Brian J. Davis - Appraiser - Bloomington / Normal Illinois Real Estate Appraisal Services

BRIAN J. DAVIS & ASSOCIATES
Real Estate Appraisal & Consulting
Bloomington-Normal & Mclean Co. Illinois

Appraisal News for
Mortgage Professionals

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Appraisal Scoop

The Appraisal Scoop.com blog is a platform where I will be posting a wide variety of news stories and articles of interest to appraisers, lenders, real estate sales agents, loan processors, title companies and even consumers. Basically anyone with an interest in real estate.

Obviously my main perspective will come from being a real estate appraiser. I will be posting articles and thoughts on real estate appraising, the real estate appraisal profession, and how appraisers and the industry relates to other mortgage professionals and consumers.

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Appraisal Reforms - How To Prevent Appraisal Fraud

http://www.demos-usa.org/

Suggestions from the How Widespread Appraisal Fraud Puts Homeowners at Risk.

Ensuring appraiser independence. This would, in part be done by reducing or eliminating contact between appraisers and lenders/brokers. Demos does not, however, offer any suggestions for how this might be done.
Punishing any of the actors in the mortgage process for pressuring appraisers. There must be two other preliminary steps: state and federal laws or rules expressly prohibiting such pressure and the establishment of a regulatory framework to hold all parties accountable.
Sanctioning dishonest appraisers. Ethics are not always enough when one's livelihood is at stake. Appraisers must feel that their competitors will not be rewarded for unethical behavior. Knowing that everyone, including the competition, faces a serious threat of penalties such as loss of license, would go a long way toward empowering appraisers to stand up to pressure.
Streamlining the complaint process. This could be done by providing a point of contact in each of the agencies that regulate a piece of the mortgage industry so that appraisers or others will know where and how to register complaints.
Increasing Enforcement Capacity. Whatever regulatory changes are made, there must be regulators with the authority and the resources to enforce them.
Educating consumers. Homeowners will ultimately pay the price when and if the real estate boom ends, and particularly if it ends disastrously. They need to be aware that the high appraisal that allows them to buy with minimum money down or refinance with cash out may not ultimately be in their best interests. As the Demos report states, consumers have been "urged...to treat their home equity like a bottomless ATM" and have "unwittingly encouraged appraisal fraud by pressuring lenders to wrap up deals quickly while paying no attention to the appraisal step, and by readily accepting higher levels of financial risk that is prudent.

How Widespread Appraisal Fraud Puts

Homeowners At RISK!

Many Americans have reduced the equity in their home to pay off credit card debts and cover day-to-day expenses. More troubling still is evidence that many appraisers fraudulently inflate property values during the buying or refinancing of homes.

Last year Demos, a New York City based think tank, issued a "briefing paper" titled How Widespread Appraisal Fraud Puts Homeowners at Risk. This paper, written by David Callahan, explores the implications of appraisal fraud.

KEY FINDINGS . . . . .

"Serious conflicts of interest pervade the mortgage industry." Lenders, brokers, and real estate agents often have an incentive to inflate the value of residential properties. The process of appraising a property - among the most important steps in either the purchase or refinancing of a home - is sometimes done dishonestly as appraisers go along with requests to overstate the value of a home.

"Appraisal fraud can lead homeowners to borrow more money than their homes are worth, putting themselves at risk of being "upside down" in a home - e.g., not being able to sell for a high enough price to pay off their mortgage - even if there is no downturn in the real estate market.

Appraisal fraud is not a new problem, but the refinancing boom - in which homeowners have cashed out over $450 billion in home equity since 2001 - has created fresh incentives for self-interested parties to collude in the overstatement of property values.

" Up to half of all appraisers have reported feeling pressures from lenders or brokers to overstate property values. Many appraisers go along with these pressures out of fear of losing future work. Appraisers who have not complied with such pressures report not being paid for work and being blacklisted by lenders and brokers.

" The inflation of home prices through appraisal fraud may be helping to push the real estate "bubble." Some observers believe that appraisal fraud helps explain high foreclosure rates in certain parts of the nation.

" Predatory lending targeting minority and sub-prime borrowers often involves appraisal fraud. Low-income aspiring homeowners are also targeted by developers who collude with dishonest appraisers in the aggressive marketing of new homes offered at inflated prices.

