Mortgage Lenders Forced Appraisers To Inflate Home Values

5 12 2008

“They would get on the phone and scream at me to inflate values,” he said. “They said, ‘If you keep coming in low, we’re not going to work with you anymore.’ ” Finally, the brokerage delivered on the threat, cutting off business with Fincham’s company.

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http://hamptonroads.com/2008/12/appraisers-say-they-were-pushed-overvalue-properties

Real estate appraisers in Hampton Roads and across the nation say they have felt intense pressure from lenders, mortgage brokers and real estate agents to deliver inflated valuations – a serious ethical breach that may have played a role in puffing up the real estate bubble and promoting mortgage fraud.

The problem has been around for some time, says Woody Fincham, a Chesapeake-based appraiser. For several years in the mid-2000s, Fincham said, his company, FM & Associates, did steady business with a Virginia Beach mortgage brokerage but faced escalating pressure to deliver inflated appraisals.

“They would get on the phone and scream at me to inflate values,” he said. “They said, ‘If you keep coming in low, we’re not going to work with you anymore.’ ” Finally, the brokerage delivered on the threat, cutting off business with Fincham’s company.

“They said, ‘You’re not hitting the numbers we need you to hit,’ ” Fincham said.

That brokerage, Everyday Lending, is now out of business, dragged down by the collapse of the subprime mortgage market. One of its former loan officers, Aretha Smiley, has been named in two civil lawsuits alleging mortgage fraud.

The volume of inflated real estate values has declined with the contraction of the housing market over the past year, Fincham and other appraisers say, but the pressure to pump up values hasn’t gone away.

 

Appraisers play a crucial role in the buying and selling of real estate: They place a value on the property to be sold.

In theory, the appraiser is an independent operator, not influenced by the buyer, the seller or anyone else. The reality, say Fincham and fellow appraisers across the country, is far different.

It’s not as if there was no warning.

Back in 2001 the Appraisal Institute, a worldwide association of real estate appraisers, told Congress that members were facing increasing pressure from lenders, brokers and realty agents to inflate property values.

Such pressure can enable lenders to make loans larger than the actual value of the house, the institute warned. Moreover, those inflated transactions can later be cited as comparable sales in appraisals of nearby properties, creating a multiplier effect.

“Such a cycle of ever escalating values adds unnecessary risk to our mortgage finance system” and “can contribute to mortgage fraud,” the institute warned.

Those words seem prescient in this era of deflating home values, mounting foreclosures and emerging cases of fraud.

Since 1999, more than 10,000 appraisers nationwide have signed an online petition urging the federal government to clamp down on lender pressure to inflate values. Such pressure is pervasive, the petition says, and includes blacklisting appraisers who refuse to go along.

Some local appraisers were unwilling to discuss the issue on the record, saying they feared losing business.

One willing to talk was Suzanne Shannon, an appraiser in Hampton.

“I’ve been told numerous times, right flat-out in plain English, ‘If you don’t do what I want you to do, you’ll never work for me again,’ ” Shannon said.

The deflation of the housing bubble has prompted some lenders to look more critically at appraisals, Shannon said. Occasionally over the past few months she has been asked to review high valuations turned in by other appraisers.

In one instance, a waterfront property in Gloucester County had been appraised at $2.1 million; Shannon’s review put the value at only $1.2 million.

 

A 2007 national study found that 90 percent of appraisers reported being pressured to raise property valuations to enable deals to go through. The prime culprits, according to the survey, were mortgage brokers.

Mortgage brokers, on the other hand, put the onus back on appraisers.

“The appraisers have to step up here and take the high ground,” said Marc Savitt, president of the National Association of Mortgage Brokers. “I understand a lot of them have been threatened with loss of business and so forth. I’m not saying it didn’t happen.

“If they get pressured, they need to report it to the appropriate regulator. That’s the first thing. The second thing is, if they do commit fraud, then they have to understand there’s consequences for that, and just because somebody tried to influence or pressure them, that’s not an excuse for committing fraud.”

The trouble is, when coercion occurs, appraisers have little recourse, said Glenn James, a Norfolk appraiser and a member of the Virginia Real Estate Appraiser Board.

“Mortgage brokers are totally unregulated” in Virginia, James said, so there’s no one to complain to.

Another problem, appraisers say, is that the pressure is usually applied in oral form, not written, making it hard to prove.

But not always.

Mark White, a Roanoke appraiser, told of getting a faxed order from an out-of-state broker that mentioned a figure of $195,000 and asked him if he could “match this value.”

A cursory review of the property – a 37-year-old, 1,000-square-foot house – showed that it was worth $150,000 at most, White said.

According to the Uniform Standards of Professional Appraisal Practice, the national appraisers’ code of ethics, it is unethical for an appraiser to accept an assignment that is contingent on reporting a predetermined value.

In Virginia, those ethical standards have been incorporated into the state regulations governing appraisers. Violations can result in a variety of sanctions, including license revocation.

Pressure on appraisers to pump up the numbers was particularly intense during the run-up in prices during the early and mid-2000s, said Bill Garber, director of government relations at the Appraisal Institute.

“Good appraisers said no to it and went about their business and did their jobs professionally,” Garber said. “But there are institutionalized conflicts of interest that exist – pressure points in the lending process – that can allow people with a vested interest in the transaction to control the appraisal process.”

Such coercive tactics are a violation of federal banking regulations.

Earlier this year, the Federal Reserve Board adopted a rule barring mortgage brokers and lenders from coercing appraisers.

The new rule is a positive step, Garber said, but the proof will be in the pudding: “Enforcement is key. It’s going to be incumbent upon the regulatory agencies to keep this issue on the front burner.”

The problem is, for every appraiser who abides by the rules, there’s another one down the street who’s willing to violate them to get more business, said Cheri Eimer, an appraiser in Newport News.

“It’s very disheartening for an honest appraiser to lose business because they’re doing the job that they’re hired to do,” she said. “It’s a big problem. It needs to be fixed.”

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