Friday, December 30, 2005 | Stephen G. Bishop thought becoming a real estate appraiser would be a good idea. A couple of years ago, he got himself an appraiser’s license and went to work as an trainee appraiser in the thick of San Diego’s then-booming real estate market.
Two years later, Bishop said he had been fired from three appraisal companies for refusing to inflate property estimates to meet the demands of competitive mortgage brokers. He mailed his license back to Sacramento in disgust.
“This whole run-up in prices has been fraud-driven, it’s got very little to do with supply and demand,” Bishop said. “Nine out of 10 deals are fraudulent, and any successful real estate person has an appraiser in their hip pocket who will give them any figure they want.”
Local, state and national real estate experts agree that appraisal fraud is a problem, though they say Bishop’s claims are extreme. Many San Diego-based appraisers said that the booming real estate market has shaken loose the ethical nuts and bolts of the home equity lending system. Appraisers said they are constantly bombarded by aggressive mortgage brokers, who pressure them for valuations that are neither accurate nor ethical.
In San Diego, where the housing market has just started to cool off after years of superheated growth, appraisers said they have begun to see an upwelling in the amount of pressure they receive from lenders and brokers.
“Everybody’s been happy with their numbers because the values were supported and the prices were going up. Now that they’re having to deliver bad news, it’s crunch time,” said Sarah Shwarzentraub, president of Inter-State Appraisal Service in La Mesa.
Schwarzentraub and other local appraisers said they receive daily requests by mortgage brokers and lenders to hit specified valuations. Appraisers said they are often asked to guarantee a certain price for a home before they have even seen it.
And if they don’t, a lender or mortgage broker has plenty of other appraisers to choose from.
The number of licensed appraisers in California has nearly doubled since 2001, from 11,400 to 19,027 as of Dec. 13, 2005, according to the California Office of Real Estate Appraisers.
Appraisers are tasked with estimating an accurate value for a property. Usually, an appraiser is chosen by the mortgage lender or broker. The value they decide upon becomes the basis for the buyer’s loan – subject to validation by the lender – and should be a truthful representation of what the property is worth.
But that’s in a perfect world. Critics allege that some in San Diego merely do what’s needed to push a deal through.
“You’ll get a call from a mortgage broker, they’ll say ‘I’m trying to do a loan on this property, I have an appraisal at $525,000 and an appraisal at $535,000, but I really need $550,000 to make the deal,’ ” said Doranne Godwin, a general certified appraiser with Harold Godwin and Associates in San Diego.
“Some appraisers would take a look at that, and go from there,” she added.
Indeed, several local appraisers said there is constant pressure put on them to engage in fraudulent property appraisals for loans that they said are not healthy for borrowers or lenders alike.
A fraudulent appraisal “can lead homeowners to borrow more money than their homes are worth, putting themselves at risk of being ‘upside down’ in a home – e.g. not being able to sell for a high enough price to pay off their mortgage,” according to a briefing paper on appraisal fraud put out by Demos, a New York-based think tank. That same research paper found that up to half of all real estate appraisers nationwide have reported feeling pressure from lenders or brokers to push up their price predictions.
While local appraisers place the blame for the increased likelihood of appraisal fraud firmly at the feet of a cadre of aggressive and unregulated mortgage brokers, John Marcell, president of the California Association of Mortgage Brokers, pointed out that it takes two to tango.
“Just because someone pressures you into doing something, does not justify the fact that you did it,” Marcell said.
Marcell also stressed that, in his opinion, the vast majority of mortgage brokers are not engaged in the practice of hassling appraisers for higher home property valuations. He said inflated valuations are not in the best interest of honest lenders, borrowers or brokers.
“One of the biggest problems that you have in the lending industry is that we’re basing our loans on true values. So we want to make sure that the value that the appraiser comes up with is a justifiable appraisal,” he said.
Appraisers who fall prey to pressures from mortgage brokers to inflate prices would be well advised to report those brokers, Marcell said. He added that any member of the California Association of Mortgage Brokers found doing so would be immediately expelled from his organization.
Even with the increased pressure from brokers and lenders, local appraisers maintained that their profession remains a steadfastly honest one, if with a few bad apples. The majority of appraisers take pride in their job, they said, and have not risen to the temptations of San Diego’s bulging real estate market.
“We just hang up the phone,” said P. David Rij of San Diego Appraisal. “We don’t want that work anyway. Go get other work, there’s a lot of good work out there.”
Nevertheless, the problem of real estate appraisal fraud has become so ubiquitous nationwide that trade groups for the mortgage and appraisal industries are pushing for new legislation at the federal and state levels to close lending loopholes.
Unfortunately, such legislation could come too late for many San Diegans who have found themselves over-extended in their borrowing after taking on mortgages based on fraudulent home valuations, Bishop said.
“California has the worst problem,” he said. “The real estate industry is in a state of total anarchy. They’ve destroyed this market by inflating it artificially, it’s just full of air and it isn’t going to float.”
Coming Tuesday: As the problem of mortgage fraud has become more and more commonplace, trade organizations and activists have been pushing for increased oversight of the appraisal and mortgage broker industries. Tuesday’s story will detail what the state does to regulate California’s appraisers and what legislative moves are afoot at the national and state levels.
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