Appraisers push for real estate fraud rules

NEW YORK (CNNMoney.com) -- It's called "hitting the number" - or inflating a home's value - and real estate appraisers who don't do it often enough can find it hard to make a living.

In prepared testimony Tuesday before a Senate subcommittee on mortgage industry abuses, Alan Hummel, spokesman for the Appraisal Institute said "Appraisers face pressure from various parties involved in mortgage transactions. They are told to doctor their appraisals or else never see work from those parties again."

Hummel blamed poor regulation of mortgage brokers and lenders, and weak or nonexistent enforcement of real estate practitioners.

Unscrupulous mortgage brokers should be singled out for special blame, according to Mike Evans, a fellow of the American Society of Appraisers.

"Mortgage brokers are on commission," he said. "If the deal doesn't go through, they don't get paid. They don't care about anything but making the deal."

And the deal can run into trouble if a buyer thinks the home is worth less than the selling price. "If the appraisal comes in below, they can't get the deal done," said Evans. That's when the mortgage brokers and real estate agents may hit the warpath. "They have to go out and beat up the appraisers," said Evans, who said he's been threatened himself, "and find one they can twist."

The National Association of Mortgage Brokers (NAMB) addressed the issue last year, changing its bylaws to prohibit pressure on any other players in the transaction, including appraisers.

"NAMB opposes any effort by a mortgage originator to pressure or influence the work of an appraiser," NAMB director Denise Leonard testified Tuesday.

According to Joe Falk, Legislative Committee Chair for NAMB, there's a fine line between discussion and pressure. Many brokers will question appraisers if valuations come in lower that brokers think appropriate. Appraisers may feel pressured under those circumstances.

He conceded that there are some rogue brokers out there who have used coercion and threats to try to get a higher appraisal, which is one of the reasons that NAMB has taken a harder line against pressure of any kind.

It's been said that overvaluing helped push prices up during the boom and has made home buyers more vulnerable during the current slump. If a home was bought for $200,000 that was really worth $180,000 and prices have now dropped 5 percent, its value is $171,000. Owners may owe much more than the property is worth.

Appraisal fraud's damage can reach beyond the individual. The potential foreclosures can have serious impacts on entire neighborhoods.

According to a study by Dan Immergluck, a Georgia Tech associate professor of city and regional planning, foreclosures lower the property values of neighboring homes located within an eighth of a mile by about 1 percent per foreclosure.

Clusters of foreclosures can destabilize fragile neighborhoods - the vacant houses can attract squatters, drug dealers and scavengers - and send them on downward spirals.

As long as prices were quickly appreciating up, many of these problems didn't surface but with the housing slump, they're bubbling up.

The remedy to most appraisal fraud, as far as Evans is concerned, is greater scrutiny for mortgage brokers.

"When they start getting sued - just like appraisers do - they'll start cleaning up their act."