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The appraisal scam...

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April 23, 2007 – Comments (5)

I've always suspected this went on, and so it does.

Here's the greatest whopper in the story. No surprise, it comes from the real-estate clerks at the NAR:

Pat V. Combs, president of the 1.3-million-member National Association of Realtors, was surprised to hear appraisers reporting undue pressure from real-estate brokers. Realtors routinely provide appraisers information to support the list price they assigned to a pending-sale property, including comps they used, and would be violating NAR's code of ethics if they pushed for a value to support the offer price, Combs says.

Ethics? Who bothered with ethics during this bubble? I had people showing me homes with 4-inch drywall gaps inside because of cracked foundations, the things crawling down hills. When I pointed it out, the simply spackled up the evidence inside and claimed they'd gotten an engineering report (never produced) that said everything was fine. Who ever heard of a price coming back as too high?

5 Comments – Post Your Own

#1) On April 23, 2007 at 3:53 PM, TMFBent (99.82) wrote:

While we're on this topic, here are some thoughts on it, sent to me by an appraiser worried for his profession.

I really respect you guys and read as often as I have time to do so.  I am one of a rare breed:  an honest and competent residential real estate appraiser, and I've been wondering for a while why the appraisal side of things doesn't get more blame for the current mess.
 
I don't know how much you know about the appraisal process, but it is a mess top to bottom.  Cursory training and licensure; lender pressure; slap on the wrist at worst regulation; underwriters who are either incompetent or speak with a forked tongue; greedy homebuyers; dishonest lenders - the whole system is set up to fail.
 
Now I'm not that naive, and I understand the profits involved in letting things slide "a little", and I'm cool with that to a degree.  I am sick and tired, however, of getting unrelenting abuse from everyone up and down the line:
 
Loan Originator:    Hit this value or we won't pay you/hire you again
 
Underwriter:        Take out this sentence about "structural damage" or we'll blame you for sinking the deal
 
Homeowner:        Do what they say or I'll put a stop payment on the check I just wrote you
 
Layperson:        You guys must have it made - $350 for a 'half hour's' work. I'm in the wrong business
 
Realtor:                Appraising is an art, not a science.  Ha ha ha ha!
 
Regulator:            We're looking into that.  We'll get back to you
 
Vet Admin:           Just rubber stamp the appraisal so the veteran can get in the house.  We don't care if they stay...
 
And so it goes.
 
As you can tell, I have some insight and some strong opinions about the situation.  If there's anything you'd like my input on, please don't hesitate to write.

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#2) On April 23, 2007 at 3:53 PM, TMFBent (99.82) wrote:

And the next installment from our appraising friend:

I'm full of hard facts.  I know that that is unusual for an appraiser, but hey, someone has to be the honest appraiser in town.
 
I know you're probably very busy, but I'll try to hit the high points:
 
1)    Residential Real Estate Appraising as we know it is a relatively new profession.  Prior to about 1990, loan products were bland and inspection of the collateral was done by the local banker.
 
2)    You know how Doctors have to intern and actually cut people open before they get allowed to practice medicine?  Appraisers just have to take some classes on really arcane theoretical stuff.  I know of licensed appraisers who don't know what a heat pump is or the difference between storm windows and double pane.
 
3)    The Veterans Administration has a system where appraisals are assigned sequentially and randomly to appraisers on the VA approved panel.  This prevents lenders from using an appraiser whom they have "in their pocket".  This is great for the VA, but not in place for conventional loans.
 
4)    You're right about many appraisers believing that they have to betray their ethical oath in order to eat.   But not all of us are that way.  Ask an honest cop or judge about crooks accepting bribes in their positions and see what they have to say.  Most of them will say stuff like 'They make us all look bad'.  True for them and true for us.
 
