The Blame Game – Go Find A Scapegoat And Pin The Tail On Their Donkey
Pundits pontificate about the reasons that the real estate market is in a shamble, and the latest target in their crosshairs is appraisers.
“Those crooked appraisers jacked up the values of the properties!” they scream.
Last night, Jonathan Miller, CEO of Miller Samuel Real Estate Appraisers and Consultants, was on the Glenn Beck show. Miller agreed that there are fundamental problems regarding how some banks award appraisals to appraisers… and that roughly 80% of appraisers are “in the tank” for the banks.
While I have the greatest respect for Mr. Miller, I don’t believe that the problem with appraisers is so wide-spread. Perhaps in Manhattan – where Mr. Miller specializes – but I don’t believe that 80% of the appraisers nationwide have been corrupted. I do, however, agree that the process could use reform.
Let’s look at the role of the appraiser. S/he is in the business of providing an opinion of value… not a guarantee of value. Their services are NOT required by real estate law – but rather as a requisite of most lenders. Their job is to safeguard the lender from fraud by assuring the lender that the collateral for the loan is sufficient.
In a rising market, an appraiser takes recent sales into consideration… but must also allow for a free market causing the values to rise. After all, what is a better indicator of market value than a willing, ready and able buyer who places an offer on the table? Is that not the true definition of market value?
I have seen many transactions that are questionable, but the vast majority of them have been well within the acceptable range of value, IMHO.
While there have been – and still are – instances of fraud involving appraisers, these instances have been the exception and not the rule… and certainly not the reason for an over-exuberant run-up in real estate prices.
In reality – there is no single factor that you can attribute to this mess.
No, ladies and gentlemen, the fault does not lie with the appraiser. In this writer’s opinion – the blame is more with the speculating investor, than anything. How else can you explain the over-supply of housing? The demand for housing was beyond the actual NEED… which resulted in rapid, unsustainable appreciation – up until it could no longer sustain itself.
It was its own ponzi scheme.
Consider a developer building homes nobody actually needs – or an individual rolling the dice with their retirement money buying a second home in Florida – or someone moving up into a home that they could only afford with a negative amortization loan – or investors watching house-flipping shows on HGTV looking to make $50K in a couple of months – you can find plenty of other scapegoats, if you look. They’re out there. Everybody wanted in the game.
The herd mentality is hard to deny.
It happens in the stock market, too. When everyone wants in – the prices rise to levels that can not supported by the fundamentals… and then you get a correction. It’s all a part of a free marketplace where supply and demand determines the market price.
Other factors should be considered.
Of course, there is the government – working towards making homeowners out of all renters. A noble goal… but one that is not without problems. The policies of the government have been to help get as many people into home ownership as possible… and the real estate industry has worked towards this end.
These programs have resulted in the reality of home ownership for many who could otherwise never own a home… and in many cases that has been a good and positive event. But this particular market segment has always been subject to a much-higher-than-average foreclosure rate.
Helping marginally qualified people become home owners wasn’t where the government stopped. Did you know that a section 8 tenant (subsidized by the taxpayer) can get a mortgage… using the voucher as payment for the mortgage?
Perhaps you didn’t understand that… so I’ll try again – the government will not only pay the rent of someone who can not afford it… but they will also back a mortgage using this taxpayer-paid rent voucher to pay the mortgage for that same person who couldn’t afford rent, in the first place.
Once again, our benevolent uncle – Uncle Sam – is playing Robin Hood with your tax dollars. This time – not only to feed, clothe, house, and provide medical care for those who can not afford it – but also to buy them real estate, too.
Let’s not forget the lenders, as they share in some of the blame with their creative financing schemes which spawned the creation of no-documentation loans – also known in the industry as “liar loans”. These loan instruments were bundled together and sold to unsuspecting investors on Wall Street.
And remember that while negative amortization loans were a reasonable and prudent vehicle for some customers – the lenders should have ensured that the borrowers could qualify for the eventually higher payments… not just the initial teaser payments.
And last but not least – real estate agents who encouraged their clients to buy as much house for which they could obtain a mortgage have been a factor. I have always told my clients that they should NOT buy as much house as the lender will allow, as that can make them “house-poor”. If more agents passed this valuable advice on to their clients – some misery could have been avoided.
As you can see – there’s more blame to go around than just with the appraisers… and there are other factors, as well. We will all be better off if we take a step back and consider ALL the factors that led us to where we are today.
Dave Shafer says:
I’m with you, brother. One small quibble. The “no income documentation” loans have not been demonstrated to be “liar loans.” In other words, although I am sure, there was some people who pumped up their income, lenders didn’t just lend to these folks on a whim. They did do a reality check. For example, they would check your occupation’s median salary and compare it to what was said on the application. For conforming loans, credit scores were given a large amount of weight. Some conservative lenders also looked at reserves, and if you claim $120K of income, yet had no money in the bank, there were questions asked.
Even now, if you have credit scores of over 760, no income documentation is asked for conforming loans.
March 12, 2008 — 6:16 pm
Jeff Brown says:
Doug — Right on point, I had a conversation yesterday with a client wanting me to ‘fix’ her Las Vegas mistake. I told her loudly and often not to go there, and that I wouldn’t help her invest there.
Not only did she turn a deaf ear, she bought a SFR using 100% financing!! She’ll lose it by next month.
The investors who’ve run into problems are those who either used poor financing, or didn’t have enough cash reserves when it hit the fan. I feel for them.
Investors surely played more than a bit part in this drama.
March 12, 2008 — 6:20 pm
Raj C. says:
I’d like to another group to the pile of blame, at least thats whhat the folks at the Cato institute
would have you believe. They claim that urban planners have made housing unaffordable.
March 12, 2008 — 7:46 pm
CRay says:
.. Aaah yes, the infamous 3 legged stool ..
1.) I don’t think I ever met “one singular” appraiser that was involved in fraud — but I sure have met quite a few in packs.
Like my great Grand Daddy used to say “you know you’re in trouble when the deaf, go blind..” … and there sure was a lot of blind appraisers out there.
Let’s be honest .. reading 2 or 3 comps and doing a drive-by on a 4,500 sq ft house isn’t rocket science .. what the heck, add 10% to the loan amount and it’s time for lunch – and you’re buying.
2.) But but but, everyone wants to be an investor – it’s the cool thing to do.
“How about” … if we just don’t find my last 2 years of tax returns, and you just give me one of those no-doc loans things .. I don’t even care that the closing costs are $5,000 more and the rate is 2% higher than normal – who cares.?
3.) besides my agent just told me I’ll make $300,000 on this house in 3 weeks, plus I’ll get free hospital care — I saw it on TV.!
I love this government and I’m not even legal, what a great country.!
..tic tic tic, I think I hear one of the legs of that 3 legged stool starting to fall off …
March 12, 2008 — 9:05 pm