And the understatement of the week goes to… Aubrey Cohen of the Seattle P-I, for his sub-headline gem: “As market slows, buyers may find they paid too much“.
Moss blankets the house’s roof. The siding is rotting off. And mold has spread through the interior.
But the home’s condition is “average,” according to an appraisal.
It’s one clear example of how many appraisers hide problems and affirm inflated prices willingly or under pressure from the mortgage brokers and bankers who give them business — calling into question whether home buyers are getting what they pay for.
“We’re pressured to hit the value every time, every single sale,” said appraiser Richard Hagar, who showed pictures of the mossy house while teaching a class on mortgage fraud earlier this month for 25 appraisers, mortgage brokers and real estate agents.
It’s a problem that is more common as buyers vie to outbid each other in recent go-go markets such as Seattle’s. And increasingly buyers may find in coming months that they paid too much, as slowing appreciation and rising mortgage interest rates force them to sell at a loss.
“I think we’ll see it come to a head here in the next year or so,” said Ralph Birkedahl, manager of the state’s appraisal program. “We may see more foreclosures than we’re seeing now.”
I don’t really understand why the appraisal process works the way it does. Wouldn’t it remove most of the opportunity for corruption like this if the lender was only allowed to work through a neutral third party to hire an appraiser? It could be “appraisal escrow.” The process I’m imagining would go something like this:
- Buyer makes offer on home.
- Buyer submits offer and house details to lender.
- Lender sends house details to appraisal escrow.
- Appraisal escrow agency is not permitted to access any information about pending offer or listing price, etc.
- Appraisal escrow sends house details to appraiser.
- House is appraised in an unbiased fashion, since the appraiser has no prior knowledge of listing price, offer details, or even who the lender is at all.
- Appraisal is sent back to appraisal escrow, who then forwards it to the lender.
So where is the flaw in my logic? Other than the fact that this process would result in yet another layer of fees in the closing process, I don’t see why it wouldn’t work. Since lenders are the problem, a law implementing such a system could dictate that the appraisal escrow service be paid for solely by the lender, with fees not permitted to be (directly) passed on to the buyer. Obviously it isn’t perfect, but it seems like it would mostly eliminate the trouble of appraisers being pressured by the lenders to hit a certain dollar amount.
Of course, the entire conversation about appraisals completely ignores the fact that $470,000 for the “median” home in King County is insane to begin with… But hey, whatever.
(Aubrey Cohen, Seattle P-I, 07.31.2007)
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37 responses so far ↓
1
biliruben
// Jul 31, 2007 at 9:51 am
“I don’t really understand why the appraisal process works the way it does.”
It works (or doesn’t) like it does because until 10-15 years ago, the lender had a vested interest in an unbiased appraisal, as it was their money on the line. Once mortgage brokers became more active and Wall Street “innovated” and created a sucker’s market for these loans, that vested interest largely evaporated.
2
Jose
// Jul 31, 2007 at 10:03 am
you can get your own appraiser to check the house. But that cost money. $200-$300. Maybe more. But if you see moss on the roof, colored water coming out of the faucet, etc, you might as well look for a new house.
I don’t know about Washington, but in Oregon, all new houses are insured for a year by the builder. That’s the law.
3
Rhonda Porter
// Jul 31, 2007 at 10:24 am
I don’t understand your “appraisal escrow” term.
The appraiser is provided a copy of the purchase and sale agreement and they have access to MLS data.
They need to know if there are any seller concessions to consider that were factored in with the agreed sales price and what the home was listed for.
I recently had a “bidding war” with seller paid closing costs on top of the agreed to sales price…guess what, the appraisal came in low.
There are appraisers out there who will do anything to get lender biz. I don’t work with those types.
In this case, the seller reduced their price to the appraised value and the buyer was happy (this was after everyone was jumping up and down at me insisting on a new appraiser).
4
Rhonda Porter
// Jul 31, 2007 at 10:27 am
Jose, if you do get your own appraisal, be aware that if you’re doing so along with obtaining a mortgage, your lender may not be able to use it. The underwriting findings will call for a specific type of appraisal (for a standard transaction-owner occupied, it will probably run around $400 - $450; FHA $450 -$500; NOO $$$). The appraiser must be on the lenders approved list and the appraisal must be done in the lenders name (not the home owners).
