Wednesday, May 23, 2018
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Real Estate

Owners pressure for high valuations to get bigger loans

Real-estate appraiser Charles Warren recently ran afoul of a San Francisco homeowner when he wouldn't promise to appraise the house at $2 million.

The homeowner was refinancing her mortgage and wanted a high appraisal to justify a bigger loan. “She said, `If you're not going to come up with the number I want, I'm not going to pay you,'” said Mr. Warren, who thought the house might be worth about $600,000 less than the homeowner's target. He lost the job.

With interest rates hovering near 40-year lows and home prices at record highs, millions of Americans are scrambling to tap the equity in their homes through refinancings or lines of credit. Most of these loans require appraisals. Higher appraisals typically result in bigger loans and sometimes better terms.

Appraisers from around the country say homeowners are increasingly pushing them to jack up the estimated value of homes. In the past six months, the Appraisal Institute, which represents 17,000 appraisers, has had a jump in complaints about homeowners threatening to withhold payment for appraisals that aren't as high as they want, according to its president, Alan Hummel.

Some lenders report similar patterns: “Homeowners don't want to be told that their home is worth less than they think it is,” said Doug Perry, a vice president at Countrywide Home Loans, a unit of Countrywide Credit Industries.

Peter Vidi, who runs an appraisal firm based in Greenbelt, Md., has just such a case sitting on his desk. The owners of a home in the District of Columbia who are refinancing their mortgage believe the property is worth $260,000. “But a prudent buyer would only pay $230,000 today for it,” he said. “We're telling them that a legitimate appraiser won't push value. That's a land mine that will ultimately come back to haunt you.”

The mounting pressure on appraisers highlights homes' changing role in Americans' personal finances. Formerly, homeowners strove to pay off their mortgages. Now, many constantly tap the rising value of their homes through refinancings and home-equity loans or lines. As a result, many homeowners are piling on debt that will make them vulnerable if the economy slows or if interest rates rise.

Even with historically low interest rates, nearly 1 percent of the 34 million loans tracked by LoanPerformance were either in foreclosure or 90 days or more delinquent at the end of May, the highest rate since the end of 1999, said Sheila Meagher, LoanPerformance's vice president of market research. What's more, she said, “We don't anticipate that's the end of it. We think we'll see a fallout in the next quarter or two.”

For some time, appraisers have complained that they felt pressured to deliver high appraisals on home sales so that real-estate agents and mortgage brokers could make bigger commissions and bankers could generate more loan fees.

Now, the push increasingly is from homeowners wanting to tap equity. Mr. Vidi, the Maryland appraiser, said pressures typically accompany a softening in home prices. Prices have been increasing rapidly in most markets, but he said, “There's going to be a downturn in the market eventually. When real-estate values slide down, people are going to be screaming.”

Inflating an appraisal not only is risky if housing prices fall, it also can be illegal. Lenders and homeowners have the right to report inflated appraisals to state licensing boards that regulate appraisers. In California, the Office of Real Estate Appraisers received 400 or so complaints against appraisers last year.

Homeowners can boost appraisals without pressuring the appraisers. Before the appraiser arrives, they can spruce up the appearance of the property. They can give the appraiser a list of all additions and improvements. Someone in a neighborhood with rapidly rising prices should collect information on comparable homes that have sold recently.

The appraisal industry could be blamed for bringing some of the abuse on themselves. A few years ago, after a spate of late or non-payment of appraisal fees by mortgage brokers, many appraisers began collecting their fees directly from homeowners before they inspected properties.

With borrowers controlling the payment, “now they have a pressure point,” said Mr. Hummel, of the Appraisal Institute.

An appraiser in Des Moines, he recently received a call from an unhappy homeowner who wanted the appraisal fee refunded.

“With my appraisal, the bank wouldn't give him sufficient money to buy the boat he wanted. “I said, `Buy a smaller boat.' He didn't like that answer.”

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