Effects and Implication of client pressure on the opinion of mortgage valuation

INTRODUCTION

 In recent years, client pressure has great influence on property valuation as this has been an emerging theme of behavioural research in the real estate discipline. Studies on valuers’ decision-making behaviour imply that client influence is an important source of judgemental bias.  Hence this work seeks to examine the effect / implication of client pressure on the opinion of mortgage valuation.

Client pressure is a huge issue and concern for most mortgage valuation.  In a recent survey the Appraisal Advocacy Coalition found that when asked about the importance of 14 different issues appraisers rated client pressure the most important of all, tied with data theft. Recently we’ve had some insight into how some of the industry’s trade groups approach the issue of client pressure on mortgage valuation.

The National Association of Mortgage Brokers (NAMB) recently amended both its Code of Ethics and Best Practices to address pressure on vendors like appraisers and title companies. “Members shall not pressure any provider of services, goods or facilities to circumvent industry professional standards,” a new section of the group’s ethics code reads. “Equally, members shall not respond to any pressure placed upon them.”

A new part of its Best Practices reads, “Members shall not engage in or respond to any pressure or influence from any party that seeks to circumvent professional industry standards, guidelines, rules or regulations in a mortgage transaction.  We have the right to participate with all providers of services so long as it is within the scope of industry professional ethics and standards.”

The sentiment is admirable but the question that pops into most appraisers’ heads is, are the mortgage brokers going to be taking classes to learn USPAP now?  Otherwise, how will they know what does and does not circumvent industry professional standards?

REVIEW OF THE LITERATURE

There are a number of studies which have investigated the nature of client influences in residential and commercial property valuations. The earlier studies revealed the existence of client pressure whilst recent studies focused more on the ways in which this pressure may have been imposed on valuers and valuation.

Evidence of client pressure and influence

It is common to find the term ‘influence’ is used interchangeably with terms such as ‘pressure’ (Smolen and Hambleton, 1997) and ‘feedback’ (Wolverton and Gallimore, 1999;) in the literature. These different terms, however, were intended to refer to the same issue; clients’ specific actions to change property valuation outcomes. How this is actually accomplished by clients may have justified the use of different terms. For example, pressurising valuers may be just one of the ways clients use to try to influence a valuation. ‘Pressure’ may come in many forms, from withholding payment to the threat of not giving future instructions to the valuation firm. The same applies to client ‘feedback’, which can have indirect pressure on valuers’ opinion. On the other hand, ‘influence’ appears to mean the end result or the actual effect; that is whether the valuation has actually been biased or diverged as a result of these pressures. Therefore, the expression ‘influence’ represents a broader and more appropriate concept than ‘pressure’. The use of the term ‘influence’ also broadens the focus of client influence on the valuation process rather than just the final outcome.

Threat or coercion imposed by client

In terms of type of threat or coercion imposed by clients, it is clear that reducing number of instructions and removal from the approved appraiser list are the obvious ones (Smolen and Hambleton, 1997). These direct threats are not negligible as failure to secure instructions may undermine the financial viability of the appraisal firm. Threats of physical harm were also a possibility as reported in Rushmore (1993:358) who himself had experienced such pressure during a hotel appraisal case.

Feedback

A significant behaviour modification was also noted among the UK valuers when one-third of the respondents agreed to the statement that their objective in mortgage valuation is to validate the pending sale price. This dilution from objective opinion of value to one that just conforms to pending sale price could be a direct result of client influence.

Influences related to client characteristics

The current literature on client influence has helped to identify the types of client and their characteristics that lead to overt pressure on valuers. In Smolen and Hambleton (1997) survey, three types of client were specifically identified as the main source of pressure for valuers. They were clients from mortgage banks, commercial banks and Savings and Loans. Clearly, lenders were identified as the main source of pressure in valuations for mortgage financing. This applies to both residential and commercial valuations (Kinnard, Lenk and Worzala, 1997; Worzala, Lenk and Kinnard, 1998). More significantly, in Levy and Schuck (1999), respondents indicated bankers as pessimistic whilst developer clients as the most difficult group of clients to manage, suggesting the former for being responsible for downward pressure on value and the latter for upward value requests understandably for funding purposes. However, fund managers were described as being conservative and measured in their influence on value.

