Professional Writing and Editing

Business Papers/Copy

Avoiding Appraisal Fraud

While many homeowners delight in hearing that their home has increased in value, for others, that news is viewed much less favorably.  The recent rise in real estate prices has been a contributing factor to the increase in mortgages and home equity loans and lines of credit. However, high real estate appraisals can have a negative impact on banks, lenders, realtors, and homeowners down the road.  It’s a trend which has received significant attention in the past several years, specifically by appraisers and appraisal management companies who recognize this is a serious issue and are committed to maintaining the highest level of integrity in the appraisal industry.

Appraisers are often under pressure to deliver an estimate based on a predetermined value, rather than an independent and accurate appraisal.  Because an appraisal is the ultimate determination of whether a property is a good investment, it is understandable that lenders, sellers, and buyers are relieved when the appraisal numbers align closely with the asking price.  While many benefit from high appraisals, the downfall is a market which can encourage appraisers to deliberately inflate the numbers by providing a less than accurate analysis of a property’s true value.

What is Appraisal Fraud?

Appraisal fraud is the intentional misrepresentation of the value of real estate in order to benefit one or more parties in the financing, sale, or purchase of property.  It is often instigated by brokers, lenders, or real estate agents who specify a predetermined value for a property and encourage the appraiser to ensure that the written appraisal meets that number.   The purpose of appraisal fraud is to ensure that the property is considered to be a good investment, increasing the likelihood for financing approval within the mortgage industry.

Who Benefits from Appraisal Fraud?

An August 23, 2005, CNN Money article revealed an increase in appraisal fraud, stating, “(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.”  Lenders and brokers who place these expectations on certified appraisers are motivated in their quest to seal the deal. A low appraisal can be detrimental to obtaining financing and closing the sale, resulting in zero commission to the parties involved.

While most lending institutions do understand the risk of inaccurate appraisals, that risk is reduced if they are in the practice of selling their mortgages to the secondary market.  In that instance, the loan originator faces less risk and more benefit when the value of a property is inflated.

Homeowners also benefit when the misrepresentation of their property’s true value results in a higher selling price to buyers.  They can also walk away from refinancing with more cash in hand or gain more equity in their home when the value is overinflated.

The Pitfalls of Appraisal Fraud

Appraisal fraud has the potential to hurt all parties in a real estate transaction.  The information below depicts how appraisal fraud affects homeowners, lenders, and appraisers.

  • Buyers

While a high appraisal can result in a greater likelihood of receiving financing, homeowners who buy real estate at an inflated price are particularly vulnerable in a declining market. When property values fall, they are often faced with the reality that their mortgage debt is more than the value of their home.  As a result, they have less equity and difficulty refinancing or selling their home at a profit.

  • Homeowners

Refinancing a home based on an inaccurate appraisal can be detrimental to homeowners.  They are subject to paying higher monthly payments, taxes, and insurance premiums on their property.  In addition, they are often disillusioned to find that their home is not worth the balance they still owe on their mortgage. This is particularly true when the economy is bad, and homeowners use the equity in their home to finance their living expenses and meet their other financial obligations and debts.

  • Lenders

Because bankers and mortgage officers profit from mortgages, it is understandable that they are pleased when a property is deemed to be a good investment. However, some lenders manipulate the appraisal process, qualifying properties at a higher value than they really hold.  While this does increase the likelihood of approving mortgages, it also leaves the lending institution with more money invested than the assets are worth.  In addition, lenders who sell to secondary markets like Fannie Mae, often find themselves liable when a property is proven to be worth less than the appraised value.

  • Appraisers

Appraisers are committed to providing a valuation of a property’s value based on independent data in the current market.  Increased pressure is being placed on appraisers to deliberately falsify their appraisal.  When lenders tell them to alter their estimate to a predetermined price, appraisers are faced with complying or not getting paid for their services.  Their compliance can be the deciding factor in whether or not that appraiser is contracted by the lender in the future.

One significant, yet lesser known, pitfall of appraisal fraud is the ripple effect it places on the real estate market. When a home sells based on an inflated appraisal, it affects the value of other homes in the nearby vicinity, thus driving up the prices and market value for potential buyers and existing homeowners who pay real estate taxes based on their property’s current value.

Avoiding Appraisal Fraud

Increased demands for appraisers to intentionally misrepresent property values have sparked concern within the industry. Because appraisers are subject to very strict professional standards, this increase has motivated them to seek even higher regulation to prevent mortgage officers and lenders from interfering with the process. 

The Home Valuation Code of Conduct (HVCC) was designed to prevent and eliminate and prevent instances of appraisal fraud and collusion within the industry. Tougher mortgage regulations like HVCC are committed to maintaining the professional integrity of the appraisal industry through the following guidelines:

                          1.          Preventing lenders, it’s agents, officers, or employees, from attempting to influence any part of the appraisal process or outcome by withholding payment for appraisals, refusal to use an appraiser’s services, promising future benefits or compensation, making the appraised value a condition of payment, requesting preliminary values prior to completion of the report, stating an anticipated property value, providing indirect benefits, removing an appraiser from a directory of qualified appraisers without providing proof of illegal conduct according to regulations and standards, and seeking a second appraisal if the first fails to meet their criteria.

                          2.          Ensuring that lenders provide borrowers with a complete copy of the appraisal report within three days of closing the loan.

                          3.          Placing responsibility on the lender for ordering appraisals and payment for the same.

                          4.          Regulating and defining the parties who are allowed to select appraisers and preventing them from communicating with them in an effort to maintain the independent integrity of appraisers and lenders.

                          5.          Requiring lenders, their agents, and appraisal management companies to receive training in reviewing appraisals and educating them in the real estate and appraisal industry. 

                          6.          Prohibiting the use of appraisers who are employees, affiliates, or partners of the lending institution.

                          7.          Providing appraisers and lenders with contact information to report alleged attempts to influence or falsify appraisal reports and guidelines for filing and investigating complaints. This measure also includes safeguards to prevent lenders from seeking retaliation for any complaint filed.

                          8.          Requiring lenders to randomly select and test 10% of their appraisals and report their findings to the Independent Valuation Protection Institute.

Appraisal management companies are dedicated to maintaining the integrity of the appraisal industry through their concerted efforts to help brokers, banks, and lenders avoid appraisal fraud. Because their appraisers are independent, appraisal management companies protect the integrity of the industry and profession by maintaining neutrality. Adhering to the Code of Conduct, their reports are unbiased and determined without allegiance to any party in the transaction. 

Functioning as the third party and overseer of the appraisal process, appraisal management companies prevent any interference or influence with an appraiser’s valuation by the originating party.  It’s a checks and balance system designed to protect all parties in a real estate transaction, ensuring their members deliver certified appraisals with are both credible and accurate.

Moreover, because appraisal management companies don’t operate on an incentive basis, their reports are less likely to be flawed or inflated due to financial rewards or gain.  They are committed to providing valuations based solely on allowed criteria, without any undue influence, such as commissions, monetary rewards, or other incentives. 

Appraisal management companies lend their full support to maintaining the integrity of the industry, welcoming the guidelines and standards outlined by The Home Valuation Code of Conduct.  They are committed to ensuring their full compliance by following these regulations and promoting a high standard of ethics within the appraisal industry.

Advertisements

Leave a Comment »

No comments yet.

RSS feed for comments on this post. TrackBack URI

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Create a free website or blog at WordPress.com.

%d bloggers like this: