by law that it's fraud, but it's a spiritual issue to change someone's heart. Added regulations" will not "stop the crooks."
Editor's note: This week's Pipeline column will run in Friday's paper.
