Housing Appraisals: Still Blowing Bubbles?

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E-mail and other correspondence between appraisers and AMCs reviewed by BusinessWeek show that at least some AMCs do press appraisers to reconsider their valuations at the behest of lenders. In one appraisal ordered last year by WaMu for a refinancing near Los Angeles, an AMC called Lender's Service told the appraiser her figure was too low. The fax read: "Please correct the following issues and resend appraisal within two hours." The problem? "Appraised value is less than the borrower estimated value." The fax listed the borrower's estimate as $171,000. The appraiser's judgment was $150,000. (Borrowers and lenders sometimes favor a higher appraisal to support a larger loan.)

In other recent exchanges with appraisers, Lender's Service, the country's largest AMC, passed on complaints from borrowers, their real estate agents, or lenders, and suggested that appraisers find comparable home sales that would boost the estimated property value. In an e-mail earlier this year to an appraiser in southern California, a Lender's Service staff member said "the borrower is disputing the value of this report...[and] would like the appraiser to search for another comparable to support a higher value." The appraisers who submitted these reports declined to comment for fear of being blacklisted.

Lender's Service President Ronald L. Frazier says his company's hallmark is integrity. "We are a completely independent third party, separate from the transaction, and we maintain those firewalls during the loan-funding process," he adds. Frazier does note that "the code of conduct has provided our company with some business opportunities."

He says he's not familiar with any of the cases BusinessWeek brought to his attention, though he didn't dispute the authenticity of the communications with individual appraisers. He insists these episodes do not cast doubt on the company's commitment to appraiser independence. "We would never demand dropping [comparable sale figures] or eliminating comps," he says. Lender's Service is a unit of Lender Processing Services in Jacksonville, Fla.

DUBIOUS INDEPENDENCE

AMCs wield immense power over freelance appraisers. To earn a living, many appraisers conclude that they have to seek inclusion on an AMC's panel of preferred appraisers and abide by its dictates. Lenders generally have a few appraisers on staff, but the bulk of the work is done by outside contractors. At closing, borrowers will typically see a $300 or $400 appraisal charge. AMCs generally pocket up to half of that fee. The AMCs say they earn the money by managing orders and assuring accuracy.

The expansion of the AMC business ought to cause concern because of the backgrounds of some of the people jumping in. Catherine Lally, CEO of FHA Choice Appraisal Manager, says she launched the Clearwater (Fla.) company about six months ago after working as a loan underwriter for Premier Mortgage Funding, a large subprime lender now in bankruptcy proceedings. Lally has recruited about 600 appraisers so far from across the country. She uses craigslist ads and mass e-mails that promise to "double or even triple your appraisal business." She's also advertising to mortgage brokers, real estate agents, and others who previously ordered appraisals directly but will be barred from doing so under the new rules.

Lally's firm promotes itself as allowing appraisers to continue working with specific brokers and lenders—a seeming contradiction of the aim of the new industry code. "All [clients] have to do is put your name in the comment box when ordering an appraisal and I will send the order to you," Lally said in a mass e-mail to appraisers in December. "I will diligently try to keep the same business practices and standards they have with you. The only difference is they will not be able to speak with you directly."

In an interview, Lally acknowledges she is offering to help appraisers maintain their previous ties to brokers, agents, and lenders. "I help them keep their relationship if I really feel there is no contact going on," she says.

Larry Holzer surrendered his Florida appraisal license in April 2007 after regulators there found he had made numerous misstatements in an appraisal report for a $250,000 home. In a letter to Florida regulators, Holzer agreed there were some "data discrepancies in the body of the report." He said he was distracted at the time by personal issues.

Now Holzer is back in business, running an AMC in Clearwater called Global Appraisal Solutions. The company promises same-day inspections and delivery of a report within 24 hours. In an e-mail, he defended his credentials: "Appraisers and former appraisers are among the more qualified people in appraisal management," he wrote. "When or if such time should come where appraisal management companies are regulated, I can assure you that Global Appraisal Solutions shall be compliant."

Joni Herndon, chairwoman of the Florida Real Estate Appraisal Board, which handled the Holzer investigation, says a revolving door is allowing dubious characters into the AMC market. Speaking generally, she says: "It is not serving the public to revoke their license for dishonest conduct and then allow them to have an appraisal management company. We need to close that loophole."

Terhune is a senior writer for BusinessWeek based in Florida.