Pricing Wars: Appraisers Fight Back

Independence is at stake as appraisers resist rubber-stamp valuations.

August 1, 2001

Mike Foil has had enough. The 20-year appraisal veteran has taken one too many calls from lenders threatening to pull their business if he doesn’t appraise a property at a predetermined level to make their deal work.

Now Foil, an affiliate member of the Central Arizona Board of REALTORS®, is leading a charge to fight back against this lender pressure, a pressure that he and his colleagues describe as escalating at an alarming pace and threatening to send property values, in a scenario reminiscent of the 1980s, collapsing if the economy sinks.

The intensity of the problem varies widely, but in some market areas, one out of every four appraisals is inflated to meet a predetermined amount, some appraisers say.

“This issue is ready to come to a head, and the trigger will be a downturn,” says Foil, principal of Foil Appraisal, Payson, Ariz.

Given the dot-com collapse and the other factors that have been grinding down the economy, the risk of a housing price meltdown is no longer academic.

“Once we start seeing a large number of foreclosures, everyone will start pointing fingers at the appraisers,” says Jerry Brewer, chair of NAR’s Appraisal Committee and principal of Brewer Realty, Senatobia, Miss. “The time to stop the pressure on appraisers is now.”

Pressure from lenders isn’t new, but it’s applied more brazenly now, appraisers say.

“In the past, pressure to meet a predetermined value was subtle,” says Francois Gregoire, vice chair of NAR’s Appraisal Committee and principal of Gregoire & Gregoire, St. Petersburg, Fla. “Now there’s an element of coercion.”

That coercion takes several forms, but all of it amounts to what some appraisers describe as “economic terrorism,” whereby appraisers who don’t rubber-stamp predetermined values are blacklisted or otherwise hit in their pocketbook.

Ironically, it’s the good economy that’s fueling the crisis. Low interest rates and strong housing sales have attracted a large number of lenders into the market, and to be competitive, those lenders have had to deliver on loans even as selling prices have been ratcheted up.

At the same time, there’s been an influx of rookie appraisers who, in their search for clients, enter into relationships with lenders and appraisal management companies that later exact a high price for their business. Appraisal management companies are intermediaries that match up lenders and appraisers.

“Newcomers are more prone to fall for such relationships,” says Gregoire. “We all want to build our business. If lenders tell you they expect to be doing 20 loans a month in your area, you might succumb.”

State laws differ, but in the absence of fraud, there’s generally nothing wrong with lenders or real estate practitioners telling an appraiser what they feel a property is worth. “It’s not pressure for lenders to say they need to get $100,000 value on a house,” says Sam Blackburn, president of the Association of Appraiser Regulatory Officials. “It’s lender pressure to say that if they don’t get $100,000 on the house, they won’t give you more business.”

Petition asks for get-tough measures

Since the 1980s real estate downturn and enactment of the Federal Institutions Reform, Recovery and Enforcement Act, states have established appraiser regulatory boards and require appraisers to be certified and licensed. The jurisdiction of the boards is generally limited, though, to licensing and certification issues, and few of them have resources to review ethics complaints aggressively.

That means little action is being taken at the state level to curb lender pressure or to impose sanctions on appraisers who bend to that pressure.

Appraisers are now hoping to turn this weak regulatory environment around, starting with the circulation of a petition that, as of early June, had attracted the signatures of 6,000 appraisers who are calling on a federal appraisal board to help them take action. The federal board, called the Appraisal Subcommittee, was authorized by FIRREA to manage the federal government’s relationship with the state appraiser regulatory boards. Foil of Arizona was the principal author of the petition.

Among other things, appraisers want the Appraisal Subcommittee to help state boards penalize lenders and others in the industry that pressure appraisers and to penalize appraisers who step over the line.

Some appraisers also want the Appraisal Subcommittee to pump money into the state boards so that they can beef up their enforcement, though that request isn’t part of the petition.

“The states are doing all they can, but they have limited resources,” says Blackburn.

As a general matter, appraisers would like to see more states pass a law similar to one enacted in Tennessee a few years ago that makes it illegal for anyone to intimidate or coerce appraisers. A bill creating such authority is now working its way through the North Carolina Legislature, but no one in the appraisal industry expects to see the legislation catch on in more than a handful of states, in part because the industry lacks the resources to push the bill, says Blackburn.

Instead, appraisers are pinning their hopes on a federal antipredatory lending bill, H.R. 3901, under consideration in the House Financial Services Committee, which includes a provision that’s based on the Tennessee law. That provision is considered noncontroversial, but there’s a long road ahead for the bill as it winds its way through Congress. NAR doesn’t have an official position on the bill, but the association is a staunch supporter of any effort to maintain sound valuation practices, say NAR analysts.

To build support for the bill and other actions to curb the pressure, the American Society of Appraisers held a meeting on the issue with NAR in May, and more meetings are in the works. Other participants at the meeting included the Association of Appraiser Regulatory Officials, Appraisal Foundation, Appraisal Institute, Internal Revenue Service, U.S. Department of Housing and Urban Development, Fannie Mae, Freddie Mac, American Association of Retired Persons, American Bankers Association, and Mortgage Bankers Association of America.

What’s next?

Appraisers want these industry groups to sign on to a memorandum of understanding that would give the issue a higher profile outside appraisal circles and set marching orders for pushing reform through Congress and the state legislatures.

That’s a simple agenda but one whose success is crucial if the real estate industry is to avoid a repeat of the valuation debacle of the 1980s, says Brewer.

Robert Freedman

Robert Freedman is the former director of multimedia communications at NAR.

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