Posting this one up because I think it’s important for readers to understand the dynamics behind appraisal fraud. Hat Tip to the Housing Bubble Blog for the link. From the Wall Street Journal (via AZCentral):
As the housing market cools, Americans are confronting a problem that was easy to ignore during the boom: Inflated appraisals of home values.
Critics inside and outside the appraisal business have long warned that many appraisals are unrealistically high. That’s partly because generous appraisals help loan officers and mortgage brokers, who often choose the appraiser, complete more deals. If a home is appraised at less than the buyer offered, the deal is likely to fall through.
Inflated appraisals didn’t matter much when home prices were rising at double-digit rates, since market values would quickly catch up. Now, however, prices are leveling off in many places and falling in some. Some homeowners are finding that the market value is below what past appraisals led them to believe.
Karen Ammon, who works for an auto-parts marketing company in Bloomfield Hills, Mich., bought her home in 2002 for $141,000. A year later, a lender encouraged her to refinance into a larger loan that would let her pay off credit-card debt. The appraiser chosen by the lender had great news: Her house was now valued at $175,000. She had room to raise her total mortgage borrowings to $165,000.
Now monthly payments on the adjustable-rate loan she received in 2003 are rising in line with the general level of interest rates. So Ms. Ammon wants to refinance into a fixed-rate loan. But when she tried to refinance, she couldn’t do so because several appraisers valued her home at around $148,000 – or about $15,000 less than she owes in mortgage debt.
In the 1980s, inflated appraisals were one factor in the loan losses that sank many savings-and-loan institutions that were holding collateral worth less than they believed. Today, most loans are sold to investors and risks are more spread out, making it less likely that poor appraisals would cause lenders to collapse. But many people in the real-estate industry believe the appraisal system is overdue for reform, and investors who buy loans are asking tougher questions about appraisal procedures.
Consumers often play along with dubious appraisals. Danny Wiley, an appraiser in Nashville who is a member of the national Appraisal Standards Board, in May was asked by a lender to appraise a condo in Spring Hill, Tenn. The buyer had offered to pay $139,000, but the contract required the seller to pay $10,000 toward the buyer’s closing costs. In effect, Mr. Wiley says, the price had been inflated by $10,000 to allow the seller to provide money to help the buyer cover closing costs.
Mr. Wiley estimated the value at $129,000, the same price at which numerous identical units in the same complex had recently been sold. That should have killed the deal. But Mr. Wiley says the sale later went through, apparently after the lender found another appraiser willing to value the condo at $139,000. Mr. Wiley declines to identify the parties involved in the transaction, citing client confidentiality.