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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/.