5
Rhonda Porter
// Jul 31, 2007 at 10:29 am
Oopss… I just re-read your post and understand the point you’re making with “appraisal escrow”. This all ready happens with VA loans. We are not able to select the appraiser, they come from a VA pool and it’s a CRAP shoot. Some of those appraisers SUCK.
6
wreckingbull
// Jul 31, 2007 at 11:07 am
As noted in Kindleberger’s “Manias, Panics and Crashes”, as a bubble nears its peak, fraud becomes rampant. (He proves this by looking back at historic bubbles in the last 3-4 centuries.)
This one has been no exception.
7
biliruben
// Jul 31, 2007 at 11:10 am
If you were the good witch of lenders, Rhonda, and you were able to waive your wand and make it better, how would you fix the system to stamp out fraud?
8
TJ_98370
// Jul 31, 2007 at 11:15 am
Report Suggests Remedies for Appraisal Fraud
Ensuring appraiser independence.
Punishing any of the actors in the mortgage process for pressuring appraisers.
Sanctioning dishonest appraisers.
Streamlining the complaint process.
Increasing Enforcement Capacity.
Educating consumers. Homeowners will ultimately pay the price when and if the real estate boom ends, and particularly if it ends disastrously.
9
explorer
// Jul 31, 2007 at 11:23 am
I spent three years working as a contractor in a commercial RE appraisal business.
The practice of “hitting the number” on an appraisal has been the NORM in commercial real estate sales for quite a long time. It is against the law in some situations, and still a serious ethical violation if the appaiser is certifed via a professional appraisers organization.
The way to get repeat and new appraisal business in commercial RE is to hit their numbers. No one talks, so the practice continues. Along with the too-easy-to-get subprimes, ARM’s etc., the lenders setup a perfect circle whereas if you shut up and do what you are told, everyone gets a lot more then they have a right to. Overvaluing becomes a near science to get more fees dishonestly all around. There are Excel spreadsheet formulas the magically pump up key numbers by a given percentage or dollar amount.
A lot, if not most of the sub-primes and ARM’s REQUIRE you to use their lender and appraiser in order to get the deal. The long-running commercial corruption was merely extended to the residential market as necessary fuel for the gravy train.
10
sniglet
// Jul 31, 2007 at 11:26 am
In my view, I don’t think there is anything that should be done to clean up fraud. The simple fact is that when bubbles are occuring, all parties are happy to turn their heads when fraud is occuring, having more rules or changed procedures wouldn’t help.
The surest thing to clean up real-estate fraud is to have a housing bust. All of a sudden lenders, investors, and purchasers will all start becoming VERY concerned about the actual market price. When people can no longer count on massive appreciation to cover all sins they will become MUCH more interested in making sure things are done properly.
11
carlislematthew
// Jul 31, 2007 at 11:42 am
Tim, if you just appraise to the value of previous comps and have no information regarding what someone is willing to pay, then I’m not sure how you could *ever* have appreciation in housing.
On the one hand, something is worth what someone is willing to pay for it. On the other hand, when people are buying crappy little houses with interest only loans then they’re not actually paying for the house in the first place.
In my opinion, the way to fix the system is to get all old fashioned with loans and underwrite with terms where people are actually *paying* for the property. Once they’re really paying for the property, the only contract price should reflect the market reality of the property. We know this isn’t always the case and that there are always scams and idiots buying moldy homes, so that’s where the appraisers come in: to protect the lender (and perhaps the buyer) from agreeing on a VERY unreasonable price.
Just my opinion….
12
mike2
// Jul 31, 2007 at 12:38 pm
” if you just appraise to the value of previous comps and have no information regarding what someone is willing to pay, then I’m not sure how you could *ever* have appreciation in housing. “
Sure you could have appreciation. Just it would be paid for in cash at the closing, by the buyer that decided the property was worth more than the market price. This would establish a new, higher comp.
13
Rhonda Porter
// Jul 31, 2007 at 12:46 pm
Biliruben, I love it: The Good Witch of Lenders. Wizard of Oz is one of my favorite movies (my grandpa was a stagehand on the set).
