Sketchy Home Appraisals
Home appraisers seem to be still inflating the values of some properties they assess, often at the request of loan officers and real-estate agents, in what some industry executives say is a return to practices seen before the financial crisis.
It is estimated that one in seven appraisals conducted from 2011 through early 2014 inflated home values by 20% or more, according to data provided to The Wall Street Journal by Digital Risk Analytics, a subsidiary of Digital Risk LLC. The mortgage- analysis and consulting firm based in Maitland, Fla., was hired to review loan files of some of the largest lenders in the country. Over 200,000 mortgages were reviewed using the firm’s software and staff appraisers, parsing the homes’ appraised values and other information, including the properties’ sizes and similar homes sold in the areas at the times.
Bankers, appraisers and federal officials have said inflated appraisals are becoming more widespread as the recovery in the housing market cools. And while home prices are increasing generally, their appreciation is slowing, and sales have continued to be weak despite low interest rates. The dollar amount of new mortgages issued in 2014 is expected to be down 39% from last year, at about $1.12 trillion, according to the Mortgage Bankers Association.
All of these factors have put increasing pressure on loan officers, who depend on originating new mortgages for their income, as well as real-estate agents, who live strictly on sales commissions. That in turn is turning up the heat on appraisers, whose valuations can make or break a sale. Banks will generally not approve a mortgage if the purchase price or the amount being refinanced is higher than the appraised value. The practice is beginning to garner broader notice. The Office of the Comptroller of the Currency is reviewing the mortgages banks are closing, concerned that some of them are based on inflated values, according to Darrin Benhart, a deputy comptroller who focuses on identifying areas of risk in the federal banking system.
Separately, Freddie Mac , the mortgage-finance giant, said it has recently opened fraud investigations related to appraisals of homes backing mortgages it bought. Almost 40% of appraisers recently surveyed reported experiencing pressure to inflate values, according to Allterra Group LLC, a for-profit appraiser-advocacy firm based in Salisbury, Md. That figure was 37% in a survey done the previous year. “If you thought what was happening before was an embarrassment, wait until the second time around,” said Joan Trice, Allterra’s chief executive and founder of the Collateral Risk Network, an organization that represents appraisers employed by lenders and other companies and has been meeting with regulators to discuss concerns about appraisers being pressured into inflating values.
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