Appraisal fraud: your home at risk

Appraisers say they're being pressured by lenders to inflate their estimates of home values.
June 2, 2005: 9:56 AM EDT
By Sarah Max, CNN/Money senior writer

SALEM, Ore. (CNN/Money) – Anyone who's ever bought or refinanced a home knows the sense of relief when the appraisal comes in with high marks.

The appraisal tells bankers, brokers and, ultimately, investors whether a house is a sound investment.

But, 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.

Rather than come up with an independent estimate of a home's value, appraisers -- who are typically independent contractors -- say they are being told to base their estimate on a predetermined value.

Alan Zielinski, owner of FAST Appraisals in Lake Barrington, Ill., said he's surprised if he doesn't get a call questioning his estimate.

"All [lenders and brokers] want to do is hit the number because if they don't hit the number the deal doesn't go through and if the deal doesn't go through they don't get the commission," said Zielinski.

In theory, it's in a bank's best interest to make sure its loans are based on accurate appraisals, said M. Thomas Martin, of the National Mortgage Complaint Center in Seattle. "But if you're selling the loans to the secondary market, you really don't care," he said. "The higher the value, the better."

(In the secondary market for mortgages, primary lenders sell off the loans they originate to other institutions, including Fannie Mae and Freddie Mac.)

If a lender sells a loan to the secondary market knowing that the appraisal is inaccurate, said Tim Doyle, director in government affairs with the Mortgage Bankers Association, the lender is held accountable.

"Our position is that we have the same concern with inaccurate appraisal as does the conscientious homebuyer," he said.

Trouble is, pressure on appraisers is often subtle and not easy to prove, said Don Kelly, vice president of public affairs for the Appraisal Institute, which is calling for stronger regulation at the state level and legislation prohibiting lenders from meddling with the process.

The problem is so widespread, that more than 8,000 appraisers – roughly 10 percent of the industry – have signed a petition asking the federal government to take action.

Appraisers, like auditors, are supposed to follow a strict standard of professional behavior, said David Callahan, senior fellow at the public policy organization Demos and author of a recent report about appraisal fraud. "What is actually happening is lenders and brokers are telling them what value they want," he said. "If [appraisers] don't play ball, they don't get paid or don't get work again."

Inflated values
A puffed up appraisal can have serious consequences for a homeowner down the road.

"There are a lot of people who have refinanced for more than their homes are actually worth and they're effectively already upside down even without a real estate bubble bursting," said Callahan. 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," said Zielinski, who before accepting a job e-mails lenders and brokers to remind them that he is obligated to appraise property based on market conditions, not a predetermined value. "Conservatively, I'd say that 10 percent of the houses I appraise are worth less than the mortgage on them."

One overvalued appraisal can skew home prices throughout a neighborhood, according to the Appraisal Institute's Kelly. "If a house is appraised for 10 percent or 15 percent more than it's actually worth and the sale closes, it may be used by another appraiser as a comparable sale the very next day," he said. "It has a ripple effect."

That could have even greater implications, said Martin. "The cumulative effect of appraisal fraud is you may have investors holding mortgage debt that's backed by real estate worth less than they think it is," said Martin. "It's a train wreck waiting to happen."