Have inflated appraisals helped fuel the surge in foreclosures on credit-strapped borrowers? Are such appraisals at the core of many mortgage-fraud schemes?
The four largest trade groups representing appraisers say yes -- and they are asking federal financial regulators to crack down on lenders and loan officers who put pressure on appraisers to raise valuations to allow overpriced deals to go through.
Led by the 22,000-member Appraisal Institute, the groups told regulators April 11 that subprime lenders experiencing high rates of foreclosures often have been guilty of "systematic inattention" to the accuracy and the sources of the valuations backing the mortgages they funded. For the full story see: http://
Why do appraisers inflate appraisals?
The main reason is money: the appraiser gives the loan officer whatever value is needed for a loan, so the loan officer will use the appraiser again and again, inflating the value of numerous properties. But when the homeowners attempt to refinance, if they use a different mortgage company, the legitimate appraiser will value the property at its actual (not inflated) value. This may cause a significant decrease in value, sometimes to the point where a client owes more on the mortgage than what the property is worth. The homeowner is “upside down” and this can cause significant problems.
The main problem with the inflated appraisal?
There may be no accountability on any entities' part. The lender can blame the loan officer for submitting a bad appraisal, the loan officer can blame the appraiser, and the appraiser can blame the market, location, timing, etc.
Prices fall below (inflated) appraised value.
The problem has become so vast that even mainstream news outlets have begun to address the widespread situation. James Hagerty and Ruth Simon of The Wall Street Journal report that, "As the housing market cools, Americans are confronting a problem that was easy to ignore during the boom: Inflated appraisals of home values." When home prices were increasing at high rates (over 10% per year in some areas), the value would catch up to the inflated appraisal. But the slowing housing market has caused some home prices not only to fail to catch up to the appraisal, but fall far below the appraised value. For victims of foreclosure, this means that two valuable options for saving the home are immediately eliminated: selling the home, or refinancing. As the article explains, "For sellers, that can mean being forced to drop their asking prices. Some people hoping to refinance, meanwhile, may be unable to lock in new loan terms because they have less equity in their homes than they thought." In fact, Jacquie Doty of Freddie Mac says that inflated appraisals may lead to more foreclosures.
However, the issue of inflated appraisals put the mortgage and real estate industry in a slump along with the housing market. A cause of concern exists in the housing market if inflated appraisals are not used. Namely, if property values are estimated lower, then the housing market may continue to slow. The lending industry has caused its own financing problem by contributing to an already growing housing bubble and then assisting in the decrease in home values by no longer accepting inflated appraisals.
The potential effects of this could be devastating to homeowners in hardship situations. For example, consider if a lender first accepts an inflated appraisal and gives a purchaser a loan for more than the value of the home. If the borrower then experiences a hardship and falls into foreclosure, they may try to refinance the loan. But with a new, legitimate appraisal, the homeowners may end up owing too much to qualify for a refinance. Then the lender will either have to take a loss by accepting a lower payoff amount because the home is worth less than originally thought, or they will have to take a loss by selling the home at a sheriff sale.
Another contributing factor to the problem is that most home buyers just want the home, as long as the process is as smooth and easy as possible. Bankrate.com states that "Many homeowners don't think about how loans get done, just whether they're approved." Overlooking the appraisal and just focusing on owning a home is a huge mistake to make. To protect themselves from the consequences of inflated appraisals, the article states that "Borrowers should also get a rough idea of their property's worth before shopping for loans. They can contact local real estate agents or visit one of several registration-required Web sites, including Domania.com andHomegain.com, for such estimates." Also, always ask for a copy of the appraisal the lender is using when applying for a mortgage. The right to receive the appraisal is granted under federal law.
If you are a homeowner who suspects an inflated appraisal, you may want to call an independent appraiser yourself and have the value of your home estimated. If that value and the amount of your loan are far off, you may have been a victim of mortgage fraud. In this case, refinancing may no longer be an option and you may not even be able to sell the home if you wanted to. You are effectively locked into your home.
Although we have known about the problem of inflated appraisals for some time, the trend seems to be growing worse by the day. More and more clients who call me have been the victims of over-inflated appraisals. When the illegal appraisal is discovered, it is usually not too late to hold anyone accountable, even if the homeowner is in foreclosure. According to the Bank Fraud Victim Center, the remedy is to stop the foreclosure and sue the lender for free clear title and money damages. See: http://mortgage-home-loan-bank-fraud.com
Colorado, New York and many other States are cracking down on “bad actor” appraisers.
Erin Toll's top priority as the new director of the Division of Real Estate for Colorado is to shut down appraisers who are artificially inflating home values, contributing to the state's escalating foreclosure crisis.
Toll plans to go after "bad actor" appraisers as aggressively as she went after title insurers making kickbacks when she was a deputy insurance commissioner.
She agrees with many in the real estate industry who believe inflated appraisals are contributing to rising foreclosures in Colorado and nationwide.
Toll, an attorney, said she expects to unveil an investigation next month of an appraiser she said has inflated the value of homes by as much as $100,000.
