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Hazards of Over Appraising?

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Jeff Horton

Senior Member
Joined
Jan 15, 2002
Professional Status
Certified Residential Appraiser
State
Alabama
Trying to put some ideas together for a article aimed at consumers, hopefully to be published, on the problems with over appraising a property. Not just the risk of us losing our license or that fact that is is simply wrong.

What are the risks to the lender and consumer? Like you loose you job and can't sell the house because you owe more than it is worth.

Any ideas would be welcome. I will make a notes and use what I can.
 

Larry Lyke

Senior Member
Joined
Feb 2, 2002
Here's a couple of starter thoughts on the disadvantage to having your property overvalued by an appraisal:

#1. If you purchased it on such an appraisal, it's possible that you don't have any equity in the property at all. Might even be true with a sizable down payment.

#2. If you refi'd under such circumstances, you've already cannabalized the equity if you just frittereed it away on nonappreciating "necessities."

#3. In both of the above situations, for every little bit the market sags, your situation only gets worse.

I'll leave the evangelization to you, Jeff. Go forth ...
 

jtrotta

Senior Member
Joined
Jan 16, 2002
Jeff

I knows yer not gonna go half way on this article, so put in yer letter the next update will cover undervaluing a property. You just might want to use the example of buyin a car on a 5 year plan, chances are at the end of the 5th year you could find that you owe more than the car is worth, shorter time line example - similar results.

Also, ifn they were lookin to suck all the equity out of their dwelling, they may have a different plan than yer thinkin about, what they really need is an honest value; it will help them in the long run fer tax evaluation and other things.

Your original Q - perhaps pointing to the fact that after they loose their house, they won't have to wonder why their taxes (earnings & homeownership) continue to increase, they will have become part of the problemo not the part of the solution. They could be forced to repay the shortfall ifn the Sale of the Forclosure doesn't cure the loan debt; the bank will incure a carrying cost for holding the property till it sells; ifn they can't cure all of the debt, it could eventually be passed on to the consumer's nationally.

good luck 8)
 

Craig Sewell

Freshman Member
Joined
Feb 6, 2002
1-Can't sell the house for what they owe.
2-Lender's liability is greater than the value of the house.
3-Could take years and years of appreciation in value to catch up to inflated appraisal value.

I used the increased equity in my real estate holdings to send my daughters to college. Could not have done this without the home equity loans that would not have been possible if I owed $100K on a $90K house.

On the other hand, over appraising is so rampant, is there really a problem?
 

Dee Dee

Elite Member
Joined
Jan 16, 2002
Professional Status
Certified Residential Appraiser
State
Colorado

On the other hand, over appraising is so rampant, is there really a problem?

Yes, and not just for the homeowner who's upside down and the lender who holds their note.

Just like stocks and mutual fund investments, what we think of as equity or gains in our home values is nothing more than air until we actually sell our properties. Our percieved equity will fluctuate with the market.

If too many of our neighbors are upside down on their loans as a result of over valuing, it could lead to foreclosures or homeowners selling quickly for whatever they can get, just so that they can move on and before they will lose their home. Whatever happens to their properties will impact the theoretical equity of every surrounding neighbor, even if those neighbors own their home free and clear!

Conseco is a good example of what can happen if too many of the properties that they have in their portfolios are over valued. Some might argue that it was just because they were too heavy in the manufactured home sector, but I believe most of us can agree that it's not impossible that the same thing could happen to lenders who back loans in the traditional housing market. Like you said, over appraising is rampant. And if that happens....trust me...all homeowners (taxpayers) will pay, and it doesn't matter how well you managed your own debt.
 

Craig Sewell

Freshman Member
Joined
Feb 6, 2002
Dee Dee,

We agree that over appraising property is rampant and it irritates the ever living you know what out of me. But why is it so rampant?? Because we can't police ourselves? I know this is the case in this area. An appraiser friend of mine (who I consider a good appraiser) told me he would NEVER report another appraiser to the state authorities. Over appraising is apparently not a problem with him, or most folks or it wouldn't be do darn RAMPANT. Thank goodness for this e bulletin board where we can vent, huh?

