The intense pressure on appraisers to “hit the number” may be taking its toll.
The appraisal industry has long said it has had to deal with mortgage brokers, loan officers, real estate agents and others who pressure its members to value properties at a certain amount so that a sale or refinancing will go through.
But the issue of appraiser independence has been the subject of renewed focus recently, prompting discussion and seminars in some industry circles.
The reason? During the fall, five federal agencies jointly issued a statement clarifying guidelines on appraisal independence, essentially reminding appraisers about their duty to uphold the law.
At the same time, the first independent national study of the appraisal industry found the challenges to the integrity of appraisers was worse than previously thought, with 75 percent of appraisers saying they had been pressured by a mortgage broker in the last year.
Meanwhile, there is not much regulation of the industry in New York State, according to some observers. A federal report last year said that nearly half of state appraisal regulatory agencies were doing an inadequate job.
Jonathan Miller, president of Miller Samuel real estate appraisal company, said the letter sent out by the federal agencies, including the Office of the Comptroller of the Currency, Federal Reserve System, FDIC and others this fall had generated “a lot of discussion.”
It really hit home,” he said. “There must have some real issues for them to come out with this. Finally, it’s a sign from the federal government that there is some concern about this.”
The letter was largely focused on how appraisal independence is compromised when an institution uses an appraiser who is recommended by the borrower.
“It said the lender is supposed to engage the appraiser, not the borrower,” Miller said.
Jeffrey Jackson, chairman of appraisal company Mitchell, Maxwell & Jackson, said the letter appeared to be “kind of a spillover from the commercial end to the residential” and didn’t necessarily create huge waves.
But he acknowledged that there are significant pressures facing appraisers. Appraisal subsidiaries and small independent operations are particularly vulnerable to pressure, he said.
“It’s happening more and more where appraisal companies are a subsidiary of a mortgage finance company or a real estate brokerage company,” he said. Because the independent functions exist within the same company, “that’s where they are most subject to pressure.”
Smaller independent companies are also vulnerable to influence because they rely on a small number of deals. “A company that is doing two or three deals a month, the deals matter so much, they might push the envelope,” Jackson said.
Skewed appraisals are not as common with sales (“the markets are very efficient,” said Jackson). However during refinancing situations, “you have a lot more pressure,” he said.
Miller said he particularly sees a problem in the wholesale lending area, where transactions usually involve a refi of some kind.
“The structure is more adversarial to an appraiser,” he said. “In this situation, our client is the mortgage broker, and the mortgage broker’s incentive is to close the deal.”
By contrast, with lending institutions, “there is an insulation and protection from the sales side of the bank,” he said.
Overall, Miller says, “there is tremendous pressure” to come up with certain numbers, or “to hit a certain value.”
“We ignore it, but it certainly creates stress,” he said. “If it’s a problem, we drop them as a client.”
In the national study on appraisers, in addition to pressure from mortgage brokers, 59 percent of appraisers reported similar pressure from a loan officer working for a lending institution or mortgage company to arrive at certain numbers.
Overall, 56 percent of appraisers said they had been pressured by a real estate agent. The study, which included 500 respondents nationwide, was conducted by Ohio-based October Research Corp.
Nearly half of the respondents said overvaluation demands ranged from 11 to 30 percent above market value, according to the study.
Pressure is usually applied by direct or veiled threats to withhold future business from an uncooperative appraiser, according to October Research.
Other tactics include “pre-comping,” in which a broker or loan officer asks in advance whether the appraiser thinks he or she can come up with “comparable” sales for a property to justify a specific target value needed for the mortgage. If the appraiser does not agree, the assignment will often go elsewhere, according to a Washington Post story on the study.
In the area of state regulation, there are also problems, according to federal agencies.
In May, a report by the Federal Financial Institutions Examination Council found that more than 40 percent of state appraisal regulatory agencies failed to resolve complaints against real estate appraisers expeditiously and were inconsistent in applying disciplinary sanctions.
Miller said there appears to be little enforcement regarding negligence in this state.
“In New York State, I don’t believe there has ever been an appraisal license lost because of negligence,” he said. “Our state law doesn’t seem to have the teeth other states do. There are certain states where we see a lot of licenses revoked.”
Miller said he was familiar with some instances here where people knew of appraisals that were questionable, but didn’t bother complaining. “They didn’t submit their complaint because they didn’t think anything would happen,” he said.
Miller said more regulation might come about a result of an economic downturn. “Things have been going so well,” he said. “If prices were down, you could see a more in-depth look.”
Overvaluations can pose a significant problem to consumers during down periods in the economy.
While overvaluation might not hurt in an economy in which houses are appreciating 5 to 7 percent a year, when an economy goes through a downturn, consumers who bought houses with small down payments and inflated appraisals could be stuck. They could be “upside down,” – owning houses worth less than the balance they owe their lender.
With its recent letter on independent appraisal functions, Miller is hopeful the federal government will take more action.
“I think the idea behind this letter is that the independence of the appraiser is paramount to having a solvent lending environment,” he said.