Richard A. Goulet – ‘Message comes through’

Skyrocketing prices, bidding wars and a flood of new lenders on the market have resulted in increased pressure on appraisers to match prices that aren’t provable in the market.

Although the pressure has always existed to some degree, it has increased greatly over the past eight years across the country, according to appraisers.

“There’s a certain pressure that does exist, oftentimes unspoken, if enough deals don’t close as a result of appraisals, then there’s a very high probability that that appraiser won’t get more business from that company,” said Richard A. Goulet, president of the Watertown-based real estate research and valuation firm The Appraisers Group.

The problem becomes more apparent with a refinance when the owner may not have a realistic idea of what the home is worth, he said.

Anthony Trodella, chief assessor in the Marlborough Assessor’s Office and member of the Audit and Budget Committee of the Massachusetts Board of Real Estate Appraisers, said he thinks the problems are growing because of the many new lenders on the market. But, he said, the difficulties are still restricted to a few “bad apples.”

“I don’t see it as a planned, fraudulent thing where they are trying to force the issue. They just don’t have a clue as to what the appraisal process is supposed to do. They’re based on a bottom-line generation. They don’t understand that the appraisal is supposed to take all the emotion out of it. They just can’t understand why we don’t appraise a price rather than a value,” he said.

The problem has become so widespread that the American Society of Appraisers recently held a colloquium to discuss the issue. The topic also will appear on the agenda of the National Association of Realtors meeting in Washington, D.C., next week.

“The concern among the appraisers is, in fact, that more and more often – almost frequently now – we feel we are being guided toward a pre-disposition on value,” said NAR Appraisal Committee Chairman Jerry Brewer, a Mississippi Realtor.

“Many lenders will send a request to an appraiser and they will imply, quite often in writing, what value they need to make the transaction work,” he said. Indeed, while Brewer spoke with Banker & Tradesman, he received a faxed request from a lender with the following typed across the bottom: “If you cannot reach [an appraised value of] $195,000, please stop and call …”

“Now that seems very innocent on the face of it, unless you are an appraiser and you understand that there is a pretty strong implication that they expect that thing to come in [at the requested value]” said Brewer.

If an appraiser fails to meet the expected amount, he may lose business from a particular lender, said Brewer.

“Now, my personal feeling is you just have to be a big boy about it and just not be susceptible to that kind of pressure. But as more and more lenders are doing that, what happens is in any situation there’s always someone who will make the numbers work,” said Brewer, who added that the majority of lenders and appraisers are above-board and the problems come from only a handful.

But the pressure appraisers feel may not be easy to walk away from, according to Goulet, especially when it comes to what he calls “kitchen appraisers” – those who work for themselves.

National companies that have appraisal arms often hire kitchen appraisers and throw a large volume of business at them. Soon many independent appraisers find that 80 percent of their business is generated through one large client. “[They] don’t tell you that if you don’t come up with the value you won’t have any more business, but the message comes through,” said Goulet.

Trodella said he has heard numerous stories about appraisers being pressured by their own companies. “I’ve got to tell you, the majority of those companies no longer exist. They’re gone; the lenders are gone. It all comes home to roost after a while.”

“The few times that I’ve been pressured, I’ve said goodbye to the client,” Trodella said. “You have to live and sleep with every number you put on paper.”

But the most blatant pressure is from aggressive lenders who verbally request a high appraisal, said Brewer. When that happens, Brewer asks them to put it in writing, although to date no lender has taken him up on the offer.

More frequently, the lender may be more discreet in relaying their expectations. “They may say it [a desired value], but usually they don’t even say it. It’s more implied, indirect,” Brewer said.

But listing the price of the loan on the form is a standard way of doing business.

“The reason that the appraiser has the value before they go out to appraise a piece of property is because they are hired to make an informed and educated assessment as to whether they ‘support’ the value the buyer is paying for the property,” said Carol Bulman, president of Conway Financial Services in Norwell – a division of real estate firm Jack Conway & Co. – and chairman of the Massachusetts Mortgage Association.

It becomes a matter of trust between the appraiser and the lender, said Bulman.

“If a lender was suspicious in any way that an appraiser was ‘bringing value in’ to please the broker or originator, the underwriter would question the appraisal,” she said. “It’s not unusual for an underwriter to request additional clarification of a comparable [property value] used or maybe a new or additional comparable.”

If the property value became “skewed” because of pressure on appraisers, it would hurt both the consumer and the lending industry, said Bulman.

“Ultimately, where it hits the fan is if we eventually go through another high interest rate period and foreclosures begin to pop up. Then overpriced appraisals are going to come back to haunt some folks,” said Brewer.

“The lenders will foreclose on the houses and expect that house to be worth what the appraiser told them,” said Brewer. Then it will become apparent which appraisers “succumbed to the pressures of a lender.”

‘Lucrative Opportunity’
Although exerting pressure for unsupportable values may seem to be nonsensical for most lenders, it isn’t when the originator is “shortsighted” and only cares about closing the deal immediately, said Brewer.

According to Brewer, the increased pressure on appraisers can be traced to two occurrences.

“[Interest] rates have stayed low for a long time and there is seemingly a lucrative opportunity for a lender to get into the lending business,” he said. But in order for that to happen, the start-up has to make money right away.

“They’re trying to get a piece of the pie. Their zealousness to establish their company sometimes becomes the altar on which the company is ultimately sacrificed because of bad appraisals or, just as important, poor underwriting decisions on the part of the lender,” he said.

Another contributing factor stems from when the Federal Housing Administration did away with its panel of fee appraisers, said Brewer.

Before the panel was dropped, it trained and maintained tight control over appraisers who did FHA appraisals. When control was transferred to lenders who would be held accountable for poor appraisals, Brewer said the new method “turned out to be a toothless tiger.”

Possibly adding to the pressure on the appraisal business is the announcement in March by Freddie Mac that, for certain low-risk loans, it would no longer require an appraisal.

Stopping pressure exerted on appraisers is, for now, difficult but not impossible. “There are remedies for the appraisers instead of just whining and crying about it,” said Trodella. Reporting it to regulators and the attorney general are solutions. “There are people going to jail throughout the country, appraisers and lenders, because of this type of activity,” said Trodella.

“We would be interested if an appraiser felt they were being pressured to come up with a higher loan value if it was one of our either licensed entities or chartered institutions,” said Steven L. Antonakes, senior deputy commissioner of administration and policy at the Massachusetts Division of Banks. But no complaints have been filed with the division in the last few years, he said.

As for Congress, it is unlikely it will take any action, said Trodella. “I think the answer really lies with the appraiser … If you refuse to do this kind of work and report these people, you can make their life a little bit miserable and you can correct the problem. Is it ever going to go away 100 percent? Absolutely not. It’s always been here. It will always be here, as far as I can see.”