Among the many guilty co-conspirators in the housing bubble were appraisers who succumbed to pressure from loan officers, buyers and real estate agents eager to get deals done. Wary of losing business, these appraisers submitted home valuations that were unrealistically high, contributing to an upward spiral of prices that was unsustainable.
Appraisers’ lack of independence brought calls for reform once the market melted down, including a spate of new federal regulations commencing in 2009, the latest in a long string of efforts by the government over the last half century to reform the business. Now, ironically, those new regulations are being blamed for some of the housing market’s current struggles, as exceptionally low home valuations kill deals, including those between highly qualified buyers and eager sellers.
By 1990, some 39 states had passed new licensing requirements. The new rules debuted just as the foundations of the next real estate bubble were forming with the gradual loosening of underwriting standards on loans purchased from banks by Fannie Mae and Freddie Mac. Motivated by the prospect of selling off loans to the quasi-government agencies, including many loans the government-sponsored enterprises would not previously have purchased, bank lending supervisors adopted slogans like, “a thin (mortgage application) file is a good file,” and loan officers sought out appraisers who would produce inflated valuations that allowed pricey deals to go forward, until the whole edifice collapsed in 2008.
To “fix” this, the government began in 2009 requiring lenders to step away from the process of hiring appraisers, inserting middle-men into the process and forbidding various parties to a transaction from discussing the elements of a property during the valuation process. The result has been to siphon a portion of their fees away from appraisers, driving knowledgeable ones out of the business, and sending evaluators into unfamiliar neighborhoods where they often get market conditions wrong. Some real estate agents and lenders estimate low appraisals are killing from 20 to 40 percent of deals. Even allowing for a certain amount of exaggeration endemic to the real estate business, low valuations have become a significant problem in the market’s struggles.