Recent news article by SHANNON BEHNKEN of The Tampa Tribune
Frank Gregoire, a St. Petersburg property appraiser, couldn't help but chuckle when an appraisal request came through his fax machine this month.
It was sent by a California loan originator, and the message was clear: "Please call if unable to attain this value BEFORE INSPECTION." Photos of the property, the request said, could not include "unfinished construction or damage."
Gregoire knew right away that the loan company was trying to influence his valuation of the home and it would be unethical to take on the work.
"It was the most blatant request I've seen," said Gregoire, who is chairman of the Florida Real Estate Appraisal Board. He said he's seen a recent spike in unethical requests like the one from California.
With the real estate market bottoming out and mortgage fraud on the rise, professional appraisers say they're under more pressure to value homes at specific, and often inflated, amounts.
As a result, some big national lenders and law enforcement officials say they are taking a harder look at the role of appraisers in questionable loan deals.
It's against state law for an appraiser to agree to value a home at a predetermined amount or intentionally omit information that could mislead a lender about the value of a home.
Home sales involving a mortgage typically can't move forward without an appraisal showing the lender that the home is valued at close to the sales price.
Law enforcement and mortgage investigators say mortgage fraud that involves obtaining an inflated loan so someone can illegally pocket tens of thousands of dollars is a growing epidemic.
It can leave investor homebuyers and their lenders on the hook for loans worth more than the property. Prices of nearby homes can be artificially driven up and neighbors can end up paying higher taxes because of the inflated values.
This type of fraud requires a string of real estate professionals willing to go along. A key to the scheme is having an appraiser willing to overvalue a property.
Historically, such unscrupulous appraisers have not been caught, or were let off relatively easy, experts say.
That may be changing.
"Without an appraiser coming in at the magic number, the fraud is stopped in its tracks," said Tampa police Detective Jim Bartoszak, who's working on several loan fraud investigations.
Fraud Occurs When Value Is Skewed
The Tampa Tribune recently uncovered a series of such deals in Pinellas and Hillsborough counties. In many of the cases, the same appraiser valued a number of homes for the same client.
Lenders and regulatory boards are now reviewing the accuracy of some of those appraisals.
Borrowing additional money on top of a mortgage loan to help with closing costs or repairs is not unusual and not illegal - as long as the lender knows about it.
The fraud, experts say, happens when the appraisal is skewed and the lender is misled about the home's cost. It is against state and federal laws to misstate who receives loan money on federal housing documents.
Tampa police said this month that they arrested two men who they said were trying to inflate the sales price of a home in Apollo Beach from $690,000 to $910,000.
At closing, $210,000 was to go to one of the men's Nevada companies. Police say the men planned to default on the loan and leave with the cash.
Local authorities set up a sting at a title company and arrested the men at the closing table.
The name of the appraiser involved in the deal has not been released, but Bartoszak said police plan to interview the man about his appraisal.
Appraisers calculate an estimated value for a home largely by reviewing the sales prices of comparable homes in the neighborhood.
"In this case, the appraiser compared the home to homes in gated communities to justify the higher price," Bartoszak said. "You're not comparing apples to apples here."
Bartoszak said he's never charged an appraiser with a crime, but he could.
Prosecuting, though, is tougher, experts say.
Some appraisers across the country have been charged recently in mortgage fraud cases, but it's not typically done, Bartoszak said, because investigators go after "bigger fish," such as mortgage companies, title companies and other parties that may be pocketing loan money illegally.
Although some of the other professionals in mortgage fraud walk away with tens of thousands of dollars, appraisers in such deals usually get little more than their typical appraisal fee of $300 to $500.
For the Apollo Beach home, the appraiser was to get $600 for the appraisal, Bartoszak said, noting that an appraiser in another case he's working stands to make just $800.
Cool Market Breeds Competition
So why would appraisers risk their licenses for so little?
Richard Powers, president of the Appraisal Institute, a trade organization, said appraisers are tempted to overvalue a home when they're starved for work.
During the recent real estate boom a lot of people became appraisers. Now that the market has cooled, there isn't enough work to go around.
"Appraisers who do this are often guaranteed more work from the client," Powers said.
The pressure to inflate an appraisal, he said, comes from mortgage brokers, loan officers and real estate agents - who are also competing for work in a slow market.
Phillip Wallen said such pressure prompted him to leave the business. Wallen worked as an appraiser in Pinellas County for 12 years and owned his own business.
"Every day I would get calls that I needed to do an appraisal for X amount," Wallen said. "There are so many appraisers out there willing to give out whatever value a client wants. That makes it tough for the honest appraisers to compete."
Wallen left that part of the industry this year and took a job as a review appraiser with a national mortgage lender in Tampa. As part of that job, he checks the work of some questionable appraisals before the lender agrees to cover a mortgage.
What he finds sometimes shocks him. There have been times, he said, that he looks at an appraisal, recognizes the area and says, "There's no way that house is worth this."
Particularly troubling, some appraisers say, is that people in the business know the repeat offenders by name. Some of them have even been disciplined by state regulatory boards in the past.
Gregoire, head of the state board that oversees appraisers, said enforcement is a problem. First, someone has to file a written complaint with the state. Then the complaint must be investigated.
An average of 300 complaints are filed each year in Florida and about 100 to 150 appraisers are either stripped of their licenses or fined, Gregoire said. Investigating complaints can take up to 14 months. Law enforcement officials say few appraisers are charged criminally or go to jail.
"It's so frustrating," he said.
Adding to the frustration is the penalty; typically a fine is up to $5,000 per offense or a loss of license. If state agencies determine laws have been broken, they can refer the cases to law enforcement.
As state and federal law enforcement investigate mortgage fraud and send some appraisers to jail, Gregoire said, others are taking notice.
Lenders Choose Appraiser
There were 22,000 mortgage fraud reports nationwide in 2005, according to the FBI. Appraisal fraud has been involved in up to 40 percent of fraudulent mortgage reports in the past five years, according to the Mortgage Asset Research Institute.
But those numbers may be understated, the institute says, because appraisers aren't typically caught unless the loan goes into default. That typically happens four to five years after the loan is made.
Some lenders protect themselves by working with a select number of appraisers that they periodically check up on. HomeBanc Mortgage, for example, works with just 20 appraisal firms in Florida, spokesman Mark Scott said.
"We want to work with firms that have a good track history and a stake in staying in the business," Scott said. "We avoid people who set up shop in their house."
Many lenders insist on choosing their own appraiser. Still, industry experts say, many find a way to get around this requirement. Major mortgage fraud operations typically use the same appraiser, real estate agent and title agency.
Some loan officers funnel these types of deals through so they can collect their commission. That, Scott said, is why HomeBanc and other lenders routinely review the work of their loan officers.
Scott Murphy, who owns an appraisal company in Sarasota and Atlanta and lectures on mortgage fraud, said it's the loan officers that have pressured him to come up with a value to justify a sales price.
"An appraiser may agree to go up 10 to 15 percent to 'prove' a value for a loan officer," Murphy said. "Before you know it, they get more and more business, and they're committing serious mortgage fraud."
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