Real estate’s ‘dirty little secret’

Real estate’s ‘dirty little secret’
‘Appraisal inflation’ a worry for housing experts
By Jane Wells
April 6, 2005

It is often referred to as “appraisal inflation” and it could be the dirty little secret of the housing industry.

The practice — when real estate appraisers bend the numbers to satisfy clients and stay in business — is a growing problem, according to real estate experts.

Appraisers say there is pressure on them to inflate home values, and there is concern that if people pay too much for their homes it could lead to more foreclosures if housing prices tumble. And banks could be left holding the bag.

Data show the problem is widespread.

A recent survey of 500 appraisers by the October Research Group, a provider of news and information to the real estate services industry, found that 55 percent of them personally feel pressured by sellers, agents, and even lenders to inflate home values by 10 percent. And one-third of the appraisers surveyed said they fear losing business if they don’t comply.

Jonathan Miller, CEO of Miller Samuel, an appraisal company in Manhattan, said he thinks 75 percent of appraisals are inflated. And Miller thinks honest appraisers are leaving the business as a result.

Congress recently introduced a bill to curb the appraiser issue.

The Ney-Kanjorski bill would prohibit agents and other outsiders from pressuring appraisers through coercion, bribes or extortion. It would also force a physical inspection for higher-cost loans instead of just using computer appraisal software, which can be manipulated, and it would force a second appraisal of a property that has risen in value over the previous six months.

However, Miller says the proposed bill does not address structural problems in the appraisal business, such as the fact that many lending institutions that hire appraisers profit from the outcome.

The wall is eroding between the loan sales department and quality control, Miller contends, and no one is worried about potential defaults if the housing market takes a breather.

So what if people start defaulting?

“I don’t think there’s a general awareness or concern about that,” Miller said. “The sales function, the people who are paid on commission probably won’t be there when those problems come in the future.”

The issue could evolve into the something similar to the savings-and-loan scandal of the late 1980s, Miller added, referring to the failed speculation and, in some cases, fraud that cost the U.S. taxpayer over $100 billion.

In California, meanwhile, an investigation into title insurance — the protection you must buy to make sure there are no other claims to the property you plan to acquire — is underway.

The state’s insurance commissioner is investigating alleged kickbacks by title insurance companies to realtors, lenders and builders.