Does it really matter if the appraisal on the house you buy is accurate? Is a little fudging a big deal?
You bet. If your valuation is inflated to hit the contract price, an occurrence that is not uncommon, according to some appraisers, you could end up with a mortgage that's larger than the resale value of your home. Or if the appraiser ignores some key value-depressing features of the property, you could be stuck with thousands of dollars of unexpected repair bills.
Now the federal government is weighing into this issue with a blunt, new message to appraisers and the lenders who hire them: Don't play games with home appraisals. Don't fool with the numbers or turn a blind eye to obvious property defects. If you do, you could face severe financial penalties.
Though the policy applies only to appraisals made on Federal Housing Administration mortgages, the ripple effect could be helpful to home buyers throughout the marketplace.
In a regulation issued by Housing Secretary Alphonso Jackson, the federal government said it will not only hold appraisers legally responsible for bad appraisals, but also will look to the lenders that hired them. If a lender knew or should have known that an appraisal was inaccurate or that the appraiser intended to inflate the valuation, the lender will be subject to potentially stiff fines and federal administrative sanctions. If the appraisal was part of a larger effort to defraud the government, anyone involved could end up in prison.
Although the regulation partially targets appraisers, they appear to support a get-tough approach on lenders. That's because appraisers say they are frequently pressured by loan officers to inflate valuations in order to hit the price on the sales contract. For example, if the sales contract says $250,000, but the property is worth only $225,000, the loan officer might insist that the appraiser find ways to boost the valuation to close the deal. Appraisers who resist or refuse to cooperate get no more assignments from the mortgage broker or loan officer.
"Lender pressure to 'hit the number' is pervasive in all segments of the [home real estate] market," said Donald E. Kelly, vice president of the Appraisal Institute, the largest professional organization representing appraisers.
"It is a very serious problem" for consumers, he said, one that could grow in prominence as housing value inflation slows over the coming year.
Kelly said the Appraisal Institute applauds the government for "taking action and calling for accountability" by mortgage lenders as well as appraisers. "Good and honest lenders should want good and honest appraisals."
FHA mortgages are particularly vulnerable to appraisal games because they typically involve small down payments and first-time home buyers. Even a 10 percent "push" on the valuation number on an FHA loan can spell trouble when a new buyer is making a 3 percent down payment. That leaves the buyer with negligible equity in the property to start, and it would almost guarantee a loss if the house had to be resold because of a job loss or other financial emergency.
Worse yet, an appraisal that intentionally ignores structural problems affecting the value of the house can leave unsuspecting buyers with staggering repair bills. In a case that drew national publicity several years ago, a Pennsylvania couple bought a four-bedroom house with a low-down-payment FHA mortgage. The appraisal noted no problems with the house's foundation, no dampness in the basement, no electrical problems, no troubles with the septic system. The home "conforms to [FHA] standards," according to the appraisal submitted to fund the mortgage.
In reality, the appraiser had ignored tens of thousands of dollars of defects: electrical code violations in every room of the house, a crumbling foundation, a basement that filled up with septic system overflow during heavy rainstorms, extensive insect damage to key structural supports and unheated rooms the appraiser counted as living space, to name just some of the glaring problems.
The estimated cost of repairs came to 84 percent of the purchase price of the house. The appraiser involved was suspended from doing further FHA work, but the local lender that hired the appraiser -- and had to suspect something was fishy with the appraisal -- got off without liability to the buyer victims.
Under the new, extended-liability rule, the FHA lender might have thought twice about the financial wisdom of submitting that rotten appraisal. Whether lenders -- and appraisers -- get the message nationwide is too early to tell.
Kenneth R. Harney's e-mail address is firstname.lastname@example.org.