Why are we seeing so many low-ball mortgage appraisals?
Appraisals have become a real estate combat zone. Every owner wants a higher valuation, while the appraisal process itself is geared toward conservative estimates of value.
Appraisers must look at local comparable properties, or comps, when pricing residential real estate. During the past few years, a large number of transactions have been short sales, foreclosures and REOs (the sale of real estate owned by lenders), so it follows that comps often include results from distressed sales, especially in major foreclosure centers. Since distressed properties typically sell at discount, the comps reflect lower values.
In October, the National Association of Realtors stated that “appraisals generally lag market conditions and some changes to the appraisal process have been causing problems in recent years, including the use of out-of-area valuators who lack local expertise, full access to local data, inappropriate comparisons and excessive lender demands. In addition, before the beginning of last year, some lenders’ loan processors edited valuations, cutting them by a certain percentage.”
In some cases, according to NAR, appraisers are being asked to increase the number of comps used in a valuation from three to eight or more, meaning a far-greater probability that a distressed valuation will be used.
The traditional role of appraisals has been to provide an independent estimate of value to limit risk for lenders, borrowers and mortgage investors. In a sale situation, the lender will value a property on the basis of its sale price or appraised value, whichever is less.
Under recent federal rules, appraisers have a new independence, something that should be welcomed because it prevents another era of toxic loans, mass foreclosures and additional bank bailouts.
No less important, the new rules have not inhibited price increases – as NAR has reported, third-quarter home prices were up 7.6 percent from 2011, “the strongest year-over-year price increase since the first quarter of 2006.”
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