Conflict of Interest: Home Appraisers and Lenders

.

After being blamed for helping to inflate home values during the housing boom, the appraisal business is again coming under fire.

.

Squeezed by a drop in fees, some appraisers are compensating by driving long distances to handle more assignments. Their wanderings are raising questions about whether they know enough about the neighborhoods to accurately assess the value of homes—which has implications for both home buyers and owners.

.

Bob Blake, a flight-test engineer who lives in Palm Beach Gardens, Fla., was shocked when an appraiser who traveled 44 miles from Port St. Lucie, Fla., valued his home at $228,000 in late May. Mr. Blake’s mortgage broker, Skip McDonough, protested to the appraisal-management company, Nations Valuation Services Inc., that the appraiser had failed to look at comparable homes. Eventually, Nations sent another appraiser, who valued the home at $295,000. The dispute delayed Mr. Blake’s refinancing by more than six weeks.

.

A spokesman for Nations Valuation declined to discuss the details of the appraisals but said, “We feel we handled it properly.”

.

Appraisals are supposed to shield home buyers from paying too much and lenders from overestimating the value of collateral. If appraisals come in too high, buyers may overpay, making defaults more likely. If they are too low, it becomes hard to sell or refinance homes. Many real-estate agents and builders say that the pendulum has swung too far toward caution, and that lowball appraisals threaten to snuff out any recovery in the housing market.

.

The debate over appraisals is inflamed by a natural tension: Real-estate agents and mortgage brokers, who need to complete transactions to collect their fees, are unhappy when an appraiser nixes the sale price. But it also suggests that there may be unintended consequences to an attempt by New York Attorney General Andrew Cuomo to reform the appraisal business.

.

Using the threat of litigation, Mr. Cuomo last year prodded the government-backed mortgage investors Fannie Mae and Freddie Mac into adopting a new code of conduct for appraisers. Since those two companies provide funding for the bulk of U.S. home mortgages, the code, which took effect May 1, has become the national standard for most home loans.

.

The code bars loan officers, mortgage brokers or real-estate agents from any role in selecting appraisers. One result is that more lenders have outsourced the selection to appraisal-management companies, or AMCs, which take a sizable cut of the appraisal fee, often 40% or more. The AMCs pay appraisers as little as $175 to $200 per assignment, compared with the $350 or more that many get when they work directly for a lender.

.

.

Appraisal-management companies deny they are squeezing appraisers too hard. A spokesman for banking giant Wells Fargo & Co., which owns an AMC, says it “has invested substantial time and resources in the quality control of the valuation process to, among other things, ensure that individual appraisers have relevant knowledge of the markets and properties they review.” A spokeswoman for Mr. Cuomo says the new code is working well and helping protect appraisers from pressure to inflate estimates.

.

.

Sometimes appraisers are called on to express opinions on the values of faraway homes without even seeing them. LandSafe, an appraisal unit of Bank of America Corp., in May assigned Jane Price, an appraiser in Dallas, to review another appraiser’s estimate of a home in Cathedral City, Calif. Ms. Price didn’t visit the neighborhood in question, but her review cited nearby homes she used to determine comparable value.

.

Ms. Price declined to comment. A spokeswoman for Bank of America says Ms. Price was asked to do only a “desktop review” of the original appraisal. “California is a state which has a lot of market information available, which allows a reviewer to gather credible data about a property even when they are not in the immediate area,” the spokeswoman adds.