I was recently interviewed on a news program, on which I was asked for my learned response and advice to a highly outraged homeowner. This gentleman had purchased a home for roughly $1.5 million, near the peak of the San Francisco Bay Area housing market, circa 2007.
Having watched uber-low interest rates come and, most recently, threaten to go, maybe for good, he decided that it was the right time — economy slightly up, income good, credit good, mortgage soon to adjust, and rates still very, very low, though on the rise — to take his lender up on its frequently mailed offers to refinance his mortgage for free.
The lender deemed him to be highly creditworthy but, alas, his home appraised at right under $1 million — more than $500,000 below what he paid for it a few years ago.
This appraisal caused this homeowner no end of outrage, as you might expect. And in this way, he was no different from so many other homeowners across the country who have tried to refinance or, what’s worse, to sell their homes and had their application rejected or their transaction threatened (or even killed) by a low appraisal.
As we all know by now, in real estate a home is worth only what someone is willing to pay for it. So, appraisers’ opinions of value are based on what a real buyer actually paid for similar, nearby homes that sold recently (comparable sales, or "comps" for short).
This particular gentleman differed from the average homeowner in that he was a physician, a scientist of sorts. So he had gone online, pulled his own "comps" and run his own spreadsheet analyzing what the home’s value should have been (he thought).
Appraisers have been so under the gun, taking so much fire for (some say) inflating home values and contributing to the housing bubble, that they are very conservative these days, in line with recent appraisal guideline changes.
The doctor’s case wasn’t helped by the facts that his community was one comprised of entirely custom homes, super-small-town, high-end properties in which his was probably one of the least pricey, even at the million-dollar value estimated by the appraiser; very few homes sell in that town, in any market dynamic, so the only comps available to the appraiser were neither particularly close by nor were they highly similar properties.
Of course, I offered some practical advice about what steps the doctor should take. First, he should pinpoint the issue with the appraisal that, he thinks, rendered it inaccurate.
Step two? Put together what he feels is the correct information — e.g., the "right" comps — which the appraiser might never see, but which lend credibility to his appeal in the eyes of the underwriter or appraisal management company staffer by whom the extent of an appeal would be decided.
Only two pieces of information that hold even an iota of getting an appraisal changed are (a) more comparable comparables that sold at a significantly higher price (more recent, closer, or more similar homes), and (b) hard documentation that the subject property (i.e., the one that was being appraised) is actually different (i.e., significantly bigger and/or better) than the appraiser understood and described it to be.
Even with strong information to combat a low appraisal, chances of getting the value increased significantly are very slim, though I have seen some homeowners obtain positive results of late.
And don’t think the doctor didn’t protest — "This appraisal isn’t a Supreme Court opinion! This appraiser is just some guy! I should be able to appeal it!" And he can, but here’s the rub: As my Dad used to say, "She (or he or it, in the case of a bank) who has the cash makes the rules."
So, in the final analysis, the good doctor has these options: (a) appeal the appraisal through his own bank, requesting that the appraiser reconsider or that the underwriter order a second opinion; and if the bank/appraiser rejects the appeal (b) apply for the loan through a mortgage broker or another bank.
The doctor’s attitude is what behavioral economists call "attachment bias," which is thinking that your assets or belongings are inherently more valuable than they actually are, just because they happen to be yours.
However, the doctor’s case of the attachment bias is being complicated by dynamics of the real estate market in the time he’s owned the home. First, he did actually pay that price for the home once upon a time.
He wasn’t so unrealistic as to be looking for an increase; he just wanted the place to be worth what he knows it once was. This is not the case of someone who bought low, then saw values go up and down on paper. This is a very real loss for him.
Second, five or six years back, home values were doubling and tripling so quickly that people got used to that — so used to it that expecting your home’s value to stay flat over four years actually wasn’t unreasonable at all.
Third, some of the outrage that homeowners in this situation have is not just from the value, but from the realization that this value issue will actually trap them and their finances and their lives.
In the context of a home sale, a super-low appraisal can kill the deal and mean you can’t move, unless you are willing and able to get a short sale green-lit by the bank (difficult, at best) or to write a check from your own assets to close the deal.
In a refinance situation like this one, a low appraisal means you’re stuck with the "Incredible Growing Mortgage Payment" (a real-life horror parody of Lily Tomlin’s "Incredible Shrinking Woman"), at worst, or a far above-market interest rate, at best.
In some cases, people perceive themselves as even physically and geographically stuck in houses or cities or even regions that no longer work for the other elements of their lives.
From my vantage point, the sources of this outrage are many. And there are just as many — maybe even more — ways this outrage manifests in homeowners’ decision-making.
Many, once they realize they are deeply underwater, begin fantasizing about or even plotting to strategically default on their mortgages, fueled by anger and the (sometimes true, sometimes not) belief that they are making a slick/smart financial decision.
Others, whose payments aren’t even adjusting and who wanted to stay in their homes until they learned how much (or, more accurately, how little) their homes are worth, panic and just start looking for any and all escape routes available, from selling to short-selling to loan modifications or even walking away.
Still other homeowners stay calm, cool and collected, staying put, and refusing to "lock in their losses" by selling, choosing instead to plan their home-related financial decisions more strategically, armed with this new information.
These are the types who do things like petitioning for a reduction in their home’s assessed value and property taxes, or reprioritizing their home improvement plans around which project will create the most value. Even some of the calm, deliberate types will end up short-selling or defaulting, but not based on anger or upset.
I did hear that the doctor’s appeal was rejected by his bank. I hope he’ll move on to another bank, and avoid making knee-jerk, outrage-fueled decisions.
The anger of America’s homeowners is deeply understandable, regardless of who is to blame for the situation, but it only exacerbates our nation’s individual and collective housing crisis when that outrage drives irrational decisions.