Appraisers Cite Pressure to Inflate Home Values

This article was originally published by Newhouse News Service on Monday, June 23, 2003.

By Katherine Reynolds Lewis
c.2003 Newhouse News Service

Real estate appraisers -- the professionals who certify what a house is worth -- say they are pressured more and more to exaggerate values in order to smooth the way for a refinancing or sale.

Yielding to such pressure not only contributes to an artificial bubble in real estate prices, but it can leave homeowners in the lurch when they discover their appraisal was inflated. Consumers have lost homes and been forced into bankruptcy due to faulty appraisals.

But with interest rates at 40-year lows, the demand for soaring appraisals is at a fever pitch, experts say.

"It's putting a squeeze on the professionals in the appraisal business who truly do conduct themselves with integrity and professional standards," said Anne Petit, superintendent of Ohio's Division of Real Estate and Professional Licensing.
Appraisers worry that they'll be blamed if the booming property market collapses and their lofty valuations suddenly look as worthless as all those "buy" ratings on stocks in the late 1990s.

"It's coming quickly, the day of reckoning," said appraiser Robert Ipock, owner of Bob Ipock & Associates in Gastonia, N.C. "If the economy does not get going pretty damn fast, we're going to breach the bubble and prices are going to start dropping. I fear that the same thing will happen to real estate that happened to the stock market, where people lost faith in it. That would be devastating to the whole country."

Realtors and mortgage brokers deny that the problem is widespread. They say housing won't slump nationwide, though in some markets prices may fall -- a view backed by many economists.

Appraisers research sales of comparable houses in a market and review a home in person to determine a property's value. They are hired by the real estate agent, lender or mortgage broker and are paid a flat rate regardless of whether the transaction is completed.

The problem arises when an appraiser says a house is worth less than the mortgage a homeowner wants, and the agent or lender -- each of whom is paid only if the deal goes through -- finds a different appraiser who will swear to a higher value. Often, the consumer doesn't even know about the first appraiser's concerns.

For instance, an Iowa homeowner wanted to refinance a house he bought three years ago for $310,000. Based on sales in the neighborhood and a review of the house, Iowa Residential Appraisal Co. in Des Moines found the property was worth $280,000 today, despite a rising market, said Alan Hummel, the firm's chief executive.

The mortgage broker simply switched appraisers to make the refinancing work, Hummel said. In some cases where appraisals are lower than the desired value, mortgage brokers or loan officers refuse to pay or won't rehire that appraiser, according to Hummel, other appraisers across the country and their state regulators.

"It is truly bad for the consumer when it goes on," said Hummel, who is the 2003 president of the Appraisal Institute, the industry's largest professional association.

Homeowners can end up owing more than they would receive if they had to sell the house, known as negative equity.

That's what happened to David Winebrenner of Oak Hill, W.Va.

In the fall of 2001, a mortgage company told Winebrenner, 63, his home was worth $95,000 -- just the amount needed to pay off both mortgages. The refinancing lowered his monthly payment to $890 from almost $1,400 and convinced him to quit his job. He hoped eventually to move closer to his grandchildren.

But when Winebrenner tried to put his house on the market last year, the real estate agent discovered that the appraiser's report listed false selling prices for the comparable houses. Winebrenner's home would probably only sell for $82,000, not enough to pay off the mortgage.

"I was totally stunned because the people I dealt with seemed upfront about everything," Winebrenner said. "My whole life has been changed from that day on. I'm stuck here."

Appraisers who falsify reports can lose their state licenses or even be sent to jail. However, state regulators say they lack the resources to investigate alleged fraud as aggressively as needed. And often, homeowners don't know to file a complaint to the state.

Sales involving inflated appraisals lead to a false upward spiral in the housing market.

If a buyer can't afford closing costs or a down payment, the mortgage broker can boost the sale price to include those expenses, often tens of thousands of dollars. The appraiser is told to certify that the larger number is the home's value.

The artificially high price is listed on the official sale documents, and relied on by appraisers when determining the value of other houses in the market.

"It's a vicious cycle," said Bob Keith, administrator of Oregon's appraiser licensing board. "Real estate agents are not disclosing how much the sales concessions are."

Meanwhile, appraisal complaints have climbed in the past three years, doubling in Colorado, for instance, and more than tripling in Kentucky.

"We're very alarmed by this situation," said Stewart Leach, administrator at the Colorado Appraiser Board and president of the Association of Appraiser Regulatory Officials. "If you get a stagnant housing market, or a declining housing market, then you've got a problem."

In Denver and Colorado Springs, down payment assistance programs are used in 20 percent to 30 percent of the transactions. "This can really distort the market," Leach said.

Sam Blackburn, executive director of the Kentucky Real Estate Appraisers Board, predicted a wave of foreclosures in the next six months, since people with no equity in their homes are more likely to default.

Representatives of mortgage brokers and realtors said appraisal inflation isn't a major problem and downplayed concern.

"Just like in any business, including the mortgage side, there are an awful lot of unscrupulous people," said Robert Dozier Jr., president of Homeowners Mortgage in Columbia, S.C.

But appraisals are fading in importance as lenders focus more on borrowers' ability and willingness to repay, Dozier said.

Armand Cosenza Jr., co-owner of Commonwealth Financial Services in Richmond Heights, Ohio, predicted that appraisals will be automated in the future.

"I probably lose a couple dozen loans a year because I can't get the appraisal to work," said Cosenza, outgoing president of the National Association of Mortgage Brokers. "Rather than do something stupid and lose my license, I say I'm sorry, I can't get the value."

Orawin Velz, an economist at mortgage giant Fannie Mae, projected that housing prices will rise by 4 percent or 4.5 percent per year in the near future. That's down from the 7.5 percent annual growth since 1999, but still positive.

The housing boom has been the pillar propping up an economy beleaguered by 2 million job cuts, a three-year stock market slump and stagnant business investment.

Last year, Americans bought a record 6.4 million homes and refinanced 10 million mortgages, "cashing out" almost $200 billion in home equity by lowering their interest rates, according to the Federal Reserve Board. People spent almost half that cash, preventing the economy from slipping further.

All that demand pushed up housing prices, which have skyrocketed 39 percent in the past five years, according to mortgage repackager Freddie Mac.