Mortgage loan originators and real estate agents are responsible for appraisal fraud — and resulting foreclosures, according to a recent report by a public policy group.
Troubling evidence that many borrowers are at financial risk as a result of appraisal fraud was outlined in the study, Home Insecurity: How Widespread Appraisal Fraud Puts Homeowners At Risk, announced Tuesday by public policy group Demos.
The group, which claims to be nonpartisan, said the highly competitive market created by the real estate boom and refinancing craze of recent years has increased incentives for originators and real estate agents to demand overstated valuations, and has, in turn, victimized countless unwitting consumers into borrowing more than their homes are worth.
“Appraisal fraud is part of a bigger, more ominous picture,” the study’s author David Callahan said in a written statement. “As home prices have continued to increase above inflation, even nearing 20 percent per year in some cities, American homeowners are vulnerable as never before to financial ruin if home prices fall to their natural market value.”
Up to half of all property appraisers have reported feeling pressure from lenders or brokers to inflate property values. Appraisers often feel obliged to deliver the target valuations demanded by originators because otherwise business will be given to those who will. Appraisers who have not complied with strong-arm tactics report not being paid for work and being blacklisted, the announcement said.
The group based the study on various sources, including the National Association of Realtors’ statement before Congress last March that detailed how pressure and fraud have worsened; a petition sent to the federal government by 8,000 appraisers complaining the lending industry had pressured them to inflate values; and undivided appraiser testimonials about the abuses.
“To make matters worse an increasing number of Americans have reduced the equity in their home to meet rising living expenses, like education and health care, or to pay off credit card debts,” Callahan added. “From 2001 to 2004, homeowners pulled out a staggering $485 billion worth of equity, and the trend is expected to continue. It is beginning to look like the American dream of financial security through homeownership is becoming a myth for far too many.”
While homeownership stands at a record 69 percent, the report highlighted that people now own less of their homes than they did thirty years ago due to decreased levels of home equity — down to 55 percent last year from 68 percent in the early 1970s.
Another worrisome undercurrent “beneath an apparently rosy homeownership picture” the Demos report highlighted is that with 34% of last year’s loans being adjustable-rate mortgages, many borrowers are “dangerously vulnerable” to a future rise in rates.
“Appraisal fraud thrives amid a failure of stringent government oversight,” the author said. “Our study shows that, even as evidence of appraisal misconduct has mounted, neither the Federal government nor most states have taken decisive steps to fix an obviously broken system and protect homeowners from risking their most important asset.”
The study’s principle recommendation was that a thorough investigation of the scope and causes of appraisal fraud should be conducted by a federal agency in collaboration with state regulators as well as with input from a range of industry participants.
The report suggested reform proposals should: make rules to ensure that appraisers can act independently, with prohibited contact between appraisers and originators being the ideal solution; punish originators and real state agents who pressure appraisers.; impose tougher sanctions on dishonest appraisers; streamline the process to file a complaint against lender or broker coercion; increase enforcement capacity; educate consumers about the problems appraisal fraud creates, as many have unwittingly encouraged appraisal fraud by pressuring lenders to close deals quickly and by not paying attention to the appraisal step.
