WSJ: Appraisals Are Bringing Housing Down

The appraisal system is broken, a Wall Street Journal article asserted last week. Low appraisals, whether the result of intentionally conservative lending practices or simply unprecedented bad times for home prices, WSJ says, are preventing the real estate market from rebounding.

“One of the conclusions from the housing bust: The appraisal system was broken,” WSJ writes. “One of the conclusions some have drawn from the struggling recovery since then: The appraisal system is still broken, but in a different way.”

While some believe that low-ball appraisals and a downward bias from those who conduct them is inhibiting the housing recovery, still some others think that lenders are instructing appraisers to be more conservative, which may be exacerbating the problem, says WSJ. Mortgage Bankers Association senior vice president Steve O’Conner told the WSJ that “There’s an extra note of caution,” on the part of appraisers.

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Additionally, the article cites an example of a valuation that came in around half of what was expected by the realtor, noting that disputes over valuations are rising and that appraisers are increasingly using automated valuation models, or AVMs to determine home values based on reams of property data, and public and privately compiled databases.

Read the Wall Street Journal article.

Written by Elizabeth Ecker

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    • reverse1,

      If you look back at the August 7th story in RMD disclosing the choice of Mr. Lucia by Greenlight, I questioned that choice based on the info you now link.  It would be better if we slowed down a little to see how this works out before awarding Mr. Lucia the RMD financial spokesperson of the year.

      Is the industry so desperate that we gush when anyone flirts with us for money and wider publicity?  That thread looked like a bunch of blushing young teenage girls just asked to their first dance.

      As to the issue of false and misleading advertising by Greenlight, you should bring that up to NRMLA, HUD, and the FTC.  I know nothing about it but if that is what is going on, report it. 

  • You missed the biggest part of the problem: the banks’ internal appraisal review process. When I sold for Financial Freedom, I lost several loans and most were reduced by internal appraisal reviewers. I argued till I was blue that short sales and foreclosure sales (often severely damaged homes) should not offset legitimate comps from the appraisal. The bank seemed to need to demonstrate to FHA that they were being “conservative.” The thread always leads back to the government.

    • roxie1,
       
      The internal review is another story.  I am a California real estate broker with two college level courses in appraisal behind me.  Even though not FHA qualified, I was as qualified if not more qualified to perform appraisals than most appraisers I met until a separate residential appraiser licensing law went into effect in California.
       
      How bad desk review can be, I had one HECM where desk review came up with half the value the independent appraiser did.  Well I blew up and asked for the data they used in making the valuation.  Guess what?  They valued the house across the street which was on a single lot rather than a double lot.  The property the review desk used had no pool, the living area was 40% the size of the home of the applicant and the other home sat on a very inconvenient incline with little landscaping. 
       
      Before informing her of the error, I asked the desk reviewer how she got her appraisal education.  The reply was through “a very experienced” underwriter and the outside vendor which provided mathematically computed values; she did not have an appraisal license even though she was overruling a licensed appraiser.  When I told this person that we had a dispute over her valuation, I was told that she used a computer determination which was far less subjective than the appraiser who had performed the appraisal.  When I pointed out the address issue, the reviewer shot back I must have the wrong address because the computer does not get things like that wrong.  I finally had to get the underwriter to intervene.
       
      Just another crazy day in the life of a HECM originator.
        

  • Wow, don’t get me started.  Comparing a perfect little home’s value to the other crap in the neighborhood that sits without owners is almost every senior’s nightmare.  Then add to the fact they are pretty much planning to spend the rest of their lives in the reverse mortgaged home and it all adds up to the opposite of common sense with these appraisers.  Then add the fact that some of these AMCs are owned by the same bank that was originating the loan and it almost borders on collusion (illegal and immoral).  I tried to get good appraisers on that panel and they weren’t given the chance nor really wanted to to because of the drastically reduced fees to them (but increased fee to the borrower).  Only the desperate and butt kissing appraisers were willing to take the nonsense asked of their AMC panel manager.  Review?  Good luck- won 2 of 8 cases and those 2 were only because a home sold for a higher value after the original appraisal (no kidding right?) and then get this- the AMC charged them another $250 to go back out and “re-appraise”.  Of course they increased the value a bit, but still not to what the other home sold for.  Its a joke.

