Early in November, the New York state Attorney General Andrew Cuomo accused home appraisal company eAppraiseIt of yielding to pressures from lenders like Washington Mutual and appraising the home values too high. According to the news report, Mr. Cuomo said
“consumers are harmed because they are misled as to the value of their homes, increasing the risk of foreclosure and hindering their ability to make sound economic decisions.”
This sounds a little odd to me. Perhaps you can help me figure out how an allegedly inflated appraisal hurt the consumers.
If I understand correctly, here’s the sequence of the events related to a home purchase:
(1) The seller lists a home for sale. The buyer looks at it.
(2) The buyer likes it and makes an offer to buy the home.
(3) The buyer and the seller haggle. They finally agree on a price and terms. They sign a sales contract. The buyer gives the seller 3% of the contract price as “earnest money.”
(4) The buyer applies for a mortgage with the sales contract attached.
(5) The lender hires an appraiser.
(6) The lender approves the mortgage application.
(7) The buyer accepts the mortgage by signing the mortgage papers.
The purchase price is negotiated between the buyer and the seller in step (3). The buyer comes up with a value of the home they are buying before an appraiser is involved. In a mortgage refinance, the process starts with step (4). The appraiser is called in after the fact by the lender. The lender wants an appraisal to see if the risk is acceptable if it lends the money. The appraiser works for the lender. If the appraisal comes in too low, the buyer will have to look for another lender. Every loan has an application form. If the lender approved a loan which was more than the home’s value, it’s because the buyer applied for that much. I just don’t see how the appraiser hurt the buyer. There was a willing buyer and a willing seller. They struck a deal. Our public officials should stop blaming everybody else when the deal didn’t benefit one party as much as they wanted.