5)    Just because a dishonest loan originator hires a crooked and/or incompetent appraiser to botch an appraisal doesn't mean that it will help seal the deal.   The appraisal still has to go through underwriting.  This is the really weak spot in the whole pipeline.   Instead of dedicated professionals who know the ins and outs of valuation theory and the intracacies of the local market, I get my work reviewed by 18 year old girls making $6.00 an hour.  I understand that it behooves the lender to let questionable items slide through to a certain degree, but the meltdown that you're seeing now is one of the results of hiring Jesse James to guard Fort Knox.
 
6)    Speaking of yelling at the barn doors after the horses have gotten away, I am now getting grilled by underwriting on legitimate jobs because they are feeling the heat for the last 5+ years of lax underwriting.  They yell at me because they can't yell at the scammer appraisers, who have closed up shop and have gone back to waitressing and selling used cars. 
 
7)    The government regulators (State and Federal) have impressive statutes on the books, and have increased the requirements for appraisers entering the profession after 2008, but the reality is that even if some lying, cheating appraiser is caught red-handed, the most they're going to get is a slap on the wrist.  Making the offender take a class is one of the most frequent punishments.
 
You tell me:  if I get caught robbing a bank and my "punishment" is that I have to take a class, but I get to keep the money, is that a good example of the punishment fitting the crime?

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#3) On April 23, 2007 at 4:15 PM, iamamartin (97.76) wrote:

I am shocked, just shocked to find out there has been appraisal fraud.

Bad appraisers drive out Good appraisers - a new application of Greshams Law !

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#4) On April 23, 2007 at 4:42 PM, CaptFoolDawg (63.97) wrote:

Doesn't suprise me one bit.....Realestate Professionals are worse than lawyers in my opinion.  Commissions have sky rocketed while value they bring to the transaction is at a all time low.

 They only continue to suceed because of fear, we fear they know something that we don't, and that is true, but its "That Real Estate Agents are not needed anymore".

Hey, if you provide value, I'll pay, but I am not cutting you a $45k check cuz you made a flyer.

 CaptFoolDawg.

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#5) On April 23, 2007 at 10:21 PM, Greshm (97.26) wrote:

Oooh, I like iamamartin's application of Greshm's Law there! 

Touche'!

Seth:  This ALL comports to everything I know about Appraisers and their business here in California but I would correct your dysfunctionally honest Appraiser's facts on just one point.  #1 of the second copy of his intel...about not much of Appraiser shenanigans prior to 1990...I don't know where he might be but Appraisers have been a mainstay in the industry going at least as far back as the 1970's.  Maybe CA was a bit "ahead of the curve" in professionalizing and requiring them because, as we know, Californian's are ALL ABOUT appearance so it might make sense.

Growing up, my Best Friends Dad was an Appraiser.  I watched him make a bundle and loss it all in the So. Cal Housing market of the late 1970's.  Then my friend followed Dad's footsteps and got into the biz.  At that point in time--1980's--I think all you had to do to "become one" was to get 2 or 3 other recognized Appraisers to sign-off that you were qualified to be one as well.  You know, kinda like being Jumped-into a Gang? 

At any rate, I've heard the stories and watched the whole thing through my old High School friend all these years and through the two major housing boom-to-bust cycles we've seen in California these past couple decades.  This cycle repeats at least as consistently as many of the other market cycles that so many others don't accept and get creamed by everytime.  Complete with the corner-cutting that ultimately becomes Creative Writing and then produces epic fictions of generational proportions.

About the only thing I can say that changes each time is that the lending abuses and ethical laxnesses at the peak of the cycle each time is much more widespread and extreme each time. 

And just like the problem with the Fed's money printing early this new Century, the problem is that once asset values have been inflated through all of the chicanery, if we then, finally, crack-down and regulate after-the-fact, we only risk deflating a bubble to the degree that then causes substantial economic disclocations.  So...

The money printing and willful ignorance will just continue anew.  And somewhere in the future, Keynes will have been proven prescient:

In the end, we're all dead...

 

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