Real estate appraisers in Hampton Roads and across the nation say they have felt intense pressure from lenders, mortgage brokers and real estate agents to deliver inflated valuations - a serious ethical breach that may have played a role in puffing up the real estate bubble and promoting mortgage fraud.
The problem has been around for some time, says Woody Fincham, a Chesapeake-based appraiser. For several years in the mid-2000s, Fincham said, his company, FM & Associates, did steady business with a Virginia Beach mortgage brokerage but faced escalating pressure to deliver inflated appraisals.
"They would get on the phone and scream at me to inflate values," he said. "They said, 'If you keep coming in low, we're not going to work with you anymore.' " Finally, the brokerage delivered on the threat, cutting off business with Fincham's company.
"They said, 'You're not hitting the numbers we need you to hit,' " Fincham said.
That brokerage, Everyday Lending, is now out of business, dragged down by the collapse of the subprime mortgage market. One of its former loan officers, Aretha Smiley, has been named in two civil lawsuits alleging mortgage fraud.
The volume of inflated real estate values has declined with the contraction of the housing market over the past year, Fincham and other appraisers say, but the pressure to pump up values hasn't gone away.
Appraisers play a crucial role in the buying and selling of real estate: They place a value on the property to be sold.
In theory, the appraiser is an independent operator, not influenced by the buyer, the seller or anyone else. The reality, say Fincham and fellow appraisers across the country, is far different.
It's not as if there was no warning.
Back in 2001 the Appraisal Institute, a worldwide association of real estate appraisers, told Congress that members were facing increasing pressure from lenders, brokers and realty agents to inflate property values.
Such pressure can enable lenders to make loans larger than the actual value of the house, the institute warned. Moreover, those inflated transactions can later be cited as comparable sales in appraisals of nearby properties, creating a multiplier effect.
"Such a cycle of ever escalating values adds unnecessary risk to our mortgage finance system" and "can contribute to mortgage fraud," the institute warned.
Those words seem prescient in this era of deflating home values, mounting foreclosures and emerging cases of fraud.
Since 1999, more than 10,000 appraisers nationwide have signed an online petition urging the federal government to clamp down on lender pressure to inflate values. Such pressure is pervasive, the petition says, and includes blacklisting appraisers who refuse to go along.
Some local appraisers were unwilling to discuss the issue on the record, saying they feared losing business.
One willing to talk was Suzanne Shannon, an appraiser in Hampton.
"I've been told numerous times, right flat-out in plain English, 'If you don't do what I want you to do, you'll never work for me again,' " Shannon said.
The deflation of the housing bubble has prompted some lenders to look more critically at appraisals, Shannon said. Occasionally over the past few months she has been asked to review high valuations turned in by other appraisers.
In one instance, a waterfront property in Gloucester County had been appraised at $2.1 million; Shannon's review put the value at only $1.2 million.
A 2007 national study found that 90 percent of appraisers reported being pressured to raise property valuations to enable deals to go through. The prime culprits, according to the survey, were mortgage brokers.
Mortgage brokers, on the other hand, put the onus back on appraisers.
"The appraisers have to step up here and take the high ground," said Marc Savitt, president of the National Association of Mortgage Brokers. "I understand a lot of them have been threatened with loss of business and so forth. I'm not saying it didn't happen.
"If they get pressured, they need to report it to the appropriate regulator. That's the first thing. The second thing is, if they do commit fraud, then they have to understand there's consequences for that, and just because somebody tried to influence or pressure them, that's not an excuse for committing fraud."
The trouble is, when coercion occurs, appraisers have little recourse, said Glenn James, a Norfolk appraiser and a member of the Virginia Real Estate Appraiser Board.
"Mortgage brokers are totally unregulated" in Virginia, James said, so there's no one to complain to.
Another problem, appraisers say, is that the pressure is usually applied in oral form, not written, making it hard to prove.
But not always.
Mark White, a Roanoke appraiser, told of getting a faxed order from an out-of-state broker that mentioned a figure of $195,000 and asked him if he could "match this value."
A cursory review of the property - a 37-year-old, 1,000-square-foot house - showed that it was worth $150,000 at most, White said.
According to the Uniform Standards of Professional Appraisal Practice, the national appraisers' code of ethics, it is unethical for an appraiser to accept an assignment that is contingent on reporting a predetermined value.
