Train wreck waiting to happen: Appraisal fraud

more than 8,000 appraisers – roughly 10 percent of the industry – have signed a petition asking the federal government to take action.

“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.

Note the date on this….Nothing happened……. Except that homeowners got screwed……..

Appraisal fraud: your home at risk
Appraisers say they’re being pressured by lenders to inflate their estimates of home values.
June 2, 2005: 9:56 AM 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, as the Appraisal Institute recently testified to Congress, appraisers 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, primary lenders sell off the loans they originate to other institutions, including Fannie Mae and Freddie Mac.)

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 valuesA 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.”

9 Responses

  1. […] Train wreck waiting to happen: Appraisal fraud […]

  2. I have proof of appraisal fraud for our purchase. The house value rose $21,000.00 in less than 36 hours. ‘Luckily’ the second appraiser shared the same building as the seller and even purchased that building from the seller prior to our appraisal. Yes, I have a CYA folder. Both the seller and the mortgage broker called me after the first independent appraisal to inform me that the second would be done as the first one ‘came in too low’.

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  5. I used to teach appraiser licensing & ethics, known as Uniform Standards of Professional Appraisal Practice (USPAP). USPAP is a 3″ thick book annually updated with a minutia of complex rules and process for the (ease/abuse) of lenders. When I was appointed to the Appraisal Foundation’s Issues Resource Panel 1997
    (AF is designated by Congress), local lenders/brokers teaming aced me out of 10-reports/week; as I am honest in comparing apples-to-apples and making adjustments to comparable sales based on actual market conditions & actual cost depreciations .. instead of just meeting 15% max line-item & 25% gross adjustments in the URAR single-family grid. Since it was my license & my liability insurance, I was taught by my 50-yr veteran appraiser father that if I did succumb to their tactics I would not respect my self later in life and become their tool. Interesting to for ALL
    readers is the fact that I called Appraisal Foundation in November 2009 to inquire as to their on-going issues: NONE were focusing on these issues, they were hell bent on making USPAP more restrictive on appraisers but no emphasis is being placed on brokers hiring in house appraisers on their payroll (office, desk, MLS, local lender favoritism/collusion!) so don’t come to expect their assistance on this or a fair honest review of your appraisal from those same people who pass off a CMA (a/k/a certified market analysis, often used by lenders and agents to foreclose or adjust your loans IF you ever get a loan modification/restructure) but is actually NOT a legally viable appraisal by a State certified appraiser who’s license is controlled by DRL.

    ALL readers must know that ANY appraiser whom inflates value whether to earn $300-$600/report or keep his broker-friend happy, inhouse appraisers received >90% of residential appraisal work while true independents have been ostracized by lenders who use control by using only their own bank-approved appraisers … such preselection for their benefit usurps
    DRL & the fact that any certified appraiser worth his salt can do a URAR etc. appraisal for a homeowner or borrower (by your choosing) & not be so driven to their guy/gal, yet we consumers are not given that chance to even select from a list of qualified local State certified people! It’s absurd, it’s controlling of money and exchange, and Fair Market Value.

    When Mr. Cox, head of Fannie Mae’s reviews, called my father in 2005 and asked him to do retrospective field review URAR appraisals in WI his office had 10 poeple. Then he called the next month and he had >100 staff “dedicated” to recouping bad loan losses by means of “exposing” bad appraisals in which he told me specifically Fannie Mae could then go after and get the lenders to repay the differences! I thought it was a great plan and program. Finally! Intent on doing right, I went 100+miles in each direction and showed via MLS and court records in my reviews their violations of USPAP, apples-to-grapefruit, and how “their” photos were falsified and nothing more than bled-off copies from online MLS listings: so appraisers were making $1000s per day then and they could NOT be physically inspecting the property per USPAP due diligence & procedural competency in truth. But, and here’s the kicker you’ve been waiting for: even on a $250,000 walk-away I did, where several of the owner’s neighbors came over to tell me about how the owner gambled away all the loan money in the casino, even then I was told that “without interior photos of the home/buildings from the original report, Fannie Mae could not prove Before-vs-After condition and thus could not recoup ANY money!!! Again, absurd and highly suspicious as subjective-only. That owner had never completed the interior construction, had a chair & table, no downstair steps access to the basement, had run the heating ductwork below the ceiling and into the open air garage, had never completed the furnace connections and no interior carpet/trim/cabinet
    work had been done. I knew it, all the neighbors knew
    it, I could prove it & they did nothing! (Except collapse)

