Home real estate appraisers have been experiencing a tumultuous year. First giant mortgage investor Fannie Mae revealed that it is considering eliminating long-standing requirements for formal appraisals on home loan applications--moves that could cut borrowers' costs from an average $350 to just $50.

Then Housing and Urban Development Secretary Mel Martinez reveals that he is planning to crack down on appraisers whose incorrect valuations lead to defaults in the FHA (Federal Housing Administration) mortgage insurance program. Martinez plans to create an "Appraiser Watch" monitoring program that tracks--and terminates--appraisers whose numbers don't add up.

All that on top of mortgage investor Freddie Mac's decision to forego traditional real estate appraisals on home purchase transactions when a borrower makes a 20 percent or greater downpayment.

What's happening here? Are appraisers--and their once-mandatory, professional valuations--headed the way of the dinosaurs? Not likely, but the appraisal profession is clearly under pressure from major federal and congressionally-chartered mortgage institutions.

Peter Barish, head of the American Society of Appraisers' Washington D.C. office, agrees that real estate appraisers "seem to be in the firing line" at HUD and elsewhere. Nationwide the industry is under assault from new technologies-- "automated valuation models" (AVMs) which tap into online property databases and allow lenders to check approximate home valuations instantaneously, at minimal costs.

Now HUD Secretary Martinez wants to subject FHA appraisers to new, vigorous statistical analyses, much like the department already does with lenders. Under HUD's "Credit Watch" program, auditors scour FHA lenders' default rate statistics, and discipline those whose rates substantially exceed regional averages.

HUD intends to extend the same statistical reach to appraisers--identifying those who appear to work frequently for lenders with high default ratios. Those appraisers could then be targeted for either disciplinary action or termination from the FHA program if their appraisals appear to contribute to a lender's high default rate.

Neither Martinez nor departmental officials would provide additional details on the forthcoming Appraiser Watch initiative last week, when asked by Realty Times. But representatives of major appraiser organizations were perplexed by Martinez's plans.

"What are they saying here--that if you happen to get a lot of appraisal assignments from a lender who happens to have a high rate of defaults, that you're necessarily a bad appraiser?" asked Don Kelly, vice president for public affairs of the Appraisal Institute. "There's a logical disconnect there," he said.

Barish of the American Society of Appraisers said that professional appraisal groups recognize that some appraisers may be part of fraudulent loan schemes, and should be terminated or disciplined by HUD. But a purely statistical approach--such as Credit Watch--"won't solve the problem of bad appraisals."

Part of home real estate appraisers' problems may arise from their own valuation patterns. Freddie Mac officials estimate that "97 or 98 percent" of all appraisals they receive on home purchase transactions hit or approximate the price on the sales contract. If the home sale price was $215,000, there is a 97 to 98 percent likelihood that the appraisal will come in at very close to $215,000.

"So when we looked at the cost of the appraisal in the transaction, we asked ourselves: is this really adding value? Is this telling us something that we didn't already know from the contract?" said a Freddie Mac official. The company decided that instead of requiring traditional $350 appraisals, it would allow as a lower-cost option a "no-appraisal" plan costing $200. The $200 is charged by Freddie Mac to participating lenders in lieu of a formal appraisal. The lender typically passes that charge on to the loan applicant instead of ordering an appraisal.

Appraises argue emphatically that they do add an essential and important ingredient to the transaction: An independent, professional judgment on a property's true market worth. That, in turn, gives a lender certainty that there is sufficient collateral backing the mortgage.

And, says Richmond, Va. appraiser Patrick Turner, a professional appraisal helps a consumer to avoid overpaying on a home purchase. "Common sense will tell you," says Turner, "that you can't know what a house is worth" without a hands-on, professional appraisal.

Published: February 25, 2002

Use of this article without permission is a violation of federal copyright laws.

Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.