I know of one appraiser I can control, and I will keep doing the best I can!
 

vargasteve

Junior Member
Joined
Jan 21, 2002
Professional Status
Certified Residential Appraiser
State
California
What does Enron & Appraisals have in common?

When a loan broker & or home owner pressure the appraiser to HIT a certain #, they are asking the appraiser to develop a fraudulant document, the purpose which is to defraud a third party (who is actually the primary client THE BANK) in exchange for approx $300 - $500 depending on the assignment. Most customers understand how inappropriate it is for a Institution to cook the books, but almost in the same step turn & pressure the appraiser. Its easy for someone else to take the heat - if you the appraiser doesn't make it GO AWAY they just might have to;

1) Face reality = I mean actual reality
2) Get a 1st & 2nd loan
3) Broker misses a commision (that would otherwise be possible if you would just be 'flexable')
4) have to put additional down
5) Not get the 'new home' they wanted & settle for less?
6) get stuck with the higher rate & ratio program
7) not be able to refinance & continue to pay a higher rate

oh, the list goes on....
 

Jeff Horton

Senior Member
Joined
Jan 15, 2002
Professional Status
Certified Residential Appraiser
State
Alabama
If too many of our neighbors are upside down on their loans as a result of over valuing, it could lead to foreclosures or homeowners selling quickly for whatever they can get, just so that they can move on and before they will lose their home. Whatever happens to their properties will impact the theoretical equity of every surrounding neighbor, even if those neighbors own their home free and clear!

EXCELLENT POINT!!

Thanks to everyone else too. These are all good points.
 

bobburnitt

Junior Member
Joined
Jan 16, 2002
Craig,

10-4 on the "not being able to police ourselves".

It has been proven to me, the majority in this profession, are not professionals. Just hit the number and pull anything out of your you know what to rationalize the illegal action.

Hence the term 'liar for hire'.

Appraisers will get the blame again, because they deserve the blame. These people couldn't have over-valued portfolios if it weren't for the legions of apprasiers that choose not to follow the rules.

Favoring the cause of the client is rampant.

BB
 
Joined
Jan 16, 2002
Professional Status
Certified General Appraiser
State
Montana
Jeff:


Over-inflated appraisals often go hand in hand with predatory lending. The over-inflated appraisal is a red flag signaling all sorts of lender predatory techniques, equity stripping, loan flipping, hidden loan terms, home improvement loan schemes, packed deals and any number of other techniques to gain points, fees etc from unsuspecting consumers. All predatory loans require the assistance of an appraiser to make them work.

The consequence to an unwitting appraiser who takes on the role of a vocational production appraisal house producing appraisals on steroids a la that old SNL skit “Vee vill pump you up”, is the lender can always sue the appraiser for negligence, using their E & O insurance as if it were mortgage insurance. According to a spokesperson for Liability Administrators, an E & O provider, more than 70% of the civil suits against appraisers come down the lender pipeline. No insurance, no assets, fine, you still have to pay a lawyer to answer the suit and handle the depositions until they go away. Remember, even if you have E&O, every time you are sued, the deductible clicks in and you have to pay that up front. Lawyers have a dilemma. If they just allege negligence, your E & O insurance will kick in and settle, if they allege fraud so they can go punitive, then E & O will not cover anything due to fraud. Lenders know this so they are going after appraisers for simple negligence.

One basic consequence I would highlight is I would remind consumers of the tax consequences of a foreclosure. Consumers are of the opinion, they just throw the keys on the desk and walk away. They don’t. An over inflated appraisal leading to a loan exceeding the value of the property is a set up for huge tax consequences that are now inescapable.

For tax purposes, the foreclosure of a loan is treated as a sale from which a borrower may realize a gain or loss. The gain or loss is the difference between the borrower’s adjusted basis in the property and the amount realized. On a non-recourse debt the amount realized includes the full debt cancelled by the foreclosure. The full cancelled debt is included as the amount realized even if the fair market value of the property is less then the canceled debt.

The foreclosure of a defaulted loan represents the forgiveness of debt, a taxable event that should be reported to the IRS with the filing of Forms 1099-A (Acquisition or Abandonment of Secured Property) and 1099-C (Cancellation of Debt). In addition to the balance of the mortgage, the lender may report other funds advanced on behalf of the owner, including costs such as payments for interest, taxes, and repairs.
 
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