Appraisal Fraud on the Rise

Despite the establishment of the Home Valuation Code of Conduct (HVCC) that took effect May 1, 2009, fraudulent appraisals have nonetheless increased. Created to improve the accuracy of the home appraisal process, the intent behind the HVCC was to reinforce appraisal rules and avoid the over-inflated housing values that ultimately caused the economic crisis the nation is still in the midst of recovering from.

It was widely assumed the HVCC would virtually eliminate the concern for fraudulent activity pertaining to appraisals. However, that is simply not the case. According to a Washington Post report, the Mortgage Asset Research Institute (MARI), an industry-leading source of information focused on combating fraud, recently released a study that not only revealed that appraisal fraud increased dramatically in 2009, but it also showed that appraisal fraud is now fastest-growing form of fraud in the mortgage industry.

MARI’s use of cutting-edge technology revealed that instances of mortgage fraud increased by approximately 7 percent in 2009, while appraisal fraud increased by a dramatic 50 percent. With the implementation of the HVCC, it’s reasonable to expect appraisal fraud to decrease, if not be eliminated altogether. However, the Washington Post report indicates that MARI’s figures reflect that 16 percent of all mortgage fraud cases in 2006 involved appraisals, while the number steadily increased each year to 22 percent in 2008 to 33 percent in 2009.

At its core, the HVCC was designed to prohibit mortgage professionals from hand-picking appraisers in lieu of using appraisal management companies instead. The appraisal management companies are to assign appraisers from a master list within their network. Previously, loan officers and mortgage brokers personally selected their own appraisers. This method was a breading ground for appraisal fraud as the loan officers and mortgage brokers were instructing the appraisers what value the homes must appraise at in order to gain mortgage approval, thus inflating home values. In turn, the more appraisals that were submitted to gain mortgage approval, the more work an appraiser would get from that loan officer or broker.

Although the HVCC was designed to diminish the possibility of appraisal fraud, it has sparked some controversy as opponents claim appraisal management companies pay a minimal compensation compared to what appraisers typically make. For example, some appraisal management companies are paying $200 for an appraisal that would normally pay $350 to $400. Therefore, inexperienced appraisers who are not familiar with a particular area are accepting the low bids to secure the job and not producing quality or even accurate work. In addition, opponents are suggesting the appraisal management companies are also requiring the inexperienced appraisers to complete the process in unrealistic time frames.

Regardless of the position taken on either side of the argument for or against the HVCC, it is doubtful that Fannie Mae or Freddie Mac will introduce any changes at this point. Additionally, critics of the HVCC have been largely unsuccessful in an attempt to have Congressional leaders act on any suggested changes either.

Robert Hyder