Jun282012

Appraisers resisted pressure to reflate the housing bubble

You knew the complaints about appraisers was coming, didn’t you? The low supply is generating bidding wars on certain properties, resulting in contract prices far in excess of recent comparable sales. When the appraisal doesn’t support the contract price, the buyer generally cannot make up the difference and the deal falls apart. Agents don’t get commissions. Rather than entertain the notion that the contract price was too high, agents blame the appraisers for killing the deal.

One of the most aggravating and ignorant arguments to come from this is that the market should determine the price. Whatever two parties agree to should be what the property is valued at. Well, that’s fair enough if the deal is all cash. Whenever my fund buys a property from the MLS, there is no appraisal because I am bidding all cash. However, when the deal requires lender money — money with taxpayer backing — then an independent third party is needed to ensure sale price is near recent comps to limit the risk to the lender, and ultimately the taxpayer.

On May 1, 2009, Fannie Mae adopted a new Home Valuation Code of Conduct making appraisers randomly selected and thereby completely independent. Now that appraisers cannot be hand selected by agents, appraisers are empowered to do their jobs without fear of a loss of income or being blackballed. The random selection of appraisers was the best reform to come out of the aftermath of the housing bubble. Appraisers are supposed to be independent arbiters of value. With the new system, they can be.

Appraisers function in a real estate market is very similar to the function of the judiciary in modern government. Supreme Court judges are appointed for life to ensure they are insulated from political pressures and thereby enabled to render judgements based on the facts and the law. Similarly, appraisers must be insulated from the pressures of buyers, sellers, realtors, mortgage brokers, and anyone else who stands to gain from the transaction so they can render judgement on the value of properties based on the facts of recent comparable sales.

This new independence isn’t sitting well with everyone who hopes to profit from these deals. They are whining and complaining in news articles all over the web lately. Expect this pressure to continue. This will test the strength of recent reforms. The outcome will have broad implications on whether or not we reflate another housing bubble with taxpayer-backed loans.

Low appraisals that don’t reflect rising markets are ruining deals

Real estate professionals say appraisals sometimes come in thousands of dollars below the price that home buyers and sellers have agreed upon.

June 24, 2012|By Kenneth R. Harney (biased columnist for Realty Times)

WASHINGTON — Are some appraisers failing to see the improvements in real estate values underway in local markets that have recently bottomed out and turned positive? When multiple bids push a house price thousands of dollars above what the seller is asking — not unusual in neighborhoods where demand is particularly robust — are appraisers still coming in with values below the agreed-upon price?

I certainly hope so. That’s their job. Appraisers are supposed to relate the value based on recently closed comparable sales. The problem with appraisals during the real estate bubble was that appraisers didn’t appraise, they simply agreed with whatever value was on the face of the contract. This allowed prices to go up too far too fast with lender funds. If buyers still want to overpay, that’s their business, but the overage needs to come out of their pockets, not the bank’s.

It’s much harder to inflate a housing bubble with equity, and appraisers must do their jobs well and limit prices to a reasonable range around recent comps to prevent lender funds from being at risk. During the bubble rally, clueless buyers would bid any amount they could imagine and some appraiser would agree to it, and some lender would fund it. If appraisers stop doing their jobs now, the bubble risk is passed on to taxpayers through GSE and FHA guarantees.

Appraiser reluctance to report local appreciation is becoming a significant complication in sales transactions, say a growing number of mortgage loan officers and realty agents.

Bullshit. Appraisers are reluctant to report a value significantly above recent comps. They are not reluctant to report a value supported by recent comps. This disingenuous lie about appraiser behavior undermines the good work appraisers are doing today now that they are truly independent.

In a new poll of its members, the National Assn. of Realtors found that 33% of their salespeople reported appraisal problems during the month of May. Moe Veissi, president of the association, said poor appraising “in markets that are no longer in decline is the single most important” valuation obstacle to seeing a real recovery.

Is anyone surprised a realtor is pressuring appraisers to reflate a bubble? Since they feel no responsibility for the results, this kind of lobbying is expected.

Even appraisal experts concede that this is a troubling issue. Frank Gregoire, former chairman of the Florida Real Estate Appraisal Board and an appraiser in St. Petersburg, says that many appraisers are reluctant to make the upward adjustments they know to be justified by recent positive appreciation trends because they fear criticism that they are potentially overvaluing the property — exposing lender clients to costly “buy-back” demands by Fannie Mae or Freddie Mac, or future litigation.

