Friday, July 1, 2016

Appraisal Companies Have Ruined The Process

During the run up in real estate from 2000-2008 there were a small percentage of appraisers that engaged in unethical and even illegal behavior. Padding appraisals to get higher values for greedy loan officers that were pushing cash out refinances. This practice contributed to the heavy losses and burden on the taxpayers during the "bailout" in 2009.

It stands to reason that the Congress would take action to limit this bad behavior in the future. And so they did with sweeping regulations and changes to the whole process of borrowing money for real estate. Senator Christopher Dodd and Congressman Barney Frank chaired to effort to create legislation to severely curb these and other bad practises.

Part of the legislation mandated that appraisals all be handled through a regulated appraisal company and that appraisers are to be randomly assigned to files with no interaction between the loan officer and the appraiser. This part makes sense as the shady dealings were often between the loan officer and the appraiser. The solution to one problem has created another problem, which has become multi-faceted.

Appraisers have begun to take on the government employee attitude of "I don't care". There is no accountability, there is no reason to put forth any genuine effort to do any kind of service. Appraisers are slow, they ignore common real estate time lines with impunity. They are now akin to employees in the department of redundancy department ;)

Furthermore the cost of appraisals which is now 100% borne by the buyer, has nearly doubled. I just had a client pay $925 for an appraisal with which has taken more than a month to complete. This was a $250,000 house. The appraisal company had all kinds of extra adds for location (which was not at all very far from town) mobile home, land size, etc. That same appraisal 9 years ago when the market was much busier than it is now would have taken half the time and cost at least 40% less money.

The appraisal is mandated by the bank to protect them from lending too much money on a home relative to its value. The buyer is paying for a report that is specifically for the benefit of the bank and is now being exploited and to put it curtly, extorted. With this new layer of shielding between the bank and the appraiser, I think it is safe to mandate the bank pay for their own appraisals.

Appraisals locally has become an extortion racket the likes of which you might find in a Sopranos episode. The buyer must pay what amounts to extortion and they have NO CHOICE in whom they "hire". There is no free market influence as the appraisers are randomly assigned. The free market is what keeps people in business working hard to provide good service at a fair price.

I believe that if banks were paying these outrageous fees, there would be a holy terror of change, and this cavalier attitude, slow work pace, and puffed up pricing would be under control faster than a downtown parking space is filled.

Dodd-Frank was designed to fix some genuinely gaping holes in the regulation of mortgages and for the most part it has been successful. The appraisal process however has become a Soviet style mess and needs immediate repair.

All of this ranting aside, for buyers and sellers it is important to note that the appraisal needs to be ordered very early in the process. Buyer's agents need to make sure the lender orders it immediately upon mutual acceptance of the purchase and sale agreement. Even with that, closing in 45 days has become a challenge.

I believe that this situation with the appraisals is a genuine consumer protection issue and perhaps our state and federal representatives should get a mailbox load of complaints from 'we the people'.    

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