An appraiser I knew of once added a pool to a property because he needed another $25,000 to get the value a loan officer requested.
No, he did not actually add a pool. He just lied about the presence of a pool and used a pool photo from another appraisal report.
It was stunningly brazen fraud, and I did not let that appraiser go near any of my deals.
And yes, it was prior to 2008, and yes, that appraiser lost his license, and yes, he and many of the loan officers who used him ended up getting prosecuted.
But THAT is why regulators cracked down on appraisals in general so much after 2008. Appraisers were not just pushing values, they were often committing serious fraud.
Rate Carnage Stalls
Before I continue with appraisals, I want to briefly discuss rates, as the crazy markets have settled down a bit. Last week, rates were shooting up largely because so many holders of Treasuries were forced to sell to raise cash, per Brent Johnson. This was highly unusual because normally when stocks tank and the economy is threatened (by tariffs or anything else), rates fall. But last week, we saw rates rise at a pace we’ve rarely ever seen.
Anyway, rates fell 1/8% today, but we should still expect a lot more volatility, as there is way more going on behind the scenes than meets the eye.
We Were Able to Toss an Appraisal – And It Was Extremely Difficult!
We were able to get an appraisal tossed out last week and then have a property re-appraised at our expense – but boy, was it difficult!
Fannie, Freddie, and regulators make getting a new appraisal so difficult because of all the fraud that took place years ago – and I don’t blame them.
They, however, went too far, as is the case with most regulators.
To get an appraisal tossed, lenders have to convince underwriters that the appraisal itself is so flawed that it is effectively invalid.
Underwriters, though, are reluctant to sign off on these requests, as Fannie, Freddie, and regulators scrutinize these situations very closely – looking for any evidence of subjective reasoning.
Appraisals get uploaded into databases and notes are in the file too, so lenders are not able to just “hide” appraisals and then order a new one.
They have to prove to underwriters in no uncertain terms that the appraiser used invalid comps, ignored better comps, and was just negligent in general.
In our case above, the appraiser did not understand the neighborhood boundaries that significantly influenced values, and he was stubbornly clinging to a value conclusion based on comps from a vastly inferior (but nearby) area.
Our Appraisal Manager had to spend four full hours writing an analysis to get the appraisal tossed, but she was finally successful – thankfully – as the contract price was easily supported.
Brief History of the Appraisal Mess
I. Pre-2008: Wild, wild west and fraud galore (despite the fact that most appraisers were excellent and honest – to be clear). Appraisers had to get approved by various lenders, but comprehensive nationwide regulations did not exist.
II. 2009: Home Valuation Code of Conduct (HVCC). This was the first attempt at regulating the appraisal realm.
- No Contact With Appraisers. Most lenders adopted HVCC standards and they prohibited loan officers from directly contacting appraisers – to ensure appraisers remained independent.
- Appraisal Management Companies (AMCs). HVCC also encouraged the creation of large Appraisal Management Companies that managed large pools of appraisers. Loan officers were supposed to order appraisals from these AMCs, and the AMC would then in turn assign appraisals randomly to appraisers in the pool.The problem with this is that appraisers and the AMCs had almost NO ACCOUNTABILITY. Lenders would often get horrible appraisals and there was almost nothing they could do about it.
III. 2010: Dodd-Frank was passed, and it largely codified HVCC rules.
IV. 2011: Lenders start to build their own internal AMCs. Because the independent AMCs were so bad, mortgage banks started to build their own internal AMCs or appraiser pools, managed by appraisal managers who were not part of the loan origination process. This is what JVM finally did in 2015 because we had so many problems with AMCs. It is also why we left the broker channel for the mortgage banking channel, as the wholesale lenders in the broker channel often forced us to use their awful AMCs.
V. Today: Hybrid – Internal Panels and Loan Officers Are Again “Secretly” Engaging Appraisers. Most mortgage banks and even large broker shops now manage their own pool of appraisers via an appraisal manager. The reality of the situation, too, is that many loan officers are again engaging appraisers directly, even though they are not supposed to. Despite that fact, we are not seeing fraud, as appraisers are well aware of their potential liability and most are simply very honest people too.
While many AMCs have improved markedly too, we still think it is essential for lenders to have their own pool of appraisers and to have a very talented Appraisal Manager – to ensure compliance, to ensure we can get an appraisal thrown out on occasion like our superstar Appraisal Manager just did, to rebut weak appraisals, and to manage our appraiser pool in general.
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