By Dustin R Burke, Adonai Financial

As a mortgage professional I am often asked by homeowners or potential homebuyers, “What this home worth?”  My answer is always an oversimplified, “Its worth what someone is willing to pay for it.”  Even though in conventional wisdom this answer is true, I am considering a new reply.  In today’s market would be better to say, “Its worth what you lender thinks it is.”?

I recently sat down with a guy who said, “Real estate appraisals today are moving goalpost for borrowers.”  And, I think he’s probably right.  There is a lot of speculation, fear, and hesitation from home buyers, people refinancing, lenders, and the like.  And, as we know, home prices have fallen in value.

There have been discussions about common sense underwriting, apparent redlining, soft market policies and tightening general credit requirements.  But, what we haven’t read about or seen on the news is how value is being applied to our greatest asset – our homes.

Almost all home loans require a real estate appraisal – a licensed Real Estate Appraiser’s certification of the homes value.  Each state has their own appraisal requirements that appraisers must follow to determine the homes worth.  What has happened more and more in recently is that banks have gotten into the appraisal business. 

The banks have done this because there have been, in times past, crooked appraisers would skew the value for a mortgage broker, or Realtor, or homebuyer.  Banks have millions (if not billions) of dollars in losses over the past two decades due to unscrupulous appraisers.  I believe that 99%+ of all appraisers do the right thing.  The losses have been incurred by a very small percent of the workforce.

To curb these losses the banks would perform appraisal reviews on some (or all) files they received to make sure that we okay.  An appraisal review needs to determine if the information used by the appraiser is accurate.  But, recently we’ve found that banks such as Countrywide and Wachovia take these reviews a step further.  Banks now require use of a limited pool or appraisers or have “in house”, bank employee, appraisers to complete the report.

Well, that in itself sounds okay, but an appraisal should be completed by an independent party.  When you have appraiser employees working for the bank you’ve skewed the relationship so that the bank is in control of the value.  When you have banks and appraisal firms enter into exclusive service arrangements you then give the bank power of the appraiser and it influences value.  And, this is exactly what has happened which has done a disservice to homeowners and the market as a whole.

Banks argue, “It’s our money.  We’ll do things as we want.”  My response to them is, “You’re getting exactly what you’ve asked for.”    There has been a massive movement by the banks and lenders to “reign in” appraisers.  It is only causing more chaos in the market.

Of course, no one wants to be upside down in value.  And now buyer wants to buy a home for more than its worth.  But, if we have seller willing to sell, a buyer willing to buy,  an appraiser certifies the value, and a review appraisal the verifies the appraiser provided accurate information then the value is what the parties say it is, not what the bank says it is.

Recent Example:  I’ve been working on a new project in central Florida.  It is 70 single family homes, each home is identical.  Yes, they are identical except for the elevation and color.  Logic and commons sense would say that all of these homes are worth the same, right?  Wrong.

We closed several units in the project with purchase prices around $421,000.  There was a two week gap between the closing of the files and then the submission of new one on the same street.  Remember, identical houses.  The bank, in its infinite wisdom, by and through its employee review appraiser decided that the homes were no longer worth $421,000 and decided they were worth $285,000.  In short, the bank determined there was a 33 percent market correction in a 14 day period.  And, this is not an isolated incident.  It’s becoming more and more prevalent especially in more exotic markets.

This bank in particular decided that the value on property is what the bank could sell it for in 90 days.  We’re not in a 90 day market, but a 360 day market.  It was and is an unrealistic way for banks to determine value.

So, what’s the solution?  It’s really very simple.  Give the real estate appraisers freedom to do their job.  Let the market decide property values.  Provide checks and balances, such as review appraisals to protect the bank from unscrupulous appraisers.  But banks, stay out of the appraisal business. 

What is your opinion?  Send me an email at dustin.burke@adonaifinancial.com.

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© 2008 Dustin R Burke & Adonai Financial Corporation