DO LOAN officers, mortgage brokers and realty agents pressure appraisers to raise their value estimates on properties in order to "hit the number" needed for the sale or refinance transaction to go through?
Preliminary results from the first independent national study of the appraisal industry suggests the answer is a resounding - and disquieting - yes.
Nearly three out of four randomly selected licensed appraisers interviewed as part of the continuing National Appraisal Survey said they had been pressured during the past year by a mortgage broker "to hit a certain value." Fifty-nine percent reported similar pressure from a loan officer working for a lending institution or mortgage company.
Fifty-six percent of the appraisers said they had been pressured by a realty agent, and 22 percent by a third-party "appraisal management company" that provides local appraisal services on contract to national lenders.
The survey is being conducted by the October Research Corp., a Richfield, Ohio-based research and publishing company active in the appraisal, title insurance and real estate data fields. The preliminary results were released this month in the company's journal, Appraisal Intelligence.
The study - the first of its kind involving in-depth interviews with appraisers conducted by polling professionals - is designed to cover a statistically representative sample of 500 appraisers nationwide.
The sampling was based on the number of licensed appraisers per state; appraisers' names were obtained from public records. The survey questions covered a wide variety of issues, and appraisers who participated had no advance knowledge of the subjects to be covered. The poll itself carries a margin of error of plus or minus 6 percent.
The preliminary results are based on the first 250 completed interviews in 31 states, but Joe Casa, founder of October Research, says he doesn't expect the final, 50-state results to differ significantly from the preliminary ones.
"The reality is that pressure on appraisers is a serious problem," Casa said in a telephone interview. "Everybody knew that it existed, but nobody thought it was this bad."
Forty-eight percent of the appraisers who reported pressure said the overvaluations demanded were 1 percent to 10 percent above the market values of the properties. Forty-three percent said the overvaluation demands were 11 percent to 30 percent above market value.
The pressure, according to Casa, typically involves a direct or veiled threat to withhold business from an uncooperative appraiser, or to withhold payment for any appraisal that did not "hit the number."
Other commonplace tactics, according to appraisers, include "pre-comping," where a broker or loan officer asks in advance whether the appraiser thinks he or she can come up with "comparable" sales for a property to justify a specific target value needed for the mortgage.
If the appraiser does not agree to pre-comp the property - in effect, to agree to hit the needed number - the appraisal job goes to someone else.
Pressure on appraisers is not a new issue. After interviewing more than 60 appraisers in 2000, I reported deep dissatisfaction with the demands placed on them by many of their clients.
One appraiser, Terry Turner of Gainesville, Ga., described a case where homebuyers contracted to purchase a condominium for $184,900. An appraiser was asked by a loan officer to hit the contract price, but could not find comparable sales in the subdivision to support a value above $165,000 - $20,000 less than the target. The loan officer then brought in a second appraiser who delivered a valuation of $184,900 by listing as comparables higher-cost units in a different subdivision, miles from the home being purchased.
A state regulatory official, Sam E. Blackburn of the Kentucky Real Estate Appraisers Board, provided a tape-recorded telephone message from an angry mortgage broker to a licensed appraiser haranguing the appraiser for failing to deliver the needed number.
"You gotta get the value on the home," the broker warns on the recording. "If you couldn't get the value, you shouldn't have taken the money, and I indicated that in my request."
What's the potential significance of overvaluations for consumers? Do inflated appraisals really matter that much? You could argue that a little fluff does little harm in an economy where houses are appreciating 5 percent to 7 percent every year. But what happens if prices go soft, as they do periodically when regional employment markets stagnate and people lose jobs?
Then consumers who bought houses with small down payments and inflated appraisals could be stuck in a very serious jam, owning houses worth less than the balance they owe their lender.
Ken Harney's e-mail address is firstname.lastname@example.org.