Unintended Consequence: Questionable Appraisals

Things have been looking better for the housing market. Sales are starting to pick up. Prices, at least in some areas, appear to be leveling off. Realtors, however, complain that new regulations are causing headaches for homebuyers. They say one problem centers on home appraisers — the people who estimate how much a house is worth.

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The National Association of Realtors said that sales of existing homes rose sharply in July, up more than seven percent. That was the forth straight month of improving sales. The last time sales rose for four consecutive months was in June of 2004, back when housing was booming. But realtors around the country are complaining that new regulations are causing headaches for those trying to buy homes. One big problem, they say, centers on home appraisers - the people who estimate how much a house is worth.

NPR's Chris Arnold reports.

CHRIS ARNOLD: Back a few months ago, new rules went into affect, nationwide, that change the way those home appraisers get selected. Regulators pushed through what they call the Home Valuation Code of Conduct - it was a response to the mortgage debacle.

But now realtors, and even some appraisers, say it's having an unintended consequence - a lot of bad appraisals.

Ms. LEE ROBINSON (Realtor, Gibson Sotheby's): This was just silly.

ARNOLD: Lee Robinson is a realtor with Gibson Sotheby's in Boston's Dorchester neighborhood. She's walking up the driveway of a well-restored old Victorian house. It's got nice woodwork, three fireplaces…

Ms. ROBINSON: On the inside, it's more like a ship captain's house where the carpenter of the ship probably made all the details. It's got a nice quiet elegance to it.

ARNOLD: A few years ago the house sold for about $550,000. This time around, a buyer agreed to pay considerably less - $460,00 - but the offer was accepted.

Ms. ROBINSON: We got a guy who wanted to buy it, his wife loved it, everything was going smoothly, except for the appraisal.

ARNOLD: Robinson says it used to be a mortgage broker would call up a local appraiser. Like many cities, you go ten blocks in any direction and home values can change dramatically, so you need that local knowledge. But under the new system, more appraisers are coming from out of town.

What's happened is that now mortgage brokers are not allowed to directly hire appraisers that they like. Instead, many now go through what are called appraisal management companies - they act as middlemen. And realtors and appraisers complain that those companies often hire the cheapest appraiser, even if that person doesn't know the area.

And, in this case in Boston, the appraisal came back startlingly low. Instead of $460,000, the appraiser said it was worth 350.

Ms. ROBINSON: This one came in at $110,000 less than the agreed-upon price. It was crazy.

ARNOLD: Robinson says, in this case, the buyer hung in there but the family had to scramble. They paid for three more appraisals with different lenders, it was stressful and it could have scared off the buyer.

Mr. CHARLES MCMILLAN (President, National Association of Realtors): Chris, it's a very big problem.

ARNOLD: Charles McMillan is the president of the National Association of Realtors, which recently did a survey about all this. It found that more than 70 percent of realtors seen more out-of-town appraisers and longer appraisal times.

Mr. MCMILLAN: More than one-third of the respondents said that they have lost at least one sale due to the delay in the appraisal process.

ARNOLD: The fear is that all this will scare off homebuyers and gum up the market, right when many people are trying to take advantage of a tax credit for first-time homebuyers. That expires at the end of November.

McMillan blames the new regulations. They were supposed to create a firewall to stop regulators and lenders from pressuring appraisers - and a lot of people think that that's a good idea.

Eric Schwartz is a long-time appraiser in Maryland.

Mr. ERIC SCHWARTZ (Appraiser): Yeah, the point we're at today is a function of the irresponsible behavior, not only of mortgage brokers, real estate agents and some appraisers too.

ARNOLD: Schwartz says that mortgage brokers used to call him all the time and offer him lots of work if he'd inflate his appraisals - that is, say that a house is worth more than it actually was. That would let the mortgage brokers get more deals done and earn bigger commission.

If you were willing to do it, they were saying they'd throw a lot more money your way.

Mr. SCHWARTZ: Oh yeah. I would actually laugh at these people sometimes. But the sad thing is they did find appraisers, apparently, that were willing to commit fraud.

ARNOLD: But Schwartz also thinks that the new rules are causing problems. He thinks that's mostly due to those appraisal management companies that now act as the middlemen. They've taken over a huge part of the market and he agrees that they're going with the cheapest appraisers.

Mr. SCHWARTZ: It's a flight to low quality in my opinion.

ARNOLD: The appraisal management companies deny that. Don Blanchard is a lawyer with Lender Processing Services, which works with 20,000 appraisers. Blanchard thinks that his industry is getting unfairly blamed. He says, for one thing, appraisals are hard to do right now. There are fewer sales to compare a house with, also foreclosure sales are pushing down prices.

Mr. DON BLANCHARD (Lawyer, Lender Processing Services): I understand that realtors and others, homeowners, are upset that values are down. But I think that that is more a function of the market than problems with the appraisers.

ARNOLD: Still, the National Association of Realtors is pushing Congress to suspend the new rules until the problems can be ironed out.

Chris Arnold, NPR News, Boston.

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