At a Portland appraisal home viewing last week, the owner
had two little dogs that would not stop barking as a result of my visit. Each time the dogs barked, the owner gave
them a small treat. The barking would
stop for a moment, but then the dogs would start again and so would the treat
process. The owner was inadvertently
rewarding wrongful behavior, thereby perpetuating the process. This made me
think, unintentional reward of improper behavior is something that also happens
regularly in appraisals contracted by mortgage financing, lending, and
appraisal management companies (AMCs).
Home appraisals for lenders or AMCs typically pass through several
layers of quality review. Often, the
examinations involve a checklist of things that generally characterize a well-supported
or lower risk appraisal opinion.
Rightfully so, lenders want to know that the appraisal can be confidently
used for evaluating collateral and avoid the dreaded forced loan buyback. If a lender’s checklist items are missing,
the appraisal becomes flagged as higher risk and often goes back to the
appraiser multiple times for additional clarification, comments, or comparable
data. Appraisers with fewer red flag issues
will often be rewarded with more work, first choice of assignments, and fewer
requests for revision or clarification.
Appraisers can usually receive more work and fewer revision
requests from lenders simply by working harder, explaining issues, and
supporting adjustments. However, often
appraisers who work longer hours (for the same pay per assignment) will still
receive red flags because the reports are not read thoroughly by the client or because
the properties are complex with few comparable sales data. Some appraisers learn quickly that there are
shortcuts to receiving more work and fewer clarification requests.
Real estate appraisers are highly trained and regulated
professionals who are required by law to be independent, unbiased, and to not
mislead. Most appraisers work very hard to maintain high ethical standards. However, an incentive based system exists in residential
finance that rewards appraisers who mislead by making an appraisal look
stronger than actual. From experience I know
that this happens all the time. Here are
some ways that appraisers may mislead a lender’s quality checker into thinking
an appraisal value opinion is stronger than it is.
and close proximity comparable sales make an appraisal look strong, but the
most recent and closest comparable sales are sometimes not the strongest nor
most like the subject (particularly on a unique property). An appraiser looking to reduce questions from
a lender might use recent and close sales over the most similar sales.
2. Fewer and
smaller comparable sale adjustments can make an appraisal look stronger than it
is. For example, an appraiser might take
a comparable sale that requires a large positive adjustment for living space
but a large negative adjustment for view and just make a smaller adjustment for
each. In this case, the indicated value
will be the same, but the comparable sale looks really strong to a reviewer
because it has few adjustments. (Here
is an article that explains more about how appraisers can
use different adjustments and come to the same value conclusion.) Fannie Mae, the nation’s largest buyer of
loans, has recognized small adjustments as an appraisal issue and is fighting
back with big data and automated review of appraisals. Click
this link to read a Fannie Mae announcement that explains more and
shows evidence that the majority of appraisers were adjusting too low for gross
living area (GLA). Also, view a video here showing
how an appraiser might support a GLA adjustment that is not artificially low.
or downplaying issues like a busy road or a necessary repair can reduce red
flags. If an appraiser can conceal an
issue or convince a lender that it is not a big deal, then the report will
likely receive less scrutiny unless the deception is uncovered. This is a particularly dangerous tactic that
can cause an appraiser to be sued or placed in serious trouble with their
The takeaway from this is that appraisers who work for
lenders are often conditioned, sometimes unknowingly, into softly misleading
practice that is only uncovered with more thorough appraisal review
processes. Here are my recommendations
for lenders and AMCs to avoid encouraging misleading appraisals.
and AMCs should be very careful to select and hire the best appraisers.
and AMCs should make sure that appraisers are paid a sufficient fee so that
they are able to take the time necessary to do the assignment correctly without
and AMCs should judge appraisers using well trained individuals and make sure
that appraiser grading and subsequent job assignment is not tied to appraisal red
flags, something that might also relate to property complexity, not just
Here are my recommendations for appraisers who do work for
should be cautious about working with the type of lenders and AMCs who
regularly reject well documented and explained appraisal reports just because
the subject properties are unique.
should be extremely careful not to compromise their work quality just to avoid
the headache that often comes when appraisers tell it like it is.
should seek out working for clients that have well trained appraisal review
departments. In my experience, these tend
to be the smaller local or regional banks and credit unions; not the nationwide
Did I leave anything out or do you want to join in the
conversation? Let me know in the
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