This article examines the effects that the too-little too-late appraisal legislation will have on home prices.
Trying to get the cat back in the bag now will depress asset values
Real estate brokers and agents in transactions requiring appraisals are now being directly targeted by California state agencies. They stand accused of improperly influencing appraisers to cook up valuations on property to get the opinion of value needed on the appraisal report. The motivation: to close sales transactions that are contingent on funding a loan secured by the property.
The state’s weapon-of-choice to protect apparently weak-willed appraisers from undue influence is a recently released list of “thou shalt not” activities. This list has been cobbled together and aimed directly at real estate brokers and agents in real estate sales transactions by the Department of Real Estate (DRE), in cooperation with the Office of Real Estate Appraisers (OREA), the Department of Corporations (DoC), and the Department of Financial Institutions (DFI). [See DRE Spring 2009 Real Estate Bulletin]
This list comes too little, too late. While the California legislature was busy enacting the code to keep appraisal values in check and licensees in line during the 2003-2006 housing boom, the four state regulatory agencies were curiously silent on these appraiser-licensee collusions.
The boom fed the pricing debacle by allowing real estate valuations to exceed the historical trend line, that ever-present equilibrium line price of property, by more than double the true market value of the properties. It seems no one wanted to spoil the party as the number of individuals looking to get in on the action increased the DRE licensee ranks by over 200,000 during the boom. As sales dry up, they too will suffer the costs of letting everyone involved to party on into infinity.
The agencies have now discovered that appraisers who were unduly influenced by licensees to arrive at specific values are to blame for the market conditions we are living with today. However, they didn’t take action to stop the dubious conduct outlined in the current DRE Bulletin when it would have been effective.
The Made-As-Instructed (MAI) appraisal has been openly and not at all subtly joked about within the real estate industry since WWII. Instructors in appraisal classes during the 1960s’ boom all cautioned attendees (mostly county assessor personnel) to avoid being influenced by a transaction agent’s need for a certain valuation to fund the loan and close escrow. Unfortunately, undue influence will not end with the advent of this list, but it’s a start.
As it now stands, it is considered improper for a real estate broker or agent to influence an appraisal by employing any of the following conduct:
- threatening to or refusing to pay for a completed appraisal report, whether or not the sales or financing transaction has closed;
- threatening to or refusing to work with the appraiser again;
- threatening to or fire the appraiser;
- implying or promising to compensate the appraiser with future business, promotions, or extras;
- asking the appraiser for an estimated value or for a list of comparable sales before the appraisal report is completed;
- telling the appraiser the desired value for a property or the amount needed for a loan (however, a copy of the purchase agreement which would contain the price agreed to and the loan contingency can be given to the appraiser);
- coupling the authorization for the preparation of an appraisal report or payment of an appraisal fee with an estimated value prior to the completion of the report or valuation reached upon completion;
- asking the appraiser to remove adverse property information from the appraisal report;
- giving the appraiser/appraisal company/appraisal management company, or anyone or any entity related to them any stock, financial, or non-financial benefits;
- blacklisting an appraiser without justification and prior written notice; or
- ordering out, obtaining, using, or paying for a second/subsequent appraisal or automated valuation model (AVM) in regards to a mortgage financing transaction without good cause or written, pre-established reviews/guidelines.
However, the state agencies do state that a broker or sales agent may always ask an appraiser to:
- prepare an appraisal report on a property [See first tuesday Form 228];
- consider additional property information [See first tuesday Forms 228-1 and 318];
- provide further detail or give an explanation of how the appraiser came to his conclusion; and
- correct factual errors in the report. [Calif. Civil Code §1090.5]
This “thou shalt not” list threatens action against licensees which will initially deter them from voicing legitimate concerns about the parameters of the appraiser’s approach to the valuation of the property:
1. What can licensees properly bring up when talking to an appraiser upon letting the appraiser onto the property? Had they best say nothing at all, or avoid meeting with or talking to the appraiser completely?
2. Can a licensee orally discuss the merits of the property as seen by the agent, the seller, or the buyer, or the strengths and weaknesses of comparable sales the broker or agent have knowledge of? Brokers and agents do have and do give their opinions of prices (BPOs), which by law must be accurate and based on all readily available information, and the brokers probably know more about the property and its value than the appraiser who is totally detached from the real estate transaction.
3. Why does this list single out conduct relating only to appraisals ordered out in relation to mortgage origination? For example, does this list apply to appraisals ordered out by a buyer under a contingency for the further approval of the price the buyer has agreed to pay for the property he has in escrow?
4. Can a DRE licensee ask the appraiser to not include real estate owned (REO) resales as comparable sales for the purpose of setting the value of the property his buyer is acquiring when the agent’s transaction is contingent on obtaining a purchase-assist loan? A recent bankruptcy case held that REO resales are not comparable sales and cannot be used for setting a property’s fair market value (FMV) when the property is security for a loan. [In re Serda (October 17, 2008) __BR__]
These are the types of questions the agencies need to put their heads together to answer. Leaving these questions hanging over the heads of licensees at the most stressful time in their professional careers (due to the great depth and breath of this multifaceted economic downturn) leads to uncertainty amongst the very gatekeepers buyers and sellers have no choice but to depend upon for protection against the improper conduct of appraisers.
Further, you can bet appraisers will be frightened in their initial response to this list. As a result, they will produce many ultraconservative valuations until an exchange of information between appraisers and transaction agents occurs and a widespread understanding of what is proper or improper can be established. All these emotional reactions to current events—fear of the uncertain—drive down valuations no differently than the boom fever—fear of being left out—drove everything up.
If you believe a person has attempted to improperly influence an appraisal, check the California Real Estate & Financial Services Status Check to determine whether that person is licensed by a state licensing agency. You can file a complaint with whatever agency controls that person’s license by notifying them about the misconduct of their licensee in the appraisal process:
- California licensed mortgage brokers and real estate licensees are reported to the DRE;
- California consumer/commercial finance lenders/brokers, and residential mortgage lenders/bankers and servicers are reported to the DoC;
- representatives of state-chartered banks and credit unions are reported to the DFI; and
- California licensed real estate appraisers are reported to the OREA.
When the dust clears and all this discussion comes into focus, those real estate sales agents and brokers now listening and learning will have become better informed. They will have learned how they can control the conversation they will inevitably have with appraisers. Appraisers will also know what is out of line and will be able to confidently correct the direction of the conversation and set expectations.
As an aside, let’s hope asset inflation isn’t tied to the monetary policy of this nation so that conversations between transaction agents and appraisers alone can keep future prices under control. Who will take that bet?