Widespread mortgage fraud threatens America's homeownersmortgagepress.comappraisal fraud, consumer risks, foreclosures
A new report, "Home Insecurity: How Widespread Appraisal
Fraud Puts Homeowners At Risk," reveals troubling evidence
that many American homeowners and buyers are at financial risk from
mortgage appraisal fraud. As a consequence, countless homeowners
have borrowed more money than their homes are really worth. Demos,
a leading non-partisan, public policy group headquartered in New
York City, conducted the report. The real estate boom and
refinancing craze of recent years has meant record profits for
institutions that originate mortgage loans. But this boom has a
dark side for unwitting consumers. Many appraisers, responding to
increased pressure from loan originators in a highly competitive
marketplace, are inflating property values during the buying and
refinancing of homes.
"Appraisal fraud is part of a bigger, more ominous picture. As
home prices have continued to increase above inflation, even
nearing 20 percent per year in some cities, American homeowners are
vulnerable as never before to financial ruin if home prices fall to
their natural market value," said David Callahan, Home Insecurity
author and director of research at Demos. "To make matters worse,
an increasing number of Americans have reduced the equity in their
home to meet rising living expenses like education and health care,
or to pay off credit card debts. From 2001 to 2004, homeowners
pulled out a staggering $485 billion worth of equity and the trend
is expected to continue. It is beginning to look like the American
dream of financial security through homeownership is becoming a
myth for far too many."
The data and findings of the Home Insecurity report
were based on a number of sources, including: the National
Association of Realtors statement before a Senate subcommittee in
March 2004, detailing how the problem of lender pressure and
appraisal fraud had worsened; a petition sent by 8,000 appraisers
to the federal government complaining that the lending industry had
applied pressure on them to exceed values; and the testimonials of
individual appraisers about such abuses. Among the report's key
findings were:
•Serious conflicts of interest pervade the mortgage
industry, stemming largely from the refinancing craze. Lenders,
brokers and real estate agents have an increased incentive to
inflate the value of residential properties.
•Appraisal fraud often encourages homeowners to borrow more
money than their homes are worth, putting them at risk of not being
able to sell for a high enough price to pay off their
mortgage.
•Up to half of all property appraisers have reported feeling
pressure from lenders or brokers to overstate property values.
Appraisers who have not complied with strong-arm tactics report not
being paid for work and being blacklisted.
•The inflation of home prices through appraisal fraud may be
helping to push real estate prices up to unsustainable levels and
contributing to a housing "bubble."
•Predatory lending targeting minority and low-income aspiring
homeowners often involves appraisal fraud. Developers collude with
dishonest appraisers in the aggressive marketing of new homes
offered at inflated prices.
•Government oversight of the appraisal process is woefully
inadequate. Key participants in the mortgage industry are
unregulated in many states and oversight of lending institutions is
weak. State boards that license appraisers and investigate reports
of fraud often lack enough resources to enforce existing laws.
American dream of homeownership could become nightmare
of foreclosure
The Demos report highlights several worrying undercurrents beneath
an apparently rosy homeownership picture. For example,
adjustable-rate mortgages account for 34 percent of loans in 2004,
leaving borrowers dangerously vulnerable to a rise in interest
rates. Also, even though homeownership today stands at a record 69
percent, Americans actually own less of their homes than they did
30 years ago due to the drop in homeowner equity that fell from 68
percent in the early 1970s to 55 percent in 2004. The report also
makes clear that appraisers often feel they have no choice in going
along with dubious practices. Their livelihoods are dependent on a
steady stream of work from lenders and mortgage brokers. If they
fail to deliver the target valuations demanded by loan originators,
they simply move on to dishonest appraisers happy to oblige them.
If, however, there is a leveling off or decline in property values,
the consequences of appraisal fraud could be devastating for
millions of Americans.
"Appraisal fraud thrives amid a failure of stringent government
oversight," Callahan commented. "Our study shows that, even as
evidence of appraisal misconduct has mounted, neither the federal
government nor most states have taken decisive steps to fix an
obviously broken system and protect homeowners from risking their
most important asset."
Demos recommendations
The report's principle recommendation is there should be a thorough
investigation of the scope and causes of appraisal fraud by a
federal agency in collaboration with state regulators and with the
input of a range of participants in the mortgage industry. Reform
proposals should:
•Ensure appraiser independence
New rules are needed to ensure that appraisers can act
independently. Ideally, the remedy is to prohibit all contact
between appraisers and lenders and brokers.
•Punish lenders, brokers and real estate agents whom
pressure appraisers
Loan originators and others who pressure appraisers to overstate
property values should face stiffer punishment from the federal
government. All states should expressly prohibit the pressuring of
appraisers. All states' mortgage brokers should be licensed and
accountable to a regulatory authority.
•Sanction dishonest appraisers
There should be tougher sanctions of dishonest appraisers who go
along with requests to inflate property values. This would create a
level playing field for honest appraisers.
•Streamline the complaint process
Appraisers who are subjected to lender or broker coercion often
find it difficult to file a complaint because agencies regulate
different kinds of loan originators. The complaint process should
be more uniform and the means for filing complaints made more
efficient and effective.
•Increase enforcement capacity
Regardless of what new regulations are enacted, there must be
increased financial and manpower investment so that laws can be
enforced effectively. Most federal agencies and state licensing
boards engaged in oversight of the industry lack the manpower and
financial clout to operate effectively.
•Educate consumers about the problem of appraisal
fraud
Currently, consumers have been urged to buy into new housing
developments, to treat their home equity like a bottomless ATM and
to exchange high-interest credit card debt for low-interest
mortgage debt. Many Americans have unwittingly encouraged appraisal
fraud by pressuring lenders to wrap up deals quickly and by paying
no attention to the appraisal step.
To view the full report "Home Insecurity: How
Widespread Appraisal Fraud Puts Homeowners At Risk," please
visit www.demos-usa.org/pub485.cfm/.
