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Before I jump on my soapbox, I do want to strongly make it known to readers of this article that I work with top notch professionals everyday. What I am writing about here is referring to an increasingly smaller amount of con artists that specialize in taking advantage of their customers, and the companies they work for. There are many people in this industry that do their job above beyond ethical and professional requirements. I consider it a privilege to work with many of them.

Once again I am reading articles regarding mortgage industry problems. This time through it is non-prime lending that is making headlines. For those of you outside of the industry reading this, on-prime or sub-prime loans are for folks with less than perfect credit scores. Like the last time there was a problem with mortgages, appraisers are taking a huge amount of heat. I will be the first person to say that appraisers deserve what they get when they intentionally lie or “massage” data to get pre-determined results. The root of the problem is not just appraisers who are in the back pockets of mortgage originators. The root of the problem comes from how mortgage companies do business.

Like many businesses in the United States, the mortgage industry relies heavily on commissioned employees or commissioned sub-contractors to sell their products, in this case, originate or bring in clients to apply for loans. That’s all fine and well and on paper it looks like it is a workable concept. It does run into some inherent problems, most of which revolve around human nature.

Whenever the general public does business with an unregulated business, there are all kinds of things that can go wrong, and often do.

Wait!

Put on the brakes!! The mortgage business is regulated isn’t it? (It is, but it isn’t, and I can speak of the State that I work in, Virginia, with some authority, but the remaining country I am not well versed on. So some of this will apply to many of the states out there, but some of it may not.)

Most states require that to do business in their borders you have to work for a licensed company. Now in Virginia, there are lenders and there are mortgage brokers. In the lender realm you have mortgage companies, banks, credit unions, and other types of companies that underwrite process and originate their loans. The mortgage brokers are generally sort of like a middle man that acts as an originator, but is actually brokering the loan to a secondary lender, or private investment company that is actually lending the money.

Many of the larger companies Like National City, Countrywide, Wells Fargo, and many, many more companies are very good about training and making sure their originators are pretty much staying within the applicable laws to lend money. These companies are very heavily policed, and do their best to make sure they can keep lending money. That is why these companies are well known for their prime lending, or loans that are available only to those with good credit.

Most of the big mortgage companies will not lend their own funds to non-prime borrowers. They do broker most of these products to other lenders, as their corporate structures do not like the risk that less than perfect credit lending can have. From what we are seeing now, I can’t say that I fault them.

Mortgage brokers, are often times, small companies that live or die by whether or not they can make a loan close. Most of these companies make no money, if they can not close a loan. They are not a division of a bank, or other related fields, so lending fees are important to them. There are very large mortgage broker companies out there that lend money to many states, most of which they do not actually have offices in. They work from a central location(s) and receive most business from cold calling, mail solicitations and print/internet ads.

So far it all sounds pretty harmless, doesn’t it? Well it would be if that were the end of the story, but it isn’t. When these companies are trying to get approval for the loans, they have to of course make sure the borrowers meet minimum criteria, or the Underwriter is going to say no, and that customer goes from being a possible stream of income to a waste of time for the loan officer.

Underwriters want each loan in this non-prime category to basically be a round peg that fits into a round hole. The loan to value ratio should be promising, the borrowers income is outstanding, the borrowers look to be moving in the right direction every where, and of course they are not buying beyond their means.

The appraisals that are performed for these types of mortgages are very important. Normal appraisal guidelines are often not as stringent as the requirements that are placed on sub-prime loans. As an example, if I need to go to another neighborhood to find a comparable for my subject, and this is normal for the area and the comp is a perfect match to the subject, many sub-prime underwriters will not accept it in the report. They will ask for additional comps, preferably from the neighborhood, even when they are not available. They will put so much emphasis on the appraisal report, that if they are not satisfied that home is worth what the appraiser says, and that the report he sends in does not meet the checklist of requirements they want met (no matter how irrelevant they can sometimes be) they will either deny the loan, ask for a second opinion or review, or they flat out deny the loan based on the appraisal. I totally agree that they should put merit to my report, even more so when there is a higher probability of foreclosure.

