Mortgage Fraud: How Inflated is Your Appraisal?

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I promised a separate post on Kenneth Harney’s column on inflated appraisals and mortgage fraud, and here it is.

How widespread is pressure by lenders and loan officers on appraisers to raise valuations? Harney writes that 90% of appraisers surveyed last year said they had experienced threats, nonpayment of fees and other kinds of coercion from lenders and loan officers. In my book, 90% is a lot.

Bakersfield appraiser Gary Crabtree lays out a particularly dastardly scheme he’s seen: House sits on the market for months, listed at $450,000, but nobody wants it. Realty agent, working in cahoots with a crooked appraiser and a crooked mortgage broker, takes the house off the market and re-lists it for $525,000. A ‘buyer’ is found and given 100% financing. The ‘buyer’ gets a $75,000 kickback, the old owner gets his $450,000, and everyone is happy, right?

Let’s see: the realty agent and the loan broker get big commissions. The buyer gets money back at closing. Neighbors hoping to sell their homes get a wonderfully fat ‘comp’ in the neighborhood.

Er, wrong. Let’s count up the losers: Future buyers in that neighborhood will hear about this $525,000 ‘comp’ -- they will probably overpay. A deal like this is a big foreclosure risk -- the ‘buyer’ owes $525,000 on a house nobody wanted at $450,000. In fact, in some of these frauds, the ‘buyer’ never intends to pay the mortgage -- foreclosure is part of the plan. The ‘buyer’ gets a free place to live for a few months, plus $75,000 cash. He walks away happy, leaving a big, fat, property-value-damaging foreclosure in the neighborhood.

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