Anyhow…to start with I would eliminate stated income loans. Just the other day I was taking a loan ap for a couple who are W2 and they wanted to go stated so they could afford the house. They didn’t see a problem with it…obviously I did. We’re not working together now which is fine for this Witch. :)
Some lenders are all ready doing AVMs (automated appraisals) in addition to the full appraisals that are required. They’ve also required interior photos with appraisals…more lenders should do this.
I also think there should be more education on what mortgage fraud is. Hopefully with licensing and the current climate in the industry, this will happen for LOs, consumers and agents.
When fraud is determined, the fraudsters need to be fully punished as allowed by law…they should be made examples of.
Fraud is not just performed from LOs. The local fraud case which made me start my blog involved an escrow company, an appraiser, agent and a LO.
14
Tom
// Jul 31, 2007 at 12:48 pm
In the process you laid out for appraisal, the step that assumes that appraiser doesn’t know listing price is not feasible with all the data available freely on the Internet.
Or, when the appraiser goes to see the house, he can see the flyer by the listing agent.
15
Garth
// Jul 31, 2007 at 2:01 pm
The thing that I thought was shady was when mortgage brokers offered to get an appraisal higher than my offer and take out the loan in that amount to pay closing costs and actually take home some cash when purchasing a house. One broker told me they could easily get me $50,000.
My appraisal was exactly the amount of my offer, imagine that.
16
RottedOak
// Jul 31, 2007 at 3:45 pm
Rhonda wrote:
“Just the other day I was taking a loan ap for a couple who are W2 and they wanted to go stated so they could afford the house.”
Actually it’s worse than that — they wanted to be approved for the loan, regardless of whether they could afford it. Who cares anymore about whether they can afford their loan? To even consider such a thing is a quaint anachronism, a vestige of a bygone day when people actually paid off their mortgages instead of flipping their way up the property ladder. It’s like asking whether your new home comes with a fallout shelter or a post to tie up your horse. Concern over such antiquities might stop people from buying so they can earn their perpetual double-digit appreciation and avoid being priced out forever.
I hope you approved them for a no-doc neg-am ARM with a three-year pre-pay penalty clause and a balloon payment in five years. It would serve them right.
17
Rhonda Porter
// Jul 31, 2007 at 4:34 pm
Garth, why don’t you turn your mortgage broker in to DFI? This is a step in curbing fraud…you can’t just sit back and blog about it.
RottedOak,
I agree, it is worse. And I would consider this to be a “savvy” couple. They want to qualify for the bigger home while keeping their current residence to rent out. They somehow feel they’re not at risk I guess. I did get an approval “full doc” however, they did not have enough reserves and were working with another lender at the same time…maybe the other LO agreed to do stated income/stated asset.
My point is, it’s not always the Witch LO who’s at fault. Consumers can be their own worse enemy too and will commit fraud or tiny lies on their loan aps to get what they feel they should have.
18
Joel
// Jul 31, 2007 at 4:51 pm
The big problem is that most people don’t have a clue and they trust their LO to give them good information. They don’t realize that a LO is a basically a mortgage salesperson and so won’t necessarily have their client’s best interests at heart. You may be one of those that look out for their clients, but in the past few years your kind was the exception rather than the rule.
19
Garth
// Jul 31, 2007 at 5:28 pm
It was not my Mortgage broker; it was other brokers who are acquaintances, who offered up that plan after I told them I did not have the down payment saved yet. They did not do anything on my behalf and I was at social gatherings when the suggestions were made, so reporting them to some gov agency is just not something I want to get involved with.
20
Rhonda Porter
// Jul 31, 2007 at 7:32 pm
Someone just emailed me instead of commenting here regarding this post…specifically on VA appraisers being a CRAP shoot.
Demerus: my reference to the CRAP shoot has to do with the level of professionalism and quality from working with a pool. It has nothing to do with them not “kowtowing to my demands” as you state in your email.
The appraiser that I have been working with for the past several years does not kowtow nor have I ever made demands on him to come in at a certain value EVER. It’s in the buyers/borrowers best interest to leave the appraiser alone and let them do their job. He’s not the fastest appraiser–however I trust him the most and if he says “it’s coming in low”, then I don’t question it.
