After a fall in the number of distressed properties being marketed in Washington, DC and nationwide, banks have ramped up pressure on mortgagors by forcing homeowners into foreclosure or allowing them into a short sale. This increased activity comes in the wake of deals being made with loan servicers and state attorney generals after a pattern of “robo-signing” was discovered, where in many cases lenders were illegally forcing people out of their homes. But in order for lenders to start the process of separating a home from its owner, a valuation must be established. Those estimates of market worth are increasingly being made by contractors who lack adequate training and experience.
A recent survey by my company finds there are more than 322 registered short sales and 100 homes in foreclosure sale in all of Washington, D.C. These distressed properties are not limited to low to moderate income neighborhoods. Many are in upscale subdivisions where owners pay more in taxes than most people earn in salary every year. Regardless of the location, houses in default exert downward pressure on their respected real estate market. Sellers wanting or needing to sell are often the second choice to a similar house selling at a discount. Make no mistake – it is still a buyer’s market. A return to a balanced market with equal numbers of buyers and sellers wishing to exchange real estate is not expected until after the 2012 Election. Pricing policies by banks in many markets often retard recovery by putting pressure on those making valuations to overprice properties being offered for sale.
For District of Columbia homeowners struggling to stay afloat, those who are unable to paddle through loan modification, sometimes the only option left is a short-sale, where the bank is willing to accept a lower amount than what is owed on the mortgage in default. But before a lender agrees to the sale, they more often than not rely on real estate agents to value properties that are “underwater,” instead of a licensed appraiser.
One has to wonder why this is happening, being that banks have historically only relied on the opinion of a licensed real estate appraiser to value a property before granting a loan. But in situations where borrowers are in default, they accept the estimated opinion of a real estate agent who lacks the knowledge, experience, and training to value a piece of real estate. Of course the question automatically comes into the mind of any person with average intelligence is why. As expected, the answer is self-serving on the part of the lender. Instead of paying the higher fee of an independent fee appraiser, banks are using real estate agents, who erstwhile made livings selling real estate but are now dependent on receiving regular BPO orders to supplement their incomes. Agents who show a pattern of low valuations see requests from banks and REO companies diminish, if they forget who is paying them.
One component of the “irrational exuberance” voiced by former Fed Chairman Alan Greenspan was the proclivity of aggressive real estate agent towards puffery. An experience agent can make a sandbox sound like an exotic sea shore, if they are good. In their defense, there is nothing wrong about lauding the features of a property; it’s a part of good salesmanship. Real estate agents are in their bailiwick when they are selling the sizzle and not cutting the steak to see what is inside. Dissecting can be messy for a well-dressed real estate. Perhaps that is why real estate appraisers usually wear jeans. They enjoy digging through the glitz to discover the real value of a property. Knowing how to do it gives them a comfort level denied even to the agent with twenty-years of experience.
The fact is during the period before the collapse of the real estate market, agents were often responsible for driving prices higher. Some would say they were just doing their job. Perhaps most were, but there were many who insisted appraisers valuing their listings review the comparables selected by them. Since being a licensed appraiser for over twenty-five years, I can not recall ever receiving a list of comparables from an agent to review that were selected with any idea in mind other than garnering a higher value. Agents should know most appraisers throw suggestions from them in the waste basket. Handing a licensed appraiser a list of properties is the same as saying they are not qualified, despite having taking the time and expense of learning their trade.
The same penchant for exaggeration can be said about what is happening during the short-sale process. Agents all too often report a value that ignores actual market activity, which in most areas is in decline. Instead of the house selling in weeks, it languishes on the market for months until its value deteriorates.
Most residential appraisals are completed on the UAR 1004 form that is sanctioned by the Appraisal Institute. Only licensed appraisers who have completed hundreds of hours of classroom instruction, 2 years of apprenticeship, and successful passage of a state exam are allowed to sign-off on the “estimated value.” While some states due require agents to have a cursory knowledge of the appraisal process, their exposure is often limited to the instructor announcing “… and this is what an appraisal looks like. Let’s get back to a contingency clause in the sales contract.”
Real estate agents’ lack of knowledge completing an appraisal-like form was recently highlighted when I had a conversation with a review appraiser for quality control of a nationwide REO and loss-mitigation company. She admitted, with few exceptions, most agents were not qualified to complete their form. But many companies have found a way around this problem by using multiple-choice drop-down boxes. In other words, if the agent believes the choices allowed are not being offered, they have a choice of accepting the options given or not getting paid. These companies know their vendors are not qualified. So, they structure their forms to return the highest values.
There seems to be no end to the greed of lending institutions. Some valuation companies being pressured by banks are now forcing real estate agents to use undocumented data in their reports. My company Nex Millennium Realty has documented evidence of a major valuation company committing fraud on the public.
We plan to share this information the Department of Insurance, Securities and Banking.
While there are no regulations for agents masquerading as appraisers, there are recognized standards and practices established by the Appraisal Institute. A crime is being committed against homeowners as Congress and local governments turn a blind eye.
If you are facing foreclosure or a short sale, and you are not satisfied with the valuation by your lender, getting an appraisal by an independent licensed professional may tip the scales in your favor, as well as buy you time to consider alternatives.
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