In Virginia, those ethical standards have been incorporated into the state regulations governing appraisers. Violations can result in a variety of sanctions, including license revocation.
Pressure on appraisers to pump up the numbers was particularly intense during the run-up in prices during the early and mid-2000s, said Bill Garber, director of government relations at the Appraisal Institute.
"Good appraisers said no to it and went about their business and did their jobs professionally," Garber said. "But there are institutionalized conflicts of interest that exist - pressure points in the lending process - that can allow people with a vested interest in the transaction to control the appraisal process."
Such coercive tactics are a violation of federal banking regulations.
Earlier this year, the Federal Reserve Board adopted a rule barring mortgage brokers and lenders from coercing appraisers.
The new rule is a positive step, Garber said, but the proof will be in the pudding: "Enforcement is key. It's going to be incumbent upon the regulatory agencies to keep this issue on the front burner."
The problem is, for every appraiser who abides by the rules, there's another one down the street who's willing to violate them to get more business, said Cheri Eimer, an appraiser in Newport News.
"It's very disheartening for an honest appraiser to lose business because they're doing the job that they're hired to do," she said. "It's a big problem. It needs to be fixed."
Bill Sizemore, (757) 446-2276, bill.sizemore@pilotonline.com
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wow pt 2
There are bad appraisers, bad agents and bad lenders. There are bad consumers. I would hope that the good out weigh the bad, but again that is what I hope, not what I can prove. Lenders should not allow commission based personnel to select appraisers. I see nothing wrong with them suggesting appraisers, but the actual rotation and use of appraisers should be left to a seperate department. Much of what happened resulted from loan officers influencing the process. Follow the math, some LO's get about a point for a closing 500K = 5,000 for one deal. it can be higher or lower. An agent gets 3% typically. On a very large and difficult to appraise home an appraiser may get 1k-1.5k. Most won't get that much becuase there is no value placed on the process. If I qoute that much there is some under trained person who will do it for $350. Lenders don't care about the report as long as it is cheap and easy. the economics of the fees say it all. That said I can say there are good ethical lenders and loan officers
wow
Appraisers can and do hit numbers. I see it more than I care for. There are few underwriters that can actually understand the reports. That is not their job, these lenders should have appraiser review staff, but the biggest majority do not. They leave the biggest part of the appraisal QA up to an underwriter who is neither trained, nor really knows valuation concepts. As an appraiser I would be hard pressed to do their job, so why is it ok in the reverse? They often make the decision that if it fits within a checklist of criteria from FHA/VA or Fannie that it is good to go. Common sense was replaced with allowing exceptions in QA so that the bottom line is most important. I have lenders that won't work with me right now becuase I report when markets are declining. One of the biggest lenders in VA Beach fails to disclose that there is a family relatiosnhip between one of the biggest appraisal companny's owners and one ofthe lender's owners.
Ethan , don't know what you think
I donn't know what kind of appraisers youve been exposed to, but I do it for a living, and do it ethically, responsibly and honestly, I know appraisers who make much more than I do, but "it is what it is" when it comes to the numbers
you can't make them up, the numbers are verifiable, the appraisers are accountable and are taken to task by underwriters everyday
there are bad apples in every occupational career, it only takes a few to tarnish and slander the entire profession
Jaxpraiser, you are wrong.
Jaxpraiser, you are wrong. Very wrong.
gnd1432 - I think all of us
gnd1432 - I think all of us here only want an honest fair appraisal for property that they are interested in purchasing or in my case, a fair market value assessment of my house for the purposes of real estate taxes that I am required by law to pay. It would appear that there are some appraisers that are in the pockets of real estate and mortgage brokers, and bankers for the sole purpose of "legally" scamming people. I also we that the citizens of Tidewater have been paying real estate taxes on artificially inflated assessments rather than the "fair" market value. Now we are rewarding the same people that got us into this mess with $750 billion in bailout money. Unbelieveable.
appraisal article
appraisers do not set value, prior sales and history does, the appraiser cannot make up the number, it has to be generated and supported by facts and history, the mls and the city records are the basic source documents used in the appraisal process, the appraiser can only provide data based on statistics provided them
as for appraisers getting rich, a fee of $350 is average per transaction in this local area ,how many realtors are collecting a commission of $350 per house, not many I would venture, the people getting rich in this situations were the realtors and the mortgage people, collecting thousands, as opposed to the minimum fee of the appraiser
in most cases the appraiser was not paid until the transaction was complete, and if the transaction did not close most appraisers were not paid, leaving some appraisers with hundreds of files not paid for
the underwriters for the mortgage company had the final say in every tranaction, it a value was not in line with what they determined was a viable number then they kicked it back and had desk reviews made of the submitted appraisal
don't blame the appraiser ,they just performed a administrative function
Instead of the Sub-prime as before now it is.................
