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Source of Title Blog

Honest Appraisals
by Robert Franco | 2007/06/08 |

Ohio Attorney General Marc Dann

Ohio Attorney General, Marc Dann filed suit against 10 lenders for violating the state's new predatory-lending law. The lawsuit claims that the lenders pressured appraisers to inflate the value of homes to allow them to close the loans.

(PHOTO: Ohio Attorney General, Marc Dann)

"Predatory lending is driving Ohio's shameful home foreclosure rate," Dann said in a statement. "Today's crackdown on appraisal fraud will help protect consumers and move us one step closer to driving unscrupulous lenders out of our communities."

Ohio has an incredibly high rate of foreclosures and subprime lending has been particularly problematic. The new law and the action taken by Dann may just be a turning point for the state. The suit asks for permanent injunctions to prevent the companies from engaging in such practices, civil penalties of $25,000 each, and reimbursement to consumers.

Personally, I have always found the appraisal mechanism to be somewhat flawed. When the lenders order the appraisals, they provide the appraiser with the loan amount, and the sales price if it is a sale transaction. Ummm... can anyone explain why the appraiser would need that information? By providing that information to the appraiser, the lender is providing a target amount that the appraiser is supposed to justify (wink, wink, nod, nod).

Why not just provide the owner's name and address, and ask for an "honest" appraisal? I don't mean to imply that a reputable appraiser cannot provide an honest appraisal when they are provided with the extra information, but why leave any doubt? We all know that in just about every sale transaction, the appraisal comes back for exactly the sales price. On refinance transactions, the vast majority of the appraisals come back for just enough to justify the loan. Is that a coincidence?

When the appraisals are based on the sales price, and the appraiser's job is just to "look harder" for comps to justify it, we are letting the Realtors and lenders exercise too much control over the inflation of home values. The more appraisals that are "tweaked," the more comps there are to justify the next one. Then we end up where we are now... with homes over-valued and depreciating. Home prices have reached the point where the appraisals just can't be justified. Not to mention that now that appraisers are starting to get "busted" for some of their work, others are a bit more gun-shy to stretch the values.

The appraisal is there to protect the lender. They should really want an honest, unbiased appraisal. My suggestion is to stop providing the loan amount and sales price and see what happens. Let the appraisers do their job and report the actual value... THEN make the decision to approve or disapprove the loan.

Robert A. Franco
SOURCE OF TITLE
rfranco@sourceoftitle.com


 

Source of Title Blog ::




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Categories: Appraisals, Ohio Legislation

654 words | 2808 views | 6 comments | log in or register to post a comment


The market method of appraising rat...
The market method of appraising rather than cost or income, is really just comparing a value with what has sold. You have to have a starting point. You can't just pick numbers out of the air. There is nothing wrong with a lender telling an appraiser what the sale price is and whether or not seller assists are included in the price. That's absolutely normal, accepted practice. Where we get into problems, however is when an appraiser takes that info and massages the report to justify the figure. What the appraiser is supposed to do is look for comparable properties, make adjustments for amenities, then see if the market price is fair.

If you had to take stabs in the dark with figures, nobody would ever match up. It would be hit and miss. It would be like asking you to search title but not telling you the name of the seller or something like that. You might search a whole street and never get the right one.

So, the problem isn't the method or tools, the problem is whether or not they are fairly and ethically used.
 
by Diane Cipa, General Manager, The Closing Specialists® | 2007/06/08 | log in or register to post a reply

I disagree. Giving the appraiser t...
I disagree. Giving the appraiser the owner's name and address, is exactly like giving a title abstractor a name and address. That is how we do a title search. Giving the appraiser the loan amount or sales price isn't giving them a starting point... its giving them the result and telling them to justify it.

If they don't have that information, they would have to determine the type of property, the square footage, the neighborhood, then find comps to ARRIVE at a value. Giving them the amount that the appraisal SHOULD BE and then asking them to find comps to justify it is backwards, in my opinion.

But, you are right. If all of the appraisers were ethical, it wouldn't matter all that much. Problem is that not all are ethical and once you have a few inflated appraisals from the unethical ones, you have "artificially" valued comps that the ethical ones can use to base their appraisal.

I think the appraisal should be done without a target value that the lender would like to see. That would keep the unethical ones in check.
 
by Robert Franco | 2007/06/08 | log in or register to post a reply

I understand and it's really just a...
I understand and it's really just a matter of understanding another person's industry. There are things in the title business that outsiders just don't appreciate. You really have to have operated in real estate over time to appreciate the value of having a starting point for a market appraisal.

Think of the negotiating process for houses as they are priced. Price is determined by a willing seller negotiating with a willing buyer. The point at which those to minds meet isn't scientific and can't be found through a market analysis.

An appraiser acting without other motivations will simply confirm for the lender whether or not the agreed price is reasonable for the market. You can't look at a neighborhood and determine pricing in any other way than through free and fair negotiation. Negotiation considers the uniqueness of the real estate itself and the availability of other choices. Since the rules require that the value on the market report justify the actual price, the appraiser can't perform unless he knows that price. Otherwise it would be a dart game in a blackened room and a total waster of time.

Remember, this is the market method they use for residential property. It's much more scientific when looking at the income approach or cost approach but those methods don't work in residential transactions. It's just inefficient.

Our problem has been just plain bad actors taking kickbacks or being afraid to ever come in low.

Restore order and the system will work again.

The bad appraisal practices, I guess, could be more compared to a title examiner ignoring a cloud or recent conveyance to enable a transaction to close. You just need to chat with a traditional good appraiser and he can explain it better than I can. ;)
 
by Diane Cipa | 2007/06/10 | log in or register to post a reply

A friend of mine is an appraiser, a...
A friend of mine is an appraiser, and he once told me all you really need to know about the pressures for 3rd party service providers. He intentionally does x% of his appraisals 5-10% under the target, so that he has room to move without compromising the quality of his product. Essentially, he has to appear like he can be pushed around, which, unfortunately is what many of the real customers actually want.

Title agents generally have their own version of this, which I'll keep as a trade secret.
 
by John Povejsil | 2007/06/11 | log in or register to post a reply

Re low-ball appraisals. Both times ...
Re low-ball appraisals. Both times (in a long history of buying and selling real estate) that we received low appraisals on our properties, the appraisers were from out of town, from areas 50 to 60 miles away, and both were employed by CitiBank--I guess on a regional basis. One property was undervalued by approximately $75,000 and the other in a different state by a whopping $300,000. I guess the point is to make sure the appraiser is from and knows the area he is appraising. We have no idea what either was using for comps. 
by Elizabeth | 2007/06/15 | log in or register to post a reply

I agree with Diane Cippa, The appra...
I agree with Diane Cippa, The appraiser needs some figure for a starting point to search for true comparables. We also need to know if there is any seller financing, or if, in the case of a purchase, there is any personal property involved that has to be adjusted for. An honest appraiser will prepare an honest report with a supportable value.  
by Diana Nytko | 2007/11/19 | log in or register to post a reply
Source of Title Blog

Robert A. FrancoThe focus of this blog will be on sharing my thoughts and concerns related to the small title agents and abstractors. The industry has changed dramatically over the past ten years and I believe that we are just seeing the beginning. As the evolution continues, what will become of the many small independent title professionals who have long been the cornerstone of the industry?

Robert A. Franco
SOURCE OF TITLE

 

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