April 30, 2010
One year ago this week a set of sweeping reforms took effect to prevent real estate appraisers from gaming the market with inflated values at the urging of lenders and mortgage brokers.So by now, buyers and sellers should feel sure that the appraisal system is working and won't contribute to another housing crisis, right?I feel about as confident in the reforms as I am that I could sell my house the same day I put it on the market.Don't take my word for it."It's a disaster in many respects," said Frank Gregoire, a 30-year veteran of the appraisal business and former chairman of the Florida Real Estate Appraisal Board who has been a vocal critic of the bad behavior by some appraisers."Borrowers find themselves paying more for an appraisal, and they have a higher likelihood that appraisal is being done by someone with less experience who will spend less time researching the market and actually preparing the report."The biggest complaint about the federal changes known as the Home Valuation Code of Conduct is that it puts too much power in the hands of entities known as appraisal management companies.Because brokers and lenders — who profited handsomely as sales prices escalated — can no longer flip through their Rolodexes and call on a favorite appraiser to go out and evaluate a house, most appraisals now get farmed out to the lowest bidder through these middle-men companies.Talk about solving one problem with another one.These low-bidding appraisers are often less established and may be called in from Ocala to appraise a house in Waterford Lakes. The lack of experience, deficient knowledge about the neighborhood in question and strict requirements by appraisal management companies to turn around reports in just one or two days can contribute to lower quality appraisals.Even worse is that appraisal management companies are unregulated in most states, meaning appraisers who lost their licenses for bad behavior can simply start such a venture and keep the money rolling in.Just last week, Florida lawmakers passed a bill to regulate appraisal management companies, which will for the first time impose some standards, such as preventing people with certain criminal histories or disciplinary records as appraisers from operating them.That law won't take effect until the summer of 2011.And what about all that fraud that was so prevalent during the bubble? There's no indication that it's let up as a result of the federal reforms.A report released last week by the Mortgage Asset Research Institute and Lexis/Nexis said that in 2009 Florida had the highest year-to-year increase in appraisal fraud. The complaints centered on appraisers who intentionally fabricated comparable sales, ignored sales prices on similar properties or incorrectly adjusted the comparable sales of houses with slightly different features than the one being appraised.Complaints of appraisal fraud filed in 2009 jumped 18 percentage points over the number filed in 2008 in Florida. Appraisal complaints increased elsewhere, too, including by 11 points in California and 5 points in New York.The report noted a culture ingrained before the federal changes, in which appraisers were pressured to "make things work" or hit higher price targets."I talk to appraisers every day, and there is plenty of anecdotal evidence that the pressure on appraisers continues," said Gregoire, who is based in St. Petersburg. "Now the pressure has to do with lowering values, just to make sure the values are conservative."For example, in Central Florida where so much of the market is dominated by foreclosures and distressed sales, the buyer, seller and lender could spend months negotiating a short sale only to have an appraisal come in for less than the agreed upon purchase price.That essentially starts the process all over again, compounding the troubles in the market by either keeping prices depressed or halting sales all together. Where's the progress in that?Beth Kassab can be reached at firstname.lastname@example.org or 407-420-5448. Read her blog at OrlandoSentinel.com/thebottomline.
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