Usually, individuals applying for a loan are only interested in
obtaining the loan and unfortunately are not worried about the
prudence of buying the property at the agreed price. In fact, many
purchasers will try to encourage appraisers to increase the
appraised value so that they can purchase the home regardless of its
value.
The majority of real estate appraisals are requested by mortgage
companies to validate the property's purchase price for loan
purposes. Except for periods of very low interest rates when
everyone is refinancing, most loans are for the purchase of real
estate and ordered after a sale price is negotiated. Purchasers
mistakenly assume that mortgage companies are looking after their
interests in the purchase transaction.
The law states that if the mortgage company orders the appraisal,
the appraiser is responsible only to the mortgage company. We expect
mortgage companies to be prudent and they should be, but being
prudent is protecting their interest, not necessarily the
purchaser's. The mortgage company's position:
- It has two sources of repayment: the purchaser's income and
the property.
- The responsibility to repay the loan is not based upon the
property's value, so the purchaser is obligated to pay the note
even if the property value declines to zero.
- The loan may be insured or guaranteed by a government agency.
- The government does not promise to pay the purchaser's debt if
the property value is wrong.
- If the loan is greater than 80% of the value, a portion of the
loan may be insured by a private mortgage insurer.
- There is no decrease in risk for the purchaser regardless of
the loan-to-value ratio. The investment by the purchaser is the
same, a mixture of personal cash and a loan that must be repaid.