Demersus, Did you read my previous comment regarding the low appraisal we had with the bidding war or do you just like to send private emails instead of posting your comments here where they belong?
21
Ralph Hial
// Aug 1, 2007 at 3:08 am
Escrow appraisals? OH, PLEASE!
Escrow works for the movement of money since dollars leave an account and enter another, which is a perfectly auditable and legally-enforceable trail.
But INFLUENCE just takes a phone call, an email, a tone of voice, or a carefully worded entry in some database. You can’t escrow influence!
No matter WHAT you do, if most market elements want to price to go up, it’s going UP. The SELLER wanted the price to go up for obvious reasons. The BUYER wanted the price to go up to flip the house anyway. The LENDER wanted the price to go up so it could book more loan/MBS volume and collect more profits. The REGULATOR was nowhere to be found since his Republican leaders would have fired him for daring to suggest the Great American Wealth Machine was faulty or fraudulent. The BROKER wanted the price to go up to collect a bigger commission. The MBS INVESTOR was in the background, indirectly urging the price to go up so he could park more money in a “sure” investment. The MAINSTREAM MEDIA wanted the price to go up for various reasons (reporters are corporate flacks now, and media depends upon real estate advertising)
And so, against all that, some puny APPRAISER doesn’t want the price to go up? Well, it’s simple enough for a plurality of the above market elements to pressure him to hit the number. If he still doesn’t, then there’s always another appraiser to comply … and the first, honest appraiser is starved out of the business soon enough, as the Great American Housing Bubble proceeds apace.
Now, let’s deal with TJ_98370’s reported list of “Suggest[ed] Remedies for Appraisal Fraud”, to see how those so-called remedies will make no difference whatsoever in the next GAHB:
1. “Ensuring appraiser independence.” This isn’t possible since they work for money and therefore are dependent upon the desires of those who pay them.
2. “Punishing any of the actors in the mortgage process for pressuring appraisers.” Do any of you actually see this happening already? No, of course not. The FBI does a few, token investigations of overall mortgage fraud, but that’s largely for show and they know it. They are at least extremely undermanned to pursue the matter, and of course their Republican bosses won’t change that.
3. “Sanctioning dishonest appraisers.” This won’t work for the same reasons why #2 won’t work: There is no will to enforce the law, standards, and overall morality. You’d have better luck (i.e. lousy, still) to get a priest excommunicated for abusing children.
4. “Streamlining the complaint process.” Since the vast majority of complaints won’t result in disciplinary action, then what difference does it make if the process is streamlined?
5. “Increasing Enforcement Capacity.” This is the only thing that will work. Remember, mortgage fraud is already illegal; we just have to enforce the law in order to make those who are still committing frauds to stop (at least the ones susceptible to fear of prosecution).
6. “Educating consumers.” This won’t work and it’s hilarious why anyone thinks it would. We had a significant set of 2 housing bubbles since 1979, reaching enough areas of the nation that information on housing bubbles was READILY available. Yet during the 1998-2003 run-up, the news media and market elements implemented a continuum of bubbletalk. Buyers and sellers freely ignored such information, even though the last bubble bottomed out about a decade ago! Consumer education doesn’t work when said education collides with the low morality of the market elements.
The only remedy to appraisal fraud is powerful and pervasive law enforcement. PERIOD. America really doesn’t want that, and it’s my theory that no matter what happens once this national bubble bottoms (in the years 2013-2018), another housing bubble of the same type will occur (and that’ll be true regardless of who’s in the White House). We’ll even have terabytes of housing-bubble information at our fingertips due to the Internet, yet that won’t matter at all … those who stand to make money will want to MAKE IT regardless of the consequences.
Anyway, thanks to the rest of you all who said the same things in more polite wording. I confess my patience with politeness is gone now, having watched my country willingly destroy millions of family financial lives.
22
Buceri
// Aug 1, 2007 at 6:16 am
Inventory (King SFH) reading this morning:
5am….10,207
6am….10,069
And now it has 2 days to climb back up to 10,200. We’ve been following this weekly trend for about 3 weeks now.
