From the Baltimore Sun:
Appraisers seek curbs on lender pressure
Have inflated appraisals helped fuel the current surge in foreclosures by credit-strapped borrowers? Are they at the core of many mortgage fraud schemes?
The four largest trade groups representing appraisers say yes – and they are asking federal financial regulators to crack down on lenders and loan officers who pressure appraisers to raise valuations to allow overpriced deals to go through.
Led by the 22,000-member Appraisal Institute, the groups told regulators last week that subprime lenders experiencing high rates of foreclosures often have been guilty of “systematic inattention” to the accuracy and sources of the valuations backing the mortgages they funded.
Such lenders:
Bought loans with zero or minimal down payments without taking hard looks at the qualifications and track records of the appraisers supplying the numbers. Yet in softening housing markets, accuracy on property valuations is essential whenever down payments are tiny and borrowers’ credit histories are shaky.
A zero-down mortgage made to unqualified buyers on a house worth thousands less than the appraisal in a depreciating market is a financial cluster bomb waiting to explode.
Failed to require “firewalls” separating loan officers working on commission from the appraisers hired to value the properties to be fi- nanced.
National studies repeatedly have shown that commissioned loan officers often demand that appraisers cooperate to hit whatever number is needed to push the transaction to closing – or lose all future business.
Ninety percent of the appraisers in a 2006 national survey by October Research Corp. said they had experienced threats, nonpayment of fees and other forms of coercion. Many said they had lost business by refusing to play the game.
Appraisers used to lowball properties (i.e. conservative appraisals) because their client’s (the banks) main objective was to ensure that sufficient collateral was available to back up their investment.
When banks were able to flip mortgages to a Wall Street hungry for yield, the main objective became “get the job done & get the fee”. What’s the big deal, banks thought, it will be worth the appraised value in 6 months anyway.
Now that Wall Street is starting to get pickier about what they buy and appraisers are under the microscope for fraud, I would expect to see a reversion to the conservative appraisal style. This alone could impact prices. If a house that was over appraised by 2% is now under appraised by 2%, this means a 4% drop in prices just from the appraisal.