The subprime mortgage mess has cost thousands of people their homes, but the tremors have sent shockwaves through the entire real estate industry.
Amid the skyrocketing number of foreclosures — the rate doubled in Queens for August alone — and layoffs among mortgage lenders and mortgage brokers, appraisers find themselves on a curious island of stability.
Home appraisals have taken on a different significance in a buyers’ market, and the professionals who analyze properties to set the basis for the types and sizes of loans offered by lenders may be breathing easier these days.
Their ranks are thinning by much smaller margins, since the rash of foreclosures gave rise to a new group of clients: banks, who must value repossessed properties before putting them back on the market.
But the primary explanation for the sense of relief is the restoration of the ethical firewall between themselves and sometimes unscrupulous lenders and mortgage brokers, which many appraisers say broke down in the superheated boom, as lenders and brokers pressured them to inflate values and get deals done.
“Mortgage brokers would call me and be blunt, saying, ‘Give me the number, or else.’ Other times they would come screaming, ‘You’re killing the deal,'” said Shimshon “Sam” Heskel, the executive vice president of HMS Associates, which is based in Brooklyn and covers New York City and Long Island.
As the credit crunch shrivels easy lines of cheap credit at many lenders, “I’m not getting those phone calls anymore,” Heskel said.
Refusing to produce numbers for mortgage brokers before he had even seen the houses lost him half a dozen clients a year during the boom, he said.
Sometimes the requests were less blatant but still aimed to inflate values by 10 to 20 percent.
Although work has slightly dried up — he recently had to lay off an employee, down from seven to six — Heskel recently appraised a two-family home in East New York for Sovereign Bank, which was willing to sell it below market value just to recoup losses on a defaulted loan.
This kind of work will increase as banks foreclose on subprime mortgage holders who can’t make their monthly payments, he said.
Jonathan Miller, president and CEO of appraisal firm Miller Samuel, shares that outlook. His client base is split equally between lenders, individual homeowners and law firms.
He says two of Miller Samuel’s best years were during the housing bust and recession of the early 1990s, when banks had an urgent need for its services.
Between 2002 and early 2006, the sales function had more clout than the credit side, resulting in a “process of exceptions.” Miller now wants appraisers to adhere to existing guidelines.
“I think you will start to see more respect for the barrier between the sales and the quality assurance function,” he said.
Outside of New York City, the pendulum might actually be swinging so far that banks, fearful of being burdened by mortgagees who can’t pay their bills, are pressuring appraisers to drive down property valuations, said Peter Cohen, president of First Alternative Mortgage Corp., which is based in New Rochelle and writes mortgages across the state.
Citibank, for example, recently reminded lenders that certain upstate areas are “declining value counties” and expects appraisals to reflect that, Cohen said.
“Banks don’t want to lend more than they have to, because ultimately they will end up with it,” he said.
First Alternative is a Federal Housing Administration lender, meaning that its loans are insured by the federal government and flow to homebuyers with lower incomes.
Still, “we are scrutinizing appraisers even more than we did in the past,” Cohen said. “We want to see if the property is worth what it’s worth.”
Lenders fearing the burden of getting burned by bad loans after encouraging them for years is welcome comeuppance, said John Brenan, a research director at the Appraisal Foundation, a quasi-governmental organization based in Washington, D.C., that sets national ethics standards.
“We’ve come full circle,” Brenan said.
But it wasn’t always this way. Fifteen years ago, about 10 percent of mortgages originated with mortgage brokers. Today, that number is closer to 66 percent, which can be a “recipe for disaster,” he said. This is because mortgage brokers aren’t the ones doing the actual lending, like lenders are, so they have less of a stake in making sure underwriting standards are followed.
Some states are now investigating all aspects of the home-buying chain to see if mortgage brokers and appraisers fraudulently colluded to overvalue homes, which would have produced large commissions for mortgage brokers. Although their work is fee-based, appraisers had an incentive to aid the brokers to drum up repeat work, appraisers said.
Still, the industry as a whole shouldn’t be blamed for the potentially illegal actions of a few, according to John Bredemeyer, a spokesman for the Appraisal Institute, an organization based in Chicago. The institute has 22,000 members, up from 15,000 a decade ago.
“Just like lawyers and accountants, there are bad-apple appraisers out there,” Bredemeyer said. “But the majority didn’t succumb to that pressure.”