Magazine article Mortgage Banking

Are 'Low Appraisals' Killing Deals? Housing Markets Gyrate but True Property Value Is a Deeper Concept. There Really Is No Such Thing as a "Low" Appraisal

Magazine article Mortgage Banking

Are 'Low Appraisals' Killing Deals? Housing Markets Gyrate but True Property Value Is a Deeper Concept. There Really Is No Such Thing as a "Low" Appraisal

Article excerpt

The root cause for our latest financial crisis (which seems to have infected every industry, commodity, currency and region) was attributed in part to real estate appraisers. Many claimed that appraisers overvalued real estate and thus triggered the near collapse of our financial "house." [paragraph] Out of this, politicians penned the Dodd-Frank Wall Street Reform and Consumer Protection Act. It created the most comprehensive financial reform measure that could be squeezed into 2,000-plus pages. Dodd-Frank was distilled into 16 titles and 243 rules, and called for 67 studies and the issuance of 22 periodic reports--rules and recommendations on paper. [paragraph] Perhaps most importantly, it gave those in the lending and appraisal realm the Consumer Financial Protection Bureau (CFPB). Its effectiveness, however, is debatable. [paragraph] For example, the philosophy of discouraging disparate pricing--the one-size-fits-all model--has over-rewarded some lender segments of the market on the high end (causing borrowers to pay more) while making other segments (i.e., smaller loan amounts) basically uneconomical for lenders to serve at all. [paragraph] It's yet to be seen if the bureau's title mission is really being fulfilled.

Learning from the crash

Prior to the crash, home prices inexorably climbed higher and higher for the better part of a decade. No one--lender, investor, real estate agent, appraiser or borrower--voiced concern as prices continued to increase. It wasn't just that this rising tide lifted all boats; it literally funded the purchase of a boat for everyone.

Then it stopped, suddenly, in what seemed like a matter of months. It was as if no one had recognized the signs.

Certainly there were some who raised their voices in warning, but they were very few and no one really heard (or believed) them. The volatility that followed continues to affect the industry and threatens to push us back to this very same starting point.

It began with the investors--those entities that bought loans from lenders and turned them into miscellaneous financial instruments. It was, in large measure, both the pressure by these financial engines to help meet the market's appetite for loans, and the failure of the guardians at the gate to understand the true nature of worth versus value that was so integral to the crisis.

When the merry-go-round stopped, it was those self-same investors and their lenders that were left to explain to their clients--the pension funds, insurance companies, credit unions, school districts, labor unions and other institutions--what had happened.

Appraisers were identified as a contributing party, which underscored the disconnect between worth versus value. It was commonplace to read and hear: "It was the appraisers; they gave us their opinion of what the property was worth, when the real question we asked was: 'What was the value?'" Ironic really, that these very entities owed their existence and spectacular growth to a system that failed to recognize the inherent flaws in its very foundation.

Defining worth versus value

So if we're to look at the issue of worth versus value, perhaps we first need to define those terms.

"Worth" means to have value. When we use it in terms of real estate, it's as a verb--as in the phrase "it's worth millions." Value, on the other hand, is relative worth--i.e., "to calculate or reckon the monetary worth of something," according to Merriam-Webster. Thus, worth becomes, basically, an idea that a thing has value or meaning or interest to someone. The term "value" is a definition. In real estate, it represents a specific assemblage of information within defined parameters. In other words, it's a reflection of data.

In a perfect world--or a market in balance--worth and value would tend to be in alignment. The world, though, is rarely perfect, and markets seldom achieve equilibrium. …

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