23
JohnnyBigSpenda
// Aug 1, 2007 at 7:10 am
Washington Continues to Show Strong Population Growth:
http://www.nwmls.com/discover/nwreporter.cfm?SectionListsID=25&PageID=3863
24
Demersus
// Aug 1, 2007 at 7:30 am
Rhonda,
I’ve read everything you’ve every posted here, and much of what your shill on RCG. My opinion of you is steadfast.
25
Demersus
// Aug 1, 2007 at 7:41 am
…and what’s that old saying; thou doth profess your innocence too much, or some such…
I think I’ll spend my free time today digging up some of your past gems about why half million dollar home for middle-class families is totally justified and sustainable. Oh, but I’ll probably only be able to use the archives from this site because we all know that RCG is pretty heavily edited to suite your purposes.
26
sniglet
// Aug 1, 2007 at 8:01 am
I repeat my earlier statement that I think it is highly unlikely that ANY regulation, or law enforcement, will clean up real-estate fraud. When all parties involved feel it is in there interests to skirt the rules (as always happens in an ecomomic mania), no rule will work to prevent malfeasance.
Sure, we can step up law enforcement of real-estate fraud, and tighten up the regulations around appraisals, etc. However, in the end it won’t make a bit of difference when everyone’s eyes are glazed over with thoughts of making millions from homes.
In any event, all the talk about cleaning up real-estate fraud is a moot point since it is already happening. Now that the markets are tightening, lenders are putting much more scrutiny into the deals they fund, and purchasers are much less willing to let things slide (i.e. over-paying). As this bubble continues to unravel, the quality of the deals being done will continue to increase, and fraud will become marginalized.
Like I said earlier, the best cure for fraud is the sharp reality-check of a market crash. Look what a stock downturn did for the Enron’s and Worldcom’s 6 years ago.
27
RottedOak
// Aug 1, 2007 at 8:58 am
I’m skeptical of claims that everyone involved in the process is pushing for inflated appraisals. Based on the evidence of appraiser comments, the pressure primarily comes from the real estate agents and mortgage brokers. This makes sense because their income will typically be affected by the price and they have no long-term stake in the financial viability of the loan. The “escrow” idea should be effective in shielding appraisers from pressure out of these two camps, since it would remove them from the process of choosing the appraiser. Once they lose input into how much work an appraiser gets, their attitudes about the price become much less important. An email or “tone of voice” may sway someone when it comes from a party that has a say in whether they get work, but it has much less influence when it comes from a party that does not have that leverage.
The big problem with implementing “escrow” or any other new appraisal practice is that it can only take hold if it has significant support among lenders. Otherwise the brokers will just steer clients towards more flexible lenders. The MBS/CDO process seems to have taken away a lot of the lenders’ incentive to be strict with appraisals. That pressure has to return to counteract that agent/broker pressure in the opposite direction.
28
sniglet
// Aug 1, 2007 at 9:12 am
Yes, I think that EVERYONE has been tacitly participating in allowing inflated appraisals. Just look at how many people have been willing to take out dodgy loans that they knew they couldn’t really pay, because they expected appreciation to make them rich anyway.
How many purchasers raise any complaints when an appraisal supports the agreed price that includes closing costs, or other “incentives”? And lets not forget all those people who were more than happy to fudge their income, or other information on the loans.
People don’t look too closely when they expect to make a lot of money from swift appreciation. It has been in the interests of ALL parties not to look to closely at real-estate transactions. So long as the lenders don’t look too closely at the information the purchaser provides, or incentives rolled into the purchase price, consumers are happy not to complain about high fees and outrageous appraisals.
29
Rhonda Porter
// Aug 1, 2007 at 9:25 am
When I had the low appraisal that I mentioned earlier, EVERYONE was upset and wanted me to get a new appraisal. The seller does have this option. The appraisal was straight-on, the house was overbid.
It’s obvious why the seller would be upset….even the buyers were angry! I had to pound it into their heads (and their agents) that buying the house for less money is an advantage. There is a mentality that many consumers have.
I’m also asked by consumers, “if the house appraises for more than the sales price, can we get cash back at closing?”
I agree with sniglet that with the mortgage industry tightening or correcting, we should have less fraud. Or at least, we can hope.
30
Rhonda Porter
// Aug 1, 2007 at 9:38 am
Demersus,
I prefer that you keep anything you have to say to me on this blog if this is where you’re repsonding to something I’ve said or written.
