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Inflated Homeowner Appraisals – WSJ Article

Now that the housing market has finally turned we learn that many of the loans were written on questionable valuations of housing once people try to refinance those outrageous nuclear no money down interest only loans. And the LTV’s (loan to values) are now inverted almost across the board on these loan types. The article blames the appraisers, but where is the blame on the ethics and others in the marketing chain:

– The home builder selling extra houses during the boom making extra profits off increasingly lower quality houses.

– The mortgage bankers and banks making fees off of the loans and then reselling them. Will they take the coming credit loss themselves or will they try to pass it onto the American taxpayer and not back to their shareholders like they should. Remember when you used to put down 20% on a house purchase, there was a reason for it that we will soon be asking why it was abandoned.

– The publishers that made it all too easy to advertise without educating the consumers, many who had no idea what interest only or ARM meant.   

– Where were the reporters that write now on these subjects as if it’s new news of what drove the boom for the past five years? That silence was deafening.    

2 thoughts on “Inflated Homeowner Appraisals – WSJ Article

  1. Over-inflated appraisals are a good reason to shun any investments that depend on mortgages right now, such as mortgage-backed securities, and their derivatives, such as CMOs.

  2. The Truth about Real Estate Appraisal

    By Stephen G. Bishop

    It is time, actually has been for many years, for the general public to learn what a real estate appraisal really is. The information provided herein is neither conjecture or opinion, nor attitude or inference. It is factual, tangibly supported and, while incredible to ordinary professionals, nevertheless is organized crime behind a mask of regulations and licensing. The FACTS delivered here are from an insider who has experienced the real conditions of real estate appraisal, which are only acknowledged with the wink of an eye among conspirators.

    Having spent thousands to earn an appraiser’s license twice in eleven years in an attempt to escape the mind-numbing boredom of corporate finance, I feel the need to educate the consumer about how real estate appraisals are prepared and how appraisers are educated and trained. This because those who buy, sell or refinance a piece of real estate are naively confident that the appraisal has been prepared by a highly educated professional with many years of experience, and that experience is synonymous with expertise.

    The simple fact is that the field of real estate appraisal is a closed society, primarily dominated by nepotism (all in the family) and a dark underworld of misperception, deception and child-like simplicity which exists to rubber stamp values determined by real estate agents, brokers, loan officers and realtors.

    Appraisal defined

    A real estate appraisal is little more than copying data from public records into a state-recognized format with a simple comparison between recent sales of same or similar properties. There is quite a bit of narrative included in most appraisals, but that too, is primarily copied from one appraisal to another and rarely is specific to the properties appraised.

    Qualifying comments are generic in nature, and some appraisers add water to their appraisals by writing lengthy “Addendums” at the end of their appraisals. These “Addendums” add depth, breadth and volume to a highly simplistic and imprecise “Estimate of Value”, which is what an appraisal is defined as by the pipe smokers at the North Pole.

    Many hours, persons, office spaces and utilities, paper, computers and postage have been spent in an attempt to properly define a real estate appraisal. These multitudes of resources have combined to define a snapshot of a property value. Truly an extraordinary army of erudites burns midnight oil contemplating such terms as “Property” and “Time of Appraisal”, to mention a few. In reality, those on the receiving of these highly generated documents couldn’t care less about the academics. They just want a number, and if it isn’t the number they want, the appraiser must go back and rework the appraisal, or find a new client. The comments in the appraisal (remember all that verbiage?) must not contain any negative comments, especially things like “Holes in the roof” or “Cracked foundation” or “Rests in the ghetto” as these are sure to kill the deal and defeats the true purpose of the appraisal, which is to get a loan for some poor soul who thinks he’s in the hands of the good fairy, even though the “Good Fairy” may have a felony record, is unable to get a normal job, and has found a cash cow in a naïve society.

    Appraisal Education

    No formal public education is required to be an appraiser above a high school diploma. While appraisal may be a course in a real estate curriculum in some colleges, 99% of specific education is only obtainable through shopping center schools for profit, who are more than happy to sell anyone an expensive series of courses without telling them that chances of becoming an appraiser are near-zero, especially if the prospective student thinks that knowing and following the rules is the road to prosperity.

    These classes are filled to capacity, generate big bucks for the promoters and provide all one needs to know to be an appraiser in 4 or 5 pretty books less than ¾ of an inch thick, while instructors hammer ethics, ethics, ethics into the spongy student, while failing to mention once that the program is designed to keep new appraisers from entering the field.

