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Mortgage Q&A: Appraisal debate gets hotter
Question of the Day
I recently wrote two columns that addressed my frustration with how the appraisal process has changed since the mortgage meltdown.
To recap, the first column described a real situation in which the property was appraised at $18,000 less than the contract price. The agents involved provided the appraiser with additional comparables that weren’t used in his report but nonetheless may have supported the contract price.
I made the comment that some appraisers seem to ignore the concept that one indication of value is what an independent third party is prepared to pay. I also pointed out that the buyer and seller were open to renegotiation but the circumstances made it impossible. The seller’s loan amount was too high, and the buyer’s down payment couldn’t be increased.
I concluded that situations like this are why the housing slump is likely to continue.
After reading that column, an appraiser emailed me, accusing me of “lambasting appraisers for doing their job.” He went on to accuse me of causing the mortgage mess by engaging in subprime lending, saying the “bad people” in my business caused the regulation today.
I responded accordingly. “Lambaste” means “to violently attack,” something I clearly did not do. My company has never originated a subprime loan, and it’s pretty clear the blame for the mortgage mess can be placed not just on loan originators, but on Fannie Mae and Freddie Mac, Wall Street, insatiable consumers and, of course, the federal government, which encouraged easy mortgage money.
I have continued to receive emails about the situation and am happy to report that all except one was supportive. One 20-year veteran of the appraisal business concurred that the agreed-upon sales price by a willing third party should be “taken into consideration.” It was called the “hidden extra comparable.” He went on to say that he doesn’t always meet a particular sales price, but he does consider it in the valuation. He wrote that it’s “just common sense to me.”
Another reader, with 34 years in the appraisal business, guessed that the appraiser who attacked me is the same type of appraiser who disregards subtle changes within markets, resulting in inaccurate appraisal reports. This reader aptly pointed out that the Home Valuation Code of Conduct — a document that describes how appraisals must be done for loans that will be sold to Fannie Mae and Freddie Mac — is encouraging appraiser selection by lowest cost and fastest turnaround, not experience and competency.
I also received some bizarre email. Let me quote: “I take exception to your thought process that a home is worth what a third party is prepared to pay for it. Nothing could be further from the truth. Appraisals have always and should always reflect what your neighbor’s house is worth.”
Say what? “Nothing could be further from the truth” is his response to the notion that a willing buyer’s price is an indication of value? Is he kidding? I think my economics courses in grad school called this sort of thing “free markets.”
He then cited an example of a home listed for sale at $350,000, supported by neighboring comparables. An all-cash buyer “swoons in” and pays $400,000 cash for it. My reader concluded that the house is not worth $400,000. Of course it’s not.
My editors at the Home Guide can go back in the archives and find multiple columns I wrote in 2004 and 2005 when the D.C.-area housing market was out of control. Overeager buyers were lining up with escalation clauses and were eliminating simple protections such as financing, appraisal and inspection contingencies. I warned against such practices and predicted a fallout.
When markets become rabid, as they were in the Washington area then, buyers often take a big risk, and many lose. But you’re not going to find many cash buyers prepared to “swoon in” and pay 50 grand more than a listing price. His example is not applicable to my assertion that a third party’s price is one indication of value.
His assertion that “appraisals have always and should always reflect what your neighbor’s house is worth” has got to be the most generalized blanket statement I’ve ever heard.
Have at it, readers. Bring it on.
By Michael P. Orsi
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