As Americans watch their real estate markets fail and friends foreclose, many are asking what went wrong? Lately, the spotlight has swung to over-inflated appraisals and inherent pressure on appraisers to "hit the number" when drawing up their reports. This month, California was among the first states to pass a bill making these fat appraisals illegal.
HITTING THE NUMBER
A real estate appraisal is an opinion, an estimate and it has a great deal of weight when it comes to your mortgage. In fact, an appraisal is the only estimation of market value that lenders can legally accept when calculating your mortgage.
Lately, appraisers have been fairly vocal about feeling pressure to come up with over stuffed property valuations to please lenders. The 2007 National Appraisal Survey conducted by October Research found that 90 percent of appraisers felt pressure to inflate property valuations in order to encourage deals to go through. The findings represent a 35 percent increase from the company’s 2003 survey. In some cases the pressure is overt. By many accounts, it's become standard for lenders to tell appraisers the amount they want a house valued at before they've even contracted them. The message is: give me this price or you don't get the job.
The amount lenders want the appraiser to "hit" can reflect any number of things that have nothing to do with the value of the home. Lenders may in fact be bending to pressure from real estate agents that want the appraisal to match or drive up a buyer's offer regardless of the actual value of the home. They may also be bending to pressure from buyers that want loans that are much higher than they qualify for in order to pay off credit card debt, renovate or take a trip.
But if everyone comes out of the deal happy, what's the problem?
While the market was on the rise, an inflated appraisal didn't matter so much - values would inevitably catch up. Now that housing values have stopped rising and interest rates are going up instead, everything is different. For home buyers, inflated appraisals are partly to blame for the rise in foreclosures. Many homeowners who knowingly took a no-down payment loan they couldn't afford are now unable to make payments and are locked out of the refinancing game. Others who paid too much unknowingly go through the process of refinancing only to find their home is actually worth thousands of dollars less than they owe on it. Not only are they saddled with unnecessary debt, but they're in danger of losing their homes if they haven't already.
A house is still only worth what someone will pay for it. A high real estate appraisal doesn't make a house worth more than it's worth, but one over-inflated home value can lead to another. If multiple bloated appraisals push sales prices up an area, it can have a snowball effect that artificially drives the market up. Hello housing bubble.
The appraisal industry says it's not to blame for it's errant behavior however and has been pleading with the government to step in and protect them from the bullying practices of the lending and mortgage industry. California has recently heeded the call, passing bill SB223 this month, making it illegal for anyone to pressure appraisers into fudging a home valuation. The bill also makes it illegal for appraisers to falsify an appraisal. So in California, the days of "hitting the number" or reaching a predetermined conclusion when determining house value are hopefully numbered. It remains to be seen however, if the rest of the country will follow suit.
Regardless of where you live, you should protect yourself by taking some proactive steps before you purchase a home or sign a mortgage:
- First of all, make sure you're dealing with a lender that has a good reputation
- Get an idea of the market value of the home you wish to purchase
- You can even hire your own appraiser, though it will cost you between $300 and $600
- Ask for a copy of the appraisal before you close - you're entitled to see it by law. Review the document to see whether or not it accurately describes the home you're buying
- Get a really good realtor on your team
