APPRAISAL FRAUD
An Inflated Appraisal Has Serious Consequences For Homeowners
The housing boom created an unprecedented increase in Appraisal Fraud. Many homeowners have been damaged from this real estate boom. They have seen the appraisals of their residential and commercial properties increase consistently and as a result mistakenly perceived themselves to be wealthier.
What Is Appraisal Fraud?
In recent years, the ease of borrowing to refinance or purchase houses has led many borrowers into completely unaffordable loans. This in part has been due to number of instances of appraisal fraud. Appraisal fraud occurs when a property is intentionally over appraised. The false data appraisal leads the lender to believe that the property is valued accurately and is worth the amount that is being loaned.
Pressure to inflate the appraisal came from one or several of the parties involved in the transaction.
Pressure From Lenders
Appraisers should be independent of the banks who lend homeowners money to purchase the property. Often times, this was not the case and lenders ask their customers to take advantage of services of only a particular "favorable" appraiser. The appraiser and the lender already have a mutual understanding and for this reason the appraiser assesses the value of the property by what the lender wants. In this situation, the borrower is misled into believing that the property is worth more and for this reason he is forced into taking a loan for a greater amount than the true value of the property.
Pressure from Borrowers
Appraisers face two kinds of pressure from borrower. One kind of pressure is by those who are refinancing their home mortgages (i.e., to meet their growing day-to-day expenses). Many times, such customers would want their homes to be over appraised in order to persuade the lender to give them more money than their equity in the property, to pay off their credit card, and other bills. This results in the loan being backed by their over-appraised property. The higher the appraised value of the home, the more money these customers can obtain from the lender. There is no thought to the long-term consequences and the consequences often times lead to the loss of the house. Some buyers assume that the property they are purchasing is accurately appraised, they’re under the mistaken belief that property prices will continue to increase. Unfortunately many times these home buyers end up taking on more debt than their property is worth and eventually lose it.
Today’s News
Lenders pool similar mortgage loans together and then sell them to investment banking firms who in-turn sells them to Freddie Mac and Fannie Mae or other individual investors. These loans are eventually securitized and traded in the open market as mortgaged backed securities. But these securities are different in effect that they carry a guarantee of a timely interest and principal payment to the investor. The parties who originated the mortgage loans are not the ones who are at risk. They are in fact the least likely to pay the price if the borrower defaults, because they have already sold the mortgage to the investment banking firm and made a profit. The investment banking firm has in turn profited by selling the mortgage to the governmental agencies. It is Fannie Mae and Freddie Mac who pay the price if the borrower defaults. This is because, Fannie Mae and Freddie Mac are quasi-government agencies that are backed by the U.S. government (taxpayer) and can't fail. That's why if a borrower defaults he loses his home. But when Freddie Mac and Fannie Mae try to sell this property in the open market they would not be able to sell it for the remaining amount of the loan, since the property was overvalued to begin with. They are in loss on the transaction. Multiply this a million times over it will result in a financial crisis. This is precisely the problem that the real estate market is currently facing.
The financial incentives of certain Banks and Investment Banking firms (Wall Street) involved in the appraisal process unscrupulously outweigh the benefits that the economy as a whole could enjoy from a clean and ethical appraisal process.
According to the 2004 "Suspicious Activity Review" filed by the Department of Treasury's Financial Crimes Enforcement Network, appraisers were most frequently identified to be the prime suspects in cases of mortgage fraud.
Evidence of appraisal fraud was also revealed in the National Appraisal Survey conducted by a private firm in 2003. The survey questioned 500 appraisers in 44 states and its findings were shocking. Of the appraisers surveyed, 55% reported to have felt pressure to inflate the values of property, with 25% of respondents expressing that it happens almost half of the time.
Lenders Pressured Appraisers
Logically it’s in lender's best interest to make sure its loans are based on accurate appraisal , , , But if you are selling the loans to a secondary market, you really don't care. These middlemen don't have to pay the price as these mortgages will finally be sold to large secondary institutions such Fannie Mae and Freddie Mac. Appraisers had both the incentive and pressure to inflate the appraisals. This pressure stems from the fact that lenders tell appraisers the exact value they want the property to be appraised at. If the appraiser refuses to inflate the value, he not only loses any future business from the lender, but he also may not get paid for the appraisal.
Inflated Values
Many homeowners have refinanced for more than their homes are actually worth and they're effectively already upside down even without a real estate bubble bursting. 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.
Opinion
It is our opinion that if a Historic and Current appraisal is completed, there is a very good chance of getting a principal reduction. We have had clients who have used Historic and Current appraisal to their benefit.