U.S. appraisers warn that a government plan to encourage short sales will only raise the risk of mortgage fraud. The groups noted that scammers have turned their attention from flipping to “flopping.”
A coalition of appraisal groups led by the Appraisal Institute today announced a letter addressed to U.S. Department of the Treasury Secretary Timothy Geithner outlining their concerns about the program, the Home Affordable Foreclosure Alternatives, which provides incentives to servicers that utilize alternatives to the foreclosure process. The program goes into effect on April 5.
Joining the Appraisal Institute in the letter were the American Society of Appraisers, the American Society of Farm Managers and Rural Appraisers, and the National Association of Independent Fee Appraisers. The associations collectively represent 35,000 real estate appraisers.
The groups claim that the use of broker price opinions in short sales, as allowed by the Obama administration, “will not adequately protect the public interest” or interests of lenders and servicers. BPOs — which are performed by inadequately trained real estate agents with a preference for speed over quality — increase the risk of mortgage fraud.
“We believe that such conflicts can and should be mitigated by implementing basic requirements reestablishing independence and competency in the valuation process,” the letter said.
The letter pointed to recent comments by law enforcement officials that short sales have been identified as a new form of mortgage fraud. Fraud tied to short-sale and REO schemes has risen by nearly half over the past year and has doubled over the past two years.
In addition, according to the letter, 23 states only allow BPOs to be performed for buyers or sellers, and “the lender that has ordered the BPO in order to make a decision related to a short sale is neither the buyer nor the seller.”
The groups want any short sales to be approved subject to valuation procedures outlined the Uniform Standards of Professional Appraisal Practice.
The appraisers also identified a new scheme known as “property flopping” where a sale is arranged at an artificially low price with an insider or other party related to someone in the transaction. Once the short sale is complete, the property is sold for a quick profit.
“To restore investor confidence around the world and dig out from the current financial crisis, we must end the culture of corruption that has permeated all levels of real estate finance,” the letter stated. “We urge the administration to revise the HAFA guidelines to prohibit the use of BPOs for property valuation requirements involving foreclosure alternatives including short sales.”