Prior studies show that client size and the requested value adjustment are important in explaining client influence. For instance, Kinnard, Lenk and Worzala (1997) tested two scenarios which might put pressure on commercial appraisers to change their value judgement. The two scenarios were the fear of losing clients (client size) and the size of the value adjustment requested by clients. As such, this is one of the earliest works that utilised behavioural methodology in studying the effect of client pressure on commercial appraisal judgement. The purpose was primarily to gather evidence as to whether appraisers were influenced by the fear of losing clients as well as the size of the value adjustment requested by clients when making value judgement. These two factors were also tested jointly to find out the overall effect on value decisions. Their analysis indicates that only client size had significant relationship with appraisers’ decision to revise their value. In other words, the bigger the client, the more likely are appraisers to modify their initial value. The largest number of respondents who chose to revise their value was from the large client/small adjustment scenario, suggesting this is an acceptable practice to safeguard business relationship as well as future instructions.

A similar study by Amidu and Aluko (2007a) in Nigeria also shows that neither the size of client nor the amount of adjustment requested by clients affect valuers’ decision to revise a valuation. The effect of client size, value adjustment requested by clients and the interaction of these two variables were tested in a logistic regression model using respondents’ answers to a hypothetical valuation scenario. Although the alternative hypothesis was not supported in the study, about 60% of the surveyed respondents believe that valuers were

Sources of client pressure

On the various sources of client pressure, both samples are in agreement with the least common and the most common source. As information is power, clients would use their knowledge of market transaction data to attempt to influence the valuation. This appears to be the most common source of client pressure. On the other end, promises of increase of fees do not seem to have an impact, implying that valuers in both countries are very professional in their conduct. Besides these two sources, there are differences in opinions in both samples on the other sources. For example, Taiwanese valuers feel that the promise of future jobs is a big source of pressure while Singaporean valuers do not think so. This also explains why the latter feel that familiar clients are a constant source of pressure; jobs are assured but the clients would use their familiarity with the firm to add pressure. The

CONCLUSION

The study has study on the effect or implication of client pressure has clearly shown that pressures and influences from clients can indeed challenge the impartiality of the value opinion provided by valuers. Any attempt to compromise the requirement to produce an objective and independent value opinion can affect public trust in the profession. This is a worrying sign considering the effects of coercion and threats in the determination of the actual value of the mortgage in question. It is seen that the threats from clients are not only in the form of coercive verbal threats but also can be hidden and indirect during client-valuer communication. The effect on the valuer behaviour can also be subtle, which may have led to the reformulation of the valuation objective from an objective opinion to the one that validates sale price.

At worse, values were adjusted to accommodate client needs. Client feedback has also been shown to have some effect on the valuer decision-making in the future unrelated assignments.

REFERENCES

Amidu, A. and Aluko, B. (2007a). Client influence in residential property valuations: an empirical study, Property Management, 25(5), 447-61.

Chen, Fong-Yao and Yu, Shi-Ming (2009). Client Influence on Valuation: Does Language Matter? A comparative analysis between Taiwan and Singapore, Journal of Property Investment & Finance, 27(1): 25-41.

Hager, D and Lord, D. (1985). The property market, property valuations and property performance measurement, Journal of the Institute of Actuaries 112(1), 19-60.

Hansz, J.A and Diaz, J. III (2001). Valuation bias in commercial appraisal: a transaction price feedback experiment, Real Estate Economics, 29(4), 553-65.

Levy, D. and Schuck, E. (1999). The influence of clients on valuations, Journal of Property Investmen & Finance, 17(4), 380-400.

Levy, D. and Schuck E. (2005). The influence of clients on valuations: the clients’ perspective, Journal of Property Investmen & Financet, 23(2), 182-201.