“You Get What You Pay For”

The Boston Globe Magazine has an interesting piece on appraisers. The article encourages consumers to closely monitor the appraisal process.

While this is not a horrible idea, there is a fine line between asking an appraiser to consider new information and pressuring that appraiser to reach a predetermined value.

The article also includes this section on the Home Valuation Code of Conduct.

Under the new guidelines, appraisal management companies (AMCs) will act as middlemen between mortgage companies and appraisers and hold greater influence over the entire process. “We think it’s going to hurt the quality,” says Peter Vadala, president of the Massachusetts Board of Real Estate Appraisers. “These AMCs put pressure on the appraisers to do two things: Do an appraisal cheap and do an appraisal quickly.”

The National Association of Mortgage Brokers filed a lawsuit against the Federal Housing Finance Agency in late February, arguing that proper contact among mortgage brokers, lenders, and appraisers helps ensure high-quality, cost-effective, efficient appraisals. Appraisal firms like Newton-based Lipof Real Estate Services make a similar case. “The essence of the [new code of conduct] was doing good,” says company president Rick Lipof. “It was to take the pressure and intimidation off the appraisers.” But for appraisal management companies, he says, “the goal isn’t to find the most competent appraiser to make sure the value is right. The companies look for the appraiser who can turn it around in a day for the cheapest price. What do you think you get for that? You get what you pay for.”

Lenders and consumers want appraisals that are fast, cheap and accurate. Appraisers can accomplish two of those qualities, but never three.

  1. David

    I could not agree more. In fact we now require everyone who places an order or inquires about a fee to read our webpage at http://www.investsmart.com We firmly believe that lenders need to know about the new liability that they are facing with regards to appraisal quality. We believe that once they comes to terms with the fact that prison time and fines are a real possibility they will think twice about subcontracting appraisal work to the lowest priced appraiser.

  2. Tim

    Consumers also need to be aware that: 1.) Whatever they are paying for “valuation serives” includes a 50% markup for the lender in undisclosed fees (profit). 2.) They need to to be informed that their personal home information; floorplan, kids rooms, presence of alarm systems, and even interior photos will be collected, sorted and sold many times over by the lender to other users of home information data (by the way there is currently no regulation over this colllection and reusing of data) many american lenders and affiliated companies use overseas cheap technical labor to oversee those data bases. I wonder if I could bribe a guy from New Dehli for some home data in the US knowing he only makes $6 a day ? 3.) Consumers also need to be aware of the methodology of how the appraiser was selected; did the lender “throw” out or broadcast the assignment to 15-25 appraisers in a 100 mile radius and the first one to get online and acccept the order gets the assignment. Not exactly a carefull selection of a local experienced and educated appraisers. More like pulling up in front of the Home Improvment store and shouting ” I need yard work”.
    4. Consumers should be aware that the whole analysis and report will be completed in a 72 hr time frame, not so much that either a borrower, buyer or seller needs it that fast, but soley due to the fact that there are 250 + Appraisal Managment Companies in competition and they all compete in terms of time. So if you are an owner of well maintained home that has been updated or significantly improved; the “fastest to the order assignment” appraiser has little time to consider such things (or just about anything) and needs to get the report out the door with minimal analysis. Every report that is completed over the time alloted to that appraiser appears in spreadsheet and the appraiser knows “lateness” will affect future distribution of work assignments.
    5. Consumers should also know that the lender will dictate the terms of the appraisal assignment and the appraiser can in no way exceed those instructions in either reporting or selection of comparable properties. Again, to bad for the guy who really spent a lot of time and effort making sure his house was one of the best in neighborhood, it will probably be valued using at least one foreclosure or distress sale. Is this “market value”, “liquidation value” or perhaps the best way to describe it “collateral value”.
    Most important there is no process for challenge of the value estimate. Sorry about your luck Mr Consumer try one of the other big banks, by the way this starts the process all over again and the consumers start by writing another check.

  3. Gregg A. Brown

    A popular clothing store in South Florida used to advertise – “An informed consumer is our best customer”. This applies to the appraisal process. When a borrower understands what they are getting through the AMC middleman, they would demand more. Consumer education must start through complete disclosure of appraisal fees paid by the borrower. Not the fee paid to the management company, but the fee the appraiser actually receives. Only then can a consumer fully evaluate what they are getting for their money. Banks and AMCs depend on hiding this information from the consumer.

  4. Bob Costilow

    Wonderful and very true article that needs to be spread to everyone seeking an appraisal.

  5. I have been a Realtor for 20 years and a limited appraiser for almost 10. I don’t think this is off topic, but the best way to fix our mortgage system going forward is a blend of the current system along with a minor amount of appraisal management. The biggest flaw we have had, especially in the refinance process, is the appraiser’s knowledge of the “target” value upon receiving the order. I am a believer of the “blind” appraiser … blind to the loan type, blind to the history of the subject property, blind to almost all things of the subject collateral. How do we do that? Not 100% sure, but I believe the MLS system is perfectly positioned to be that management system. For example, upon receiving an order, an appraiser would not be given anything on the order other than a “coded password”. That password would be used for the appraiser to get into the MLS system and log into the order. Then, from that point forward, the appraiser will be able to obtain info on the subject property’s attributes, but not listing history, only comps and items necessary for completing the appraisal. The curretn FNMA form may need to be changed to accomodate. (great for a purchase appraisal) This way there is no bias … currently the appraiser has access to all info and also the purchase agreement. On a refinance, could work similarly but no information about TARGET VALUE needed for the loan or even mortgage amount. THE VALUE OF THE COLLATERAL IS JUST WHAT IT IS, irregardless of all factors. This way, no pressure for the appraiser or any inherent bias, intentional or otherwise. Also could make it a Federal crime if the owner or potential borrower of the property discusses the loan terms, listing history, purchase price, etc. with the potential appraiser.
    Call me crazy or way off base, but I would like to know if my thinking is ON TARGET, LOL!!

  6. jerry rolls

    One step in assisting the consumer is to allow a range of value, no more $495,000 on a $499,000 property. the differance is eaten by someone and it is not the appraiser

  7. bd

    This is a great article. I especially like the comment from Tim with further explains things. Additionally i disagree with Al Block. All of those factors you think should remain silent are part of the process of assessing the overall market at time of appraisal, which as a realtor knows does impact value.

  8. Marg

    TIM …THANK YOU for your time with the “on the money” FACTS!!! …quality for sure…gone. AMCs get to sound like what they do is important enough to claim half of our fees. WHY half of OUR??? Soon…each day more app are gone…they are the good ones, the apps that really care about signing their name to their ethical product…that took time to complete…most likely more than 24 hrs. When you need them…forced out! Who in their right mind would want to be an app, a field each year is proven to go down in income but up in AMC, E&O, ED, & mandatory fees. Every chance I get, I tell everyone I ethically can about the new AMC way and to be sure they check out what they have been charged for the report and then TRY to find out what the app really was paid…A JOKE!,and perhaps they are due a refund for being overcharged!

  9. As a Realtor for 26 years, I have often felt it was inappropriate when I would get a call from an appraiser asking for a copy of the purchase agreement. I typicaly refused based on confidentiality….I never felt it was my place to share that information. Don’t get me wrong, I have shared information with many appraisers over the years that in years past was not available to the appraiser (the MLS) or personal knowledge of properties from either being the listing or selling agent…those appraisers were truly doing their job. But I have always felt the “canned appraisal” played a part in the upward spiral of home values as well as the current mortgage crisis we are in with overvalued properties and upside down mortgages. An appraisal is supposed to be an independent opinion of value not a “target value” to make a loan work.