Appraisers can burst your bubble
by inflating the value of your home
much is your home worth? Better find out before heading to the lender's
office or you might end up with a mortgage you can't afford.
The problem stems from the way the industry
calculates property values. Loan originators, many paid on commission,
sometimes pressure appraisers to fudge their numbers to make mortgages
work, experts say. That means people who don't have a ballpark figure
in mind before they borrow -- or who don't verify numbers that sound
too good to be true -- could be setting themselves up for financial
"It's an acknowledged problem," says Cameron
Rogers, senior vice president of Chicago
Title-Market Intelligence Inc. The Hopkinton, Mass., division
National Financial Inc. does appraisal work for lenders
who outsource that step of the loan process.
"We've had some clients that are very strongly
pushing on value. They may have loan processors that if the value's
not there, they pick up the phone and say, 'Well, I need $5,000
more,'" he adds. "From a sales standpoint of course, you want to
satisfy the applicant's desire because you're more likely going
to get that person's business. But are you really doing that applicant
a service by pushing it? Maybe not."
just want the job done
Many homeowners don't think about how loans get done, just whether
they're approved. But one of the most important steps, from both
a consumer and lender perspective, is the property appraisal. If
a property isn't worth enough to support a loan, that loan won't
be made. If the value comes in high enough for a loan but not as
high as a borrower expects, the borrower's financing costs will
be higher. That's because the appraisal determines the mortgage's
loan-to-value ratio and the higher that ratio, the more onerous
the loan's terms.
Today, companies use several methods to determine
a property's worth. They can access the local tax authority's data,
for instance, or run computerized models that calculate a value
based on recent sales and property trends in the area. Humans will
sometimes be called in to verify that information via a "desktop
evaluation." Or, a full-blown appraisal involving an indoor and
outside inspection of the property by a licensed appraiser will
be required. Lenders generally use the more thorough methods with
purchase transactions, though they also require them on riskier
home equity loans.
"It really varies from institution to institution,
but it's based on the risk-acceptance criteria that the credit committee
happens to accept," Rogers says. "Typically, the decision is based
on loan amounts and credit criteria. The less risk and exposure
perceived, the quicker, simpler methods are then applied."
In a perfect world, the appraisal is just like the title search,
which is just like the recording of the deed at the courthouse --
another step in the closing process the borrower doesn't need to
worry about. But the appraisal can be manipulated in ways that hurt
unsuspecting consumers, and that's why homeowners need to tread
Say a borrower owes $70,000 on a first mortgage
and wants to take out a second one for $30,000 to consolidate debt.
If the lender won't lend at more than 95 percent loan-to-value and
the property appraisal comes back at $100,000, the borrower is out
of luck. The same holds true for the loan officer, who gets paid
a commission based on the number of loans closed in a given time
But if the home value can be coaxed up to $105,300,
the problem goes away. Originators know this, so some will try to
talk appraisers into modifying their estimates. Experts say that
isn't too tough because those estimates rely to some degree on an
appraiser's subjective evaluation of property and market conditions.
often the origin of price inflation
"It starts with the originator trying to make the deal happen,"
says Sandy Nickol, a regional president with Republic
Bancorp Inc.'s mortgage company in Farmington Hills, Mich.
"Sometimes you can't close the deal unless you can get the customer
a mortgage of 'X.' If they're trying to pull cash out to pay off
three credit cards and it doesn't make sense to refinance today
unless they can do that, the whole deal is going to hinge on an
appraisal that's high enough to do that."
At first glance, the process might look harmless.
After all, it helps borrowers get the loans they want. But in reality,
overinflated appraisals trap consumers with too much debt and lock
them out of the refinance market. They can also force people into
Say our sample borrower lost a job and needed
to sell the property to move somewhere cheaper. Buyers aren't likely
to pay much more than the property's actual $100,000 worth, even
if some random appraisal pegs the value at $105,000. That means
the borrower wouldn't get enough money from the transaction to settle
the two debts, considering the cost of the real estate agent commission
and pre-closing repairs.
"It really becomes an issue where for whatever
reason it's necessary to sell the property," Rogers says. "You're
left with a shortfall, a large shortfall."
against appraisal fraud
Fortunately, there are several ways savvy consumers can avoid the
appraisal problem. They can research and track down reputable lenders,
for example, because those companies usually have checks and balances
in place to make sure their appraisers aren't bending the rules,
as do the outsourcing companies they use.
"We have an agreement with a national vendor
who does most of our appraisals for us," says Carolyn Hart, senior
vice president of credit risk management for FleetBoston
Financial Corp.'s mortgage company. "They handle that function.
They screen them. They do the reference checks. They do the licensing
checks and, also, their performance is checked through them."
Borrowers should also get a rough idea of their
property's worth before shopping for loans. They can contact local
real estate agents or visit one of several registration-required
Web sites, including Domania.com
for such estimates.
Owners may want to go back through old tax receipts
to see how much their properties were assessed for and how recently
those assessments were performed, too. The extra-cautious can even
order their own full-blown appraisals, but those cost anywhere from
$300 or $350 on up to $600 in some remote locations.
"It's really a research project on the part
of the consumer," says Greg Dennis, president of LandSafe
Appraisal Services. The Plano, Texas-based company does property
evaluations, title searches and other work for lenders.
Mortgage customers can protect themselves once
they've started the application process, too. Under federal law,
a borrower is entitled to a copy of the lender's appraisal before
closing, says Republic's Nickol. A quick review of the document
will show whether the property described matches the actual home.
As for people who've already closed on inflated-appraisal
loans, legal experts recommend they contact a local real estate
attorney. They may be able to sue their original appraisers for
negligence or violations of their state's consumer practices acts.
Borrowers should also file complaints with the agencies or boards
responsible for overseeing appraisals in their states.
Still, the best thing to do is avoid trouble
in the first place. Borrowers can accomplish that by either understanding
the mortgages they're signing and the home values they're based
upon, or hiring people who do.
"The person should really have some familiarity
with what values are in the neighborhood and what likely they would
be able to sell the house for," says Denis Murphy, director of Civil
Justice Inc., a Baltimore-based legal assistance group. If not,
"get a lawyer before you sign the documents."