Many First Time Mortgages and Refinancing Deals Could Have Falsified Property
Values; Appraisers Tell of Widespread Pressure From Lending Industry
Homeowners Cashing Out More Equity Than the True Value of Their Homes; Threat
of Housing Bubble Looms Large
NEW YORK, March 29 /PRNewswire/ -- A new report released today, 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. The report was
conducted by Demos, a leading non-partisan, public policy group headquartered
in New York City.
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," says David
Callahan, Home Insecurity author and Director of Research at Demos. "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."
"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:
* 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 thirty 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 comments. "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 Who 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:
http://www.demos-usa.org/pub485.cfm /
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