    To summarize appraisal education, there is no shortage of expensive, water-filled courses, seminars, books and lectures to fill the aspiring appraiser with much ado about nothing! The reason colleges do not offer degrees in Real Estate Appraisal is simple: There isn’t enough substance to stretch over a semester or quarter. Real Estate Appraisal is a sub-function of real estate and can be assimilated by a high school graduate in a few weeks. Which leads directly into the subject of experience.


    The greatest façade of real estate appraisal is experience. A common illusion is that appraisal experience is synonymous with expertise. In reality, the opposite is more often true. Given the depth and breadth of real estate appraisal, one reaches the limits of knowledge in a few months and twenty years of experience is 1 year 20 times. It is the perception of other professionals and the public that experience implies constantly expanded capabilities and knowledge. In the real world of appraisal, the most senior appraisers tend not to have a college degree, no education in Accounting, Business Administration, Economics, Marketing, Statistics or any of the other higher level skills which one would think would be inherent in a high-income, independent occupation. It is not uncommon to find a “Senior” appraiser with the highest level license measure a property with a measuring tape, do calculations longhand using Boorum & Pease ruled pads with frequent erasures and fundamentally computer illiterate. Yet, these people are hired by lawyers to be “Expert Witnesses” for thousands of dollars to testify in a court of law.

    You see, experience is everything in appraisal because it is a semi-skilled trade, requiring little education, low barriers to entry and a limited technical knowledge base. As a result, the primary way a senior appraiser can distinguish themselves from junior appraisers is experience.


    It came to pass that, after the S&L debacle in the late eighties, the federal government demanded that appraisers be licensed.

    This, supposed the Fed would put an end to the corruption and fraud of real estate appraisal, and so governing documents were created, state government offices of appraisal oversight created, courses developed and a program of licensing implemented.

    The result of all this is that the corruption and fraud worsened, rather than lessened. The reasons for this are two-fold: It actually lowered the bar for new entry into the field and the feeding frenzy for licensing and training fees created an abundance of new licensees with few alternatives for employment, unless devious means are used to skirt the system. The impermeable membrane of real estate appraisal which was supposed to keep the bad eggs out, actually drew them in, because only the unprincipled will circumscribe the prescribed career path set forth by the states. Those of strong character, disillusioned into thinking they were entering a profession of integrity simply throw the licenses away when they learn what is necessary to use them.

    One appraiser described real estate appraisal as a combination of “Ambiguity and overkill”. Ambiguity abounds as there are only ten highly generalized rules of appraisal, and therefore much left to interpretation, while the length of the apprenticeship, formology, and control of the appraisal process would choke a horse.

    Take the license level “Trainee”. After taking 5 or 6 courses and passing a state exam, an aspirant acquires a Trainee License. This license requires that the new appraiser be under the complete control of a “Supervisor”, which is simply an appraiser with a higher level license. As in other unskilled and semi-skilled trades, the Trainee is regarded as developmentally retarded, having no skills or other work experience and quite incapable of performing even the simplest tasks without strict guidance. Of course, many enter this field from other professions, have infinitely more education and life skills than their so-called “Supervisor”, who regards him/herself as a genius. Woe is he/she who comes into this field with a bachelor’s degree in business administration, accounting, math or similar disciplines and tries to employ these attributes as a Trainee in appraisal. For one thing, most of the underlying assumptions upon which real estate appraisal is founded are erroneous and reflect a gross lack of academic source.

    For a mature, educated professional to enter the appraisal field, two years of apprenticeship is sheer torture. An exercise in reversion of intelligence and capability and mind-numbing boredom.

    Though it is extremely difficult for an educated person to dumb down for two years of apprenticeship, it doesn’t really matter anyway, because noone will hire them. You see, the basic program is designed to fail. Why would a veteran appraiser train his/her future competition? The answer is, they won’t, unless they can exploit the Trainee to an infinite degree by working them to death for little or no compensation (which is against federal labor law). Some “Supervisors” actually charge the downtrodden Trainee for his signature on their hours log. The Trainee lives for the 2,000 hours required to advance to the next license level and independence, and this is a valuable carrot for the supervisor to extract free labor.

