Preliminary results from an ongoing national study suggest that the appraised values of some American homes contain a 'fluff factor' -- an overvaluation caused by pressure placed on appraisers to "hit the number" needed to close the mortgage loan.

Nearly three out of four appraisers told researchers that they had been pressured by mortgage brokers to hit a specific value; 59 percent said they had been pressured by a retail mortgage loan officer working for a lender; 56 percent reported similar pressure from realty agents, and 22 percent said they had been pressured by an appraisal management company that contracted with them on behalf of a lender client.

Over one-third of the appraisers polled told researchers that they had delivered the valuations demanded of them, usually by choosing "comparables" for the appraised property that supported the value needed to close the deal.

The overvaluations sometimes were substantial: 43 percent of the appraisers reported raising valuations by 11 to 30 percent; 48 percent of the appraisers said their overvalutions averaged between 1 and 11 percent.

The ongoing study, the National Appraisal Survey, is the first independent analysis of the appraisal industry using professional polling techniques on a statistically-representative sampling of appraisers nationwide. The study is being conducted by October Research Corp., a Richfield, Ohio-based research, consulting and publishing firm that specializes in real estate issues.

Appraisers were selected randomly from publicly-available licensing lists on a state-by-state basis, and were interviewed in depth by polling professionals. The survey itself carries a plus-or-minus 6 percent margin of error. Appraisers who participated in the study were not informed in advance of any specific questions, and the survey itself covered a wide diversity of appraisal-related questions besides "lender pressure." The preliminary results -- based on interviews in 31 of the 50 states -- were released in October Research's Appraisal Intelligence journal.

Joe Casa, founder of October Research, called the preliminary results eye-opening. "We knew that pressure on appraisers is a problem," he said. "But we had no idea it was this bad."

Other real estate and financial industry experts said the findings confirm some of their own impressions. Michael Ousley, executive vice president of FNIS Appraisal Enhancement Services, said that anywhere from 15 to 30 percent of the appraisals his firm reviews are found to be inflated by "at least 15 percent" on a regular basis.

Casa said that "a fundamental character issue is involved here" -- not only should loan officers and brokers ethically refrain from putting pressure on appraisers, but "appraisers should just say no."

But a Washington-based appraiser, who spoke to Realty Times last week on the condition of anonymity, argued that 'saying no' can be devastatingly costly.

"They tell you right out -- hit this number or you won't get paid. Or hit this number or you'll never get another assignment from us again."

Other forms of pressure include what's known as "pre-comping," whereby loan officers fax out information in advance about a property and ask prospective appraisers whether they think they could support a valuation of some specific dollar amount. That number may be the contract sale price on the house or the amount needed to support a loan-to-value ratio the purchasers can afford.

Appraisers who won't agree to hit the "pre-comp" target number simply don't get the assignment. Others who agree to cooperate get the business instead.

Inflated values on homes can cause huge troubles for consumers and for the lenders financing them. The S&L crisis of the early 1980s -- triggering a multi-billion-dollar bailout and fire sale of failed lending institutions and their assets by the federal government -- was triggered in part by inflated real estate appraisals. Even in less catastrophic economic situations, artificial valuations can give homeowners a false sense of wealth, and cause them to borrow against equity that isn't really there. Or it can put them in an "upside down" position on their mortgage -- owing more in principal debt to the lender than the market sales value of their property.

Published: September 22, 2003

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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.