Appraisal
fraud: your home at risk
Appraisers say they're being pressured by lenders
to inflate their estimates of home values.
May 23, 2005: 1:17 PM EDT
By Sarah Max, CNN/Money
senior writer
SALEM, Ore. (CNN/Money) – Anyone who's ever
bought or refinanced a home knows the sense of relief when
the appraisal comes in with high marks.
The appraisal tells bankers, brokers and,
ultimately, investors whether a house is a sound investment.
But on Tuesday, the Appraisal Institute will
tell Congress that its members are under increasing pressure
from lenders, mortgage bankers and real estate agents to
"hit their number" when appraising property.
Rather than come up with an independent estimate
of a home's value, appraisers -- who are typically independent
contractors -- say they are being told to base their estimate
on a predetermined value.
Alan Zielinski, owner of FAST Appraisals
in Lake Barrington, Ill., said he's surprised if he doesn't
get a call questioning his estimate.
"All [lenders and brokers] want to do
is hit the number because if they don't hit the number the
deal doesn't go through and if the deal doesn't go through
they don't get the commission," said Zielinski.
In theory, it's in a bank's best interest
to make sure its loans are based on accurate appraisals,
said M. Thomas Martin, of the National Mortgage Complaint
Center in Seattle. "But if you're selling the loans
to the secondary market, you really don't care," he
said. "The higher the value, the better."
(In the secondary market for mortgages, an
institution like Freddie Mac assumes the risk of an outstanding
loan by purchasing the rights to the mortgage payment stream
from the bank that issued to loan. So the institution --
not the originating bank -- is on the hook if the loan goes
bad.)
If a lender sells a loan to the secondary
market knowing that the appraisal is inaccurate, said Tim
Doyle, director in government affairs with the Mortgage
Bankers Association, the lender is held accountable.
"Our position is that we have the same
concern with inaccurate appraisal as does the conscientious
homebuyer," he said.
Trouble is, pressure on appraisers is often
subtle and not easy to prove, said Don Kelly, vice president
of public affairs for the Appraisal Institute, which is
calling for stronger regulation at the state level and legislation
prohibiting lenders from meddling with the process.
The problem is so widespread, that more than
8,000 appraisers – roughly 10 percent of the industry
– have signed a petition asking the federal government
to take action.
Appraisers, like auditors, are supposed to
follow a strict standard of professional behavior, said
David Callahan, senior fellow at the public policy organization
Demos and author of a recent report about appraisal fraud.
"What is actually happening is lenders and brokers
are telling them what value they want," he said. "If
[appraisers] don't play ball, they don't get paid or don't
get work again."
Inflated values
A puffed up appraisal can have serious consequences
for a homeowner down the road.
"There are a lot of people who have refinanced for
more than their homes are actually worth and they're effectively
already upside down even without a real estate bubble bursting,"
said Callahan. Down the road if they have to sell or decide
to refinance, a more accurate appraisal might show that
they owe more than the house is worth.
"The real issue is on the refinance
side where people are cashing out of their equity on the
basis of higher and higher values," said Zielinski,
who before accepting a job e-mails lenders and brokers to
remind them that he is obligated to appraise property based
on market conditions, not a predetermined value. "Conservatively,
I'd say that 10 percent of the houses I appraise are worth
less than the mortgage on them."
One overvalued appraisal can skew home prices
throughout a neighborhood, according to the Appraisal Institute's
Kelly. "If a house is appraised for 10 percent or 15
percent more than it's actually worth and the sale closes,
it may be used by another appraiser as a comparable sale
the very next day," he said. "It has a ripple
effect."
That could have even greater implications,
said Martin. "The cumulative effect of appraisal fraud
is you may have investors holding mortgage debt that's backed
by real estate worth less than they think it is," said
Martin. "It's a train wreck waiting to happen."
http://money.cnn.com/2005/05/23/real_estate/financing/appraisalfraud
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