It still sounds like everything is just fine doesn’t it? Well let’s get just a little deeper, and we will see where the rabbit hole leads to…

This is where things get a little hairy. Many loan officers, when they don’t work in an area very much, will canvas appraisers within the local area of their borrower’s home. When I say canvas, I mean canvas like they are expecting certain criteria to be met. I bet you guys can’t guess what the main question is on the request when they solicit for appraisers. If you guessed turn around time, license status, price, resume type qualifications, or ability to perform the work competently, you would be wrong. The most requested thing they want to know is, my borrower thinks that their property is worth x, can the property make that value, or higher? This is called pre-comping a property.

It should be noted that it is illegal for an appraiser to provide an estimate of value, without performing an appraisal. In the state of Virginia, oral appraisals are considered to still be a binding report. In order for an appraiser to provide an opinion of value, he/she is supposed to perform a number of required practices to arrive a supported value opinion.

Once more, I have to re-iterate that I have done business with many of the companies that lend money as mortgage brokers and as lenders, and most of them are very ethical and do what they are supposed to, at least from my perspective.

Many appraisers are very small businesses, such as a one man to two man operation. They end up being in the same boat as many of the mortgage brokers: no work, no money!

Some appraisers, especially right now, are literally at the point of saying “if I don’t give them what they want, then I am going to go bankrupt.” This is a situation that is dangerous for both the lender and the borrower. I am seeing reports all the time now that are estimated at higher amounts than what could realistically be seen in a sale on the open market.

I really want to pound on this fact: I abhor lying appraisers; they should be sought out and removed from the business. In all honesty many of these appraisers are on their way out anyway, due to the downturn in business volume. Many of these folks got into the business as a quick way to make money, and that train has left the station.

These unethical appraisers are directly linked to the loan officers that seek them out. These types of loan officers are not interested in what is best for their client. Their interest begins and ends with the maximum commission they can get from the product they want to use. They are not interested in an appraiser that will help the borrower make sound financial decisions; all they are after is the biggest value.

My state’s board for mortgage lenders, The Bureau of Financial Institutions, has proven to me they are not set up for fraud like this. I contacted them regarding this type of practices on a lender that not only asked me to promise a value, but also was very nasty to me when they were told we can not do this. This loan officer had also canvassed about 20 appraisers from what I would tell from the cc line in the email.

The board contacted me and explained to me that there are no laws in Virginia that are set up to handle complaints from appraisers. Essentially the only people who could complain were consumers. That blew me away, and it still does 4 months later.

The mortgage industry, HUD, VA, and all sorts of industry giants all consider the appraiser as the “lynchpin” in the transaction. Meaning that we have the power to see that a deal is ethical or not, and our involvement with it is a matter of professional ethical conduct that is directly related to the appraisers professional obligations to the lender, the borrower and the community at large. So why does my own state refuse to act on what is obvious coercion from the lenders?

That is a question that only they can answer. I refuse assignments when they are directed at harming the borrower, and when I am expected to do things that are not on the level.

I see the Federal and State levels will pretty much handle this similar to how they handled the S&L crisis in the 80’s. In that debacle appraisers were required to have licensing and certification requirements that revolved around minimum education requirements and such. The appraisal industry will be going into it’s second increase in competency and education requirements on January 1, 2008. There will actually be a college degree required to get a license, and the appraisal education hours will significantly increase. This will exclude many un-qualified folks from becoming appraisers, but does little to influence currently licensed folks.

The next logical step in this process is to require Loan Officers to undergo similar education and licensure requirements. Some states already have some, but they should be put to task just like the appraisers. They should also be put under investigation whenever a complaint is received at the state level. As an appraiser people can complain anonymously against me and the state board still has to validate the grounds for the complaint. I can be found guilty in such a situation, and so should any other licensed professional.

Will licensure clean up practices? Perhaps, but it is a step in the right direction. Appraiser licensing has helped some, but it is still an industry that could see more regulation.

Appraisers are to blame to a degree with the sub-prime fall out that we are seeing now. In my opinion, this problem would be reduced by a large degree if the loan officers, who are vastly unregulated, were regulated and licensed. The dis-honest folks who are loan officers would have no choice but to either start doing right by their clients or do something else. I really think the industry as a whole has more egg on it’s face then does any appraiser.