Overvalued Appraisals in Softening Market
Homeowners (and lenders)
may be left holding the bag
The New York Daily News ran a story today on the problem of inflated appraisals. The article addresses run of the mill overvaluation rather than the type usually involved in stories posted on Mortgage Fraud Blog.
Letís say youíre trying to buy a house. You lost your last two bidding wars, so this time you go in with guns blazing.
Forget the asking price; you bid more - maybe, too much more. Your mortgage broker has a sense youíre overpaying, but heís determined to see this deal close. If you donít, he doesnít get paid.
So he whispers to the appraiser: I really need this valuation. If you canít appraise for the amount they agreed to pay, donít appraise at all.
The appraiserís been around the block a few times. If he doesnít come back with the right number, he can forget about future business from this broker. So the mortgage broker gets the valuation. The deal gets done. No one gets hurt.
Until you decide to sell the property. Then you may be in for a big surprise. By then, the market may be softer and the house isnít worth what you paid. You may sell it and still owe money on the loan. Ouch.
Of course, this is a serious problem in the industry today. In otherwise clean transactions, except in cases where there have been unanticipated events (e.g. post-funding loss of employment), these types of overvaluations havenít caused significant losses to the industry. With a softening market, however, the original overvaluations will be at issue - especially in the repurchase chain.
The groups of professionals who seem most concerned with this practice are appraisers. Those who refuse to overvalue in order to close sales find themselves without business. Those who do overvalue perpetuate the problem. If you would like to read some interesting conversation from the point of view of the appraiser, visit http://appraisersforum.com/forum/index.php
Make sure home is fairly valued
How much is your house really worth?
Chances are, much more than it was several years ago.
On average, New York City real estate has appreciated 60% over the past five years, according to the Office of Federal Housing Enterprise Oversight.
But how about your own house? When was the last time it was appraised? Are you sure that appraisal was on the level?
That's a important question to ask these days. According to the FBI assistant director Chris Sweiker, who heads up the division of criminal investigations, mortgage fraud ballooned five-fold from 2001 to 2004 and cases of appraisal fraud represent a big chunk of those.
What is appraisal fraud and how might it rear its ugly head?
Let's say you're trying to buy a house. You lost your last two bidding wars, so this time you go in with guns blazing.
Forget the asking price; you bid more - maybe, too much more. Your mortgage broker has a sense you're overpaying, but he's determined to see this deal close. If you don't, he doesn't get paid.
So he whispers to the appraiser: "I really need this valuation. If you can't appraise for the amount they agreed to pay, don't appraise at all."
The appraiser's been around the block a few times. If he doesn't come back with the right number, he can forget about future business from this broker. So the mortgage broker gets the valuation. The deal gets done. No one gets hurt.
Until you decide to sell the property. Then you may be in for a big surprise. By then, the market may be softer and the house isn't worth what you paid. You may sell it and still owe money on the loan. Ouch.
"It's a very serious problem in the United States today," says Sweiker, "particularly with new construction where the values of all the new homes can be inflated simultaneously." And - though it's not as rampant in New York - the FBI has seen a large number of cases here.
So if you're buying a house or considering pulling out cash in a REFI to pay for college, a car, credit card debt or anything other than renovations that might boost the value of your home, how do you make sure your home is fairly valued?
Check comparable prices. Web sites like homegain.com make it easy to determine prices of nearby properties.
Insist on a licensed appraiser. It also helps if that appraiser is a member of a professional group like The Appraisal Institute.
That's not to say these appraisers are immune to industry pressure. But they're probably not as likely to succumb.
Ask to see copies of the appraisal. Appraisers who want to inflate numbers use as comparable sales homes that are nearby, but perhaps in a better school district or on a quieter street, explained Dominick Pompeo, a former residential appraiser who switched to commercial appraisals because of the pressure. Comparables should be properties that you know are similar to yours.
Get a second opinion. If you don't trust the appraiser hired by the lender, hire one yourself. Full appraisals run $500 to $1,000. If you can't spend that much, you can get a limited appraisal - where the appraiser simply does a drive-by - for about half that.
Finally, if you get an inflated appraisal, complain. You can find a complaint form from the New York State Division of Licensing Services at www.dos.state.ny.us/lcns/licensing.html. Or, call (518) 474-4429.
The government is trying to take care of this problem. For three years, legislation has been introduced by Rep. Paul Kanjorski of Pennsylvania to outlaw pressure on appraisers. But until it passes, you're on your own.
As the FBI's Sweiker says: "It's the old trust, but verify."
Originally published on January 19, 2005
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