The GSE buy-back provisions keeps lenders from underwriting stupid loans. This is another valuable safeguard in the system. Look for it to come under attack as well.

Even if they have the data to support adjustments reflecting positive trends that affect value — pending home sales and new listings of similar houses at higher prices, for example — “they take the easy way out” and go with a lower valuation so as not to upset hyper-cautious reviewers at the appraisal management companies that now control the bulk of home real estate appraisal assignments, Gregoire said.

Higher pendings and new listings are not legitimate adjustments to value. Pendings are wildly manipulated by realtors, and WTF listing prices are MLS pollution, not a reflection of market value.

One appraiser in his area recently assembled strong supporting data to make an upward adjustment to a valuation based on recent sales activity on comparable houses. When he delivered the report to the appraisal management company that hired him, however, an official of the firm sent it back immediately with instructions to “revisit” the upward adjustment — in other words, get rid of it.

The Realty Times columnist writing this article wants to make this sound scandalous. To me it sounds like an effective check-and-balance in the system working as it should.

Joseph Petrowsky, owner of Right Trac Financial Group Inc., a Manchester, Conn., mortgage company, says too often valuations in upward-trending markets “aren’t catching up with the new values, let alone a property that was involved in a bidding war.”

And their not supposed to.

He cites a series of recent loan applications where the appraisal was thousands of dollars below the agreed-upon sales price, endangering or blowing the deals. In one case, the buyer offered $312,500 but the appraisal came in at just $280,000, despite readily available evidence that the local market has experienced appreciation in recent months.

More bullshit. First, recent closed comps are what matters. Second, the buyer always had the option of putting in the extra $32,500 to close the deal. Buyers can always work to inflate prices with their own money. It’s lender money appraisers are there to protect.

“Appraisers are scared to death” to report rising values, Petrowsky said. “I talk to them and they are beside themselves. They feel they have to [deliver] appraisals they know should be higher.”

Complete and utter bullshit. That comment insinuates appraisers are being held back by some sinister force. No appraiser is delivering an appraisal they know should be higher. They are delivering appraisals reflective of recent comparable sales because they have no pressure on them to deliver appraisals they know shouldn’t be higher.

Much worse, though, is the effect on sellers and buyers. When appraisals comes in much lower than the mutually agreed-upon price, buyers may need to revise their loan requests or renegotiate the purchase price with unhappy sellers.

Dennis Smith, a co-owner of Stratis Financial Corp. in Huntington Beach, says the problem is magnified when the appraiser assigned by the management company travels from 30 or 40 miles away and has no insights into neighborhood appreciation trends that may be relatively recent. He cited an example in which a client saw a bidding war — four offers that pushed the price from the listed $350,000 to $375,000 — but the out-of-town appraiser would not take this into consideration in arriving at the final valuation.

No matter where the appraiser is from, they should not take into account the stupidity of buyers caught up in a frenzy. That’s what inflated the housing bubble. Appraisers are supposed to look at recent comparable sales, which is undoubtedly what this appraiser did.

Sara W. Stephens, president of the Appraisal Institute, the largest association in the industry, says it is every appraiser’s professional duty to arrive at valuations that “reflect the market,” including recent changes — whether positive or negative — if they can be verified with authoritative and accurate data.

How can buyers and sellers guard against the see-no-appreciation problem?

The better question is how can appraisers guard against the see-no-limits-on-value problem of realtors.

Tops on the list: Make sure the realty agents on both sides of your transaction have assembled accurate data on comparable sales or pending sales that demonstrate how the market has changed in the last six months or less. Then make sure the appraiser sees the data.

Your purchase or sale doesn’t have to be jeopardized simply because the appraiser doesn’t have — or chooses not to collect — all the relevant recent facts.

Is he really insinuating that appraiser are intentionally ignoring relevant data? Give me a break.

Not arguing for my own interest

During 2010, my flipping fund was clipped by over $40,000 on low appraisals. I certainly would have been happier if these appraisals came in higher. Some of them I felt were ridiculously low and not reflective of recent comparable sales. Just last week, a property I was selling fell out of escrow due to a low appraisal. But even in my frustration, I recognize the important function appraisers perform, and I salute them for their independence and the work they are doing to prevent another housing bubble on the backs of the US taxpayer.