When an appraiser hired by your mortgage company confirms that the house you bought is worth what you paid, that's reassuring.
But what if the appraiser was pressured to fudge the number? What if the house is actually worth $20,000 or $40,000 less than you paid, and you've got no equity?
Does that happen very often? And what connection, if any, might inflated appraisals have with the current mess in the mortgage market?
A suit filed in New York Nov. 1 suggests that puffed-up appraisals may not only be commonplace in softening markets but could even be the result of collusion by some of the largest companies in American real estate.
New York state Attorney General Andrew M. Cuomo, who filed the suit against First American Corp. and its appraisal management subsidiary, eAppraiseIT, believes that inflated appraisals have "contributed to the growing foreclosure crisis and turmoil in the housing market."
Cuomo's suit, which rattled mortgage lenders, appraisers and settlement service companies nationwide, accused First American and eAppraiseIT of knuckling under to illegal pressure from Washington Mutual, the giant Seattle-based lender, to hit the numbers needed to close loan deals.
Citing extensive internal e-mails, the suit charged that Washington Mutual demanded that eAppraiseIT use the bank's own preferred list of appraisers -- who allegedly had demonstrated their willingness to inflate values -- rather than eAppraiseIT's regular roster of independent appraisers.
Executives at eAppraiseIT knew that agreeing to Washington Mutual's demands would violate federal and state laws, but they caved rather than lose millions of dollars worth of business that the bank could shift to competitors, according to the suit. An e-mail sent to senior executives by eAppraiseIT's president last February and quoted in the complaint said, "We have agreed to roll over and just do it."
From April 2006 to last month, eAppraiseIT supplied about 262,000 appraisals to the bank in connection with home financings. Post-closing reviews of nine appraisals performed on New York properties by Washington Mutual's preferred appraisers found higher than accurate numbers in every one, according to the suit. The alleged padding ranged from $5,000 to $720,000.
Washington Mutual was not named as a defendant in the complaint because, as a federally regulated bank, it is buffered from certain state legal attacks. In a statement, Washington Mutual said it was both "surprised and disappointed by the allegations," and has suspended business with eAppraiseIT pending its own investigation of the matter.
First American, a Santa Ana, Calif.-based real estate information services firm with revenues of $8.5 billion last year, said Cuomo's charges are "specious" and have "no foundation in fact or law."
Whatever the ultimate court disposition of the suit, appraisal industry leaders say the problem of lender interference is significant, and declining home prices are intensifying the problem. Frank Gregoire, chairman of the Florida Real Estate Appraisal Board and a St. Petersburg, Fla., appraiser, said, "Every appraiser deals with this stuff every day," routinely confronting threats of nonpayment and blacklisting if they refuse to play the game.
Perry "Pat" Turner, an appraiser in the Richmond, Va., area, said pressure to inflate values is so widespread that "it amounts to organized fraud by loan officers, based on their need to generate fees and close deals, and then pass the loans on to Wall Street" where they get packaged into the mortgage bonds that are now experiencing heavy default rates and losses to investors.
"And they all think they're never going to get caught," Turner said.
A national survey of 1,200 appraisers last year by October Research Corp., publisher of the industry newsletter Valuation Review, found that nine out of 10 appraisers said they've recently been intimidated or otherwise pressured to raise valuations on homes -- a 64 percent increase in complaints since a similar survey in 2003.
When appraisers refused to cooperate with demands to fluff the numbers, according to the study, two out of three of them lost the client's business altogether; nearly half did not get paid for the work they had performed.
Gregoire says the First American/Washington Mutual case illustrates a serious loophole in the current regulatory system: The federal government has urged banks to outsource their appraisals to ostensibly independent, third-party appraisal management firms such as eAppraiseIT in order to separate loan officers from the choice of, or direct contact with, appraisers.
But "no one is checking to see how free from influence these [management companies] really are. States don't regulate them -- they're not even considered appraisers. They're brokers of appraisal services -- so nobody is looking."
In areas where prices are falling and appraisal numbers are getting fudged, that could prove to be sobering news for everyone involved -- especially unsuspecting buyers.