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There are concerns that many of the mortgages originated in recent years involved inflated appraisals, leaving homeowners owing more than their property may be worth.
These owners could encounter problems of they seek to refinance adjustable-rate loans to avoid higher monthly payments. Meanwhile, sellers might have to slash their asking prices, and lenders could post substantial losses if borrowers are forced into foreclosure.
Much of the problem stems from conflicts of interest, as appraisers are hired by loan officers and mortgage brokers, and appraisers depend on them for repeat business.
These loan officers and mortgage brokers are compensated only for completed transactions, prompting some to pressure appraisers to achieve a particular valuation that will allow a transaction to go through.
Research indicates that brokers orchestrate 50 percent of mortgages, and they are not governed as strictly as lenders at the state level. Inflated appraisals also result from the inclusion of comparative home sales data in the valuations, as it is virtually impossible for appraisers to know if such things as landscaping and closing-cost assistance are included in new-home prices.
As a result of these concerns, Congress is considering increasing regulation of appraisers.
Source: The Wall Street Journal, Ruth Simon, James R. Hagerty (07/23/06)
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