The appraiser’s lonely fight against mortgage fraud

Last week we wrote about how mortgage fraud is reported to be a prime mover behind artificially inflated property values in some local, fraud-prone areas. You agreed. We've never received more e-mail from our e-newsletter than we did last week, and far too many of you had fraud "war stories."

One appraiser wrote us:

"I was recently requested to complete an FHA appraisal on a home that had been flipped. A local [real estate agent] purchased the home for $7,500 had her maintenance crew put a poor paint job on the home then sold to three elderly friends living on a fixed income for $33,000. The loan officer agreed with the [agent] to use an FHA appraiser from [another market] instead of using a local FHA appraiser. The appraiser completes the appraisal for $39,000 with few or no requirements. It was a complete joke.

"The loan is completed and closed. The FHA underwriters got a hold of it and said, 'banker/loan officer, this loan looks like the home was flipped. Either get the receipts for all the repairs that were made on the home or get another appraisal from a FHA qualified appraiser.' We all knew there were no repair receipts.

"I was asked to complete a new FHA appraisal. It did not take long for me to understand how bad they did these elderly buyers. At my inspection, one of the older ladies nearly broke down crying as she told me her toilets did not work very well. The smell of sewage was making them sick. I investigated to find half the crawl space in a foot of raw sewage.

"When they moved into the home, she told me the renter had stripped the home of ceiling fans and light fixtures. She, not knowing what to do or what her legal rights were spent $500-1,000 replacing lights and making repairs on this FHA home.

"I rejected the home and explained the problems to the loan officer who begged me to do this favor for her. I know the second appraiser who was asked to do her this favor, he said no thank you. Finally, the third FHA appraiser completed an appraisal for the $33,000 getting the loan officer off the hook.

"This client used to be my biggest client but not any more. But my conscience is clear. I did the right thing."

Unquestionably, yes, you did.

We got far too many e-mails like this. Most were horror stories like the one above, involving one, single property whose value had been inflated (or attempted to be inflated). But the larger point of last week's piece bears repeating: The property above goes into the MLS and sales records as a $33,000 "comp." Without extraordinary due diligence on the part of an appraiser, an appraisal of the house down the street in comparable condition with comparable square footage and features will use a $33,000 sales price to justify the next value.

Appraisers are the front line defense against this type of unconscionable fraud, as our e-mailer demonstrates. Unfortunately, loan officers can cherry pick till they get a malleable appraiser, as the story also illustrates.

Another reader wrote us that in his MSA, "95 percent of the appraisals go to five percent of the appraisers." And to hear him tell it, it's not always the loan officer. "[Real estate agent] makes sale, then he/she tells loan officer to use their good old boy appraiser. As a result, the loan can't fail and borrower gets stiffed.

"This is what loan officers are telling me. They say their hands are tied. If they do not use the [agent's] appraiser then no more loans."

Lest we forget that that five percent of appraisers – and the third FHA appraiser in the first e-mail above – are also part of the problem, another e-mailer told us: "Let's not kid ourselves. Appraisers via lender pressure are a large part of the problem. There are too many of us and certification is the worst thing that ever happened to this industry. There are many, many appraisers who are basically untrained, and are hired because of one attribute that they possess, i.e., their ability to magically meet or exceed the 'estimated value' written on the appraisal order by the loan officer."

We wish we could wind this article up with the magic solution to the problem. (It would be even better if we could sell you software or technology that would eliminate the problem!) We know it's not AVMs or alternatives to full appraisals. An AVM on a home down the street from the "$33,000" FHA property above will factor in proximity, square footage, acreage, frontage and as-built features and say the next run-down, unfit for living in shack is also worth $33,000. An "AVM plus inspection" – which isn't, it's more of an "AVM plus a quick look to make sure the house is actually there" – won't catch it, either. The place was painted, right?

Thanks to everyone who wrote in, and also – especially – every appraiser who dedicates their working hours to fighting this nonsense. Without the 95 percent of appraisers who take their professional responsibilities seriously, every one of us would be at risk of being defrauded out of tens of thousands of dollars in a mortgage fraud scheme.