I don’t welcome your private pot-shots to my email. What’s the point?
I speak my mind. And I’m not always 100% correct–who is? I’m not sure what you’re referring to “RCG is pretty heavily edited to suite your purposes”.
None of my post have been edited and my only purpose is to try to help educate consumers and to speak my mind. I don’t know (and I don’t know that I care what) you think my purpose is.
Overall, I enjoy the Seattle Bubble and the participants. I think there is really important information for consumers. People should learn as much as they can from as many different sources/view points so they can make the best personal decision.
Owning a home is not for everyone.
Renting a home is not for everyone.
I don’t appreciate crap shots from anyone. Disagree with something I’ve said or wrote all you want–I’m all for a fair constructive debate.
31
david losh
// Aug 1, 2007 at 9:47 am
Good Morning!
Sorry, that moldy old moss house is mine, all mine, and my appraiser did his job for me. He has been working with me for the past few years after I objected to and fired the last appraiser who steadfastly refused to hit my number. The other appraiser thought there would be a house pricing crash and refused to appraiser at current value.
Not only that but, my appraiser called me before he took the pictures of my house to have me move my junk cars off the lot. I also cleaned up the back yard and put a plant in front of some peeling paint. This is the third appraisal he has done for me this year and I now request him. I won’t buy or refinance a property without him.
Real Estate is my business and a year or so ago it was my opinion that I could help other people who wanted to learn about the business. What I found out is that everybody is an expert. Everybody knows so much about the transparency of the Real Estate market that they don’t need me. My clients are telling me how the Real Estate business works and what to do.
You are making another excellent point here about appraisers but it’s a little cog in a bigger wheel. My lender makes money from me, I make money by using his money. My housing products sell and in my opinion I am doing a service by providing a better quality product at a fair price. There are money for nothing deals in the Real Estate market today. Most of those deals are a product of the internet Real Estate business model. Look at any web site and find a lender. Look up houses on line to find the value. Write a Real Estate transaction for less by having absolutely no guidance in what is or is not a good value in a Real Estate purchase. Everybody is an expert.
To me that’s where the real problem is.
By the way, I was looking for a commercial property for a friend the other day and could not find one for cheap. That usually means sellers think the price of commercial property is going up. Residential pricing usually follows.
32
Chris
// Aug 1, 2007 at 10:23 am
‘Seattle houses goes it’s own way: UP’ is the times article I almost spewed coffee over this morning. Without offering even a hint of caution the paper tells you everything is down in the country except here and goes on to ‘prove’ why with the usual jobs/growth manrta. I mean this was a pump piece extraordinaire. These people are getting very desperate…
33
biliruben
// Aug 1, 2007 at 10:26 am
“…I was looking for a commercial property for a friend the other day and could not find one for cheap. That usually means sellers think the price of commercial property is going up. Residential pricing usually follows.” - Losh Dave
I’m no expert, so let me make sure I understand what you are saying here, Dave. Commercial RE has gone up, so that means that commercial RE is going to go up? Genius!
And again, I’m no expert, but I’ve done a little bit of reading, and historically commercial development follows residential development, not the other way around.
We really need more experts around here to enlighten us with their profound projections. Dave’s the man I want to turn my nest egg into a goose egg!
34
Greg Kirkos
// Aug 1, 2007 at 10:37 am
How is this different than it’s always been?
35
softwarengineer
// Aug 1, 2007 at 12:21 pm
SINCE APPRAISERS CAN BE BOUGHT OFF TO OVERINFLATE SEATTLE PRICES, BUY ONE TO LOWER YOUR APPRAISAL TOO
Believe me its simple and cheap; especially the thousands you’ll save on property taxes….these buffoons are like dogs jumping through rings.
36
david losh
// Aug 1, 2007 at 6:00 pm
Sorry, the Target Safeway and Walgreen goes in where residential housing is planned, not the other way around. You build the Mall and they will come. There truly is a sucker born every minute.
37
biliruben
// Aug 2, 2007 at 2:55 pm
Simply repeating it doesn’t make it any less false, Dave.
The normal historical pattern is for non-residential construction spending to follow residential construction spending.
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