While equity evaporates, new values keep some out of the market.
Rosita Fields hit a dead end when she tried to refinance the mortgage on her south Minneapolis house: The appraisal came in at less than what she owed.
Aaron Smith was equally stymied when he tried to buy a $180,000 house in St. Paul. The appraisal was $10,000 less than the asking price. The sellers refused to budge, sinking Smith's chances of getting financing.
Just a year ago, situations like theirs were less common. But with house prices falling and the mortgage markets in disarray, more consumers are feeling the effects of a crackdown on appraisals by lenders and regulators.
It's a major turnaround for an industry that critics said was plagued by inflated appraisals which didn't garner much attention as long as prices were rising. Now many lenders are trying to curb their losses by scrutinizing not only the borrower, but the value of the property, as well.
The bottom line? The value of a house is only what a buyer will pay. And in this bear market, lenders aren't taking any chances.
"Values might have retreated more than the consumer might be willing to admit," said Tom Musil, director of the Shenehon Center for Real Estate at the University of St. Thomas.
Risk of blacklisting
According to a survey last year by the October Research Corp., almost 90 percent of the appraisers polled said that they were pressured by mortgage brokers, lenders, realty agents, consumers and others to raise property valuations. That percentage was nearly double the findings of a study done three years earlier.
The study also found that 75 percent of appraisers reported "negative ramifications" -- including being blacklisted -- if they didn't cooperate.
Alan Hummel, chief appraiser for Forsythe Appraisals in the Twin Cities and a past president for the Appraisal Institute, has taken his concerns over such practices to Washington, where he testified before a Senate subcommittee on banking and housing.
He blamed the problems on skimpy oversight and regulation of mortgage brokers, lenders and real estate agents and what he called a systemic coercion of appraisers.
"Too many brokers and lenders unfortunately view the appraisal process as something to be manipulated," he told lawmakers.
Simple inexperience may have played a part, he said. Many appraisers got into the business in the last few years and didn't have the skills to handle either the pressures of the boom market or the challenges of a declining one.
Some homeowners are equally ill-equipped. "There's a whole bunch of property owners out there who haven't lived through this type of situation either," he said.
Brewing for years
Several state and federal agencies have stepped in to help curb such abuses.
In Congress, several mortgage reform and anti-predatory lending bills have been introduced that would ban improper influence on appraisers and coercion, even on independent mortgage brokers who were not governed by existing federal rules. It would also raise the standards for licensing appraisers.
"Congress recognizes the effect this has had on consumers and they have to take some type of action," Hummel said.
In Minnesota, the situation has been brewing for years. In late 2004 the Department of Commerce, which licenses appraisers, was cited by federal regulators for not having a good system for keeping track of continuing education and not putting enough resources to policing the industry. The agency has since beefed up its investigations department by hiring former appraisers as investigators.
In addition, the state has established a 15-member real estate appraiser advisory board that's charged with making recommendations to the commissioner on licensing, standards and educational requirements, among others, according to department spokesman Bill Walsh.
The most serious attempts, and those that could have the broadest impact, have come from Fannie Mae, the nation's largest provider of mortgage money, which has issued new rules aimed at protecting lenders and reducing the likelihood that homeowners will find themselves upside down on their mortgages.
Appraisers must now note if a property is in a "declining market" and factor in how many listings are on the market and for how long. Despite large variations from neighborhood to neighborhood, several big lenders have already labeled the Twin Cities metro area a declining market.
Tough for first-time buyers
That means, for example, that a borrower in a declining market who is trying to get a mortgage through Fannie Mae's popular My Community loan program will automatically have their loan amount reduced by 5 percent from the maximum for that program. The borrower will have to come up with that 5 percent.
Such a move could have a big impact as borrowers who can least afford it are asked to make a larger investment in their house. Many of Fannie Mae's mortgages are made to first-time and low-income borrowers.
"It'll blow a lot of first-time home buyers out of the market, especially in the most vulnerable neighborhoods," said Kris Wilson, senior loan officer for Fairway Independent Mortgage. "I really believe that Fannie is going to cause more damage than good by doing this."
Dan Arrigoni sees the situation from another perspective. As president of Minneapolis-based U.S. Bank Home Mortgage, he's watched loan losses pile up and has had to spend more to comply with the increasing regulations. For example, new restrictions no longer let the lender pick the person who is going to do the appraiser. That's now automated. And getting the proper documentation for an appraisal is now more complicated and takes longer.
"We're paying more attention to the overall economics of where a house is located, how many homes are for sale in that area, what is the supply -- and it varies from neighborhood to neighborhood," Arrigoni said.
And that's why it's getting more difficult for borrowers like Smith and Fields, who both face uncertain futures when it comes to their real estate.
Sellers who had bought their homes at the height of the real estate frenzy are also going to feel the pinch.
"They are not about to get out of a transaction with any equity and in some cases, may be upside down and be required to bring a check to closing," Wilson said. "It's painful."
Jim Buchta • 612-673-7376