Appraisal Fraud, Mortgage Brokers and the heating of the California Real Estate Market

A lot of posts have written about the sometimes difficult relationship between appraisers and mortgage brokers. One thing has become clear though, appraisal fraud and appraisal exaggeration have played a part in the run up of housing prices well ahead of incomes in the California real estate market.

I realize that little supposition needs more support so let's take a look at the

role that the appraiser plays in a real estate transaction. Traditionally the appraiser's role is to secure the bank's interest in the transaction. The bank is the largest owner in any real estate transaction. Unless you are buying your home with cash, you need to get the money from somewhere.

Let's think back to how Ward Cleaver probably bought his house. It's a little different. Ward probably got a loan from a local bank guaranteeed by the VA. Little known fact about Ward - he served in WW2 as a SeeBee in the Pacific. His local banker probably knew his neighborhood, understood the value of the home and additionally was going to was likely to carry the paper throughout the life of the loan.

In today's market your loan is likely going to be done by mortgage broker. This broker has an interest in getting the deal done since that's the only way he gets paid. The actual lender on the property is probably going to re-package and sell the loan within a few months of the house closing.

So how can appraisal fraud play a part in a real estate bubble? The mortgage broker begins to assert pressure to "hit a number" with the appraisal. Don't think it doesn't happen?

According to Appraiser Petition - it certainly does

The concern of this petition has to do with our "independent judgment" in performing real estate appraisals. We, the undersigned, represent a large number of licensed and certified real estate appraisers in the United States, who seek your assistance in solving a problem facing us on a daily basis. Lenders (meaning any and all of the following: banks, savings and loans, mortgage brokers, credit unions and loan officers in general; not to mention real estate agents) have individuals within their ranks, who, as a normal course of business, apply pressure on appraisers to hit or exceed a predetermined value.

This pressure comes in many forms and includes the following:

• the withholding of business if we refuse to inflate values,
  
• the withholding of business if we refuse to guarantee a predetermined value,
  
• the withholding of business if we refuse to ignore deficiencies in the property,
  
• refusing to pay for an appraisal that does not give them what they want,
  
• black listing honest appraisers in order to use "rubber stamp" appraisers, etc.
  

This combined with the free money and loose underwriting standards, means that that housing prices have grown faster than incomes and far faster than they should have. But this isn't a bubble blog.