Over a decade after the 2008 financial crisis, the prevalence of predatory lenders continues to plague the U.S. marketplace. Generally speaking, appraisers are not predatory. They do not create predatory lending and fraud schemes. And in the vast majority of cases, they do not share in the profits of those who do. However, appraisers do play a role in predatory lending and mortgage fraud. In this article, we look at how and why real estate appraisers can become entangled in predatory lending schemes.
The appraiser’s role
The real estate appraiser’s typical role in predatory lending is that of an enabler. Just as many mortgage fraud schemes could not happen without the assistance of an appraiser, many predatory lending transactions likewise could not take place without an appraiser providing an inflated appraisal.
Predatory lending may not meet the textbook definition of fraud, but it can also be destructive to borrowers and communities. The fact that appraisers do not mastermind these schemes, and typically do not participate in the profits, does not spare them from fines and jail time when a mortgage fraud or predatory lending scheme is investigated and prosecuted.
Types of predatory lending schemes
According to a Joint HUD-Treasury Department Report on Predatory Lending, there are four primary predatory lending practices that have been identified:
- Loan flipping
- Excessive fees and “packing”
- Lending without regard to the borrower’s ability to pay
- Outright fraud and abuse
Loan flipping, for example, entails repeated refinancings with increasing mortgage amounts. With each refinance, the broker or lender collects fees and points. This often ends in foreclosure. The appraiser’s role is simple: The property owner could not possibly borrow more than the value of the property without an inflated appraisal.
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What causes inflated appraisals?
Despite the efforts of the FBI, HUD, the U.S. Department of Justice, and other enforcement agencies, appraisers continue to produce inflated appraisals for predatory lenders and mortgage fraud schemes.
There are a number of specific reasons why appraisers produce inflated values and misleading reports:
- The hope of creating future business – The appraiser inflates the value to meet the client’s requested value in the hopes of retaining the client or obtaining future assignments.
- Going along to get along – The appraiser simply doesn’t want to deal with the problem which often arises when a property doesn’t appraise for the sales price or the client’s requested value.
- Lack of appraisal ethics – The appraiser doesn’t understand the importance of independence and objectivity as the very foundation upon which the appraisal profession rests. Some appraisers actually believe their role is to facilitate the transaction, no matter what it takes.
- Lack of appraisal education and skill – The appraiser lacks the skills and ability to provide a properly-developed value opinion, and instead simply “rubber-stamps” the client’s requested value. This often occurs as a result of poor training.
- Lack of local market knowledge – The appraiser accepts an assignment in an unfamiliar market, and simply chooses comparables that fit the client’s predetermined value.
- The desire to help the property owner – The appraiser knows the property is not worth what the owner is trying to borrow, but the appraiser inflates the value in a misguided attempt to help the owner get the loan.
It is important to note that these are reasons, but not excuses. Any reason that an appraiser gives for producing an inflated value conclusion can generally be placed in one of two categories: 1) lack of knowledge; or 2) caving in to appraisal pressure.
What are the consequences?
If an appraiser unwittingly becomes entangled in a mortgage fraud scheme, the fact that he or she was not the mastermind behind the scheme does not help him or her avoid prosecution. Appraisers who provide inflated valuations are prosecuted as co-defendants in fraud cases, even if they do not participate in the profits of the enterprise.
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