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The Lender's Fudge

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Gerry Hastin

Freshman Member
Joined
May 26, 2003
Hi folks,

I have been reviewing your posts for some time and I can understand your often expressed frustration with the amount of interference by third parties in the appraisal process. “Hit the number or forget about future assignments” seems to be the consistent instruction plaguing your discipline.

As someone involved in the lending side of the equation, I understand how this instruction from loan officers is actually a transference of pressure originating from the Realtor, “Get the loan down or that’s the last loan referral you’ll see.” Just as appraisers are only as good as their last appraisal, loan officers are only as good as their last loan.

When Realtors create a transaction that is not supported by the comps because it is as over laden as an Iraqi looter’s donkey with seller concessions, the pressure dominos begin to fall. Inevitably, the appraiser (although it should be the underwriter) is the final domino in the way of closing these overpriced transactions. Are you going to stand or fall? Many times members here have suggested turning the “deal maker” appraisers in to the authorities (what authorities?) to stop this abuse of home buyers and lending programs. But if the only party complaining is a disgruntled “deal-breaker” appraiser, you know nothing is going to happen. Enforcement is a paper tiger.

Obviously, this system isn’t working. Good ethical appraisers are economically punished while the “rubber stamp” guys run away with their clients. And first time home buyers are saddled with negative equity because they naively allow their common sense to be supplanted by their Realtor’s commission-centric spin. - What to do? What to do?

It seems that a very basic flaw exists in the lending process because a conflict of interest is created by entrusting the acquisition of the appraisal to those dependent on its exact outcome. But when you subject this problem to greater scrutiny, it seems that the problem may not actually be rooted in the appraisal acquisition process, but rather in the lender’s underwriting process.

In over ten years of lending, I have often wondered why the language printed on the appraisal form above the appraiser’s signature is not construed literally. The sentence says, “I (we) ESTIMATE the market value, … as of … to be $X.” The operative word being “ESTIMATE.” I look up “estimate” in Webster’s and its says “to form an approximate judgment or opinion regarding the worth...” I then looked up “approximate,” Webster says, “nearly exact, not perfectly accurate or correct.” This language seems to clearly state that the number appearing on an appraisal was never intended to be construed literally. Yet it is. In my opinion, the misapplication of the appraised value is at the root of the lion’s share of the appraiser coercion problem.

This literal application of the appraiser’s value estimate by the lending industry seems erroneous. Instead of pointing fingers at appraisers for fudged values, lender’s and secondary market agencies should revise their lending guidelines to allow for a “margin of error” that goes hand-in-hand with estimates or approximations.

Leave it up to the lenders to define a tolerable margin of error at whatever percentage they deem fit. This way, if the appraiser says $200,000 and the purchase agreement says $208,000, it would be up to the lender to determine if 4% is a tolerable margin of error. Instead, the way the process works today, the appraiser is coerced into forcing their estimate into the high or possibly fraudulent “band of value.” This places undue pressure on the appraiser to fudge the numbers when it should really be the lender’s fudge.

This change in practice could drastically reduce the coercion problem (and phone call volume) plaguing the appraisal profession and would better illustrate to all parties involved when a transaction has been skewed high without necessarily “killing the deal” and “blacklisting” the appraiser. This practice will also properly shift liability for over-financed transactions into the lender’s and Realtor’s laps where that liability rightfully belongs. The days of scapegoating appraisers would likely be over. Also, by adopting this practice, third parties will get out of the habit of micro-managing appraisers on every transaction.

Do you think the FNMA appraisal form should be revised to remove the word “estimate” or should lenders underwrite the appraiser’s opinion of value by keeping in mind the implied margin of error inferred by the use of the word "estimate"?

