While many groups bear culpability for the subprime mortgage meltdown, appraisers, in particular, helped determine the sea levels that have put millions of Americans “underwater.”
As the crisis has unfolded, the trustworthiness of appraisers has taken a massive hit. New regulations meant to restore the credibility of the profession have been enacted, but many real estate professionals still wonder whether enough has been done.
“Appraisers felt threatened that they wouldn’t get business from banks if they didn’t come in with the right figure on their appraisal,” said Chris Dreibelbis, communications and economic policy director at the Reform Institute. “Inflated appraisals really skewed the market, and they got a lot of people in mortgages that they couldn’t afford and in houses valued at more than they were worth.”
Appraisers haven’t always been eyed with caution. In the early 1990s, appraisers served as safety nets for banks by independently evaluating the home — the asset underlying the mortgage. In the wake of the savings and loan scandals that rocked the real estate and financial industries, banks had a vested interest in getting a proper valuation on those — but that was back in the days when mortgages stayed on the books of the banks that issued them.
A decade later, the ability to sell securitized mortgages in the secondary market lessened the need for such stringent checks and balances.
“In the fast-paced market we were in a year ago, things were going up so fast that the appraisers were really in a bind,” said Klara Madlin, owner of Klara Madlin Real Estate and president of the Manhattan Association of Realtors.
Appraisers said that if they came to
mortgage brokers with appraisals that did not suit their needs, they would lose future business with those brokers.
“An independent appraiser is absolutely going to feel pressure if he continually goes in with a figure lower than the figure on a loan application,” said J. Philip Faranda, owner of J. Philip Real Estate.
The pressure to make numbers, some believe, was the genesis of today’s financial mess. A few inflated home values in one neighborhood affected the values of other nearby homes. The situation worsened further as lenders began ordering cursory “drive-by” appraisals instead of full appraisals.
In a drive-by appraisal, the appraiser never goes into the home.
Instead, the value is estimated based on neighboring home sales, square footage, number of bedrooms and school district.
When the credit markets froze last year, many homeowners found themselves stuck with houses they could not sell or refinance because of overstated appraisals. Banks initially would not accept many short sales because the banks’ appraisals listed the homes as worth far more than the market would support.
In March, New York Attorney General Andrew Cuomo tackled some of the system’s flaws through an agreement with the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, the nation’s two largest purchasers of home loans. The companies, which purchase about 60 percent of all home loans originated in the United States, agreed to the establishment of a “New Home Valuation Protection Code” that attempts to eliminate bias in appraisals.
Under the agreement, which goes into effect Jan. 1, Fannie Mae and Freddie Mac will not buy loans that do not meet the code. Specifically, the code prohibits mortgage brokers from selecting appraisers and bars lenders from using “in-house” appraisers or appraisal management companies that they own or control.
New York appraiser Jonathan Miller of Miller Samuel hails the agreement as a “step in the right direction,” but he said it must go even further.
“They have to figure out a way to incentivize buyers of mortgage paper to have high-quality standards,” he says. “It has become much more difficult to sell their paper to the secondary market and free up money so they can continue to lend to consumers. The whole issue is about restoring confidence in the credit markets.”
Not everyone supports the Cuomo agreement; not surprisingly, the mortgage broker industry has been critical of the changes.
“I think it’s an unfair and one-sided point of view based on false public perceptions,” says Andre Mitchell, a mortgage broker with Lynx Mortgage Bank in Westbury, N.Y.
Regulators should penalize those who have broken existing laws, but remain wary of over-legislating, he says.
“The market will correct itself,” he notes. “It’s just going to take time.”
Others in the industry say that fixing the flaws in the appraisal system would require the elimination of any long-term relationships between lenders and appraisers.
“I think we just need to give back independence to the appraiser so that he can just do his job,” says Sam Heskel, executive vice president at HMS Associates, an appraisal firm.
Some recommend requiring appraisers to stick to one geographic area in order to offer better appraisals.
An appraiser used to evaluating single-family homes in New Jersey, for example, does not have the proper frame of reference to appraise an apartment in a Manhattan high-rise, although in recent years they have, Madlin says.
Heskel takes issue with such suggestions, saying that appraisers who do their due diligence are perfectly competent to work in a broad geographic area.
Others said appraisers should be held answerable for loans that default following their appraisals.
“Instead of fearing for losing bank business, appraisers should fear getting a fine or going to jail [if they inflate a home value],” Faranda says.
Mortgage broker Mitchell thinks such a structure could unfairly punish appraisers.
If borrowers get unreasonable loans to buy the house and then default, that is not entirely the appraiser’s fault, Mitchell says.
In addition, there are no absolute standards of valuation in real estate, Mitchell adds. “If an appraiser does his job properly, and there are no blatant errors, it’s still always going to be subjective.”