The Problem with Appraisals

For months now attorneys have been telling me that as many as two-thirds of the sales or refinancings that come through their doors are scuttled when the appraisal comes back with a lower than expected value. Recent comments, and our own statistics, suggest that this phenomenon is more often true for properties in Lowell than for those in the towns in this registry district, but it remains a system-wide obstacle to the recovery of the real estate market.

While many of the properties being valued have certainly lost considerable value, there may be more going on here. Today’s New York Times carries a front-page story detailing how the appraiser’s profession was upended by a new “Code of Conduct” that went into effect in May. The main feature of this code is that the lender, and not the real estate broker or the mortgage broker, selects the appraiser.

The intent of this rule was to insure the independence of the appraiser by eliminating any incentive he had to shade his valuation upward for the benefit of the broker or mortgage originator who both get paid only if the deal goes through. But with the lender making the decision, many local appraisers have been forsaken by major lenders who have turned to larger, centralized appraisal firms to do the work. The concern now is that the appraisers working for these firms are inexperienced and not locally based and are therefore less likely to accurately value the property. At least those are the concern raised by the article. Still, based on the comments of local attorneys, there is some validity to these concerns.