Thank you in advance for your comments.
 

hal380

Senior Member
Joined
Apr 26, 2003
Professional Status
Certified General Appraiser
State
Connecticut
Hello Gerry;

I appreciate your comments and would be happy to work for a client such as yourself who seems to have a good grip on the situation. Send me some work. :beer:

Regards

Hal
 

Ghost Rider

Senior Member
Joined
Apr 27, 2003
Professional Status
Banking/Mortgage Industry
State
Connecticut
Same idea, different way of approaching it. I've had underwriters lower my appraised value for lending purposes, if they didn't deem the appraisal "reliable" (even though it isn't legal, they still do it).......so if they can lower it, why can't they raise it?? Let them sign off on the nudge to "make it happen"
 

Dee Dee

Elite Member
Joined
Jan 16, 2002
Professional Status
Certified Residential Appraiser
State
Colorado
Originally posted by Gerry Hastin@May 26 2003, 11:56 PM
When Realtors create a transaction that is not supported by the comps because it is as over laden as an Iraqi looter’s donkey with seller concessions, the pressure dominos begin to fall.
:rofl:

Gerry, you should give warning before you make analogies like that. Coffee coming out of the nose can be very painful!

I've pretty much concluded that it's going to take a major financial upset within the lending industry before anyone will seriously look at the flaws in our current system and take the appropriate steps to correct them.

Inevitably it has to be the lenders themselves who will determine and enforce any new standards and rules deemed necessary to clean up the corruption and third-party coersion.
 

Restrain

Elite Member
Joined
Jan 22, 2002
Professional Status
Certified General Appraiser
State
Florida
The process already exists - it operates by using number-hitters.

Let's be real. Freddie/Fannie doesn't care for the most part until some appraiser's name keeps coming up. Then, after several years, they start looking at why the foreclosures from this appraiser are rolling through and selling at 60 cents on the dollar of loan value. The lender doesn't care because the lender isn't going to hold the note or sell it at recourse, so their only goal is to make the deal. They have no liability. The only person in the whole chain that has ANY true liability is the appraiser, and that's through the loss of the license.

Roger
 

Mike Garrett RAA

Elite Member
Gold Supporting Member
Joined
Jan 14, 2002
Professional Status
Certified Residential Appraiser
State
Colorado
They can raise it....underwriters prerogative!
 

Bill_FL

Senior Member
Joined
Aug 23, 2002
Professional Status
Certified General Appraiser
State
Florida
Gerry,

You have some pretty good ideas.

How about this one? If the loan is to be sold, the package is put out and "committed to" by a buyer, prior to the appraisal. Then, the entity who will actually shell out their own money orders the appraisal. This is a blind process to the brokers and LO's. They have no control over the process. It does not matter where the broker takes the loan, because none of them can control the process.

The actual "lenders" are usually pretty good at weeding out number hitters.
 

Gerry Hastin

Freshman Member
Joined
May 26, 2003
Bill:

In the "old days" they used to assign FHA appraisals that way. As I recall, when the market would start frothing up it would take a couple of months to get an appraisal. Bureaucracies tend to slow the appraisal process down while loan originator control often leads to fraud and coercion.

While underwriters often require conditions to correct factual issues with appraisals, when you have a non-appraisal licensed underwriter "adjusting" the appraiser's opinion of market value, you no longer have the actual licensed appraiser's opinion of market value as required under a federally related mortgage loan program. It's been replaced by the underwriter's opinion of value.

The reason I've suggested the "margin of error" approach is because the original appraiser's estimate would remain unchanged. If the lender wants to accept the appraisal using the margin of error approach, it is obviously "the lender's fudge" and not the appraiser's as a matter of record. Frankly, I just question the legality of an underwriter inserting their unlicensed opinion of value into the appraiser's mouth. Sounds more like V-V (value ventriloquism).

Are you appraisers or knee-puppets?
 

Dee Dee

Elite Member
Joined
Jan 16, 2002
Professional Status
Certified Residential Appraiser
State
Colorado
Originally posted by Gerry Hastin@May 30 2003, 06:49 AM
Are you appraisers or knee-puppets?
Actually, we are scapegoats. <_<

How would you suggest we convince the omnipotent lending industry that they need to change the way that they do business? Decisions like that would have to come from their own policy makers.

It's all about the money, Gerry. The goal is to make as much profit as possible to appease the share holders and make themselves look like successful and profitable businesses, yet they still want someone else to point a finger at if a borrower defaults.

Trust me, if appraisers had the political clout and lobbying power of the lending industry there would be some sweeping reform....but don't hold your breath, it isn't going to happen anytime in the foreseeable future.
 
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