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Special Reports
AVM/Appraisals/BPOs
Expert: Appraisers Still Subject to Lender Pressure
By Brad Finkelstein
NEW YORK -- When Mayfield Hills, Ohio-based AMCO created its advisory board, board
member and former Department of Housing and Urban Development secretary Andrew Cuomo issued a statement saying,
"Through my involvement with AMCO, I hope to further positively impact the threat of over valuation and the
protection of the underlying securities within the housing finance industry."
The other members of the advisory board, former HUD secretary Jack Kemp and former
FHA housing commissioner William Apgar, are also making appraisal fraud and lender pressure a focal point of their
efforts.
Mr. Apgar said when FHA was revising appraisal standards, it solicited appraisal
industry trade groups for comments and the most common complaint was that appraisers "were in a tough spot"
doing their jobs properly and dealing with lenders.
Many, he said, "were subtly encouraged or outright asked" to change
the valuation of property so a loan could be originated. Those that stuck to their guns ran the risk of losing
business from that lender.
Appraiser independence, industry insiders note, is mandated as part of the package
that cleaned up the thrift industry in the late 1980s, the Financial Institutions Reform, Recovery and Enforcement
Act.
However, many lenders have reportedly placed appraiser oversight in the production
arm of their company.
In October 2003, the Office of the Comptroller of the Currency, in conjunction
with the Office of Thrift Supervision, the National Credit Union Administration, the Federal Reserve Board and
the Federal Deposit Insurance Corp. issued an advisory letter reminding banks "that the board of directors
is responsible for ensuring that policies and procedures are adopted that establish an effective, independent real
estate appraisal and evaluation program that covers all lending functions."
The letter also called for the independent selection of appraisers and that a
person not involved in loan production should review the reports.
This letter, Mr. Apgar pointed out, did not change any of the rules but reminded
lenders of what was there all along.
However, there are those who believe lenders did not take OCC and OTS seriously
and the letter did not result in any changes in their practices.
What is obscuring the problem of inflated appraisals has been the massive rise
in the value of homes in the United States over the past several years.
Doug Duncan, chief economist for the Mortgage Bankers Association, points out
that there has never been a national devaluation in housing, although several have occurred on regional scales.
Yet there is a concern among commentators that housing is on a bubble that is on the verge of bursting.
Mr. Apgar said that appraising is an art form, not a science. Even though "inflation
covers a lot of sins," when the loan goes into default and foreclosure, it is discovered that the property
was not worth what it was said to be worth.
An industry observer noted that when the value of the mortgage exceeds the value
of the property and the borrower has no equity, most if not all walk away from the home.
In fact, there is a belief among some observers that there is no net equity left
as a result of the overvaluation of properties not only for first mortgages but for home-equity loans as well.
While Mr. Apgar said he believes we are not heading for a crash, overvaluation
of properties hurts both the lender and the borrower. Overappraisals get built into the process, so that home prices
unnecessarily rise on the following sales.
The pressure on appraisers can be so intense, he said, the end result could be
that people lose confidence in the entire system.
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