    The moral of the story here is Caveat Emptor, buyer beware. Especially of the loan shark lender and his broker-friends making 7% commission (WI median is >$200,000 so $14,000 per sale to broker’s house), while that appraiser who made a few hundred and had his license put-out-to-use also has liability insurance for you to attack in your defenses. Were you present when the appraiser came? Did you have an opportunity to meet with the appraiser? Were there material physical assets and condition ratings missed or falsely reported? Did the sales comparisons seem distant and/or unlike your property? Many many issues within USPAP are totally unknown by borrowers whom worked so hard to obtain downpayments & financing, who worried at that crucial moment of buying their home that they can only see their new home (as the Dopamine levels surge).

    Now when we realize how it all has been manipulated for profit and look at the nice expensive offices of Title, Realtor, Broker and the bank’s new branches in each area town … think about who actually was making all the money. It was NOT the appraiser, typically. They are the one person who does not get a percentage of money kickback, but DOES get more and more and more appraisal work by his employer/lender-friends.
    Being on their (HUD has special classes but does have strict guildelines too, to avoid abuses) approved list may essentially make them interested-parties to your loan rather than “independent and unbiased” as per USPAP. USPAP is enforceable: too few appraisers
    of that ilk have been brought to task YET, but Expert Witnesses are coming to expose them to their insurance companies; and DRL will investigate, free.

    NOTE: any appraiser or party contributing to mortgage lending fraud found guilty faces 1) loss of licensure by State Dept of Regulation & Licensing 2) 30-yr prison sentence and/or 3) $1,000,000 fine! Audit for TILA and your QWR then must include request for the original appraisal and the appraiser’s notes which by law must be kept for 7-years. Ask for your original lender’s
    approved appraiser list from the date of your loan, OK. Analysis of your appraisal for USPAP violations is another powerful tool to prove collusion between lender-broker-appraiser (racketeering?), appraiser’s notes, appraiser’s paid receipt which we never seem to get yet we pay for them in the loan package; and any/all directions/emails from Lender prior to and after the final report is transmitted (usually electronically. As underwriter pressure-reviews often-change fair market values to “accomodate” the loan, this is violation if the actual market allocation of “value-pieces” don’t add up.

    PS – Stephen from 1-7-10 comments; you’ve only yet to meet an honest appraiser, as there are fewer each day
    but don’t make universal attacks against groups only based on individuals used by the lenders/brokers, OK?
    Your views might need my help, to see more clearly…

  6. You guys are fortunate to have been ahead of the curve. There’s been somewhat of an awakening as to the level of fraud that was taking place by AMC’s and the effects of Bank Review Appraisers, AVM’s, etc.

    This was largely a result of the gutting of FIRREA.

    The sad part is that they take $300 from the consumer so that they can vandalize the industry.

  7. I agree with Stephen-Old news!

    That;s why the majority of forensic audits are useless. Without a forensic appraisal a mortgage transaction has not been properly audited!

  8. The Fraud of Appraisal Regulation by Larry Levy is also a great read!

    Many appraisers I’ve talked to say the HVCC (Home Valuation Code of Conduct) aka the “cure” is much worse than the disease itself. That disease is the Appraisal Institute (a non-profit industry group that is selling out it’s own members by mocking data from public record to be used in a data portal where no appraisal would be needed.

    Also part of the disease are AMC’s (aka the pimps of the industry), AVM’s (automated valuation models), bank “review” appraisers, etc.

    BETTER, FASTER, CHEAPER… that’s the banks motto.

    The new HVCC stinks! People simply don’t want to pay $300 for a product that is defective, biased, fraudulent & harmful. The appraisal industry has been “hijacked,” seasoned (honest) appraisers have been run out of business and nobody is willing to address the issue.

    How else could the banksters have accomplished their mission? They are merely mocking data recorded in public record – aka sale data as listed in the county property appraisers and tax assessors office.

  9. Old news. Real estate appraisal is and has always been a farce. Appraisers are hired by commissioned salespeople, given a predetermined value to rationalize and if they don’t hit the number, they don’t work. Read:

    “The Truth About Real Estate Appraisal” by Stephen G. Bishop

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