In a city where walnut-bordered herringbone floors or cast-iron claw-foot tubs or onyx backsplashes can amount to multimillion-dollar differences in real-estate prices, there’s a small group of New Yorkers with quiet, immense power over realty.
They’re the appraisers—little-known, little-regulated, and smack at the hub of an unfolding state investigation into Manhattan’s ever-ballooning home prices.
Since mid-May, State Attorney General Andrew Cuomo has issued subpoenas to three companies. “You’re going into a hornets’ nest,” Melissa Cohn, the owner and chief executive of the subpoenaed Manhattan Mortgage, told The Observer.
Here’s what stings: Say you want to refinance a mortgage, and your mortgage broker orders an appraisal to pin down your apartment’s market value. If the appraiser says your apartment is worth less than you thought, you won’t get the mortgage you wanted—because banks will only lend a certain fraction of the appraised value.
And when the deal falls through, your commission-based mortgage broker doesn’t get paid.
“That’s when people make the mistake of saying: ‘If you don’t make this deal happen, you’re not getting my business anymore,’” said Steven Maxwell Knobel, a co-founding partner of the New York appraisal giant Mitchell, Maxwell & Jackson, which Mr. Cuomo also subpoenaed.
“I get it from major banks, I get it from mortgage brokers,” he said about that pressure.
His firm did 20,000 appraisals last year, so they got “hundreds” of those browbeating phone calls. “Thankfully, since I’ve gotten big, I’ve had the opportunity to tell the bad people to go away.”
But even without the bad people’s direct threats, appraisers are more gently and more commonly pressured by the custom of mortgage brokers telling them beforehand what number the client is expecting from the appraisal. That’s the value, of course, your mortgage broker wants met.
“You’d think that in order to get a truly 100 percent objective appraisal, you wouldn’t give them a number,” said Ms. Cohn. “But we do, because that’s what we’ve been asked to do.”
(Nevertheless, she and Mr. Knobel both maintained that appraisers don’t necessarily feel forced to hit that client-made value.)
Jonathan Miller, president of the Miller Samuel appraisal firm and an oft-quoted real-estate blogger, disagrees. He estimated that only one in four or five American real-estate appraisers does his or her job independently. “The rest of them are order-takers; they’re making the number, and it all works out.
“It’s a joke—the system is a joke,” Mr. Miller said. “There is very little independent analysis of what collateral is really worth.”
But the system is big business: Manhattan Mortgage brokered $3 billion in loans last year; Mr. Miller’s firm provided property valuations of more than $5 billion in the borough; and Mr. Knobel estimated that his firm did at least $7.5 billion.
Andrew Fautley, a co-founder and principal of another firm, Vanderbilt Appraisal, said he took offense to an industry-wide critique. Nevertheless, things are bad and getting worse: According to a study quoted by Bloomberg News, 90 percent of appraisers feel influenced to do sham work—and that number was only 55 percent just four years ago.
Where will Mr. Cuomo’s investigation lead? And are more subpoenas coming? His office didn’t return several calls for comment.
According to John Brenan, the director of research for the Congressionally authorized Appraisal Foundation, appraisers are legally required to remain impartial and objective. So should mortgage brokers be giving them the number that a client expects from the appraisal—even if that figure is simply a useful illustration of market value?
“The way we look at it is, we’re presenting a guide to where the value should be,” Ms. Cohn said. “We’re not directing them or compelling them to come in at that value.”
Strong-armed or not, mortgage brokers were barely here only a decade ago; most mortgages back then came directly from salaried staffers at banks. Now, Mr. Brenan said, most come from mortgage brokers, who are paid on commission and need the appraisals to go just right in order to get paid.
It isn’t healthy for Manhattan realty when appraisers buckle under the pressure that nine out of 10 say they now feel. “What you’re doing is creating a mortgage system that is based on collateral whose value is not there,” Mr. Miller said.
So, thanks to the loose relations between appraisers and mortgage brokers, Manhattan’s bubbly real-estate market has gotten bubblier.
Mr. Miller pointed out that the politician who fought the hardest to reform that relationship, Congressman Bob Ney, regrettably turned out to have some bigger corruption problems: He has been sentenced to 30 months in prison in relation to the Jack Abramoff scandal.
Something has to change. “The potential is there to have a repeat of what happened with the savings-and-loan crisis,” Mr. Brenan said. When loans are made on inflated appraisals and those loans foreclose, the bank takes a direct hit: “Which, of course, could have a devastating effect on the real-estate market and, in large enough numbers, on financial institutions.”
The third firm to be subpoenaed by the State Attorney General, eAppraiseIT, is based in California, despite the fact that they reportedly work on as many as 15,000 New York homes annually. That’s because they’re an appraisal management company that contracts appraisal work out.
“It’s effectively finding appraisers working for half the rate,” Mr. Miller said about management companies. “I’m all for competition, but they can’t do business without cutting significant corners. They get high volume because they turn paper around in 24, 48 hours.”
The firm is owned by the First American mortgage-service conglomerate; eAppraiseIT did not return calls for comment.
But our localized system isn’t perfect, either. For example, Vanderbilt Appraisal’s Web site has an affiliations page that listed Manhattan Mortgage as a “strategic partner.” (It was removed one hour after Mr. Fautley was asked about it by The Observer.)
“All that means is, sometimes they give us work—that’s it,” Mr. Fautley said. He added: “And I’m friendly with Melissa Cohn—that’s it.”
Does she get anything in exchange? “Absolutely not,” he said. “I do not accept pressure from anybody.”
But some do. “I think every state, to one degree or another, has some problems going on with this issue,” Mr. Brenan at the Appraisal Foundation said. “We’ve heard different people talk about possible solutions: They are anywhere from changing the way that [mortgage brokers] are compensated, or saying that only a disinterested third party engages an appraiser, and that the appraiser is made completely unaware of the specifics of the transaction, or what the owner thinks the property is worth.
“It would take a fundamental change in the residential lending system,” he added, “to bring about that kind of change.”