At a Portland appraisal home viewing last week, the owner had two little dogs that would not stop barking as a result of my visit. Each time the dogs barked, the owner gave them a small treat. The barking would stop for a moment, but then the dogs would start
again and so would the treat process. The owner was inadvertently rewarding wrongful behavior, thereby perpetuating the process. This made me think, unintentional reward of improper behavior is something that also happens regularly in appraisals contracted
by mortgage financing, lending, and appraisal management companies (AMCs).
Home appraisals for lenders or AMCs typically pass through several layers of quality review. Often, the examinations involve
a checklist of things that generally characterize a well-supported or lower risk appraisal opinion. Rightfully so, lenders want to know that the appraisal can be confidently used for evaluating collateral and avoid the dreaded forced loan buyback. If a lender’s
checklist items are missing, the appraisal becomes flagged as higher risk and often goes back to the appraiser multiple times for additional clarification, comments, or comparable data. Appraisers with fewer red flag issues will often be rewarded with more
work, first choice of assignments, and fewer requests for revision or clarification.
Appraisers can usually receive more work and fewer revision requests from lenders simply by working harder, explaining issues,
and supporting adjustments. However, often appraisers who work longer hours (for the same pay per assignment) will still receive red flags because the reports are not read thoroughly by the client or because the properties are complex with few comparable
sales data. Some appraisers learn quickly that there are shortcuts to receiving more work and fewer clarification requests.
Real estate appraisers are highly trained and regulated professionals who are required by law to be independent, unbiased,
and to not mislead. Most appraisers work very hard to maintain high ethical standards. However, an incentive based system exists in residential finance that rewards appraisers who
mislead by making an appraisal look stronger than actual. From experience I know that this happens all the time. Here are some ways that appraisers may mislead a lender’s quality checker into thinking an appraisal value opinion is stronger than it is.
Recent and close proximity comparable sales make an appraisal look strong, but the most recent and closest comparable sales are sometimes
not the strongest nor most like the subject (particularly on a unique property). An appraiser looking to reduce questions from a lender might use recent and close sales over the most similar sales.
Fewer and smaller comparable sale adjustments can make an appraisal look stronger than it is. For example, an appraiser might take a
comparable sale that requires a large positive adjustment for living space but a large negative adjustment for view and just make a smaller adjustment for each. In this case, the indicated value will be the same, but the comparable sale looks really strong
to a reviewer because it has few adjustments. (Here
is an article that explains more about how appraisers can use different adjustments and come to the same value conclusion.) Fannie
Mae, the nation’s largest buyer of loans, has recognized small adjustments as an appraisal issue and is fighting back with big data and automated review of appraisals.
Click this link to read a Fannie Mae announcement
that explains more and shows evidence that the majority of appraisers were adjusting too low for gross living area (GLA).
Also, view a video
here showing how an appraiser might support a GLA adjustment that is not artificially low.
Omitting or downplaying issues like a busy road or a necessary repair can reduce red flags. If an appraiser can conceal an issue or
convince a lender that it is not a big deal, then the report will likely receive less scrutiny unless the deception is uncovered. This is a particularly dangerous tactic that can cause an appraiser to be sued or placed in serious trouble with their licensing
The takeaway from this is that appraisers who work for lenders are often conditioned, sometimes unknowingly, into softly misleading
practice that is only uncovered with more thorough appraisal review processes. Here are my recommendations for lenders and AMCs to avoid encouraging misleading appraisals.
Lenders and AMCs should be very careful to select and hire the best appraisers.
Lenders and AMCs should make sure that appraisers are paid a sufficient fee so that they are able to take the time necessary to do the
assignment correctly without cutting corners.
Lenders and AMCs should judge appraisers using well trained individuals and make sure that appraiser grading and subsequent job assignment
is not tied to appraisal red flags, something that might also relate to property complexity, not just appraisal quality.
Here are my recommendations for appraisers who do work for lenders.
Appraisers should be cautious about working with the type of lenders and AMCs who regularly reject well documented and explained appraisal
reports just because the subject properties are unique.
Appraisers should be extremely careful not to compromise their work quality just to avoid the headache that often comes when appraisers
tell it like it is.
Appraisers should seek out working for clients that have well trained appraisal review departments. In my experience, these tend to
be the smaller local or regional banks and credit unions; not the nationwide lenders.
Did I leave anything out or do you want to join in the conversation? Let me know in the comments below.
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