Developers Pressed Appraisers For Higher Values During Boom

Reporters at the Land Use Accountability Project have uncovered evidence that home appraisers were under great pressure at the height of the bubble to inflate home values.

"The Center also found many appraisers who say they bowed to lender pressure to 'hit the numbers' in order to remain in business. These appraisers, along with the lenders who pressured them, helped pump air into the housing bubble that led to widespread economic devastation, according to dozens of appraisers, lenders, and others with intimate knowledge of home loan practices.

And there's evidence that Fannie Mae and Freddie Mac, the two largest purchasers of home loans, bought mortgages without ensuring they were made with accurate appraisals, according to an investigation by New York Attorney General Andrew Cuomo.

No one knows exactly how much of a role inflated appraisals played in the mortgage meltdown. But as an increasing number of homeowners face foreclosure, many remain unaware that the appraisal they paid for during the purchase process may not have reflected the true value of their investment, and may have allowed them to borrow more money than their home was worth."

Full Story: The Appraisal Bubble



You don't say

I kind of figured this was old news to some degree, but it's good to see it anyway. I've made this comment before, but appraisers and bond raters are supposed to be the private regulators, but it's clear it will never work since they are trying so hard to "serve" their clients. But their paying clients interest is not in the public interest (their indirect paying client). Well functioning markets require good, if not perfect information and although I typically spurn suggestions of more government involvement, this is as good of a case as any for intervention. Right now, government wants to be a participant in the market, but they haven't been and continue not to be a good referee.

In defense of the appraisers, the process can be self-fulfilling. Since appraisers value properties based on evidence (comps) rather than any theoretical value, "overpriced" sales will just lead to more "overvalued" appraisals. It just snowballs. Another option is to mandate that residential appraisers use the Income Capitalization Approach and the band of investment in deriving the cap rate. Of course, this would produce ridiculous low values for today's world and Obama, homeowners, the banks, and MBS investors would never allow it.

Income Cap Approach

This just doesn't make sense for residential homes as most of them are not purchased to be rented out... valueing homes on this approach just doesn't really capture what one is willing to pay for a place to live. And if you're not attempting to value the property the way it will actually be used then the appraisal is invalid. The appraisal is really a tool for lender underwriting purposes and the ultimate responsibility should be on the buyer of the property for the purchase price. Property can be a risky investment, despite the governments subsidies and hopes that it isn't.

Understood, but

presicely why I suggest it is for lender underwriting- not to dictate to buyers what they can pay - but to guide lenders on what is appropriate to fund. If appraisers had done this and lenders saw the massive divergence between the sales and income approach, we would probably not be in the situation we are in now with banks and/or real estate. The concept of an objective third party appraisal is to provide guidance on value to participants. I'm not suggesting using appraisal as a substitute to the market, I'm suggesting ways it can actually be used as an educational tool (which was the original intent) as opposed to rubber stamping a way out of existing regulation. You will almost never get an "objective" appraisal out of the current system and therefore no market participants get to see the "red flags" before they make a decision.

No Mention of the Buyers

Notice how no accountability is placed at the foot of the buyer at all in this article. One can use comparable properties all one wants but the ultimate market price is what the borrower is willing to pay... so if there's an offer on the table or a purcahse agreement in place for $X, then the home is most likely worth $X with or without a corresponding appraisal. The buyer makes the choice to purchase he property, put his equity on the line and agrees to repay the amount borrowered... not the appraiser. There are already rules in place to prevent "pressure" from banks, brokers, lenders, etc. on appraisers from doing things like this. Any new rules would be just as easily circumvented. This just sounds like a scam for an excuse for an attorney to pursue some deep pockets (banks, or banks that bought the assets of now defunct lenders).

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