Ken Harney – Appraiser pressure at pandemic proportions

With home prices softening and sales volumes sagging in many local markets, real estate appraisers say that pressure on them to inflate values has reached pandemic proportions.

A new survey of the national appraisal industry found that 90 percent of appraisers reported that mortgage brokers, realty agents, lenders and even consumers have pressured them to raise property valuations to enable deals to go through. That percentage is up sharply from a parallel survey conducted in 2003, when 55 percent of appraisers reported attempts to influence their findings and 45 percent reported “never.” Now the latter category is down to just 10 percent.

Both surveys were conducted by October Research Corp., a Richfield, Ohio-based firm that publishes Valuation Review, a popular industry newsletter. The latest survey involved 1,200 appraisers representing a statistical cross-section of the industry in 50 states, the District of Columbia and Puerto Rico. The results have a margin of error of plus or minus 2.8 percent.

“I call it a perfect storm scenario,” said Alan Hummel, senior vice president of Forsythe Appraisals of St. Paul, Minn., one of the largest property valuation firms in the country with 40 offices and 190 licensed appraisers. Forsythe was a co-sponsor of the new research study.

“You’ve got a situation where sales are down so everybody in the deal needs it to go through” at the contract price — the mortgage broker, the Realtor, the lender, and even individual sellers, he said.

Loan brokers are now routinely “dialing for values,” said Hummel. “They call up appraisers and say, we’ve got this sale at $335,000 at such and such an address. Can you get to that number?” If an appraiser answers yes, he or she gets the assignment. If not, the appraiser is bypassed.

Worse yet, said Hummel, when an appraiser comes back with a market value estimate that is lower than the sales contract price, the appraiser may not get paid for the work, and frequently is blackballed by the mortgage broker or realty agent.

The survey found that 75 percent of appraisers reported “negative ramifications” if they refused to cooperate and come in with a higher valuation. Sixty-eight percent said they lost the client — typically a mortgage broker or lender — following their refusal to fudge the numbers, and 45 percent reported not receiving payment for their appraisal.

Hummel said realty agents may retaliate against non-cooperative appraisers by telling local mortgage brokers or lenders, “Look, I’m not sending any more [home purchaser] clients to you if you continue to use that appraiser.”

Though mortgage brokers were ranked the most common source of pressure — 71 percent of appraisers said brokers had sought to interfere with their work — realty agents came in a close second at 56 percent. Both numbers were up significantly from where they were in the 2003 survey. Also identified as sources of pressure were consumers — typically home sellers (35 percent), mortgage lenders (33 percent) and appraisal management companies (25 percent).

Mortgage brokers represent the biggest problem, said Hummel, because they are generally lightly regulated at the state level, often wield the power to bestow or withhold appraisal assignments at the application stage and, ultimately, “if the deal goes south two years from now, they’re long gone” from the transaction.

On the other hand, lenders, including banks and mortgage banking companies, “have more skin in the game” — they are more intensely regulated and can be forced by bond market investors to “buy back” defaulting mortgages that have inflated appraisals or other defects.

Hummel emphasized that the responsibility for the problem of pressure rests not only with loan brokers, realty agents and lenders, but with the appraisal industry itself. Large numbers of newcomers with inadequate training and little experience flocked into the appraisal field in recent years — drawn by high housing sales volumes and constantly escalating prices.

Now that sales are down, said Hummel, “you’ve got more appraisers out there who think, gee, if I don’t [cooperate], maybe I’m not going to get any more work.” The vast majority of appraisers resist the pressure they receive — from any source — and simply refuse to submit valuations they know to be inflated, he added.

Bottom line, in Hummel’s view: Congress needs to enact legislation making pressuring appraisers to distort their valuations, or interfering with appraisals in any way, a federal offense, subject to criminal penalties. And state regulators need to step up enforcement against fraudulent appraisals, pressure tactics and appraisers who give in.

Ken Harney is a real estate columnist with the Washington Post.