" Government oversight of the appraisal process is inadequate. Key participants in the mortgage industry, such as mortgage brokers, are unregulated in many states and oversight of lending institutions is often very weak. State boards that license appraisers and investigate reports of fraud often lack enough resources. New reform steps are urgently needed.

View the document (pdf)

Online Home Values - What Are They Worth?

7 things an automated or non-appraiser valuation won't tell you!

Lenders and brokers using Automated Valuation Models (AVMs) and homeowners using "free online home values" to determine the value of a property need to know what those results aren't telling them.

Appraisers are cautioning consumers and clients to be aware of the difference between online home valuation services and an eyes-on, hands-on appraisal.

The sites use computerized data crunching tools called "automated valuation models," or AVMs. The crunching typically begins with public records -- tax assessments, deeds, demographics, property characteristics and sales price trends, but can also include data from mortgages, multiple listings and appraisals.

AVMs run an address and ZIP code through mathematical models to compare the home with others recently sold in the same area. Historical trends may be considered and some of the most sophisticated can take into account a home's unique characteristics -- number of bedrooms, baths, etc. -- and compare it with similar properties.

While the valuations can be a handy house-to-house comparison tool, a source for past sales prices or as a guesstimate of home value growth, they won't pass muster with lenders who need a certified appraisal to grant a home loan.

Whether the house is really there. A computer can't drive by a house to see if it's actually located where it's supposed to be, has four walls and a roof, and really is a four bedroom split level and not a one bedroom shack.

Whether unique features of a property might add to or detract from market value. Let's say an AVM returns an estimated value of $150,000. Did it account for the 24/7 convience store next door? The railroad tracks nearby with trains that blow their whistles every night? The desirability of its tree-lined street versus the next street over?

How long ago the property was assessed. Many AVMs and free online services rely on public assessment records. In Illinois, properties may only be revalued by the assessor every four years - the value may be nearly three to four years old in that case. You know the old saying, "Garbage In - Garbage Out". Some states mandate that an assessed value not increase beyond a certain percentage, even if sales activity indicates the property has appreciated far more. When you use an AVM or free online service, you risk a lower value than reality.

What makes the comparables comparable. A computer might compare your subject property to another property with similar square footage sold three months ago a quarter of a mile away. Even if that "comparable" property is in a different, less desirable school district, fronts a four-lane, 55 M.P.H. street, and is flood-prone. Or even if the property was sold under duress, such as in a divorce situation, or sold to a family member. A computer simply does not know all the adjustments that might need to be made to a "comparable" property's sales price.

Whether a market is declining. Automated valuations use data from recent, nearby sales. If those sales were completed at the peak of a local housing market, the computer will think the trend is going up. Even if a professional appraiser knows that the overall neighborhood is beginning to experience a downturn. As a lender, don't get stuck with a property that's been overvalued by a computer.

Whether there is a conflict of interest. Free online home values are often farmed out to real estate agents who use the service to get a home listing. The higher the value estimate, the more likely the agent will be in procuring the listing. Internet valuation sites lack the experience and judgment of a professional appraiser. An appraiser goes even further and can include a visual inspection to account for factors even comps can overlook, including recent upgrades, modernized appliances, floor-plan utility, and the age and condition of not just the home, but specific areas in the home such as a basement or detached garage.
What qualifications, designations, experience and education the preparer of the value has. When you work with an appraiser, you can be confident we're highly qualified, ethical and prepared to complete your assignment professionally and with good judgment. Most of the time, you don't know the qualifications of whoever is behind those free online values, and they couldn't compare to an appraiser's if you did. And if you're relying on an automated valuation, you're cheating yourself out of an appraiser's education, experience and expertise.

A free Internet valuation might beadequate if you want a quick estimate, but when making decisions about your largest investment, there is no substitute for an appraisal.

OurAppraisal.com

Brian J. Davis, RAA
Brian J. Davis and Associates
1303 Dover Rd
Bloomington, IL 61704

www.OurAppraisal.com Ph. (309) 662-4070

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OurAppraisal News is published as a service to keep readers apprised of current appraisal happenings that may affect their business or customers. It is available at no charge to interested parties. The contents of this newsletter are intended for informational purposes only. It is expressly not intended to be legal advice and should not be relied upon as such for any reason. The accuracy of the contents of this newsletter cannot be guaranteed, though a reasonable attempt at accuracy was made during the compilation of the information.