Lost in The Headlines: Appraisal Fraud Risk on the Rise. What Are We Doing About It?

We’ve talked here before about the importance of valuation or appraisal data integrity.  We know that this was one (of more than a few) of the root issues at the heart of the subprime meltdown in the late 2000’s—investors suddenly found that they had portfolios with homes not only in default or foreclosure, but which had been appraised at inflated values.

The concern remains even today—especially at a time when home values are higher than they’ve been in over a decade.  Mortgage Professional America (MPA) not too long ago reported that mortgage valuation risk is on the rise.  One report issued not long ago stated that its national Property Fraud Valuation Risk Index, was at 128, up 27% from the 1st quarter in 2017 and 17% from 2016.

“…the increase in valuation fraud risk seems to be driven by people in certain areas purchasing multiple properties in the same neighborhood. Such people essentially control the markets in those neighborhoods, and would therefore have the ability to artificially control the price of property to their own advantage. Another contributing factor was the rise in properties “being appraised well above their traditional valuation thresholds,” according to the report.”

Let’s not repeat the same mistakes that were made during the refinance boom of the early 2000’s.  Fraudsters are always seeking a new way to make money.   That won’t be ending any time soon.  And, although not remotely in the same league as fraud, institutional pressure on appraisers to “keep pace” with the rising home values in the market still exists as well.  It’s up to the lenders, their service providers (such as reputable appraisal management firms), appraisal firms and borrowers themselves to stay vigilant.  The potential for negative consequences should we collectively turn our backs again would impact us all.

Editor’s Note:  In keeping an eye out for anything unusual in a transaction, let’s also avoid heading to the opposite extreme:  appraisal inflation or pressure on appraisers to inflate. Inflated values are also the obvious result of pressure on an appraiser to “meet a number,” or to assign a home value inconsistent with his professional evaluation so that the anticipated amount of the mortgage can be met.  This, in fact, is an even faster way to inflated values and artificiality in the market (which leads to bubbles; which leads to bubble-bursts; which leads to things like underwater home owners and investors with toxic portfolios).  So, while we highly encourage vigilance, we highly discourage direct involvement in the appraisal itself.  It’s appraisal independence that protects not only the market and the investors, but the very homeowners who temporarily “benefit” from that inflated number in the first place.