On the Front Lines Against Mortgage Fraud

On the Front Lines Against Mortgage Fraud

Mortgage fraud has made headlines locally and nationally. Most of the time, mortgage fraud involves identity theft or fraud — making a borrower appear to be somebody else, with a better job, more income or fewer debts. Somebody more creditworthy.

But some mortgage fraud involves a broker or loan officer telling the mortgagee — the lender — and the borrower that the house is worth more than it is. This way, they can close a larger loan and make a bigger commission. Since real estate agents also usually make a percentage of the sale as commission, sometimes they can be involved. In reality, most loan officers, mortgage brokers and real estate salespeople are ethical and would never think of engaging in mortgage fraud. But mortgage fraud of this type always originates with one of the parties who makes a commission on a closed sale.

Sometimes, fraud like this can be accomplished without an appraiser involved. Honest, professional appraisal reports are simply altered, or honest, professional appraisers' signatures forged. But in reality, a complicitous appraiser often makes it easier to perpetrate mortgage fraud. At the same time, appraisers are also homeowners', lenders' and the economy's best defense against mortgage fraud.

Appraisers are paid a set fee for their work whether a deal is closed or not. Appraisers are hired by and work for the lender that is considering loaning the money to buy a house. That lender is interested in an objective, third party, professional opinion of the true value of the home. The lender needs to know that if the borrower defaults, the collateral used to secure the loan — the house — is valuable enough to cover their loss.

Appraisers do not work for individual, commissioned loan officers, mortgage brokers or real estate agents. If they did, there would be too much pressure to "make the deal work," rather than arrive at a professional, considered opinion of the market value of the property. Appraisers also do not work for borrowers, at least in the context of a mortgage loan. But borrowers work closely with mortgage brokers, loan officers and real estate agents, and benefit the most from a third party, objective valuation of the home they want to buy.

If something catastrophic happens, such as a job loss, illness, divorce or death, and a borrower can no longer make payments on the home they've mortgaged, they will need to be able to sell the home for enough money to cover the balance of their mortgage. So, nobody benefits more from an appraiser's professional opinion of value on a home than the new homeowner, even though there is no direct client relationship.

See the following article reprinted below for a well written synopsis of this situation:

Appraisers Come Under the Microscope

By Kenneth R. Harney
Washington Post
Saturday, June 18, 2005

Behind the billowing housing boom in dozens of metropolitan areas around the country toils an industry under steadily increasing pressure: legions of real estate appraisers who routinely are asked for professional opinions that validate the soaring values often placed on homes by eager sellers and buyers.

Federal financial regulators, Congress and a slew of private researchers are focusing new attention on appraisers, the accuracy of their valuations, and reported attempts by lenders and others to influence the numbers they produce.

· Twice in recent months, federal financial regulators have imposed new rules and restrictions on banks requiring them to more carefully monitor appraisals on first mortgages and home equity transactions. The Office of the Comptroller of the Currency required banks and their subsidiaries to prohibit mortgage loan officers from being involved in the selection of appraisers to reduce the potential for conflicts of interest.

· Congress is debating new mortgage reform legislation that would ban lender interference with or influence over the conduct of appraisals. Among the types of interference that appraisers themselves complain about are threats by loan officers and mortgage brokers to withhold future business -- or even payment for completed work -- when valuations fail to "hit the number" needed for the home financing transaction to proceed.

Appraisers also have complained to Congress about a practice known as "pre-comping," where loan officers send out faxes or e-mails listing the address of a home to be financed. Only appraisers who are certain, in advance, that they can find "comparable sales" to justify the contract price -- even if inflated -- are eligible for the appraisal assignment. Comparables are recent closed sales of homes similar to, and located nearby, the house the lender seeks to finance.

· Several studies have found that high percentages of appraisers say they are frequently subject to lender or broker pressure to inflate valuations to suit sales contract terms. October Research Corp., an Ohio-based publishing and research firm, conducted a National Appraisal Survey in 2003 that found that 55 percent of appraisers polled had been pressured to overstate property values.

All of this is getting heightened attention as mortgage economists and federal financial regulators look at local and regional housing price spirals and predict slowdowns in appreciation rates in the months ahead, if not actual declines in values. When the telltale signs begin to appear -- houses remaining unsold for longer, greater numbers of properties showing markdowns from the original listings -- regulators want the appraisal process to be unbiased and open to changing realities.

"We are the bearers of any bad news out there, if and when it exists," says veteran appraiser Francois K. Gregoire of St. Petersburg, Fla., who is also vice chairman of the Florida Real Estate Appraisal Board. "We have to value property accurately," not at what the seller thinks the property is worth, or what the loan officer needs the property to be worth.

If, for example, a buyer in a highly competitive but slowing market is the top bidder for a house using an escalator clause in the contract that adds $50,000 or $100,000 to the seller`s original listing price, an appraiser may well end up with the unpleasant duty of pouring cold water on the deal with a valuation closer to the original listing amount.

"We have to be the middle guy" in the process, says Tony Merlo, president of eAppraiseIT, a California-based national appraisal management and "collateral valuation" firm. "We have to be independent."

Otherwise the bank -- and later investors in the mortgage bonds that supply the actual capital for the loan -- could lose money if the mortgage goes sour.

Home buyers also have a huge stake in accurate appraisals, untainted by influence from a loan officer who won`t get a commission if the appraisal comes in too low. After all, buyers in a once-hot but declining price environment stand to end up with lower equity in their property -- or even negative equity -- if they purchase a house with a big mortgage based on an inflated appraisal.

Bottom line here: Follow the lead of the federal financial regulators and focus more carefully on the appraisal process. Be aware of the wide range of appraisal tools available to lenders today -- including automated-valuation models that can render valuations in a matter of seconds for $8 to $12 a pop, combinations of automated-valuation models and desktop appraiser reviews for $200 and full, traditional interior and exterior inspection appraisals for $350 and up.

These methods frequently produce different valuations on a home. Make sure the appraisal you pay for is not simply the one that spits out the number the loan officer needed to give you the biggest possible mortgage.

Kenneth R. Harney`s e-mail address is KenHarney@earthlink.net.