FHA, USDA, and VA.
The lenders are applying the same pressure to hit value and over look problems as they did with sub-prime loans. This time the government will have to bale themselves out of the mess.
Some one needs to get some type of controls on the lenders who order appraisals and the Appraisal Management Companies who order appraisals.
The AMC's look for the fastest and cheapest appraiser and many badger appraisers to look the other way and hit the values needed. The AMC's it appears takes the lions share of the fee paying in many case the appraiser 20% to 30% of what is charge the borrower for an appraisal fee.
Many lenders and appraisal management companies want a 24 to 48 hour turn time or even faster even in the rural areas, where drive times are greater, research times are longer if an appraisal is to be correctly and meet USPAP Standards. Still wanting to pay only the same as they do for urban appraisals.
How many borrowers and end users really know what they are getting in the way of an appraisal under these conditions????
Government can let the printers ink flow and the printing presses print the next round of bale out money for FHA, USDA and VA
After reading this article it is even more obvious
that the core problem was fraud. Unregulated mortgage companies made loans not for investment in future income from the mortgagee, but for the fees of both making the loan and selling the loan to investment banks. Subprime or no subprime, the loans were so egregious that they would not even qualify as loans, just fee generating fraudulent paper. Merrill Lynch even bought a mortgage company to generate their own fees and speed up the packaging of CDO's. Then, to make things even more ridiculous, they invented an investment called "synthetic CDO"…nothing more than total "air". No one was watching the front counter and the thieves went rampant.
And then you get comments from people like Greenspan, who were shocked that the market was not self regulating. Wow, is that a foolish comment. The folks on Wall Street can't even spell ethics, never mind having any. We put locks, cameras and guards in banks to keep the Willie Suttons from coming in the front door for robbery, but leave the back door wide open with absolutely no oversight for the MBA's to march out with sacks of money.
Aye Ethan
There is no denying that over the years you have repeatedly warned us. I clearly remember several posts of yours predicting the real estate collapse. I chose to ignore them & failed to notify the proper authorities, so I feel partially at fault.
As an appraiser I found this
As an appraiser I found this article to have excluded certain key information. For example, there was no mention of the difference in earnings on any given transaction by the various parties who share an interest in whether or not a loan closes. The realtors make thousands of dollars on each transaction, as does the lender. The appraiser, on the other hand, only makes a few hundred, or these days with the AMC's as key players, not even a couple of hundred. Yet, only the appraiser is regulated. He/She is the one everyone wants to go after when the deal goes south, or the people making the big money gets caught with their hand in the cookie jar.
Also, the appraisal profession is the only profession where, in order to do business, lenders require a copy of their Errors and Omissions insurance. Obviously this is required by lenders to see how much they can sue the appraiser for should they find themselves in hot water. Unfortunatley, as a discredit to our profession, we supply it for them. It's mandatory if we want to work and earn a living. Pathetic.
While there are "honest" appraisers and "dishonest" appraisers, this honest appraiser is tired of being the scapegoat.
Fraud and greed
Greed and Fraud. Some Realtors, some mortgage brokers, some banks. Clinton (Glass Stegal act), Greenspan (Arm loan suggestion, repetitive bubble blowing, holding rates too low too long). Appraisers, Scammers, flippers and all the people that lied on the loan app. Fannie Mae (massive amounts of fraud, over $1 billion to redo finances, and the guy in charge still gets $100K _a MONTH_). Home prices will plummet, cities will bleed. Jobs will disappear. Other countries will loose faith in our country (I know I did). Capitol hill is doing nothing. Probably the best move now is to buy a big house, immediately quit making payments, and live free -- hopefully for over a year. For those that saw my comments over the past 4 years... I told you so. Are you ready for great depression II ?
