Ms. Ruth Simon
The Wall Street Journal
Dear Ms. Simon,
Thanks for your well timed article published May 26, 2005 and entitled “Lenders clamp down on inflated appraisals”. Unfortunately I missed it on the day it was originally published and just became aware of it this morning. I was referred to your website and fortunately the article is still there. My response is not timely, but I’m responding with some observations of my own.
It has become popular recently for lenders to do as US Bank and others have done in order to address the issue that they alternately call “inflated appraisals” and “appraisal fraud”. If one looks one can find inflated appraisals and certainly many in the appraisal profession are very concerned that there are those among us who because of incompetence or influence provide appraisals that are not well supported by market data. However, before coming to the conclusion that an inflated appraisal is the problem and the lenders’ solutions are the answers to the recently released federal banking regulators guidelines please consider the following:
Historically it is very seldom that lenders suffer any consequence whatsoever from an inflated appraisal. The costs of default on loans collateralized by value inflated real estate is most often born by government sponsored entities such as Fannie Mae. The original lender or loan broker is long gone and usually unaffected by the final consequence. Therefore there is no meaningful financial impetus for lenders to require better quality appraisals. The response of US Bank only makes sense if the lender is required to accept responsibility for a loan gone bad that included an inflated appraisal at its inception. So far the lenders have avoided that responsibility. While there is nothing illegal about using in-house is appraisers, I doubt very seriously that it is being done to address the guidelines of the federal banking regulators in any meaningful way. This is simply another ploy by the lenders to deflect criticism and avoid responsibility.
There is well hidden evidence that lenders are charging the borrowers at closing double and sometimes triple the amount that the appraiser charged the lender. If the lender has in-house appraisers the paper trail that an over-charged borrower might be able to discover if an independent appraiser is used will be non-existent. Incidentally, any investigator questioning the charges passed on to a borrower at closing will have an equally difficult time. Hiring in-house appraisers will eliminate accountability, transparency and discoverability of what an appraisal should reasonably cost the borrower. This is about the lender making up-front money on the loan.
I have had the opportunity to listen to appraisers who have contracted with or become employed by lenders. Many, unless they are able to advance to a position where they review or form policy, eventually quit because of pressure to close the loan. Lenders do not realize anything if the loan does not close. Quite often the reason a loan does not close is that the appraisal did not come in high enough. Hiring in-house eliminates this problem and expense for the lender and places the lender in a position to avoid the surprise that the original loan request was over-inflated. Hiring in-house will ensure the appraisal will never “come in low”.
So hiring in-house makes it easier to do a couple of things that are important to the lending industry. The charges made for the appraisal can be padded without any checks and balances and it is more far more effective to pressure employees than independent appraisers to arrive at a predetermined value that will support the loan closing.
The same motivation is driving the construction of “do not use lists” and the use of computerized automated valuation models. There is inflation and fraud, but a great deal of it is traceable to the lenders you have cited for cleaning up the industry. This is about lenders making money (a great deal of it) and the inertia behind it is impossibly large, maybe too big to stop. I doubt if you can find a sincere effort on the part of lenders to assist the consuming public or the appraisal profession, but they have discovered a scapegoat they call “inflated appraisals”. Crocodile tears arte being shed.
I am signing below, but I am asking that you keep my identification and location confidential because there is evidence that many lenders will “black ball” appraisers who speak out and I am currently dependent on this work for 100% of my income. I hope my request for confidentiality does not diminish the credibility of my input. I am taking you close to the dark under belly of the mortgage industry and I need to work. Please look closer at what is going on and report it. There is a problem, but appraisers aren’t causing it. The lenders are putting the heat on us just because they can. Please call the next article “mortgage fraud”.
Edd C. Gillespie
107 W 11th
Pueblo, CO 81003
719-544-1771
edd@crreports.com
