Appraisal fraud continues to haunt many homeowners

We have written before about the problem of appraisal fraud. A home appraisal is supposed to be an independent assessment of the value of a property so that a lender will have a good idea of how much money may be lent against the property. Obviously, a lender would not be interested in lending more money than a piece of property is worth...or would they?

Conventional wisdom suggests that doing so would be foolish, as the lender would lose money in a foreclosure if the homeowner defaulted on the loan. With the property being worth less than the loan, the lender would have to sell the property at a loss if the owner defaulted on the loan.

And yet, it appears that a major lender, currently under fire for predatory lending practices, was doing just that. Even more interesting is that they seem to have been doing it for reasons that differ from the usual ones.

Most appraisal fraud is done for two reasons. The most common reason is to make sure that a home appraises for at least as much as the seller’s asking price. This type of fraud usually consists of just a bit of “fudging” on the price. The more insidious type of fraud comes when mortgage company insiders attempt to wildly inflate the value of a property in order to take out a loan against it that will never be repaid.

It would appear that the fraud perpetuated by this particular lender was conducted for a different reason - to make sure that the homeowner could not refinance elsewhere. If a customer answered one of their television advertisements for home refinancing, the company would arrange for an appraisal as part of the process, as is the norm. The appraisals often indicated a value that exceeded the actual value of the property, and a loan was drawn up for the appraisal amount. The loan terms were often not particularly favorable, as the company specialized in lending to people with less than ideal credit. With high adjustable interest rates, the loan payments often grew higher than the owner wanted to pay. It was only when the homeowner shopped around for another loan that they discovered that the property was financed for more than its actual market value.

And with that, the owners realized that they were stuck making payments on a loan that wasn’t terribly favorable. Some of the buyers would default on their loans, but most of them would continue to make payments, which were quite profitable for the company.

What does this mean for consumers? It suggests that some lenders may have motivation to inflate the value of the homes they finance, not to insure that the loans are granted, but to insure that the loans will not be refinanced anytime soon. While this activity may not be all that common with mortgages for borrowers with good credit, it could happen in the subprime lending market, where borrowers have fewer choices when shopping for a home loan.

It may be worth your while to get more than one appraisal when buying a home. It is better to be safe than sorry.