Overvalued Homes Causing Problems for Sellers in Down Market

As the South Florida housing market remains cool, Americans are confronting a problem that was easy to ignore during the boom: inflated appraisals of home values.

Insiders have often feared that appraisals are unrealistically high. Why would this be the case? Because appraisals help Florida home loan officers and mortgage brokers close the deal - therefore, they’re not very likey to favor the buyer. After all, ifa home is appraised at less than the buyer offered, the deal is likely to fall through.

Inflated appraisals in current housing market

Inflated appraisals didn’t matter much when home prices were rising at double-digit rates; actual market values would simply soon catch up. Now, however, prices are leveling off around the state. Some homeowners are finding that market value is below what past appraisals led them to believe.

Click to enlarge the following image, a recent chart and survey depicting appraisers views on this situation.

For sellers, the result is a necessary drop their asking prices. Some people hoping to refinance Florida home loans, meanwhile, may be unable to lock in new loan terms because they have less equity in their homes than they thought. Lenders and mortgage investors could also take a hit if it turns out the collateral backing their loan is worth less than expected.

Dubious appraisals have left hundreds of thousands of people at risk in the past few years who have bought homes with little or no down payment, or used almost all their home equity to finance home improvements or other types of spending. That has left these people with little financial cushion to deal with rising Florida home loan rates.

“Now it’s pay-the-piper time for people, and they’re finding out they don’t have the value in the house they thought they had,” says John Taylor, president of the National Community Reinvestment Coalition, a Washington-based nonprofit that supports low-income housing.

Inside the world of appraisals

Widespread discrepancies in appraisals can mean that at least one of the estimates was unrealistic. Iowa Assistant Attorney General Patrick Madigan, who coordinates with law-enforcement officials from other states on mortgage-related issues, believes the deliberate inflation of appraisals is “widespread” among loans to subprime borrowers, or those with flawed credit histories.

Jacquie Doty, an executive at Freddie Mac, predicts that inflated appraisals will lead to more foreclosures.

In the current market, most Florida home loans are sold to investors and risks are more spread out, making it less likely that poor appraisals would cause lenders to collapse. But many people in the real estate industry believe the appraisal system is overdue for reform, and investors who buy loans are asking tougher questions about appraisal procedures.

A natural conflict of interest

The appraisal system has a built-in conflict of interest: Appraisers often are hired by loan officers or mortgage brokers, whose compensation depends on how many loans go through. Appraisers, dependent on loan officers for their livelihoods, say they often feel pressure to come up with a number that will allow a home purchase or Florida home loan refinancing to proceed.

Another problem is that - unlike in the 1980s, when current mortgage law was enacted - around half of all Florida home loans are made through brokers rather than directly by closely regulated lenders. Mortgage brokers are lightly regulated in most states, and appraisers say brokers often apply pressure.

Joseph Falk, chairman of the legislative committee of the National Association of Mortgage Brokers, says brokers shouldn’t pressure appraisers to distort value estimates. But he advises appraisers to create and enforce their own ethical standards.

Even when all parties want an honest appraisal, that can be hard to achieve. We’re just talking about an opinion here.

In making their value estimates, appraisers rely heavily on “comps,” or prices paid recently for similar homes nearby. But those prices may be misleading. For instance, builders of new homes sometimes include in the sale prices such items as landscaping or contributions toward loan fees or settlement costs. Such “concessions” are rarely broken out in the sale price listed in public records, though.

Therefore, the appraised value is off base. This effects the amount a buyer can offer or a seller can set for his/her property.