Current Approach to Appraisals

Past of an article in the Wall Street Journal on August 12, 2011

There is little doubt that home values have depreciated sharply in recent years for the most basic of economic reasons: excess supply of homes on the market and weak demand. The housing bubble that burst a few years ago was inflated, in part, by overly generous appraisals. Now, lenders are pressuring appraisers to come in with lower estimates, some real estate professionals say. Banks also are using less-experience appraisers, who often don’t appreciate factors that make a home worth more, they say. And valuations are being heavily influenced by distressed sales priced at a discount to the rest of the market.

Lenders are “instructing appraisers to be a little conservative, and that responsibility on the one hand is seen as credit tightening and, on the other, as exacerbating the housing problem” says Columbia Business School economist Chris Mayer.

Disputes over valuations are rising. The National Association of Realtors said the 16% of realtors surveyed in June of this year reported a cancelation in June due to a low appraisal.

For decades, appraising a home was both an art and a science, executed primarily by independent professionals who were experts on the local markets. Designed to protect both the borrower and lender, appraisals were based largely on selling prices of comparable homes. But appraisers also combed through property records and interviewed brokers, buyers, sellers, and even other appraisers. Banks selected the appraiser and often had influence over the outcome. Home buyers paid the fee.

In the aftermath of the housing bust, then New York State Attorney General Andrew Cuomo sought to reform the appraisal industry by convincing Fannie Mae and Freddie Mac to bar loan officers, mortgage brokers, or real estate agents from any role in selecting appraisers. Besides combating inflated and sometimes fraudulent appraisals, the goal was to eliminate pressure on appraisers to provide estimates that match the contract price, which would increase chances that the mortgage loan would get approved. The sweeping Dodd-Frank financial-overhaul that went into effect in 2 0 10 went one step further to bolster appraiser independence by regulating both the industry and the fees they are paid.

The result has been that appraisers with less experience or who are unfamiliar with a community, but who work cheap, are getting assignments while more experienced appraisers are going out of business. According to critics, this is producing appraisals that are less accurate.

Some complain those appraisers are using foreclosures and other distress sales as comps when coming up with estimates, on regular sales. Because foreclosures and short sales tend to sell at big discounts from the actual value, some argue they shouldn’t be used to determine value.

Some economists disagree. They argue that foreclosures account for such a large share of housing sales that it’s perfectly acceptable to use them as comps, or use them but adjust pricing accordingly.

Another compliant is that appraisers are increasingly relying on automated valuation models. Computer programs that extrapolate home values based on reams of property data, and public and privately complied databases. The industry began automating in the mid 1990’s but it wasn’t until a few years ago that automated valuation models (AVM’S) took hold in a big way.

One of the biggest complaints is that appraisers, in their haste, are overlooking or missing important elements that could add substantial value to a home. According to Erin Wanner, a sales executive with Stirling Sotheby’s International, appraisers today seem less knowledgeable. Real estate is a neighborhood business. One neighborhood can be hit, and another can be flourishing. She says new laws prevent lenders and agents from contacting the appraiser directly, which has been especially frustrating. Once we get a report, it states that individual’s opinion and that’s that.

When an appraiser is not familiar with an area they can easily miscalculate a properties true value by using erroneous comps.