    Add it all up and our seniors got the shaft AGAIN.

  • Your post seems like the ramblings of a disenfranchised mortgage broker or real estate agent with an adolescent understanding of the appraisal profession. While no profession is without bad actors and various degrees of incompetence, it is improper and juvenile to simply label a profession as broken when these elements are suspected or detected.

    A properly developed appraisal will consider inventory levels, absorption, competitive sales, competitive listings, pending sales, and expired/withdrawn listings. Each of these bits of market data ate helpful in measuring the velocity and direction of the market as well as narrowing the most probable range of value for the subject. While the estimation of market value lacks the precision of scientific formula, there are a variety of tools and methods to aid in measuring an imperfect market. With this being said, there appears to be mo shortage (both in good times and bad) of people having a dubious agenda who will leap to criticism of the appraisal profession when appraisers fail to rubber stamp the opinions of others.

    Perhaps the greater problem centers around vocal critics that lack a functional understanding of independence; such as the independence required of an appraiser so that they are free to report the truth, even when said truth is unpleasant.

    • BlackSharpiePen,
       
      One just has to compare the appraisal industry of twentieth century and the appraisal industry today to realize something has changed.  It seems someone lost confidence in the appraisal process as it was then structured.  Perhaps you are right it was only one or two appraisals (or appraisers) that were bad and all others were done independently and with integrity.
       
      Yet something caused government and its departments and agencies to go beyond mere licensing and approval to require new ways of conduct between lenders and appraisers, even requiring specific types of entities to provide appraisals in specific situations.  Somehow that does not express confidence in the ability of the industry as previously structured to provide independent appraisals, at least when it comes to appraisals of residential homes.
       
      No, this was more endemic and systemic than a few bad apples.  This was an industry gone awry.  You might not be aware of the common definition used by many in the real estate industry to describe what MAI means other than Member of Appraisal Institute.  I was somewhat embarrassed to hear several fellow California real estate brokers joking in a less than an admiring way that when they saw those initials after the name of an appraiser it indicated that the appraisal was “made as instructed.”  That less than flattering description has been in use for well over three decades and it brings into question two issues and two issues alone, independence and integrity. 
       
      Perhaps you know a lot about the experience of The_Critic in regard to independence, perhaps you do not.  You may personally know something about independence and its practical meaning, perhaps not.  For over 30 years as a CPA I dealt with it not only as an individual but for the majority of those years as a partner in a regional CPA firm.  In one meeting alone my partners and I had to decide if we would swallow our independence or suffer the financial and time loss in a lawsuit over $30,000,000.  In a vote of 9-0, we decided to prepare for the threatened lawsuit.  Because of our united decision, our former client backed down.  In fact one year later, the former client begged us to bid on an audit of his company once again which we quickly but politely declined.
       
      I know many appraisers with strong personal independence standards and integrity but unless one knows your name, it is unclear if you rank among them.  By the way most of those appraisers complained frequently about the level of independence and integrity to which the appraisal industry fell over the last decade; it seems you do not share that view. 
       
      Those of us in the CPA world were horrified by the lack of independence found in the relationship between Arthur Anderson & Company and Enron; as an industry we condemned it.  When it comes to independence most in my industry do not live in the world of denial you express.

  • We recently had a HECM appraisal come in low because comps from outside of the area had to be used.  New comps soon thereafter became available that were in the area and more indicative of the subject property’s value, so the appraiser agreed to update the appraisal in a manner that was in compliance with FHA guidelines.  The appraiser completed his work in a professional and ethical way, but the (major) lender wouldn’t accept the new, more accurate value.   

    • Lance,

      Using comps with sales dates after the physical review of the property are not acceptable for increasing values although some seem to believe they can be used to lower them.  Go figure.

      Zorro

    • Lance,

      Using comps with sales dates after the physical review of the property are not acceptable for increasing values although some seem to believe they can be used to lower them.  Go figure.

      Zorro

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