Home appraisals under fire as owners struggle to refinance

Home appraisals, which were blamed for being too generous during the US housing boom, are now being criticized by some homeowners for being too stingy, preventing them from refinancing or borrowing against their houses, The Wall Street Journal reported Thursday.

The criticism is being leveled at computerized real estate appraisals, which depend on models that use prices from home sales and other data to determine the value of a house. Because of the volatility in the housing market, they are underestimating prices, some homeowners, real estate agents and fee appraisers say.

Lenders use computerized appraisals primarily for home equity loans, pre-approvals for mortgage refinancing, loan modifications and mortgage originations of less than $250,000. Automated appraisals are cheaper and faster than in-person appraisals. They run as little as $20, whereas appraisals done by people can cost hundreds of dollars.

The computerized models are used as a check on in-person appraisals, which often were too generous during the housing boom, according to federal banking regulators and state attorneys general. The regulators said banks often held sway over appraisers, encouraging them to value homes at certain prices in exchange for future business.

Gary Cohen, an advertising-sales manager in West Los Angeles, Calif., says Citibank suspended his $510,000 home equity line of credit based on a drop in his home’s estimated value. A computer model used by the bank showed his home had dropped to just over $1 million in 2009 from the $1.65 million it was appraised at four years earlier.

Cohen, 65 years old, paid $750 for an in-person appraisal from a firm designated by the bank. It estimated his home was valued at $1.3 million, but Citibank still would not reinstate his credit line.

Cohen sued Citibank, a unit of Citigroup Inc., over the appraisal. In court documents, Citibank said that even if his home is worth the higher figure, the bank has a legal right to suspend the credit line.

Borrowers also have sued J.P. Morgan Chase & Co., Wells Fargo & Co. and other big lenders, claiming that banks are misusing automated valuation models in order to cut home equity lines of credit.

J.P. Morgan Chase and Wells Fargo declined to comment.

For more on this story, please go to The Wall Street Journal.