Appraisal Fraud Remains Hot Topic

Appraisal fraud is generating a firestorm of responses from the industry, both to extol efforts to publicize the issue and to offer insight a recent study may not reveal.

Appraising, the science of determining the value a home, has been under the microscope recently as part of broader law enforcement efforts to curtail growing levels of financial fraud in real estate transactions.

Questionable appraisal activity has flown under the radar for years as many appraisers succumbed to pressure (for fear of being blacklisted or losing their jobs) to value a home often based largely on the highest bid. However, law enforcement has begun to take a closer look at inflated appraisals in its crackdown on home finance industry fraud that's reached levels comparable to organized crime and racketeering.

"Why does this surprise anybody? Pressure on appraisers to 'hit the number' has been a standard of the real estate industry for years. As long as appraisers receive their work assignments from those who stand to gain financially by the transaction, the pressure will remain," wrote in David L. Fry of O'Fry Associates Valuation Management in Santa Clarita, CA.

Market forces would indicate that a home is worth whatever a buyer is willing to pay, and that's often the argument used by those exerting pressure on appraisers.

The counter argument says if an appraisal doesn't match the offer, the buyer should have to come up with the difference.

But that's not what's happening, and it's illegal and economically dangerous to set the value sky high without the benefit or authentic appraising.

According to Fry, "Enforcement efforts by state licensing boards are hampered by limited staff and budgets. Appraisers and the brokers they work for know this, so there is little fear of getting caught. Many users of appraisal services -- banks, mortgages companies, real estate services companies etc., won't report 'aggressive' appraisers to their state licensing boards for fear of angering clients or some perceived liability."

"Home Insecurity: How Widespread Appraisal Fraud Puts Homeowners At Risk" recently released by public policy think tank, New York City-based Demos said too many home owners risk financial ruin because appraisal fraud allows them to borrow more than their home is really worth. Should home values tumble and reflect homes' true market value, home owners with "upside down" mortgages (mortgage balances larger than a home's true value) who face hardship that forces them to sell their home will have to come up with the difference.

Widespread depreciation in over-inflated home values could have a devastating impact should it affect local, regional and national economies many of which today are driven, in part, by the booming housing market.

The study said, more than half, 55 percent, of all appraisers have reported feeling pressures from lenders, brokers and their bosses to overstate property values.

Some appraisers say the problem has been over stated and that most appraisals are fair, accurate and based on professional valuations.

"Appraisers feel pressure on the job, so do many others in lots of professions. If you work with the bottom of the barrel brokers who try to push every deal through the system with no regard for market value or ethics, then life is rough. If however, you refuse to work with the unethical brokers and only work for the true professionals then life is good," said P. David Rij, owner of San Diego Appraisal Company, Inc. in San Diego, CA.

He went on, "I believe fraud is a very small part of the appraisal industry and the fudging of values does occur. For years I performed appraisal reviews for lenders throughout California and I learned that the vast majority of appraisals completed, at least the thousands that came through my office, were appraised at or very near the true market value. On average, 10 percent of the time the reviewer did not concur with the appraisal value estimate, but keep in mind, the reviewer almost never sees the interior of the subject property and many times does not leave the office to perform the review," he added.

Others say it isn't just an appraisal industry problem after the fact, but begins with the listing, when the home is originally priced and put up for sale.

"Appraisers are under a lot of pressure, but they should not fall victim because real estate agents don't do their job," said Jennifer S. Warburton, a real estate broker from Orange County, NY.

"I recently moved from Long Island to Orange County, NY, where I have noted that list prices on houses are a far cry from appraised prices. I see deals die constantly (something that has never happened to me before) because listing agents are pricing houses according to a supposed market increases. Price a property right and it will sell. Price it wrong and we all suffer," she added.

Published: April 20, 2005
by Broderick Perkins