An Aug. 12 story in The Wall Street Journal — Judgment Call: Appraisals Weigh Down Housing Sales — has left the appraisal industry furious, especially appraisal management companies. Worse yet, a perceived lack of deference by the Journal's editors for industry concerns towards alleged inaccuracies in the original story is only adding fuel to the fire.
John Walsh, president of real estate data and analytics firm DataQuick, went so far as to send a detailed letter to both of the reporters on the story and to the Journal's general editorial domain. Receiving no reply, his letter now appears verbatim in The Niche Report, a trade publication catering to mortgage originators.
Walsh states the WSJ article shows a "serious misunderstanding of appraisers, appraisals and the overall valuation process." What's more, the meatiest point of Walsh's statement comes last — and is most likely to be the least-read aspect of his diatribe. "Unfortunately, this article reflects a serious misunderstanding of the causes of the housing crisis, the lending process, and the current challenges in the housing market," he writes. "This misunderstanding is pervasive both in the press and in Washington," he said. "It is driving poor legislation and outrage at the parties least responsible for the current predicament."
The fundamental role of appraisals is, in fact, not actually ever mentioned in the WSJ piece. So I will do what the Journal didn't and make something amply clear: Appraisals are a tool used by lenders to determine if they wish to lend on a specific piece of collateral. More importantly, appraisals are not a tool for the buyer and seller of a home. What this means is that any article — like the WSJ story in question — that parades one angry buyer after another, all of whom invariably bemoan the appraisal process, in front of readers is grossly mischaracterizing what an appraisal is in the first place.
Put simply, homeowners are not meant to have any influence on the valuation process.
"An appraiser may in fact kill a deal, but the home is worth what it is worth, and a quality appraisal gives the most probable price a home is worth in a certain market, regardless if the buyer and seller agree to a different price," said James Kirchmeyer, CEO of Kirchmeyer & Associates, an appraisal management company. "There is no exact number in a valuations," Kirchmeyer said. "For example, ten bidders on a property give ten different prices they are willing to pay."
The WSJ article also fails to note that the appraisal industry is now under the auspices of the Dodd-Frank offspring known as the Consumer Financial Protection Bureau. T
he argument above — that appraisals are not a consumer tool — is one I've actually made to the CFPB.
Nonetheless, homeowners can now air their appraisal grievances to the CFPB when they believe an appraiser gives a particularly low value. (Even this option curiously also goes unmentioned in the Journal's coverage.) So I agree with Walsh on the point of wide misunderstanding on the part of the press and Washington — although I cannot agree with his assertion that the appraisal system is "the least responsible for the current predicament." Nonetheless, it is hard to find logic in the WSJ article sources, who assert appraisers are somehow purposely coming in low on their valuations.
Mortgages are typically long-term, fixed-interest products. Furthermore, 95% of mortgages are financed on the secondary market by the government-sponsored enterprises Fannie Mae and Freddie Mac. If an inaccurate valuation is discovered, the lender faces a repurchase on that loan, which translates directly into a risk for the appraiser's bottom line. (This risk to a lender due to an inaccurate appraisal is not mentioned in the story, either.)
"An accurate appraiser is a busy appraiser," Kirchmeyer said. "If an appraiser consistently gives low-ball valuations, then eventually quality control at the lender catches up. The lender will flag that appraiser as a poor quality appraiser." Are appraisers low balling? If the lender could pressure anything, it would pressure to bring the price higher."
Invitations to the authors to discuss the original article as published in the Wall Street Journal went unanswered.