Although we have been familiar with the problem of inflated appraisals for some time, the trend seems to be growing worse by the day. More and more clients who call us have been the victims of over-inflated appraisals. When the illegal appraisal is discovered, it is usually too late by then to hold anyone accountable, especially if the homeowner is now in foreclosure. Saving the home is the top priority – anything else comes after that.
Why do appraisers inflate appraisals? The main reason is money: the appraiser gives the loan officer whatever value is needed for a loan, so the loan officer will use the appraiser again and again, inflating the value of numerous properties. But when the homeowners attempt to refinance, if they use a different mortgage company, the legitimate appraiser will value the property at its actual (not inflated) value. This may cause a significant decrease in value, sometimes to the point where a client owes more on the mortgage than what the property is worth. Obviously, this can cause significant problems.
And the main problem with the inflated appraisal? There may be no accountability on any entities’ part. The lender can blame the loan officer for submitting a bad appraisal, the loan officer can blame the appraiser, and the appraiser can blame the market, location, timing, etc. Appraisers generally do not make enough money to be worth a lawsuit, as well.
The problem has become so vast that even mainstream news outlets have begun to address the widespread situation. James Hagerty and Ruth Simon of The Wall Street Journal report that, “As the housing market cools, Americans are confronting a problem that was easy to ignore during the boom: Inflated appraisals of home values.” When home prices were increasing at high rates (over 10% per year in some areas), the value would catch up to the inflated appraisal. But the slowing housing market has caused some home prices not only to fail to catch up to the appraisal, but fall far below the appraised value.
For victims of foreclosure, this means that two valuable options for saving the home are immediately eliminated: selling the home, or refinancing. As the article explains, “For sellers, that can mean being forced to drop their asking prices. Some people hoping to refinance, meanwhile, may be unable to lock in new loan terms because they have less equity in their homes than they thought.” In fact, Jacquie Doty of Freddie Mac says that inflated appraisals may lead to more foreclosures.
Another contributing factor to the problem is that most home buyers just want the home, as long as the process is as smooth and easy as possible. Bankrate.com states that “Many homeowners don't think about how loans get done, just whether they're approved.” Overlooking the appraisal and just focusing on owning a home is a huge mistake to make. To protect themselves from the consequences of inflated appraisals, the article states that “Borrowers should also get a rough idea of their property's worth before shopping for loans. They can contact local real estate agents or visit one of several registration-required Web sites, including Domania.com andHomegain.com, for such estimates.” Also, always ask for a copy of the appraisal the lender is using when applying for a mortgage. The right to receive the appraisal is granted under federal law.
According to another article from The Wall Street Journal, “Some lenders are getting pickier about the appraisers they do business with -- a policy that is easier to enforce now that refinance activity has slowed.” This means that as more appraisers who inflate appraisals end up on lender blacklists, properties will be appraised for their true values. When conducting a real estate transaction, the article suggests that “homeowners should request that the bank uses a "designated" appraiser and not simply one who meets state licensing standards.”
However, the issue of inflated appraisals put the mortgage and real estate industry in a Catch-22. A cause of concern exists in the housing market if inflated appraisals are not used. Namely, if property values are estimated lower, then the housing market may continue to slow. The lending industry has caused its own financing problem by contributing to an already growing housing bubble and then assisting in the decrease in home values by no longer accepting inflated appraisals.
The potential effects of this could be devastating to homeowners in hardship situations. For example, consider if a lender first accepts an inflated appraisal and gives a purchaser a loan for more than the value of the home. If the borrower then experiences a hardship and falls into foreclosure, they may try to refinance the loan. But with a new, legitimate appraisal, the homeowners may end up owing too much to qualify for a refinance. Then the lender will either have to take a loss by accepting a lower payoff amount because the home is worth less than originally thought, or they will have to take a loss by selling the home at a sheriff sale.
Either of these choices puts the lender in a bad situation, which would not have occurred if the borrower had not fallen behind. They may be less willing to work with the homeowners, push them further into foreclosure to cut their losses as quickly as possible, and accelerate more and more fees to try to obtain a deficiency judgment against the borrowers.
If you are a homeowner who suspects an inflated appraisal, you may want to call an independent appraiser yourself and have the value of your home estimated. If that value and the amount of your loan are far off, you may have been a victim of mortgage fraud. In this case, refinancing may no longer be an option and you may not even be able to sell the home if you wanted to. You are effectively locked into your home.
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