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As the housing market cools, Americans are confronting a problem that was easy to ignore during the boom: inflated appraisals of home values.
Critics inside and outside the appraisal business long have warned that many appraisals are unrealistically high.
Inflated appraisals didn't matter much when home prices were rising at double-digit rates, since market values would quickly catch up. Now, however, prices are leveling off in many places and falling in some. Some homeowners are finding that the market value is below what past appraisals led them to believe.
For sellers, that can mean being forced to drop their asking prices. Some people hoping to refinance, meanwhile, may be unable to lock in new loan terms because they have less equity in their homes than they thought.
Dubious appraisals are a risk for the hundreds of thousands of people who in the past few years have bought homes with little or no down payment, or used almost all of their home equity to finance home improvements or other types of spending. That has left these people with little financial cushion to deal with rising interest rates.
"Now it's pay-the-piper time for people, and they're finding out they don't have the value in the house they thought they had," says John Taylor, president of the National Community Reinvestment Coalition, a Washington-based nonprofit that supports low- income housing.
Karen Ammon, who works for an auto-parts marketing company in Bloomfield Hills, Mich., bought her home in 2002 for $141,000. A year later, a lender encouraged her to refinance into a larger loan that would let her pay off credit-card debt. The appraiser chosen by the lender had great news: Her house now was valued at $175,000. She had room to raise her total mortgage to $165,000.
Now monthly payments on the adjustable-rate loan she received in 2003 are rising in line with the general level of interest rates. So Ammon wants to refinance into a fixed-rate loan. But when she tried to refinance, she couldn't do so because several appraisers valued her home at $148,000 -- or about $15,000 less than she owes in mortgage debt.
The appraisal system has a built-in conflict of interest. Appraisers often are hired by loan officers or mortgage brokers, whose compensation depends on how many loans go through. Appraisers, dependent on loan officers for their livelihoods, say they often feel pressure to come up with a number that will allow a home purchase or refinancing to proceed.
Another problem is that -- unlike in the 1980s, when current mortgage law was enacted -- around half of all mortgage loans are made through brokers rather than directly by closely regulated lenders. Mortgage brokers are lightly regulated in most states, and appraisers say brokers often apply pressure.
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