Wall Street Journal Recognizes New Appraisal System Bad for Consumers

After being blamed for helping to inflate home values during the housing boom, the appraisal business is again coming under fire.

Squeezed by a drop in fees, some appraisers are compensating by driving long distances to handle more assignments. Their wanderings are raising questions about whether they know enough about the neighborhoods to accurately assess the value of homes -- which has implications for both home buyers and owners.

Bob Blake, a flight-test engineer who lives in Palm Beach Gardens, Fla., was shocked when an appraiser who traveled 44 miles from Port St. Lucie, Fla., valued his home at $228,000 in late May. Mr. Blake's mortgage broker, Skip McDonough, protested to the appraisal-management company, Nations Valuation Services Inc., that the appraiser had failed to look at comparable homes. Eventually, Nations sent another appraiser, who valued the home at $295,000. The dispute delayed Mr. Blake's refinancing by more than six weeks.

A spokesman for Nations Valuation declined to discuss the details of the appraisals but said, "We feel we handled it properly."

Appraisals are supposed to shield home buyers from paying too much and lenders from overestimating the value of collateral. If appraisals come in too high, buyers may overpay, making defaults more likely. If they are too low, it becomes hard to sell or refinance homes. Many real-estate agents and builders say that the pendulum has swung too far toward caution, and that lowball appraisals threaten to snuff out any recovery in the housing market.

In June, Evie Salazar traveled about 75 miles from her office in Corona, Calif., to do an appraisal in Cathedral City, Calif. Usually, Ms. Salazar says, she tries to work within about 40 miles of her home, but business was slow at the time she accepted that job. "You do what you've got to do at times to feed the family and pay the bills," she says.

Ms. Salazar, an appraiser for the past 12 years, says she researched the Cathedral City market carefully and did a good job. But many real estate agents and mortgage brokers charge that some wandering appraisers are coming up with dubious estimates. Too many appraisers are getting assignments in places where they "just don't know the nuances," says Rick Turley, who oversees the San Francisco Bay area for the Coldwell Banker real-estate-brokerage chain.

The debate over appraisals is inflamed by a natural tension: Real-estate agents and mortgage brokers, who need to complete transactions to collect their fees, are unhappy when an appraiser nixes the sale price. But it also suggests that there may be unintended consequences to an attempt by New York Attorney General Andrew Cuomo to reform the appraisal business.

Using the threat of litigation, Mr. Cuomo last year prodded the government-backed mortgage investors Fannie Mae and Freddie Mac into adopting a new code of conduct for appraisers. Since those two companies provide funding for the bulk of U.S. home mortgages, the code, which took effect May 1, has become the national standard for most home loans.

The code bars loan officers, mortgage brokers or real-estate agents from any role in selecting appraisers. One result is that more lenders have outsourced the selection to appraisal-management companies, or AMCs, which take a sizable cut of the appraisal fee, often 40% or more. The AMCs pay appraisers as little as $175 to $200 per assignment, compared with the $350 or more that many get when they work directly for a lender.

"Many appraisers are struggling to survive on the fees paid by the AMCs," says Bill Garber, a spokesman for the Appraisal Institute, a trade group based in Chicago. Appraisers are being asked to work faster even as their fees are cut, and that conflicts with the goal of getting reliable appraisals, he says.

Squeezing Appraisers

Appraisal-management companies deny they are squeezing appraisers too hard. A spokesman for banking giant Wells Fargo & Co., which owns an AMC, says it "has invested substantial time and resources in the quality control of the valuation process to, among other things, ensure that individual appraisers have relevant knowledge of the markets and properties they review." A spokeswoman for Mr. Cuomo says the new code is working well and helping protect appraisers from pressure to inflate estimates.

Appraisers are required to follow a set of national rules known as the Uniform Standards of Professional Appraisal Practice. Among other things, those rules require that "an appraiser preparing an appraisal in an unfamiliar location must spend sufficient time to understand the nuances of the local market."

Yet some appraisers who travel long distances to find work may be hard-pressed to spend "sufficient time" in an unfamiliar market. LaRon Hall did an appraisal in early June on a home being sold in Palm Desert, Calif., about 86 miles from his office in Rancho Cucamonga, Calif. He says he needs to accept jobs within a broad swath of Southern California to earn a living. Under the new appraisal code, Mr. Hall says, "you're getting less money and you're having to do more. ... It's definitely a sticky situation."

Mr. Hall appraised the three-bedroom home at $186,000, far above the $138,000 for which it sold in late June. Concerned about accuracy, the mortgage lender that financed the purchase rejected Mr. Hall's appraisal and ordered one from another party before making the loan, according to a person involved in the transaction.

A spokesman for Equifax Inc., whose AMC unit ordered the appraisal in Palm Desert, says Mr. Hall has an excellent record on appraisals and that Equifax has a "rigorous quality-control process."

Though consumers can't choose their own appraiser -- unless they're paying cash for a home -- they should request a copy of the appraisal and examine it to see whether it contains any errors in the description of the property and whether the nearby homes, or "comps," used to gauge its value are truly comparable. If they aren't, the consumer should present any evidence of flaws to the banks and insist that the appraisal be reviewed and redone if necessary.

Carol Kearns, herself a real- estate agent, complains that an appraisal done on her own Montvale, N.J., home in June was "an unprofessional guess." The appraisal came in at $730,000, which was more than enough to qualify Ms. Kearns and her husband, Robert, to refinance their mortgage. But Ms. Kearns, upset at what she sees as sloppy work, maintains that the home is worth more than $900,000.

The appraiser was Uchenna Eboh, whose employer, Kobi Group, is about 46 miles away in Mendham, NJ Ms. Kearns says Mr. Eboh didn't seem to know her neighborhood and used dissimilar houses as "comps." Among those, she says, were two on much smaller lots and one on a busy street corner.

'Reasonable Proximity'

A colleague of Mr. Eboh says he couldn't comment and referred questions about the appraisal to the AMC that ordered it, Lender Processing Services Inc.'s LSI unit. A spokeswoman for LPS says the appraisal "followed the processes required" by federal standards and LSI's "more-stringent requirements." She says LSI "only uses local, knowledgeable appraisers located within a reasonable proximity to the properties."

Sometimes appraisers are called on to express opinions on the values of faraway homes without even seeing them. LandSafe, an appraisal unit of Bank of America Corp., in May assigned Jane Price, an appraiser in Dallas, to review another appraiser's estimate of a home in Cathedral City, Calif. Ms. Price didn't visit the neighborhood in question, but her review cited nearby homes she used to determine comparable value.

Ms. Price declined to comment. A spokeswoman for Bank of America says Ms. Price was asked to do only a "desktop review" of the original appraisal. "California is a state which has a lot of market information available, which allows a reviewer to gather credible data about a property even when they are not in the immediate area," the spokeswoman adds.