GAO Study: Home Appraisal Process Flawed

by 01 Mar 2012

A Government Accounting Office study has raised concerns over the quality and oversight of the appraisal industry.

(Builderonline) The Government Accounting Office has come to the same conclusion many home builders have: the home loan appraisal process remains flawed.

“Some 20 years after the passage of Title XI [which establishes rules about appraiser qualifications and independence] questions remain about the oversight of the appraisal industry and the quality of appraisals,” says the recently released GAO report.

Appraisal fraud, the deliberate overstatement or understatement of a home’s value, remains a concern. Of the 816 mortgage fraud cases the FBI closed from the fourth quarter of 2010 to the third quarter of 2011, 92 involved appraisal fraud, the report said.

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And there are still worries within the industry that the increased use of appraisal management companies, which are often accused of focusing more on the bottom line and quick processing, is sacrificing quality, the report continued.

A much-simplified summation of the GAO’s study is that the appraisal process needs better monitoring. The National Association of Home Builders (NAHB) agrees and said there is evidence that the flawed system is continuing to hamper the home building industry’s recovery by derailing sales.

A recent NAHB poll showed that one out of three builders surveyed lost signed sales contracts because of flawed appraisals. And a National Association of Realtors survey conducted last fall found 18% of Realtors reporting recent contract cancellations or delays as a result of a low appraisal.

“The current system is not working,” said NAHB Chairman Bob Nielsen in Nation’s Building News. “We must resolve a flawed appraisal process that produces inaccurate assessment of home values because this fosters price instability, puts more families in danger of default or foreclosure, and undermines the housing and economic recoveries.”

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  • by Pete Deatherage | 3/1/2012 7:35:39 PM

    Whenever I see an article like this I cringe. There is a part of me that acknowledges that the appraisal industry needs work, but I also think asking Realtor's and builders is stupid. As far as they are concerned, if it doesn't come in at sale price it's a flawed appraisal.

  • by mad | 3/1/2012 9:55:12 PM

    Ever since the AMC's came into being appraisals have gone down hill. The established seasoned appraisers won't and don't work for the appraisal management companies. They don't need to. Instead the appraisers that cannot get business or are of poor quality have signed up to get business with the AMC's. A very well know and seasoned appraiser said that when he looked into signing up with the AMC's the only questions they asked were how fast can you turn an appraisal around and how much do you charge. No references or education questions were ever asked. You did not have to prove anything to sign up.

    Many of the appraisals we receive the appraisal management companies fail to catch the errors on the appraisals even though they go through their quality control. This then takes longer as the underwriters find the errors and then the appraiser has correct the appraisal. Waiting a 2nd time for the appraiser to make the corrections and get it back to the underwriter causes the mortgage process to be longer and rate locks have been lost. If the AMC's would do their job correctly, this would not happen as much as it does.

    Part of the problem also comes from all the regulation. Yes, appraisers are very scared of getting accused of fraud, so they feel it is safer to bring the appraisal in low to cover their behinds. Every group involved in the mortgage industry is constantly in fear of making a mistake and getting accused of something they didn't do because of all the Federal agencies breathing down our necks. Funny how every time the Government gets involved they make things worse. A clear case of people making rules when they
    have no idea what they are talking about.

  • by Kim Napier | 3/2/2012 8:30:49 AM

    Amen to the above comments. But I would like to further add mine.

    I'd like to point out that if only 92 of the 810 fraud cases included appraisal fraud, that's less than 12%. Now, any amout is not good, what makes up the other 88%? Builders, Realtors, mortgage officers? So...really, the appraisers are the problem?

    Also, Management Companies are the issue. When appraisers are asked to do reviews for $40.00 and drive by appraisals for $100? Really? I'm not going to put my license on the line for that amount of money. With the cost of E&O insurance and the cost to do business, I'm not taking that kind of fee. So, that begs the question, what type of appraisal quality and experience are they getting for that fee?

    When I started doing appraisal work in 1984 (I know I'm dating myself) fees were $275 to $300. Now, 28 years later, we count ourselves lucky to have a management company offer us $300.00 What other industry has not had ANY increase in fees or profit for 28 years? Realtors fees are still at typically 6%, BUT when the price of housing goes up, their 6% commission is greater. Builders may still ONLY get typically 20% profit, BUT when the price of a new house goes does that 20%.

    Back to the management companies, if they are paying the appraiser $300.00, they are most likely charging the financial institution $450-550, and they pass that fee along to the consumer.

    So, my questions to the builders, Realtors, mortgage officers, etc. would be: Are they low appraisals or inflated contracts? Is it a bad appraisal or a low quality appraisal provided by an inexperienced appraiser?

    Appraisers do not need more regulation, they need to be allowed to do their job.


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