Colorado Property Appraiser: Increased Pressure to Inflate Values
The last few years have been tough on real estate appraisers in the Colorado housing market.
In a recent survey conducted by October Research and underwritten by the country’s largest appraisal company, Forsythe Appraisal LLC, more than 900 certified appraisers weighed in about how their customers were treating them.
The results sent a powerful message, said Alan Hummel, Forsythe’s chief appraiser.
Hummel said that the pressure on certified appraisers has always been there, but the increased intensity of demand to meet stated or implied “loan targets” has mushroomed, largely because 70 percent of residential loans are originated by third party companies, not mortgage lenders.
“Some of these brokers are used to doing 10 loans a week, but with the slowdown in home sales, they’re looking instead at two to three deals a week,” he said. “If I kill one transaction, I’m cutting their production by 33 percent — and they’re hungry.”
In a slow housing market, the pressure is on to arrive at residential values high enough to meet real estate broker, homeowner and lender expectations. Some appraisers have been threatened with the loss of future referrals if they can’t “make the numbers work,” and others have been offered $100 or $200 to meet a lender’s “target.”
Add to that picture the increasing popularity of “automated valuation models” available at Web sites such as Zillow.com, HouseValue.com or Valuemyhouse.com — all of which can compete for an appraiser’s clients and some that offer “free” estimates of a home’s value.
Stories about pressure placed on home valuation experts by mortgage brokers struggling to make loan quotas appear in real estate columns and blogs in every state.
“It’s gotten so complicated to get into this business,” said Colorado Springs commercial and rural real estate appraiser Cheri Santi. “There’s so much liability if you don’t follow the letter of the law, and at the same time, there are mortgage brokers challenging your ethics to make a deal work.”
Claudia Klein, a certified residential appraiser and president of the Colorado chapter of the Appraisal Institute agreed. “Most (residential appraisers) have been reluctant to talk about the subject because they fear retaliation from mortgage brokers and Realtors,” she said.
October Research surveyed 500 appraisers in 2003. Almost 60 percent of respondents said they had experienced some form of inappropriate pressure by mortgage brokers and 47 percent said they had been pressured by real estate brokers to come up with “the right” number for a seller or Colorado mortgage borrower.
Three years later, in 2006, those numbers had risen to 71 percent and 56 percent, respectively.
The 2007 National Appraisal Survey released in December showed that 90 percent of the 1,200 appraisers surveyed reported feeling pressured to restate, adjust or change values, up from 55 percent during the survey in 2003.
“It’s not the lenders who are the culprits,” Hummel said, adding that independent mortgage brokers who “shop” home loan rates and conditions offered by a range of mortgage lenders are the biggest source of inappropriate pressure.
Their goal is typically to get the borrower qualified, get a fresh appraisal that jives with the borrower’s loan capacity, process the paperwork, close and once the mortgagee is on his or her way, “sell the paper” to a larger financial company that sends out payment coupons and becomes the mortgagor.
Another example cited by the AI’s chief appraiser was an aggressive home builder who advertised “We will provide you with a new Cadillac in the garage of every house we sell.”
“That means the home loan will be based on a $500,000 rather than a $450,000 sales price,” he said, adding that an appraisal slated to come in at 80 percent of the higher value does not truly reflect the value of the real estate.
In contrast, pressure tactics from mortgage lenders dropped from 51 percent in 2003 to 33 percent in 2006.
“They want good collateral and would rather pass on a risky borrower who gets in over his head and ends up with a foreclosure situation,” Hummel said.
He also said that of 982 respondents to a survey conducted in 2006, many claimed they were beginning to see the fallout from the subprime phenomenon, fueled by aggressive Wall Street lending practices.
At its worst, some mortgage brokers were getting loans approved for borrowers based on 125 percent of value and interest-only payments for the first two to three years. Once the rates began escalating after the initial period, many homeowners simply couldn’t afford the payments and faced foreclosure action.
“Borrowing more than a property is worth is not a good idea,” Hummel said, “especially when you begin to see price declines and don’t have enough equity to repay your loan.”
He said the Mortgage Broker’s Association is trying to do a better job of representing borrowers, but “the independents are numerous and continue to make inappropriate requests.”
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