Appraisal Inflation 'Systemic', Process 'Broken'

The Broker Universe site has this editorial by William C. Apgar, the former Federal Housing Administration Commissioner and currently Senior Scholar at Harvard University's Joint Center for Housing Studies. "The American Dream of home ownership has become a reality for more people than anywhere on the globe. Lending money based on the securitization of loans backed by real estate has been the rock on which this phenomena has been built. Fundamental to this system is the fair, objective and unbiased valuation of the real estate that secures these loans and provides the confidence Americans have in the value of their home." "As it is not uncommon today for a lender to be on both sides of the equation, making the loan and picking the appraiser, the federal regulations seek to separate the appraisers' work from other aspects of the transaction. That is the idea, anyway, but not always the practice. In practice there are lenders that hire staff appraisers who are picked by and report to the lender's loan officers. Certain lenders and title companies own or are part owners in appraisal companies." "In May 2005..the regulators again issued guidelines, warning that financial institutions 'may not fully be recognizing the risk inherent in their aggressive lending standards.' In June, on the heels of this 'shot over the bow,' a nationally recognized consumer group..determined in their study 'problematic appraisal practices exist as a serious impediment to responsible lending, impede fair housing and equal access to credit, and place the American Dream of homeownership and the safety and soundness of the mortgage marketplace at risk.'" "Today, no one can accurately assess how many homes are overvalued in the U.S. housing market and for how much. There are those who argue that there is no such thing as appraisal inflation and therefore, no problem exists; if a buyer is willing to pay an asking price, then the price isn't inflated. True enough. But, when appraisal inflation becomes systemic to the loan process and when almost half of appraisers say they are pressured to inflate appraisals by others involved in the loan closing, then maybe it is time to change the way appraisals are ordered." "This is a time of transition for the mortgage marketplace. Economists agree that although there is no nationwide housing bubble there are 'regionalized bubbles' where housing prices seem to have risen to unsustainable levels and price declines have been predicted over the next two years. The mismatch between income gains and higher real estate values in some cities is particularly striking. How can someone earning $70,000 a year afford a $500,000 home? They can't over the long run." "This issue is systemic industry-wide, as the entire process from the regulators to the lenders to the third party interactions of the loan officers and the Realtors/builders is broken. It certainly will take a collaborative effort from the entire industry to unravel the pyramid of bad practices that have occurred over the past ten years."