Appraisal fraud solutions sought

Appraisal fraud is a key component in mortgage fraud and costs Americans milions

The lending industry has suffered tremendously in the past five years from a problem known as mortgage fraud. Usually conducted by several people in the financing chain, the most common scam typically involves selling a home for much more than it is actually worth, usually to an innocent buyer who knows nothing of the scam. The parties involved split the profits and the buyer gets stuck with a house that’s worth nowhere near the purchase price.

There are other methods of fraud in the real estate industry, several of which could be described as out and out theft of houses. But the most common scam involves manipulating numbers in order to make houses seem to be more valuable than they really are. A $10,000 value increase, multiplied by hundreds of houses, adds up to a tidy profit for those involved.

The key to these scams is something called appraisal fraud. An appraisal of the value of the home is required by all lenders in order to insure that the value of the house justifies the value of the loan. These appraisals are conducted by visiting the property, evaluating its condition, and comparing the property to others of similar size and location that have recently sold. This helps determine the home’s true value and has historically been considered an honest approach the problem of determining the value of a property.

But fraudulent appraisals are common, as buyers are eager to move into houses and as lenders are eager to close on loans. Many in the value assessment industry have long complained of being under pressure to appraise a home at a “desired” value, pressure that can cause them a loss of future work if they fail to “make the numbers.” But houses that appraise for more than they are actually worth costs everyone money and artificially inflates home values.

Some new guidelines and paperwork may soon help reduce the amount of fraud that goes on in the industry. New appraisal requirements for Fannie Mae, Housing and Urban Development, Freddie Mac and Veterans Administration loans have recently gone into effect. The new rules require more details about the comparison properties that were used to determine the value. In addition, the appraisal most note any “concessions” made by the seller to the buyer in order to facilitate the sale of the property. If the house was for sale at $150,000 but the seller offered $5000 back to the buyer to fund the replacement of carpet, then the appraisal should reflect that the sale amount is actually $145,000.

These new guidelines should help in an industry where fraud losses were estimated at more than $400 million in 2005. Will it eliminate the problem? Almost certainly not. There is a lot of incentive to produce false numbers in the lending industry and there are too many people in the chain of paperwork who stand to benefit from cooked numbers. Still, it is a step in the right direction, and all Americans would benefit from a more honest and equitable process of determining an accurate value of real estate offered for sale.