Making sure appraisals are 'independent'

Pressure : Appraisers say lenders push them to inflate values so that homeowners can maximize their refinancings.

March 07, 2004|By Daniel Taylor | Daniel Taylor,SUN STAFF

Maryland home appraisers and bankers are discussing ways to lessen what some describe as growing pressure to inflate housing values as scores of homeowners try to tap into the increased equity in their houses.

The National Appraisal Institute and the American Bankers Association met last month to discuss new guidelines for appraiser-lender relationships.

Lenders rely on licensed appraisers to evaluate a home using a formula that includes recent sales in the neighborhood, the condition of the property and any upgrades or repairs that have been done or are needed.

Several appraisers say banks request a specific value for a house and pressure the appraisers to confirm that number even if it is higher than the market value of a home. An appraiser who refuses to bend, appraisers say, will lose the lender's business.

"Many times they'll put a minimum value on what they want, and if it works out, then fine," said Janet Hollingsworth, a Fallston appraiser. "But if it doesn't, I might not get business from them. I tell them that's not how I work. We're not here to rubber-stamp a loan officer's value. We're paid to be objective."

Bankers acknowledge the practice but say the problem is minor.

John Rasmus, senior counsel at the American Bankers Association, said recent discussions have been an effort to "nip the problem in the bud."

"I don't think it is a significant problem affecting the safety or soundness of banking," Rasmus said. "However, there are instances in the examination process where [the] independence [of appraisers] is not as they would have liked it. I think that's why the new guidelines came out in October 2003."

The federal guidelines, which update 1994 requirements, focus on guaranteeing "appraiser independence," Rasmus said.

According to the regulations, lenders must ensure that the banker involved in creating the loan and the person choosing the appraiser are not the same person. Lenders also are forbidden to provide a borrower with a list of appraisers from which to hire.

Eric Schwartz, an appraiser from Annapolis, thinks bankers are understating the problem.

"I think they are playing it down a little too much," he said. "I've had loan officers from banks tell me straight out that we need this number. It's not the majority, but I would say it's a significant enough minority that it makes it a pain."

Steve Mueller, an appraiser in Towson, said the appraisal industry must share responsibility.

"It takes two to tango," Mueller said. "You've got a lender who wants [a loan amount] desperately and an appraiser who's willing to bend."

Many appraisers say the refinancing boom of the past three years and the rapid rise in real estate prices have intensified the problem. The National Appraisal Institute and the American Bankers Association are to discuss the practice again in June at a Chicago conference.

"Sometimes when people are looking to refinance, they're not concerned with the actual value of the house," Hollingsworth said. "It's just the amount the owner wants. Someone may be needing that value just to cover his debt, and so the loan officer puts pressure on you" to complete the deal.

The results can be bad for homeowners and banks, Hollingsworth said.

Banks allow up to 80 percent of the value of a house to be refinanced. So for a homeowner to borrow $80,000 on a house, it must be worth at least $100,000. If the appraiser finds that it isn't worth that much, the deal can fall through.

"If something goes wrong, you lose a job or your health fails and you can't make a payment, that house is going to have to be sold," Hollingsworth said.

"You're not going to get any money because you've maximized that loan, and so you run the risk of using up all your equity. So many see [their home] as part of their retirement package, so if they're told by an appraiser that it's worth too much, it's going to distort their portfolio."

Ceil Barbee, a loan officer and a resident of Bel Air who had her house appraised by Hollingsworth, said trustworthiness is an important quality.

"I want someone I can trust that will give me good honest figures that I don't have to worry about," Barbee said.

Though it depends on the property, appraisers typically charge $300 or more for a residential appraisal. Commercial appraisals can cost several thousand dollars.

To be licensed, appraisers are required to undergo 90 hours of education and be trained under a licensed appraiser for at least 2,000 hours. Licenses must be renewed every three years. In Maryland, there are about 3,700 people in the profession, and the number has been growing with record real estate sales.

Bill Garber, director of government affairs at the National Appraisal Institute, estimates that there are about 75,000 licensed appraisers in the United States.

Kathleen Murphy, president of the Maryland Bankers Association, said it's in a bank's interest to ensure integrity in the appraisal process.

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