Thanks for the link to the complaint. Having read through it, I stand by my comments, I think what I say is very accurate in describing part of the ongoing foreclosure issue.
I work in an industry (insurance) were one side of the buyer-seller arrangement is expected to have extensive knowledge of the industry and the other side is expected to purchase on faith; that if something goes wrong, then things will go in their favor.
The mortgage debacle is largely the fault of people who put their faith in mortgage brokers, lending institutions and (finally) appraisers who arrange the mortgages. Is there an innocent party in this? Are we dealing with victims? No one is truly innocent, but an honest appraisal system may have avoided some of these poor loans.
Let’s hop the way back machine to 2005. I had just finished rehabbing a duplex I intended to keep as a rental property. I wanted a fixed rate mortgage with cash out at closing, my mortgage guy said no problem, he’ll get his ‘best’ appraiser on it. The appraiser pulls comps from an adjoining upper income neighborhood, showing my property worth more than true market value, making my mortgage sail through loan underwriting with no PMI.
WaMu does exactly this. They work with Realtors, mortgage brokers, mortgage wholesalers, the whole lot. If $116 Billion a year in loans get approved and sold to investors, WaMU gets paid, the brokers get paid the Realtors get paid, even the appraisers get paid. Everyone gets something, except when it goes wrong. Now of all the people in this transaction, which one has a responsibility under Federal statute to be honest and unbiased? The appraisers.

What you described might have happened elsewhere but it was not the case in the WaMu and eAppraiseIt case. If you read the actual complaint filed with the court, there is no indication of WaMu shopping for buyers *before* a sales contract was signed or a loan application was made. WaMu merely approved the buyer's application. They gave what the buyer wanted. If the real estate market didn't turn south, I bet there would be none of this.

Appraisal is subjective. A big part of the value is land. You may be able to put a value on the structure based on material, construction and depreciation, but when the market is moving fast, valuing the land is nearly impossible. Last month's price quickly becomes obsolete. If you call in 2 appraisers, you will get 2 different values. Who's to say which appraiser is right? Is the low value too conservative or is the high value inflated? Hard to say.

Loan originator finds client whose warm breath can fog a mirror.
Realizing there’s no one in the world dumb enough to do 100% financing they find an appraiser willing to ‘hook them up’ at 125% of asking price securing them financing on a terrific ARM loan.
Buyer sees appraisal numbers and thinking they’re getting a great deal so they follow through with purchase.
Having ‘equity’ in the house they close, then quickly get a HELOC to tap into their ‘money’
Fed raises rates causing their HELOC payments to go up.
ARM resets now they can’t afford either payment.
Is all this the appraiser’s fault? Not entirely, but like a three legged stool, without their support the whole structure would have collapsed. Loan originators and borrowers are expected to lie a little in this transaction to get the deal done. The appraisers play a key role since they’re expected to be unbiased hence they become the primary people who convince the loan underwriters to make the deal.

Chuck, I disagree with your last statement:

"The consumer was possibly hurt by being approved for a loan that they could not afford."

Whether the buyer is able to afford the loan is very subjective. The lender is in no position to know that. Some people can afford to use 60% of their income on loan repayment, while some others can afford only 10%. If the buyer doesn't even know whether they can afford it, the lender won't know either. Plus, the buyer asked for the loan amount. They applied for that amount. The lender merely gave what the buyer wanted. How could they hurt the buyer by giving them what they wanted?

Ted, I agree with what your friend is saying. It's really lame to place the blame on the appraisers while all parties involved in the transaction want the deal to go through.

Julie, I agree that an appraisal should be objective. An inflated appraisal hurt the mortgage backed security purchaser if the loan package was represented with an artificially low loan-to-value ratio. I just didn't think the home buyer can blame the appraiser though.

Finally, anonymous, I don't think it's unethical to shop for a mortgage lender who will approve the loan application. The lenders are sophisticated institutions. Some are more aggressive than others. As long as there is no fraudulent misrepresentation by the buyer, I think applying to a different lender after being declined by one is fair game. To borrow a tag line from Lending Tree — "When banks compete, you win."

The house is collateral for the bank in case the borrower defaults on the loan. If the borrower pays cash for the home, he can pay any price he wants but since the bank is financing the loan, they have a right to make sure there is enough equity in the home in case the borrower defaults and the home has to be sold to pay off the loan.

Inflated appraisals are only one part of the problem but they are a significant problem.

At the same time, appraisers don't want to be known as "the guy/gal who always brings the value in low, making a pain in the butt for the loan officer, the realtors and the buyers and sellers." So they do try their best to justify the sales price as it is.

They want to make a law here that says on a refinance we can't tell the appraiser what we or the borrower expect the property to be worth. Which is unfortunate, because we (MOST of us anyway) don't do that in order to commit fraud, but in order to ask the appraiser if we're in the ballpark, so that if he figures out we're not, he can let us know BEFORE we spend the borrower's $400 only to tell them we can't do a loan for them.

It's a big mess. If everyone would just conduct business ethically, life would be a lot simpler.

If a buyer is getting a mortgage loan, then the transaction is not just between the buyer and seller. The lender is now involved, and if the mortgage is securitized, then the company who buys the securitization is involved, and if the company is publicly held, then investor who invests in the company who buys the securitization is now involved.

If you hired a home inspector to make sure the home was within code and there was no major structural damage or hidden repair items, then you would expect the home inspector to give an unbiased report on the condition of the home, not a report that favors one party (the seller in this case).

Are inspections and appraisals done in the right order? Maybe not, but they still should be performed independently and without bias.