The appraisers: Price estimates made to order
A homeowner doubts he can sells his house for what it was appraised, and now he's stuck there.
(Money Magazine) -- Last summer Daniel Kim was feeling pinched. So when Kim, now 27, of San Leandro, Calif. got a call from a mortgage company, he was intrigued.
The loan officer, Mia Yi of ALG Capital, sold Kim on refinancing, putting him an additional $81,000 in debt on his house. Kim says he was surprised he could borrow more. He had bought the two-bedroom the previous year for $560,000 with no money down, and everything he had read said the market in his area was cooling. But after Yi produced an appraisal in November that said his house was worth $642,000, Kim signed. "I was excited," he says, "that my house had appreciated that much."
Appraising the value of a house has never been an exact science. But the $4-billion-a-year appraisal industry provides a crucial reality check for the system. Banks need an appraisal to make a loan. Regulators and mortgage investors require it to insure against fraud. Consumers rely on appraisals to give them some measure of confidence they aren't paying too much.
In refinancings, the appraisal is the only thing that tells a consumer what a house is worth and how much he can borrow. So perhaps it's not surprising that appraisers have come under pressure from some of the people selling mortgages.
MONEY has obtained more than 100 e-mails and faxes sent by loan officers to appraisers across the country. The language varies from asking if a predetermined value was possible to promising more business if a number could be hit.
"Many homeowners are finding out that the equity they were led to believe they had in their house is not actually there," says John Taylor, president of the National Community Reinvestment Coalition.
According to an appraiser MONEY hired, Kim's house is worth only $580,000 and was at the time he refinanced the house. Yes, different appraisers often have different takes. In Kim's case the appraisers disagree about whether an enclosed porch counts as part of the total square footage.
But ALG's Yi strongly suggested to appraisers what the answer ought to be. In an e-mail she sent to numerous appraisers, Yi said she needed "a value of $650,000 or more. Please let me know ASAP with max value." Five days later Paul Chasteen, an appraiser in Discovery Bay, produced the appraisal that led to Kim's $642,000 mortgage, less than Yi wanted but enough to do a deal. ALG got him loans for the full appraised value.
The result: Kim now owes $62,000 more than his house may be worth. Kim put the money from the refinancing into a dry-cleaning business and paying off a car loan. He can't move without foreclosing. "It's not a good feeling," he says.
Yi declined to comment. ALG owner Crystal Palomino said two appraisers (from the same firm) reviewed the value, as did the funding bank. Chasteen says he and his fellow appraisers are under the gun because as many as 10 competitors may get the same order.
Referring to that pressure, Chasteen says, "Is there a problem out there? You bet there is." He adds, though, that he resists and that in Kim's case pressure wasn't an issue. "I never push values," he says.
Appraiser Ray Miller of Lyndon Station, Wis. also says he doesn't inflate values but complains that he is asked to do so daily. Miller says he doesn't always give the preferred answer, which hurts business.
"If I don't hit the number they are asking for, I almost never hear from that loan officer again," he says. "But if you don't accept these orders at all, you won't have any business."
Brokers sometimes ask for a "comp check." They don't ask for a target price, but get a number of appraisers to guess what a property is worth, sight unseen, before ordering.
"Appraisers who do comp checks know that they have to inflate values to get the order and get paid," says Pamela Crowley, a former appraiser who recently launched a site to catalogue lending abuses, MortgageFraudWatchList.org.
Hanzimanolis of NAMB says appraisal pressure isn't a big problem. His organization amended its code of ethics last year to prohibit members from squeezing appraisers. "I don't see how anybody but the appraiser is responsible for an inflated or fraudulent appraisal," he says.
A number of states, including Colorado, are mulling laws that would make it clearly illegal to pressure appraisers. Jonathan Miller (no relation to Ray), owner of New York City's Miller Samuel and one of the nation's most prominent appraisers, argues that such laws are sorely needed.
"Under the current system," he says, "there is really no point to a mortgage appraisal anymore." You might expect that those ultimately on the hook if a borrower fails to pay would take an interest in making sure that the collateral was really worth its appraised value. But until the past few months, you'd have been wrong.