Commercial PropertyAppraisers Respond: Too Much Fraud In Lending
Realty Times has been flooded with mail about the story "Sickened by fraud, a real estate appraiser turns in his pencil" we did about Texas appraiser Bob Burnitt. He was so tired of being pressured by lenders and real estate licensees to make fraudulent appraisals that he decided to quit the business.
Not one appraiser has said the story wasn"t true. In fact, they say to a person that the situation is worse than even Burnitt says it is. We may be teetering on the edge of another lending debacle like the nation experienced in the 1980s when savings and loans were found so guilty of inflating market values in appraisals to "get the business" that numerous loans defaulted, driving many into bankruptcy.
"What Mr. Burnitt said is all true - and it"s even worse than what was written," says Florida appraiser Pamela E. Crowley. "Mortgage brokers, loan officers, and way too many Realtors dictate who the appraiser will be for their deals. The honest, competent, and ethical appraisers are now being run out of business. Currently, any appraiser that doesn"t ignore repair issues and hit the value they are told to will get no more appraisal orders. I know of appraisers that are on the verge of filing bankruptcy because of this."
Like Burnitt, Crowley claims that legislators are looking the other way. "No legislator, federal or state level, can claim ignorance on this issue," accuses Crowley. "Too many appraisers from across the nation have been reporting this to them and begging for relief for too many years."
In 1999, the "Appraisers Petition," was sent by a grass-roots appraisers" organization to Mr. Ben Henson, executive director of the Appraisal Subcommittee (ASC), Federal Financial Institutions Examination Council. It was also posted at AppraisersPetition.com:
"Lenders (meaning any and all of the following: banks, savings and loans, mortgage brokers, credit unions and loan officers in general; not to mention real estate agents) have individuals within their ranks, who, as a normal course of business, apply pressure on appraisers to hit or exceed a predetermined value," said the petition, signed by over 7,800 appraisers. "This pressure comes in many forms and includes the following:
The withholding of business if we refuse to inflate values,
The withholding of business if we refuse to guarantee a predetermined value,
The withholding of business if we refuse to ignore deficiencies in the property,
Refusing to pay for an appraisal that does not give them what they want,
Black listing honest appraisers in order to use "rubber stamp" appraisers, etc.
"We believe that this practice has adverse effects on our local and national economies and that the potential for great financial loss exists. We also believe that many individuals have been adversely affected by the purchase of homes which have been over-valued," said the petition.
In 2000, Charles L. Drecksler, IFAS wrote an article entitled "Appraisals Under Pressure." He sent Realty Times a copy. He"s concerned about a repeat of the savings and loan crisis of the late 1980"s.
"Many appraisers had hoped following the experience of the savings and loan crisis of the late 1980’s and the advent of state licensing of appraisers, some of the appraisal-related problems in the lending industry would be solved. To the surprise of the industry, this has not been the story. Many believe the problem is worse today than before licensing," wrote Drecksler.
He points out that many large lending institutions own appraisal management companies with one-sided vendor agreements that seek to control the appraiser to make value and take a portion of his/her fees. Education, experience, residential designations and integrity are no longer factors for getting appraisal work.
Large institutions as well as mortgage brokers apply pressure, says Drecksler. "An appraiser must not accept an assignment that includes the reporting of predetermined opinions and conclusions" according to Uniform Standards of Professional Appraisal Practice. Appraisers are required to follow USPAP guidelines. That means that appraisers are not to accept appraisal assignments with predetermined value conclusions. Payment for appraisal services is not subject to hitting a predetermined value or an event occurring.
Appraisers are under tremendous pressure to "hit the number", be a "team player," and not be a "deal killer."
Not only does that mean hitting the right number, but ignoring items that should impact value such as external obsolescence, poor condition, or rooms added without permits.
"In conclusion, vendor agreements, appraisal assignments that do not meet USPAP guidelines, pressure to hit a predetermined number and pressure to overlook items along with nonpayment for services rendered are just some types of pressure applied to appraisers," says Drecksler.
One appraiser says he isn"t quitting - he"s just going to go where the business is better.
"I am a certified general appraiser in Missouri. I just read your article and must say that things may be even worse than Bob Burnitt says," writes Steve Owen. "However, I cannot imagine doing anything else. Rather than quit, and because I will not bend to the pressure, I have had to find another way to keep working."
Owen recounts, "I was fired from the last main mortgage broker client I had left when I would not bring a deal in $10K above what market value should have been, based on numerous good comparable sales. The Realtor, mortgage broker, and everyone else wanted the deal to close that the unrealistic price. The stubborn appraiser was the only road block. I noticed later that it did finalize in the MLS - closing at the contract price on a VA loan. Wonder who they found to appraise it for that when all the market data said it should have been less?
"I have been fired by every mortgage broker you can imagine," he continues. "I will appraise for food; however, I won"t do what it takes to keep working for mortgage brokers. Now I only rarely do such work when an out-of-town broker, who doesn"t know I won"t break the law, calls - and if I don"t hit that number I never hear from him or her again."
The answer for Owen was finding a different client base. "Lots of people hire appraisers and want to have an honest opinion of value," he says. "Not all clients are mortgage brokers. There are banks with their own portfolio at stake, there are attorneys who need appraisals that will stand up in court, there are estate tax appraisals, work for people wanting to list who are smart enough not to trust the listing agent"s opinion, and there are even a few Realtors who know the value of a good appraisal. Last, but not least, there is work for local governments, who always want an honest value. Too bad that Bob could not find another avenue to pursue rather than having to quit. But, it"s good that he"s making some noise as he goes."
Owen also has solutions for the industry as a whole. "I believe that the solution to the problem is two-fold," says Owen. "First, appraisal regulations should be enforced. Appraisal commissions and boards charged with enforcement at the state level are mostly volunteers and their entities do not have the budget to do a proper job of enforcement. Secondly, there should be regulation and enforcement of similar standards on appraisal users. Until it is a crime to attempt to influence an appraiser by asking for the property to "come in" at a specific value, witholding payment, or witholding future work this will continue to be a problem. Mortage brokers in particular need to be licensed and regulated with standards at least as stringent as those for appraisers."
One appraiser isn"t giving his name. "I, too resigned my license a month ago," a reader wrote Realty Times. "You cannot participate in the real estate business without committing felonies. I complained to the boards and they tried to stifle me. According to the FBI, this is the new Mafia. The things I have seen deserve prison sentences. I filed a complaint with the local FBI office and they are acting."