    Appraisal Accuracy

    Appraisers value a property by adjusting the differences between the subject and comparable sales. They employ factors, such as dollars per square foot to adjust for differences in square footage. These “Factors” have little to no substance as they are typically handed down from generation to generation without knowing where the number originally came from, or are picked up from the “Supervisor” who got it from hearsay, and the factors employed vary from appraiser to appraiser as much as animal species vary. Three methods of valuing a property are employed by the appraiser and the three are supposed to be tangential and validate one another. This is a fallacious assumption, and reflect little application of economics or common sense.
    Yet, these methods are pontificated by senior appraisers/Supervisors as undeniable facts.

    Homeowners often ask, “Can’t I do that myself?”. The sad fact is that one can simply pick up a newspaper and value their property with more accuracy than a seasoned real estate appraiser. This is because the compounded effects of fallacious assumptions, lack of standard factors and disagreement among appraisers as to values employed actually renders a formal real estate appraisal more harmful than beneficial. Combine this with the utter absence of ethics in the appraisal industry and one quickly realizes that real estate appraisals could be eliminated from the real estate transactional process, reduce the cost of the transaction, and protect both parties from harm.


    While ethics are shouted from the pulpit in appraisal courses, they cease to exist upon graduation. This is primarily due to the fact that appraisers are employed by the most unethical workers in any industry….Brokers, Agents, Realtors and loan consultants. The real estate industry is one of total anarchy, dominated by the most unscrupulous, easy money seekers on the planet. Real estate “Professionals” as they refer to themselves, will do anything to make a deal, have no oversight except a token agency at the state level which looks the other way as long as it gets it’s fees, and earn obscene commissions for a few hours’ work. This includes hiring their own appraisers, selected according to their flexibility in rendering a value opinion. Guess what? The appraiser who hits the number the most, gets the most work. A successful real estate “Professional” will always have a “Damned Good Appraiser” in his/her hip pocket, usually in a long-term relationship, who makes every appraisal value equal the number needed to make the deal work.

    Ethics is both inherent in the character of human beings and defined for them in terms of the working world later in life. Therefore, it is difficult for the average humanoid to be unethical in the course of ordinary life. A genetic malformation occurs when one has substandard capabilities and a lust for extraordinary income. Although real estate “Professionals” have ethics hammered into them, many are frequently found to have criminal records and/or no other employable skills. One can obtain a real estate license as easily as one can acquire a new car. Background checks are frequently not conducted. The agencies in control subsist on licensing fees, not on background checks and enforcement of the rules. One only need read the number of persons in the field (real estate and appraisal) sanctioned, punished or whose licenses have been revoked to validate this assertion.

    A simple test of the level of enforcement of rules and ethics is to file a complaint against another “Professional” in the field for blatant fraud and wait for the response. And wait, and wait, and wait. You see, the Department of Real Estate and the Office of Real Estate Appraisers protect the bad guys and whistleblowers, or those who believe their competition should follow the rules are ignored, stifled or forced out.


    Much more regarding the ruse of real estate appraisal can be presented, space permitting. The simple fact is that the industry is actually the opposite of what it purports to be. The FBI labels the real estate industry, which includes appraisal as “The New Mafia” and “Organized Crime”. Truly, a conspiratorial relationship between real estate professionals and the lenders who accept their bogus loan applications (because they just sell them anyway) in an absence of risk management create a truly incredible industry of scofflaws not unlike a swarm of locusts who decimate the countryside and fly off with full bellies while the land is left barren and infertile.

    While supply and demand may play a role in real estate market prices, one needs to consider what creates extraordinary demand when no other factors change significantly. A dramatic runup in prices, when incomes are flat, supply is sufficient, consumer credit is overextended, the cost of living rises constantly and prosperity lies in the hands of the elite, can only be attributed to one primary cause. Inflated appraisals. If an appraiser doesn’t hit the number, they don’t work. The fundamental relationship between an appraiser and those who employ them guarantee it.

    My first potential client, a broker, invited me to lunch prior to giving me an appraisal order. We went to a cheap greasy spoon where he opened the conversation with, “Our job is to help people. We get them the loans they need to get out of financial trouble. This means we must make the loans acceptable to the bank, no matter what”. I replied, “That’s fraud”. The broker smiles and says “That’s what real estate is. It’s good for the economy”. I paid for lunch. My first appraisal order from him dictated clearly that a value of $340,000 was needed to make the loan work. The comparables of the cookie-cutter tract home were identical and sold recently for $300,000. I appraised it as such and the broker threw a tantrum. After he cooled down, which took a few days, he came to me and demanded the pictures used in the appraisal. I didn’t give them to him because I knew he was going to forge his own appraisal. And he did. The loan was approved.


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