Report on Appraisal Fraud
It is becoming an everyday news event - Appraisal Fraud has become part of the lexicon of most Americans. When the topic becomes part of television shows (Soprano’s, Numbers, and Close to Home) you know appraisal fraud has arrived.
Demos is a combination of a think tank and advocacy group whose stated purpose is to “help build a society where America can achieve its highest democratic ideals. We believe that requires a democracy that is robust and inclusive, with high levels of electoral participation and civic engagement, and an economy where prosperity and opportunity are broadly shared and disparity is reduced.”
Their report “How Widespread Appraisal Fraud Puts Homeowners At Risk” was made available recently and has some interesting comments. The report findings are summarized below with a copy of the full report found here.
Key Findings:
* Serious conflicts of interest pervade the mortgage industry. Lenders, brokers, and real estate agents often have an incentive to inflate the value of residential properties. The process of appraising a property — among the most important steps in either the purchase or refinancing of a home - is sometimes done dishonestly as appraisers go along with requests to overstate the value of a home.
* Appraisal fraud can lead homeowners to borrow more money than their homes are worth, putting themselves at risk of being “upside down” in a home - e.g., not being able to sell for a high enough price to pay off their mortgage - even if there is no downturn in the real estate market.
* Appraisal fraud is not a new problem, but the refinancing boom - in which homeowners have cashed out over $450 billion in home equity since 2001 — has created fresh incentives for self-interested parties to collude in the overstatement of property values.
* Up to half of all appraisers have reported feeling pressures from lenders or brokers to overstate property values. Many appraisers go along with these pressures out of fear of losing future work. Appraisers who have not complied with such pressures report not being paid for work and being blacklisted by lenders and brokers.
* The inflation of home prices through appraisal fraud may be helping to push real “bubble.” Some observers believe that appraisal fraud helps explain high foreclosure rates in certain parts of the nation.
* Predatory lending targeting minority and sub-prime borrowers often involves appraisal fraud. Low-income aspiring homeowners are also targeted by developers who collude with dishonest appraisers in the aggressive marketing of new homes offered at inflated prices.
* Government oversight of the appraisal process is inadequate. Key participants in the mortgage industry, such as mortgage brokers, are unregulated in many states and oversight of lending institutions is often very weak. State boards that license appraisers and investigate reports of fraud often lack enough resources. New reform steps are urgently needed.
The issue of appraisal fraud was blogged about today by Broderick Perkins in his article “Appraisal Fraud Likely Greater than Reported“. This is not a comforting thought but I suspect Mr. Perkins is right on target.
In commenting on the Demos report, Mr. Perkins states:
“The study said more than half, 55 percent, of all appraisers have reported feeling pressures from lenders or brokers to overstate property values.”
The Appraisal Institute gets some additional press for its work on this issue. Mr. Perkins continues with the following:
“The industry concedes, appraisers who practice the science of determining the value of a home are too often under pressure (Link to Appraisal Institute Website Article on “What is Client Pressure?”) to set the value of a home at over inflated levels. Often that’s because, in markets with small supplies and high demand, transactions driven by multiple offers push prices up into the stratosphere.”
“To help ease the pressure on appraisers, the industry’s trade group the Appraisal Institute has set up a complaint center (link to Appraisal Institute’s Appraiser Independence Action Center: Resources to help you combat client pressure) to give appraisers somewhere to direct complaints to the appropriate federal and state regulatory agencies.
The Appraisal Institute’s lobbying efforts have also created greater awareness among regulators. Earlier this year, the Office of the Comptroller of the Currency issued new guidance making clear that engaging in a practice of influencing the independent judgment of an appraiser would violate the law. ”
All of the press may be bad for appraisers in general, but overall the topic being discussed by your neighbors, taxi drivers, and people out in restaurants is a good thing. As the awareness of appraisal and appraisers rises, I think people will be more inclined to seek out competent and ethical appraisers.
April 14th, 2006 at 8:01 am
How is this different from the pressure placed on other decision-makers to skirt the rules? As the bar for licensure rises and there is less competition among appraisers, the problem may solve itself.
April 19th, 2006 at 11:10 am
I am not sure if competition is the issue. The issues are that 1) there are unethical lenders out there who put pressure on appraisers and 2) there are unethical appraisers who cave in to that pressure.
Licensing and competition are moot. What we need is the ability to enforce the rules and regulations that are already in place.
Those of us who are proud of our profession and are doing things right are trying to hang in long enough to survive . Many of us aren’t making it.
April 19th, 2006 at 1:09 pm
As you both point put, this is a complex issue with plenty of blame to go around. No one party is to blame per se. The pressure would be no less if the appraisers said no. Lenders who are trying to make a deal work will still try to make the deal work. But as the penalties start to work against the bad lenders, that might help eliminate some of the pressure.
I’m not sure that the licensure bar rising with the 1/1/08 AQB requirements will have a direct impact on this issue…except to say that as it becomes harder to become an appraiser, I think fewer people will enter the field that aren’t committed to being appraisers for a career. In addition, as the level of education increases maybe appraisers will discover additional revenue streams than typical mortgage banker/lender work where the pressure seems to be the greatest. Diversifying your practice is one way to slowly help insulate you from some of these issues.
Thank you Sue and Annemieke for your comments…interesting coincidence with your last names Hoell and Roell…