Study: More Home Appraisals Altered to Inflate Values

With U.S. home prices softening and sales volumes sagging, real estate appraisers say pressure on them to inflate their home appraisals has soared.

Syndicated columnist Kenneth Harney writes in the San Jose Mercury News that a new survey of the national appraisal industry found that 90 percent of appraisers report that the mortgage broker, real estate agent, lender and even the consumers will pressure them to raise valuations to close deals.

That percentage is up sharply from 2003, when 55 percent of home appraisers reported attempts to influence their findings and 45 percent reported “never.”

Now the latter category is down to just 10 percent.

“I call it a perfect storm scenario,” said Alan Hummel, Senior V.P. of Forsythe Appraisals of St. Paul, Minn., one of the largest property valuation firms in the country. Forsythe was a co-sponsor of the new research.

“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 realty agent, the mortgage lender, and even individual sellers.

U.S. mortgage brokers are now routinely “dialing for values,” Hummel said. “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, is when an appraiser comes back with a fair 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 brokers or real estate agents.

The survey found 75 percent of appraisers report “negative ramifications” if they refused to come in with a higher valuation, while 68 percent said they lost the client - typically a mortgage broker or mortgage lender - following their refusal to doctor the numbers, and 45 percent reported not getting paid.

Hummel said ticked off real estate agents may retaliate against non-cooperative appraisers by telling a local mortgage broker or mortgage company something to the effect of:

“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 the broker had sought to interfere with their work - the real estate agent 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 the home sellers (35 percent), the mortgage lenders (33 percent) and the home appraisal management companies (25 percent).

Mortgage brokers represent the biggest problem, said Hummel, because they are 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.”

On the other hand, a lender, including banks and mortgage companies, “has more skin in the game” - they are more intensely regulated and can be forced by bond market investors to buy back a defaulted mortgage that has inflated an appraisal.

Hummel emphasized that the responsibility for the problem of pressure rests not only with the loan broker, realty agent and home loan lender, but with the appraisal industry itself.

Many newcomers with inadequate training and little experience flocked into the field in recent years - drawn by high home 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 good news is that the vast majority of appraisers resist the pressure they get - from any source - and simply refuse to submit valuations they know to be inflated.