Monday, December 05, 2005

"We'll just have the appraiser push the value..."

I asked for comments this past weekend, and here is one that I think many of you will find pertinent:

cactuscody said...

Thanks for the great everyday real life stories. I'm curious about how corrupt the appraisal business has gotten. It seems like anytime you want to refi the price of the home goes up and if it doesn't you just find another appraiser who will bump it up. Likewise I've heard that those originating the loans follow a similar practice. If the appraisal doesn't hit the number they find one that will to make the loan work. My guess is things won't change until the banks start losing money. Finally I don't really hear about any FB's. Everybody seems to be making money. Maybe it's like the stockmarket. You only talk about your winners and don't say anything about your

12/03/2005 6:59 AM

You are correct that there are appraisers out there that will "push" the value to get it where it needs to be. BUT, the lenders still have their "appraisal review" process. I spent a few weeks in an appriasal review department when I was trying to learn all of the various aspects of the business.

Before we get ahead of ourselves, let's look at what an appraiser is supposed to do. An appraiser is supposed to find the value of a piece of property by using other comparable properties to help "show" that the value is there. In a perfect scenario, you want to compare as many like variables as possible. You want to compare a 3bed/2bath home of 1500 square feet to other homes of similar characteristics...and prefereble have the comps within a 1 mile radius, and not seperated by something like a major freeway.

You don't want to find a 4bed/3bath home of 1800 square feet...and then try to "subtract" the value for extra rooms and square feet. These values can be harder to determine. This is where the appraisal business gets tricky. Unlike many parts of SoCal, not every house is a cookie-cutter "plan A" from some developer stacked next to each other. These are easy to comp as floor plans and square footage are identical. What gets hard is when you have different sizes, rooms, acreage, ages, conditions, stories, roofs, locations, etc. This is where an appraiser adds value and can make or break the appraisal. A good appraiser will use several different software programs to search for comps. They will do some good leg-work to make sure a legitimate value is there.

Once the appraiser has done their job, the mortgage broker will send the appraisal to the lender. The lender will have the appraisal review department "check" the work of the appraiser. Not all appraisal reviews are the same, so I will mainly speak to the appraisal review department that I spent some time working with.

Appraisal review is what can make or break a lot of deals. There is an entire department that does nothing more than review appraisals to see if the value is there for the lender to make a loan on the property. The company I worked for actually had lists of appraisers that were "black balled" or banned from doing any appraisal work for our company. We would NOT accept ANY appraisal they sent in. Sometimes the meat of the appraisal would be fine, but we would disagree with the weight the appraiser placed on an something, and we would cut the value by a few thousand, or many thousand depending on what we thought of the collateral.

Example: let's say we have 2 identical homes (bear with me on is JUST an example). one is 5 years old and sold for $300,000, and we are trying to determine what an idential house would appraise for, but it is 35 years old. Let's say the appraiser is trying to "push" the value, they might only subtract $1500 for the "age" of the property. So they bring it in at $298,500. Which house would YOU rather have?? For $1500 more, wouldn't you rather have a house that is 30 years newer?!?!?!

In a case like this, we might agree with the meat of the appraisal, but we might cut the value to $270,000 for the "age" of the property. I know this is basic, but does that make sense??? There are a million things that can be different with property, so an appraiser has to figure a value for what each part that is different is worth....and the lenders appraisal review is there to see if it makes sense BEFORE they lend on the property.

Appraisers can inflate value all day long...but IF the lender is doing their job, they won't be able to get away with it. The problem that arises is, when the times are good....what's a few grand here or there, we want the business, and we want to gain market share. After all, the property will go up 10k in the next month or two anyway, and we (the lender) will be fine.

Also, don't think that the "sales" side of the buiness doesn't put pressure on the "operations" / "appraisal review" side of the business to get things done. Yes, there ARE hookups when people will sign off an appraisal that might be questionable, or not cut an appraisal as much as they would like so that "John Doe" will get to close the deal. Starbucks cards, Best Buy cards, and Nordstrom cards seem to buy extra favor with some in these situations.

I will add, that as the appreciation is slowing, the appraisal review departments of the major lenders ARE tightening their standards. It probably isn't as much as many of you would wish, but it is slowly happening.

I hope that helps to add some light to the appraisal part of the business. I will do my best to answer your questions and comments.



Blogger Flatteningyieldcurve said...

My friend was doing some research on sub prime lenders. He contacted one posing as a 24 year old with an income $120,000. Few assets and student loans to pay. He attempted to get approval for no money down mortgage for $900,000. To purchase a 1 BR condo in New York. Needless to say he was appoved. When he asked how the lender was able to appove him. THe lender answered, "it is amazing what you can do with appraisals these days" Yes it is truely amazing!

12/06/2005 8:02 AM  
Blogger EPRobert said...

My wife's co-worker just bought a $450k place on one, $23.00 per hour income (less than 50k a year). Makes me feel like crap because we make double that and are afraid to stretch to $350!!!!

12/06/2005 11:02 AM  
Blogger SoCalMtgGuy said...


Be patient, save money, you WILL be rewarded.

You are doing the right thing!


12/06/2005 12:02 PM  
Anonymous Anonymous said...

I'm curious about something. What would you guys do with someone with a low-ish FICO score (say mid-6s) whose score was low because of non-use of credit versus abuse - who had say 30% to put down on something and was only buying 2x their income. Would such a person be stuck in a subprime loan?

12/30/2005 2:34 PM  

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