Intense pressure is being brought to bear on honest appraisers to inflate their estimates by greedy, reckless lenders and Realtors, who just want to close the deal –and damn the consequences. Is this just another inevitable consequence of the overall credit and greed-driven bubble, or one of its root causes? Can anything be done, especially after the bubble (thanks to politics, reforms rarely happen during a bubble) which might prevent this in the future? Do you see any recent evidence that Realtors, appraisers or lenders are taking measures to CYA?
Here’s a good article on the problem:
“Home Insecurity - How Widespread Appraisal Fraud Puts Homeowners At Risk”: tinyurl.com/7ru64
” Serious conflicts of interest pervade the mortgage industry. Lenders, brokers, and real estate agents often have an incentive to inflate the value of residential properties. The process of appraising a property - among the most important steps in either the purchase or refinancing of a home - is sometimes done dishonestly as appraisers go along with requests to overstate the value of a home.
” Appraisal fraud can lead homeowners to borrow more money than their homes are worth, putting themselves at risk of being “upside down” in a home - e.g., not being able to sell for a high enough price to pay off their mortgage - even if there is no downturn in the real estate market.
” Up to half of all appraisers have reported feeling pressures from lenders or brokers to overstate property values. Many appraisers go along with these pressures out of fear of losing future work. Appraisers who have not complied with such pressures report not being paid for work and being blacklisted by lenders and brokers.
Quite a few appraisers appear to agree with this assessment and are petitioning the federal government to step in and do something about it:
“Appraisers Petition - Concerned Real Estate Appraisers from across America”: appraiserspetition.com
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FollowBefriend (1)119 threads4,785 comments HARM's website
Here's an interesting trend in the CYA department:
Inman News August 8th, 2005:
In October 2004, the California Association of Realtors announced the release of a new disclosure form, the "Market Conditions Advisory," which states, "In light of the real estate market's cyclical nature it is important that buyers understand the potential for little or no appreciation in value, or the actual loss in value, of the property they purchase."
The form also states that it is "impossible to predict future market conditions with exact accuracy," and describes "hot" versus "cool" real estate markets. Many real estate markets in California have not experienced a cooling trend in the past 10 years. "In a less competitive or 'cool' market there are generally more sellers than buyers," the form states, "often causing real estate prices to level off or drop, sometimes precipitously."
The form also states that in a "hot" market, "some buyers may offer more than originally planned or eliminate certain contingencies in their offers." Buyers are responsible for determining a price to offer on a property, and "If your offer is accepted, you may have 'buyer's remorse' that you paid too much,'" the form states.
FollowBefriend (1)214 comments
Appraisal fraud is a complicated concept in this market. In addition to problems of losing business, etc...when RE is appreciating so quickly (at least on paper), how can an appraiser be certain of his determination to within 10-15%?
And what's the harm in estimating the price at the date of closing instead of the date of appraisal? Those sixty days could be a 5% increase! (I know, the appraisal report has a DATE at the top, I'm just saying that it'd be real easy for someone to justify.)
My only experience with appraisal fraud (I hate to use that word...so uncouth) was in a bit of a reversed role. I, as the buyer, wanted the house badly enough that I encouraged the appraiser to report a higher number so I could get the mortgage approved. (We had already agreed on a price, sans Realtors® -- just two guys in a living room watching a Celtics game :-) . The seller was my landlord, and when the first appraisal came in $20k too low, I spent $10k redoing a bathroom in my apartment and tried again. With a little encouragement, the appraiser agreed that the new bathroom was worth $20k (must have been my handiwork). He probably fudged his number upward by $5-10k, which sounds like utter peanuts today...but at the time it felt like a big deal.
Ahh, the things we do when we're young and don't know any better...I'm definitely glad I did it, though.
FollowBefriend25 threads1,690 comments SQT15's website
I just watched a story on the news about a homebuilder that is being sued for selling homes they claimed had a certain square footage, but were later found to be about 150sqft smaller than claimed. The builder (JTS homes) is saying that it is a marketing misscommunication, but there are over a hundred complaints in many different developments.
I think by the time the whole bubble sorts itself out we are going to hear so many stories of fraud it'll boggle the mind.
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We probably do not want to blame the appraisals too much... the buuble must run its course. This would have been dragged over a much longer period of time if prices were not inflated so quickly to the breaking point.
Excess liquidity is still the root cause of the problem.
Excess liquidity is still the root cause of the problem.