"Appraisal fraud opens up a can of worms bigger than I can imagine," he said. "In many cases for it to work, the appraiser, the lender, the broker and the borrower are all complicit.
New York, NY - Attorney General Andrew M. Cuomo and State Banking Superintendent Richard H. Neiman today announced nearly 25,000 homeowners across New York State are eligible to receive restitution as a result of a $325 million settlement with Ameriquest Mortgage Co. and its subsidiaries.
The settlement, a result of a multistate investigation, led by the New York State Attorney General and Banking Superintendent, along with 48 Attorneys General, found Ameriquest engaged in predatory and illegal lending practices to sell refinance mortgages including misrepresenting and failing to disclose loan terms; charging excessive loan origination fees; and inflating appraisals to qualify borrowers for loans.
“When refinancing with Ameriquest, consumers put at risk the foundation of their American dream – their home,” said Attorney General Andrew Cuomo. “In reality, Ameriquest profited handsomely from its schemes while defrauded victims found themselves trapped into debt and at risk of losing their homes. This settlement sends the message that fraudulent and discriminatory real estate deals will not be tolerated in the State of New York.”
Cuomo's suit, which rattled mortgage lenders, appraisers and settlement service companies nationwide, accused First American and eAppraiseIT of knuckling under to illegal pressure from Washington Mutual, the giant Seattle-based lender, to hit the numbers needed to close loan deals.
Citing extensive internal e-mails, the suit charged that Washington Mutual demanded that eAppraiseIT use the bank's own preferred list of appraisers -- who allegedly had demonstrated their willingness to inflate values -- rather than eAppraiseIT's regular roster of independent appraisers.
Executives at eAppraiseIT knew that agreeing to Washington Mutual's demands would violate federal and state laws, but they caved rather than lose millions of dollars worth of business that the bank could shift to competitors, according to the suit. An e-mail sent to senior executives by eAppraiseIT's president last February and quoted in the complaint said, "We have agreed to roll over and just do it."
From April 2006 to last month, eAppraiseIT supplied about 262,000 appraisals to the bank in connection with home financings. Post-closing reviews of nine appraisals performed on New York properties by Washington Mutual's preferred appraisers found higher than accurate numbers in every one, according to the suit. The alleged padding ranged from $5,000 to $720,000.
Advertisement: Consumers can get more information about predatory lending and a legal remedy at: http://mortgage-home-loan-bank-fraud.com/articles/predatory_lending_claims_available_in_foreclosure.htm
Homeowners just want the job done
Many homeowners don't think about how loans get done, just whether they're approved. But one of the most important steps, from both a consumer and lender perspective, is the property appraisal. If a property isn't worth enough to support a loan, that loan won't be made. If the value comes in high enough for a loan but not as high as a borrower expects, the borrower's financing costs will be higher. That's because the appraisal determines the mortgage's loan-to-value ratio and the higher that ratio, the more onerous the loan's terms.
Today, companies use several methods to determine a property's worth. They can access the local tax authority's data, for instance, or run computerized models that calculate a value based on recent sales and property trends in the area. Humans will sometimes be called in to verify that information via a "desktop evaluation." Or, a full-blown appraisal involving an indoor and outside inspection of the property by a licensed appraiser will be required. Lenders generally use the more thorough methods with purchase transactions, though they also require them on riskier home equity loans.
"It really varies from institution to institution, but it's based on the risk-acceptance criteria that the credit committee happens to accept," Rogers says. "Typically, the decision is based on loan amounts and credit criteria. The less risk and exposure perceived, the quicker, simpler methods are then applied."
Manipulating the numbers
In a perfect world, the appraisal is just like the title search, which is just like the recording of the deed at the courthouse -- another step in the closing process the borrower doesn't need to worry about. But the appraisal can be manipulated in ways that hurt unsuspecting consumers, and that's why homeowners need to tread carefully.
Say a borrower owes $70,000 on a first mortgage and wants to take out a second one for $30,000 to consolidate debt. If the lender won't lend at more than 95 percent loan-to-value and the property appraisal comes back at $100,000, the borrower is out of luck. The same holds true for the loan officer, who gets paid a commission based on the number of loans closed in a given time period.
But if the home value can be coaxed up to $105,300, the problem goes away. Originators know this, so some will try to talk appraisers into modifying their estimates. Experts say that isn't too tough because those estimates rely to some degree on an appraiser's subjective evaluation of property and market conditions.
Originators often the origin of price inflation
"It starts with the originator trying to make the deal happen," says Sandy Nickol, a regional president with Republic Bancorp Inc.'s mortgage company in Farmington Hills, Mich. "Sometimes you can't close the deal unless you can get the customer a mortgage of 'X.' If they're trying to pull cash out to pay off three credit cards and it doesn't make sense to refinance today unless they can do that, the whole deal is going to hinge on an appraisal that's high enough to do that."
Consumers can get more information about predatory lending and a legal remedy at: http://mortgage-home-loan-bank-fraud.com/articles/predatory_lending_claims_available_in_foreclosure.htm
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