The Truth About Appraisals and Foreclosures
By Charlie Elliott, Jr., MAI, SRA

If we are to believe what we read in the news, foreclosures on homes are escalating at an alarming rate. There seems to be no shortage of statistics to back up this contention, so I accept it.

It is disconcerting to me to think that families who aspire to have a piece of the American Dream find that they lose it because they are unable to pay their mortgage payments. There would surely be few of us who would not find it within our hearts to find compassion for these people. That being said, there has been a lot written in the news and elsewhere concerning the root cause for foreclosures and who is to blame. Many of those offering opinions and positions on the subject are apparently not well informed or, for whatever reason, consider it their job to twist the facts and/or inject politics into the equation.

Given the above and in attempt to offer a fair and balanced analysis of the situation, listed below are a few concepts and perhaps some misconceptions having to do with property foreclosures as they relate to appraisals of the property.

First, it would be unfair to paint all appraisals and/or appraisers with the same broad brush in developing a picture of how appraisals relate to property foreclosures. There are undoubtedly many cases where appraisers have performed poor appraisals involving foreclosed properties. There are also many cased involving foreclosed properties where appraisers have done good jobs.

To listen to some, all foreclosures are the responsibility of the appraiser and the poor people who lose their homes are suffering because of those who prey on the weak and call themselves appraisers. This is not true and is borne, in my opinion, out of a lack of education and understanding.

The Charlotte Observer ran an article recently offering five ways to cut foreclosures. These points of view are apparently a composite of information provided by what the Observer refers to as experts, including builders, borrowers, defaulters, community advocates, academicians and government officials.

Among the five points was “Name the broker and the appraiser on public mortgage records in addition to the mortgage company allowing regulators and the public to identify the source of problems.”

I have no problem with full disclosure when necessary, however to imply that the broker or appraiser is guilty of some misdeed without due process is inappropriate. The lender has a record of who the loan officer and the appraiser are on a transaction and this information is readily available to anyone needing it for investigative purposes. To try and convict the loan officer and appraiser in the court of public opinion because they participated professionally in a loan transaction whereby a borrower did not make mortgage payments is misguided logic.

In the not too distant past, HUD posted national appraiser rankings online in a registry that attempted to measure skills according to claims and defaults. This lasted only a short time because it unfairly singled out appraisers on transactions that went south through no fault of their own. The root causes of foreclosures are many, and a large portion of foreclosures occurs for reasons outside that of the underwriting process such as the loss of a job, unforeseen health problems and divorce.

The appraiser is responsible to his client, the lender. The lenders first and primary line of defense in evaluating a loan under consideration is the ability of a person to repay the loan. While the appraised value of underlying collateral may be used as a secondary tool to limit the amount of a loan to protect the lender in the event of a foreclosure, it in no way should be misconstrued as causing or contributing to a foreclosure.

In conclusion, it would be fair to say that some appraisers have been and are responsibly for improper appraisals. Here we are talking about violations of the Uniform Standards of Professional Appraisal Practice as well as state and federal laws. In some if not many cases, appraisers have been and are guilty of loan fraud. These people, in my opinion, should be dealt with appropriately, whether it be the suspension or revocation of their appraisal certifications and or civil and criminal penalties, up to and including the serving of prison time.

It is, however, fair to also note that appraisers have little, if anything, to do with the foreclosure of properties, even in cases where they are guilty of violations of appraisal standards and violations of the law. The approval of a borrower’s credit and his or her ability to make payments is a completely separate function from that of the appraisal, and an appraiser who takes it upon himself or herself to get involved in an individual’s credit or ability to service a mortgage is out of bounds. Said another way, the appraisal process is designed not to prevent foreclosure but to aid the lender in recovering as much as possible from a loss due to a foreclosure, in the event that it becomes necessary. The appraised value of a property in no way determines a borrower’s ability to make mortgage payments, however, it may serve to direct the lender as to the maximum amount the lender will lend on a given property.

Furthermore, if the appraiser is found to be liable for preparing a fraudulent appraisal, he or she will be subject to sanction, whether or not there is a foreclosure involved. Said another way, if the appraiser commits fraud is he or she not guilty unless there is a foreclosure?

If we in the lending community have a responsibility to borrowers to help protect them from the woes of foreclosure, my vote goes to better informing and educating them as to how the lending process works and of the serious responsibility they undertake when they obtain a home loan.