I agree but rampant greed and fraud follow along the same path. Anytime there's a mania there will be fraud. Heck, just look at how much of a problem identity theft is these days; there will always be someone out there looking to take advantage of the unwary. But when you have a system already out of whack, and then you add people to the mix who are ready and willing to make it worse just for their own gain, it makes an already growing problem that much worse. I doubt there will ever be a way to really know how big an impact fraud has on an asset bubble, but it does factor into it.
how can this be solved? by regulating the credit securities market and making them available to the public. we should offer ’stock options’ in MBSs for a local area to residents who buy in.
Many small investors have more MBS exposure than they think. Many bond mutual funds are big purchasers of these supposedly AAA rated instruments.
I think it's interesting that there are people who want a higher appraisal who do not know the whole story (higher property taxes). That seems to be more like background noise rather than a full understanding that "yes, the appraised value will be higher but you will also have to dig deep in your pockets for more money." So whether you fold it into your monthly mortgage obligation or pay twice a year, it's still can be a considerable hit, especially for people who are already marginally making the payments.
Of course, the NAAVLPs will make light of these types of things for the buyer...temporarily. But we know how that will turn out when those 1/1 and 3/1 adjustables adjust. My guess is that some of the foreclosures hitting the books now are 1/1, and the 3/1 people are going, "hmmm....was that really a good idea what we did?? What was that date again? October 17th? Ok, thanks."
I'm sure the people desiring the high appraisal are the sellers more than the buyers. But in this market everyone wants to say 'my house is worth ___!
Although when a house is refi'd with a higher appraisal does that change the property taxes? IF so, you'd be stupid to go for that high appraisal but stupidity is all too common these days.
Sacto., in CA a refi doesn’t change the property tax basis.
I’m sure the people desiring the high appraisal are the sellers more than the buyers.
That's true. But there may be more people than we know who, like quesera, wanted a higher appraisal when he was negotiating with his landlord.
Here is some information I wasn't aware of....I got it from an appraisal and consulting firm's page: tinyurl.com/ey3eq
"Once equity in the home reaches 20% you can eliminate the PMI and start saving immediately."
Has anyone here who has PMI taken advantage of that? Fortunately, I don't have PMI in my current loan but it sure is good information for future acquisitions.
Some silly buyers also want high appraisals too... they want to feel like buying a bargain.
"Look, I just bought this 700K 1000sf 1950 house. And the apprasisal came in as 750K. I made 50K already!"
How is the market up there? How much do you think it will correct? It is probable that we will move there in the future.
CentralCali, I think he probably just realized that the thing will implode before he leaves...
Or perhaps he is paving the way for a 50bp increase in September?
I 'flipping' through the channels last night and there was a program on ch. 9 that discussed the rising RE in the BA. They interviewed a RE agent who just recently left his job as a bag boy at Albertsons. Fast forward 4 years, and now he is living the high life, driving a new 5 series BMW and living in a million dollar plus home in Santa Rosa.
There also was an interview with a couple who make a combined income of $100k/yr, and how they were able to purchase a $950K home with an IO loan. They interviewed their mortgage broker who was walking around his office in shorts and bare footed. What a TWIT! The couple’s monthly interest payments are around $3600 plus taxes plus insurance. After two years, they will have to pay an extra $800/mo. for the principle, and the loan could adjust upwards, if the interest rates rise. If rates are 2% higher in two years, their monthly mortgage would now be $6120, P&I plus taxes plus insurance. How in the hell can you live like that? What are these people thinking/smoking? What if one of them or both of them lose their jobs?
The gist of the program is that none of these people are worried about falling RE prices or rising interest rates.
Hmm..Well, we shall see.
what incentives does the appraiser have to appraise higher or lower?
For some...the almighty dollar. For others....having a job, a stream of clients. Without clients, they don't work. There is a lot of intimidation going on resulting in appraisal fraud. Having gotten sick of the intimidation and lack of integrity, a lot of appraisers are fighting back.
Silly people in silly valley... no sense of crisis of risks whatsoever. It would a crime not to profit from their demise.
They interviewed their mortgage broker who was walking around his office in shorts and bare footed. What a TWIT!
Now now, lets not insult TWIT. :mrgreen:
Again, this is so reminiscent of the tech boom and all the so called success stories then. Sure, the money was flowing in, for awhile. But every boom has its bust. I'm not aware of much day trading going on now so it'll be interesting to see where all these realtors are in a few years.
And speaking of appraisals...you should see the LV listings on craigslist. There is one listing where the owner is bragging (that's novel) that the asking price is lower than the appraised value.