Fraud!
Well, it appears to me that I am a victim of fraud. It appears that all of us in Virginia Beach are due a refund of real estates paid on fraudluent assessments of our property. The law dictates that taxes are assessed at fair market value vice a fraudlent one. I went to the assessors office two years ago to contest my assessment and was told it was based on what houses sold for in my area neighborhood. So... Madame Mayor, I think you should cancel the free vacation day after Christmas for Virginia Beach employees and put that money towards my refund plus interest of real estate taxes I overpaid. One could assume that the city assessors are accomplaces as they benefited greatly from this fraud. Are you listening Rosemary?
the president elect is tied into this mortgage crisis
Mr. Osama was a lawyer that took mortgage companies to court when they would not issue loans to those who did not qualify. Fannie Mae and Freddie Mac was pushed to promote these loans to people who really did not nor could afford a home. Thank the Clinton era for this one.
Now instead of jail or any criminal charges these crooks at Fannie Mae and reddie mac are staying on board to help with the " transition"
The love of money...
It's all about the Benjamins baby.
Always has been.
Always will be.
Sad isn't it.
hmmm...
so who is going to go after the thieves who went along with this shindig?
i notice the good guys paid the price for doing the right thing, but i didn't see anywhere in this article about the bad guys going to trial or being charged for fraud or theft or whatever.
who is going to put them in front of a judge to answer for their crimes?
i want to see the bad guys put out of business and the only business left is the good guys who had to pay the ultimate price by losing business to the shady thieves interested more in making a buck and playing thief than doing the right thing and doing their job responsibly.
Appraisers
During my tenure in Real Estate we were not allowed to fratenize with the appraisers - we could give them comparables of other properties but we could not suggest a price to them - that was considered unethical - and poor real estate - but here again the almighty dollar has overiden ethics and the results are- over inflated property values - It is a shame that there isn't some agency to go back over the appraisals and bring ethics charges against every appraiser that can not justify his work - until we bring honesty back to the profession of appraiser there will not be any true values given to homes and we are now seeing part of the problem of home values - the other part is greedy people with champayne tastes and beer pocketbooks.
My Philosophy
"This home is Just what I wanted!" "this Home would be perfect for our children!" This home is very very clean and close to my job!" "I've been looking for a home for so long I'm just gonna get it!" "Oh my god the backyard is so big" People People Please!!!! If it isn't in your budget don't get it,and that is the bottom of the bottom line.
Regulation of Appraisers
Actually, appraisers are regulated by the Virginia Department of Professional and Occupational Regulation (DPOR). They are only required to be registered with the State Corporation Commission (SCC) if they are incorporated or a limited liability company (which most of them are), but the SCC has no oversight other than to keep their corporate status active. The following site has a copy of the regulations, as well as the regulations for all Virginia licensed professionals (contractors, real estate agents,etc.) http://www.dpor.virginia.gov/dporweb/Appraiser_Regs.pdf. DPOR also has the authority to fine licensed professional and to revoke licenses for noncompliance with the regulations. However, they have to know about the violations first so the public hs to be willing to report violations. The Board is required to investigate all complaints.
re: Sales people work on comission
lwright740 wrote:
>>>I lost all respect for real-estate agents when they descended on my mother after my father died.<<<
How long did they wait? When my family left my mother's house for my father's service, there was a business card in every window at her house from an agent.
I doubt she had ever received a phone call like the one I gave her...
Chesapeake
Here in Chesapeake, our local government saw ample opportunity to reap the rewards of a falsely inflated real estate market for three years. They ran through that money like "kids in a candy store". Proof of this is the fact that we will have a 12 million dollar budget shortfall this year, and a 30 million dollar budget shortfall next year. All of this after huge real estate tax increases and a found surplus of 14 million dollars from mosquito control. REMEMBER THAT. After all of that income, we are still closing bridges, and have bridges that fire trucks cannot cross. The upper management compensation in City Hall is off the charts for a city with 250,000 taxpayers and a median income of 57k - 62k. We have upper management employees making more than their counterparts in cities with 8-12 million taxpayers and a similar job description. This must change. However, it won't, because we elect the same people to city council, who do not have corporate "know how", to make the tough decisions that need to be made