New Appraisal Rules Higher Appraisal Fraud

In 2009 the rules for appraisals were changed so supposedly toughened and imposed on appraisers nationwide to avoid fraud within the mortgage industry. The figures have been release and show that appraisal fraud is actually on the rise.

The Mortgage Assets Research Institute also know as MARI found that over all fraud rose in 2009 by seven present and that the lion share involved property values. Appraisal accounted for fifty percent of the mortgage fraud according to the data obtained by MARI. MARI is a serve that is provided by LexisNexis. The company collects information from over six hundred wholesale mortgage lenders that account for the vast majority of all loans originated in the country. MARI reports come out once a year and are given to the Mortgage Bankers Association.

According to the report the vast source of mortgage fraud comes from borrowers who intentional supply misinformation on the mortgage loan application in regard to employment, income and assets. Appraisal misrepresentation came in second. In 2006 only sixteen percent of all mortgage fraud derived from fraudulent appraisals. In 2008 only twenty two percent of all mortgage fraud derived from fraudulent appraisals. The figure now stands at thirty three percent.

The figures show that appraisal fraud actually increased even though restrictions that were designed to limit interference in real estate appraisals and improve more accurate appraisals where put in place. One restriction that was put in place on May 1, 2009 was to prohibit loan officers and brokers from selecting appraisers. Lenders were to use appraisal management companies and assign appraisers from their own networks across the country.

The new rules in regard to appraisals were widely protested by mortgage brokers, appraisers, home builders and real estate brokers. They charged that management companies paid to little for appraisal services. Appraisers who would receive three to four hundred dollars for their service would only receive a little less than two hundred dollars for the same service if managed by an appraisal management company. They further contended that these management companies used inexperienced appraisers who are not familiar with the market in selective markets. The group also contended that management companies forced unrealistic turn-around times and forced appraisers to cut corners that would affect the quality of the appraisal. The National Association of Realtors lobbied congress and was able to put the new rules on back burner for eighteen months; however the rules did go into place on May 1 of 2009.

Appraisal Institute Government Affairs Director, Bill Garber stated that the bad appraisals in 2009 further demonstrates what happens when lenders hire appraisers solely based on low prices and quick turn times. The figures should send a loud wake up call to lenders to hire ethical and competent appraisers if they want to avoid fraud in their mortgage loans.

Brad German, the spokesperson for Freddie Mac stated that the MARI study made no specific reference to the new rule that was put in place or the use of appraisal management companies and therefore there is no connection between the increase in fraudulent appraisals and the new rules.

The MARI report included all types of valuation methods used by lenders to underwrite mortgage loans. The valuation types include traditional appraisals, electronic valuations and broker price opinions (which are supplied by real estate agents and others). The report showed that the largest fraud derived from comparables. Comparables were often selected miles away from the home being appraised in order to obtain the value needed to make the loan work rather than comparables within a reasonable distance from the home. Some of the fraud derived from leaving out important information such as a railroad track within walking distance which would reduce the value of the property.

Fabrications on the appraisal often customized in this manner are usually off value by fifteen to thirty percent and result in the loan application being approved for a much larger sales price. The result of this leaves lenders holding the bag if the mortgage loan should go into default.

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