Posted on 04/07/2005 6:14:02 PM PDT by khalsa
It is often referred to as “appraisal inflation” and it could be the dirty little secret of the housing industry.
The practice — when real estate appraisers bend the numbers to satisfy clients and stay in business — is a growing problem, according to real estate experts.
Appraisers say there is pressure on them to inflate home values, and there is concern that if people pay too much for their homes it could lead to more foreclosures if housing prices tumble. And banks could be left holding the bag.
Data show the problem is widespread.
A recent survey of 500 appraisers by the October Research Group, a provider of news and information to the real estate services industry, found that 55 percent of them personally feel pressured by sellers, agents, and even lenders to inflate home values by 10 percent. And one-third of the appraisers surveyed said they fear losing business if they don’t comply.
Jonathan Miller, CEO of Miller Samuel, an appraisal company in Manhattan, said he thinks 75 percent of appraisals are inflated. And Miller thinks honest appraisers are leaving the business as a result.
Congress recently introduced a bill to curb the appraiser issue.
The Ney-Kanjorski bill would prohibit agents and other outsiders from pressuring appraisers through coercion, bribes or extortion. It would also force a physical inspection for higher-cost loans instead of just using computer appraisal software, which can be manipulated, and it would force a second appraisal of a property that has risen in value over the previous six months.
However, Miller says the proposed bill does not address structural problems in the appraisal business, such as the fact that many lending institutions that hire appraisers profit from the outcome.
The wall is eroding between the loan sales department and quality control, Miller contends, ...
(Excerpt) Read more at msnbc.msn.com ...
Good article. It is going to be an issue. We'll soon have a perfect storm - a decline in the housing market in the midwest and northeast (babyboomers want warm climates), homes with no equity because people have refinanced it all out, and loans that exceed the value of the homes because of appraisal inflation. Add to that the idea of paying a real estate commission 5-6% to sell your home and we're going to have a massive foreclosure problem in many areas of the country.
The appraisal inflation problem will be eliminated in a few years because lenders will electronically appraise homes via data culled from up to date home sale data.
Thanks for posting this. And, welcome to FR.
I am a Realtor and am shocked at the number and dollar amounts given to owners by appraisals which have been conducted for credit line or refinancing purposes. Quite frequently when I have provided a CMA to an owner thinking of selling they tell me "their house just appraised last year for $$$$ which means they almost always owe more on the house than the market will tolerate. Many appraisals are coming in at about 125%.
Along the same lines, many people have repeatedly taken out home equity loans or refinanced and taken the equity out and spent it.
They are treating home equity as income, when in fact it's debt.
Can't tell you how many people I know, who've racked up credit cards, refinanced their houses, pay off the credit cards and buy SUV's etc. Then go and do it again, over and over.
The end result is they never build any equity since they are spending it, and their home loans keep getting bigger and bigger.
With interest rates rising, now they can't afford the greater debt load. Housing inventories are at seven year highs and climbing.
In today's Wall Street Journal there's an article about builders having to offer incentives to people to get them to buy starter homes.
There's a lot of potential problems on the horizon. Greenspan today again spoke about pulling back the Fannie-Mae and Freddie Mac's loan portfolios, stating that they could cause a negative impact to the U.S. economy if there is a decline in real estate.
Many a chicken waiting to come home and roost. Keep your powder dry.
If the appraiser for my home had only been honest - all I can say is that I hope every appraiser cooking the books pays a price for his dishonesty and the bank that buys in on it too . . .
Dude! You missed the boat! That's 'wealth'! Of course you when you factor out the hundreds of billions that's been extracted and spent on new curtains or tile from Home Depot the economy has been treading water since 2000, let's just call it a new para-diggum.
In "The Millionaire Mind," Dr. Thomas Stanley describes a conversation between a decamillionaire and a banker. The banker looks out the window over the city and comments on how the banks own everything and the debtors are just working for the banks. Gets more true every day...particularly when idiots get mortgages that exceed the market value of their home, refinance with interest-only payment mortgages, etc. I haven't seen such a housing bubble here in Dallas since right before the collapse after the '80s oil boom.
Good post thanks
How is the appraisers fault? You asked for the loan. You or your representative at the lenders office told them what you wanted/needed. It's like when the car dealer tells you you're approved up to a $500 a month payment. Does that mean you buy a car for $500 a month?
bump for later.
"The appraisal inflation problem will be eliminated in a few years because lenders will electronically appraise homes via data culled from up to date home sale data."
As a fairly tech savvy real estate broker, I question the quality of data, in databases.
The human element will need to be involved, pretty much as today.
In my area, I have not heard of a single deal, being upset for an appraisal not coming in "at value." In other words, the sale price.
Our zip code increased about 16% last year. Other places in the US have bigger percent increases.
In the middle of 2004, we had a small and brief dip in prices, but it quicly bounced back up.
Supply/demand here. Willing buyers, and sellers, and lenders.
What is an appraiser to do? "Value" is set at the price willing sellers and buyers agree, for comparable properties, adjusted for time, size, condition, etc.
Where were these clowns when I refi'd 2 years ago? Back then I got the classic lowball appraisal just so they could hit me up with PMI. When I inquired about how the appraisal was done, I was shocked to find out my place was compared to those of older places with less bedrooms.
What I haven't seen mentioned is the property tax consequences of a bubble burst.
When the stock market bubble was underway, state goverments were flush with cash and created new spending programs. Then as it burst, they found themselves in debt and had to raise taxes.
Could the same thing happen with local governments in a real-estate bust? Property values have gone through the roof, which caused huge increases in property tax dollars pouring into local government couffers. What happens if property values decline significantly and the taxes dry up? Scarey thoughts.
"
The appraisal inflation problem will be eliminated in a few years because lenders will electronically appraise homes via data culled from up to date home sale data."
That data ability exists today but is only useful when a borrower is solid gold on his credit rating and the appraisal is a formality to have in the loan file.
Agreed. It is impossible to accurately use such data, as there are innumerable intangibles which add or subtract to/from the value of a home.
I was a realtor for many years and have been saying for a few years these appraisals are ridiculous. This bubble will make the stock bubble look mild.
later bump
ping.
In my area you tell me what value you need and i'll tell you which appraiser to use.
The West has never had this problem as far back as I can remember. Usually it levels off then increases again..The supply is running low and I can't imagine a bubble out here for quit some time..
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