Other listings? A lot of "rent-to-own w/tax benefits". Desperate sellers?
Can you fix the graph on the front page of the blog? It ends on Sep 01 in my browser.
Is that how everyone else sees it too?
btw- I am getting a lot out of these discussions. I wish they were threaded. Is there any way we can discuss these things on a threaded forum? ( i know has been mentioned before )
It is currently semi-threaded alread. ;)
yes, but how does the appraiser get paid? Is he/she working with the broker? isnt that the reason why these are two different jobs?
The appraiser works on behalf of the lender and in this market they are constantly being pressured to "hit the number" that the real estate professionals are looking for.
“Once equity in the home reaches 20% you can eliminate the PMI and start saving immediately.”
Has anyone here who has PMI taken advantage of that? Fortunately, I don’t have PMI in my current loan but it sure is good information for future acquisitions.
Yes, I did that. We bought our home with 10% and a 10% "piggyback" second. After the home had appreciated enough, we refi'd at a 75% LTV loan at a 30 year fixed 5.25% rate.
Another quoe from that article:
"All [lenders and brokers] want to do is hit the number because if they don't hit the number the deal doesn't go through and if the deal doesn't go through they don't get the commission..."
Dang typo. :-( quoe = quote
A bit off topic but…what the hell. What are the general feelings about Greenspans latest “Cover his Ass” comments? He basically came out and said (not even in Greenspanese) that there is a problem, a big problem in the housing market.
I think this is very significant. And it will be interesting if his words alone will hold enough water for people to heed the warnings (as the Govenor of the Bank of England was able to do so far). Full article in link below. Personally, I try to give people enough room to act like mature adults and expect them to make rational decisions, but, alas, that really doesn't work either. People make irrational decisions every day. (You know: uh, Dude...that train is coming faster than you think. Do NOT try to cross that track now. Oops....too late. Bad decision. :-( ) Also count the people whose life is based on how they look compared to "the Joneses". Poor sheeple. :-(
When it's all said and done, though, some people will learn invaluable lessons (the rest of them I will remember in my prayers). And those lessons can be taught to the little grasshoppers who eagerly seek knowledge and will *listen*.
(I'm getting hungry. Geez, it's after 1pm already!)
have you ever read the textbook for real estate school? it is written for junior high school level reading comprehension.
When I was in college earning my journalism degree, the teachers told us the average newspaper is written at a 6th grade level so the average person can comprehend it. It explains a lot doesn't it?
FollowBefriend1 threads973 comments
When prices are fallng, the game for the appraiser usually becomes: “I will cover both the bank’s and my own ass by lowballing the price an extra 20K to 40K.”
Lowballing RE in Marin? I'd love to see that! Value seems like such an "inexact science". It the coming years, I think it will be pretty hard for the average homebuyer to have an accurate idea of value...perhaps that will inspire the consumer to better educate themselves? But, in the near future...if "values" on recently sold homes drop, will buyers/investors get litigious--or are they SOL?
Jack--btw: remember that SA cottage for $800K? The price dropped this week to $774.
Re: new thread
I'd be happy to put it up for you, but since this thread's still active and small yet, why don't we wait until tonight or tomorrow to start the new one?
Boy, Did I miss a couple of interesting days ????
Seems to me that people get stirred towards the end of the week.
(bad week at work perhaps)
Couple of comments:-
1) Most loans in Oz are with variable rates. Being variable does not seem to damage the market too much.
2) I am not aware of stats of I/O loans but I think that they are a minority.
Even so, RE market here in NSW has fallen, regardless of loan products. I guess you inevitably can't beat fundamentals.
3) Wouldn't the appraisers be responsible (read liable) if their valuations were way off the mark.
4) Even with the new bankruptcy laws won't the banks be in a pinch if loans go bad. If a person is bankrupt, and the RE doesn't cover the loan (including sale of primary residence etc), how can the bank count the outstanding debt, to a bankrupt person as an asset on their balance sheet.
@Vertias: great thread idea, I am looking forward to it.
@all: Does anyone know the "going rate" for mortgage paper? If an originator makes a loan for $500k (total term interest payments ~$700k), how much do they want to sell the paper for? Is the value of the paper based on the borrower's risk category? If so, does it change over time?
Just thinking about the refinance industry. I would think the original lenders (or current paperholders) would be extremely motivated to also process the refi loan. If they bought the paper for any premium over the remaining principle...
