Mortgage Scams: Appraisal Fraud
Real Estate appraisers are under pressure to 'tweak' the numbers and when they do they are guilty of appraisal fraud.
A real estate appraiser who doesn't tweak their numbers to fit their lenders' needs is an appraiser that doesn't work. It's that simple. With the rise in real estate prices over the past few years, loans have grown larger in value. The last thing lenders want is a bad surprise during the closing process. Appraisers that won't "work with" the lender will not get work.
There is no way of knowing exactly how much appraisers adjust their numbers to meet the needs of lenders, but the based on the interest being received from Congress recently, we can guess that it is a lot.
An appraiser who knowingly and willingly tweaks the numbers is committing fraud
People in the mortgage industry acknowledge that appraisal fraud is very common. The way appraisal fraud works is really quite simple. When somebody approaches a mortgage lender about refinancing their home, they receive a "good faith" estimate for the loan. This estimate includes a value for their home. This value is the minimum amount needed to complete the loan.
Appraisers are hired by the very lenders who need the number. Rather than being independent in doing their jobs, appraisers are really in a situation where they work for the lender. There are lots of other appraisers that a lender can turn to when they need to meet their number.
An appraisal that comes in too high or too low can wreak havoc for both borrowers and lenders. For example, suppose that an appraiser tweaks their number to show that a home that is worth $300,000 is worth $350,000. The borrower can then decide to cash out some of this false equity. Then, if they decide to sell the property, when they will only get a price that the market will bear, they won't be able to sell the property for what they owe on it.
From the lender's point of view, they can end up with the short end of the stick should they have to foreclose on the property. In the same situation, they too may not be able to get the amount of money that they lent for the property.
Home Appraisal reform may be on the way
Appraisers, tired of being pressured into inflating home values, are leading the charge for reform. Appraisers blame mortgage brokers and lenders for the appraisal fraud epidemic. The brokers are paid on commission, and are also under great pressure to close their mortgages. Appraisers fear that a correction to the housing market may make the existing problem far worse.
So far, Congress has been unable to enact change. The real estate industry will continue to push for change. All that is left until then is to try to avoid appraisal fraud.
Basic steps can be taken to avoid appraisal fraud
- Hire your own appraiser - You have to pay for an appraisal when buying or refinancing a home anyway. It is well worth the money to know that the risk you are taking is legitimate.
- Use an ethical appraiser - Given the severity of the problem, this is not an easy task. Make sure that your appraiser is state certified.
- Ask for references - It may be better to look for an appraiser that works for banks rather than one who works for mortgage brokers. Banks will be more likely to hire competent and ethical appraisers.
Appraisers under pressure
Most appraisers are hard-working, honest people. When they are pressured by lenders, however, their livelihoods are threatened making it necessary for them to do whatever they have to do to stay in business. Unfortunately, you have some that are more than happy to work with the lenders and bring in the number that they need to close their deal at any cost.
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