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Home Equity Loans May Lead to Appraisal Fraud

Avoid over-appraisal when seeking a home equity loan or mortgage

 Home equity loan and mortgage lending has been booming during the last five years, as investors have shied away from stocks, seeking to build equity in real estate instead. This has resulted in a record number of Americans who own their own homes, a figure which recently reached 69%, as well as a record number of homeowners who have taken out home equity loans. The competition among lenders has made it easier than ever to purchase a home, and in 2004, the average down payment on a home loan was a mere 3 percent. 

A home equity loan or a mortgage requires an appraisal, and a recent survey of home appraisers showed that nearly 55% of them had been pressured by lenders to deliver an appraisal at a predetermined “target” value that will justify the amount of the loan. Appraisers who tried to be objective in their work and produced appraisals that failed to meet the target price for the home were rewarded by a failure to be paid or by not being hired again by that particular lender. Since appraisers, like anyone else, want to keep working, the majority of them simply give in to the lender’s pressure and deliver the home appraisal as requested. The result of this is property that is actually worth less than the loans issued against it and an artificial increase in the value of homes in general. In short, this practice has led to homes being overfinanced and overpriced.

While it may be overstating the case to suggest this, a possible result of this practice could be a total collapse of real estate prices. The market has been booming during the last five years, and home prices on the East and West coasts have reached astronomical levels. This market collapse probably will not happen, but the market is vulnerable. Here are a few tips you can do to avoid being caught in this trap:

Learn about the process of appraising a home as well as the process of issuing a home loan. The more you know about the process, the less likely you are to be a victim of fraud.

Be aware that refinancing a home will not solve all financial problems. Many people are now obtaining home equity loans in order to facilitate

>debt consolidation, but if the result is a loan that exceeds the value of the home, the borrower has gained nothing.

Take an active part in the appraisal process. Meet the appraiser, ask to see the finished report, and ask to see the information used to create the appraisal. Appraisals are partly based on sales of comparable homes in the same neighborhood. See those homes yourself and compare those homes with their stated value in your appraisal.

Come right out and ask your lender if they pressure appraisers to meet target values. Let them know that you are not interested in participating in a fraudulent process. You may not get an honest answer, bAut if they are lying, you may be able to tell.

Anytime you take out a home loan or equity loan, you are putting your home at risk. Before doing so, it pays to be informed. Pay attention to the appraisal process and if something looks unusual, ask about it. It could save you a lot of money as well as your home.
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