The general statistics are based on huge numbers, yet each house is so idiosyncratic and different from the next (in Marin County) that it seems it will come down to your awareness of the specific market and comparables for the house type you want, against the GENERAL statistical trend of houseprices (which is always nice and slow)
So true--isn't Marin the definition of idiosyncratichousing? Isn't that great? While there aren't many identical rows of track houses (thank god), the variety does make it challenging to understand the market. Like you said--research and knowledge of particular areas are my best bets.
"The general “big picture” i.e, stagnation, correction, bust etc., will be easy to know, and it is SO SLOW that it will never remove the “guess” aspect with reguards to individual purchases entirely..."
Exactly! While we keep talking about a "bust", I think whatever effect to RE prices will be a slow burnoff of "value", perhaps over years. (I do realize I'm contradicting my earlier bearish guess) We may be seeing the signs already, but the evidence will grow slowly. Perhaps we research things similarly, because I like to get the back-end knowledge/rationale before I ever make a decision, so I can recognize a good thing when I see it.
I'll finish with a little bit of anecdotal info. I was south today, driving through Los Altos, and could've sworn seeing perhaps 50% more sale signs than late July. Proves nothing of course, but I "felt" a change.
Run a few comparisions with the house price 100K less and the interest rates at 7.5 to 8%, and see what would produce a higher payment in your scenario.
Jack--good advice, in some cases this might work in our favor. Yet, seeing how "UNGODLY" things have risen locally during the bubble, I think we'll hold off, since we can save more, pay off more principal and have less property tax. Calculating a 200K drop in mortgage puts us ahead (even with a higher rate.) What goes up may well go down, and in any case we have a nice place to live. As "buy before it's too late", drove homebuyers before, perhaps we'll soon see "wait and see--don't overpay". And we're doing just that.
So you may just really be looking at the choice between interest rates costing you or homeprice costing you if you wait. Which will be greater, in the month to month and long term? They could BOTH be higher if you wait. Or, home prices could correct, but rising interest rates could make the payment similar anyway.
Jack, the affordability index for CA state-wide is already 16% (I think the numbers will go lower when they release the July figures --odd how CAR is so slow in updating these ;-) ). For Marin, it's now 10%: car.org/index.php?id=MzUyODE= How much lower can it go before no one --save Sauce-- can afford to buy here?
IMHO, interest rates --fixed and adjustable-- have nowhere to go but UP from here (see Greenspan's recent bearish comments on housing), so there is precious little upside left in housing prices. Home prices cannot and will not defy gravity forever, and the irresponsibly loose lending (born from "Easy Al's own negative real interest rate policies & the MBS effect) will not last forever. It's not IF housing prices will correct but WHEN.
You can fix the interest rate, but the home price/value will always fluctuate. The fixed interest rate DOES have the flexibility of taking advantage of lower rates though if they come down.
Buy in a few years after prices have corrected/bottomed out at a (likely) higher interest rate using a non-NAAVLP amortizing mortgage at a much lower basis price. The next time the economic cycle brings mortgage rates down, you can refi and get the best of BOTH worlds: lower asset price and lower rate.
The next time the economic cycle brings mortgage rates down, you can refi and get the best of BOTH worlds: lower asset price and lower rate.
And that's another real possibility! Thanks for the practical advice, Jack and HARM.
FollowBefriend2 threads362 comments
Theorem: MP was ruining this site.
Test: Ban MP. Observe.
Result: This thread.
Proof? No. But compelling affirmative evidence.
Also, a big hand to Shmend Rick.
Excellent posts, stimulating excellent discussion.
Still, depending on the homeprice, a 200K correction might be a bit of a stretch, as well as a bit of a wait.
Perhaps, but we're willing to wait...we have time after all! ;) Let those homes sit, while they expect to get bubble-peak prices.
Since over 5 years I've noticed a 50-100% increase in "value" for comparable homes, I don't think a 20% drop is that unlikely. But that's just my take; we'll see how much post-investor "demand" is there if prices only dip 10%! :)
Theorem: MP was ruining this site.
Test: Ban MP. Observe.
Result: This thread.
Proof? No. But compelling affirmative evidence.
The improvement on the quality of posts and volume of participation post-MP has exceeded my expectations. If I had known the impact would be this great, I would have banned him a long time ago –even without a vote.
FollowBefriend (28)169 threads4,156 comments Premium
All appraisals are fraudulent based on the realtor and lender's threats to stomp the fucker and never give him another gig if he doesn't come up with the number he is told he going to pull out of his ass.
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