Once again the National Association of Realtors (NAR) is working hard to manipulate any system that threatens their survival. This time, they're fighting the government's efforts to change the way appraisals are performed.
As part of the reform of the loose mortgage and lending practices which helped put so many home owners in peril, the government has been concentrating on changing the relationships bank appraisers have with others who might weild undue influence on their work.
The love-hate relationship between appraisers and real estate agents has been ongoing for years. Agents resent appraisers who want real estate agents to do some of their work for them, specifically, providing the appraiser with data regarding comparable sales. It has been common practice for some appraisers to expect or demand the agent involved in the transaction to provide this information. In good times, this places the agent in a position whereby they need to cooperate or risk low appraisals, and in bad times, the agent is desperate to provide anything they can to get the property to “appraise out” at the sale price.
Such an association can lead to an exchange of expected or needed values and perhaps a certain amount of manipulation.
The government wants to change this and the NAR is working to stop or modify the position of the government.
Now, the NAR would lead the public to believe that it is for their benefit that realtors are allowed to discuss values with the individual appraiser but you need to ask why? Do the realtors need this involvement to actually justify their position for the sake of self- preservation? Are the appraisers (with required formal education that realtors do not possess) so inept at their jobs that they need help in establishing fair market values? Will the values of properties change that much if realtors are not involved? How much of a help to sellers were the realtors in forecasting the reality of this marketplace? Are realtors partly responsible for contributing to the inflated property values that have come crashing down?
Appraisers and appraisal practices are under intense scrutiny right now. The end result of this investigation in this depressed marketplace is that appraisers will err on the side of safety. The safest value an appraiser can assess is a low value. How does this help the seller?
As if it were not difficult enough at present for property owners to sell their homes in the middle of this depressed market, things seem to be getting worse.
Article comments
1 - Joanne Huspek
I'm not sure where you live, but the appraisers tend to go high here, not low. This has not only given a false read on home values and has contributed to people getting refinancing they can't afford.
But I agree. The free market is no place for government.
2 - Doug Hunter
It all goes back to the packaged loan fiasco. Appraisals get inflated to get the deal done (or the appraiser won't be hired again). None of the parties have any incentive to verify the accuracy of the appraisal because they're all just taking a fee and passing the loan on. By the time the loan tanks it's way off in some institutional investors portfolio where the manager has been paid to look the other way.
If the lender holds the loan then they will make sure the appraiser does a good job so they don't get stuck with junk collateral. They will be happy when the appraiser makes them aware that the value is not what is in the contract. Problem solved.
Smaller banks that hold their own loans for the most part never got into the toxic asset mess. The unfortunate part is they can now get wiped out by the bubble caused by the big boys. The difference is the big idiots who caused the mess get bailed out and the small banks pay higher FDIC/Government fees and get nothing when they fail.
That is par for the course for government though, rich people and idiots get bailed out. Normal, responsible people get stuck with the bill.
3 - Doug Hunter
In short, they need to create an environment where the lender-appraiser relationship is restored to what it should be and the rest will take care of itself. If the appraiser wants comps they should pay to join MLS (which they are allowed to do in most areas I'm familiar with) like everyone else.
4 - Ruvy
I'd be interested in reading what Baritone has to say about all this. He has real knowledge and understanding of these problems gained first hand.
5 - Cannonshop
Notably, at least around here, Realtors have to obey a set of Ethical Guidelines or they lose their license-but Lenders don't. Lots of the subprime mess goes back to that very thing (as Doug described), since Lenders made a habit during the bubble of 'shopping' for an appraisal that matched the amount they wanted, rather than reflecting the actual (usually lower) value of the property.
6 - Bliffle
Realtors (and most other operators in the RE sales chain) have a vested interest in appraising high, because their commissions are proportional to gross price. It's one of the biggest reasons that prices escalate so much.
7 - Cannonshop
6. So do sellers, Bliffle. An agent mainly does three things:
a. shows the property to buyers.
b. Lists the property and the asking price.
c. Helps with the paperwork, and sometimes assists in negotiations.
Agents don't set the asking price. basically they're middle-men and facilitators.
They're also licensed, and can lose that license if they violate the code of ethics for their state's real-estate licensing. One High commission vs. losing your ability to work in your profession isn't a good trade. Agents have a vested interest in following the rules.
Unlike Lenders, who are not licensed OR regulated.
8 - Baritone
Thank you Ruvy. I'll weigh in here at least a little.
Just as a reminder, I have been a residential appraiser for well over 20 years. I've seen a lot of changes in that time. The process of completing a residential appraisal has become quite time consuming and complex.
Relatively speaking, when I started appraising, I could have submitted a report written on the edges of a wet napkin just so long as the address and final value estmate were legible. Today, the average appraisal report that I submit consists of around 20 to 25 pages.
I'm not sure where appraisers go to realtors with the expectations of being provided comparables any longer. I have always had access to an MLS service. Granted, many small communities and rural areas around the country may not have that luxury. But those instances are becoming more and more rare. Also, there are a number of other regional and national data bases with comparable information available.
When I started in the real estate business - I more or less pretended to sell real estate for a few years - the Indianapolis MLS system included Marion, its home county and 4 or 5 of the surrounding or "donut" counties. Now the system includes more than half of the 92 counties in Indiana - virtually everything within 60 to 75 miles from downtown Indianapolis.
Appraisers have historically been demonized by about every corner of the business - despised equally by realtors, mortgage brokers, loan originators and processers, buyers and sellers - the whole gamut. We are a maddening cog in the system.
If lenders could totally have their way, there would be no appraisers. To that end, over the past several years a number of different resources have been developed so as to obviate the need for an actual, feet on the ground exterior/interior appraisal.
A number of "products" have appeared over the years including a variety of "drive-by" reports, and more recently, desk-top valuations. Beyond that, lenders have made use of AVMs - Automated Valuation Models - which are created via those aforementioned regional and national data bases - compilations of residential sales which are fed into the maw of some complex computer analysis to arrive at a value for a particular property. No appraisers are involved in that process. There are those that swear by them, but I have found them in many cases to be grossly inaccurate.
New rules or guidelines came down the pike effective as of last May 1 called the HVCC or the "Home Valuation Code of Conduct" which is intended to lay out rules regarding the problem of pressures being brought to bear on appraisers primarily by realtors and lenders.
In more and more instances now, the lender cannot have direct communication with appraisers which has increased the prominence of so called appraisal management companies, or AMCs through which a lender requests an appraisal and the AMC then assigns it to an appraiser who has been accepted to their panel in the appropriate market area. Of course, I hate the AMCs as they get a fairly hefty piece of the appraisal fee. So now, I'm obliged to perform the same work for about two thirds of the fee. That sucks.
It is an imperfect system in that the AMCs are in hot competition with each other to get the good accounts. Keep in mind that there are few "local" lenders any longer and the number of regional or national lenders - banks, mortgage companies, etc. shrink almost on a daily basis. Consequently, the AMCs are beholden to the lenders and the same pressures can be brought to bear on them and successively on appraisers.
I've written about this before here, and I am tempted to reroute this to an actual article, but I'm too tired. Suffice to say that there is much more to be said about this situation. I fear that unless more changes are made at all levels, we may well see the whole housing/mortgage industry fall down the same damn hole in no time at all.
B