Inflated property appraisals targeted

Real estate division chief plans crackdown

John Rebchook, Rocky Mountain News

Wednesday, September 27, 2006

Erin Toll's top priority as the new director of the Division of Real Estate for Colorado is to shut down appraisers who are artificially inflating home values, contributing to the state's escalating foreclosure crisis.

Toll plans to go after "bad actor" appraisers as aggressively as she went after title insurers making kickbacks when she was a deputy insurance commissioner.

She agrees with many in the real estate industry who believe inflated appraisals are contributing to rising foreclosures in Colorado and nationwide.

Toll, an attorney, said she expects to unveil an investigation next month of an appraiser she said has inflated the value of homes by as much as $100,000.

"Overinflated appraisals hurt everybody," said Toll, who has been at the helm of the real estate division since Sept. 5. "Consumers are hurt when their property values are artificially inflated in price when they go to sell them."

Lenders typically require appraisals to protect their loans when a person is buying a home or refinancing a mortgage.

When the loan is worth more than the sales price, the homes often end up in foreclosure, Toll said. Colorado has the highest foreclosure rate in the nation, according to national studies.

"The best way to stop mortgage fraud and our abysmal foreclosure rate is to crack down on appraisers who inflate property values," Toll said this week.

"And lenders, who trust the appraisals, are often victims, too," Toll said. "They may not know there is a scam going on."

Others, however, say that lenders often pressure appraisers to artificially inflate properties so they can justify making loans and collecting fees.

National studies indicate that predatory lending practices, which frequently involve appraisal fraud, are especially prevalent in poor minority neighborhoods.

Toll said she can yank the license of an appraiser who is found to be inflating values. There are about 5,500 licensed appraisers in Colorado.

In her first case, Toll said she knows the appraiser has inflated more than a dozen appraisals, but she's trying to figure out why.

"I don't think he is doing it for the $350 appraisal fee," Toll said.

Asked if she thought some appraisers were taking kickbacks, Toll said: "I would not be surprised. Why else would they do this?"

A lot of fraud is committed by appraisers who want repeat business from lenders, said Ivor Hill, who heads Pueblo-based IJ Hill Appraisal Services and is a member of the Colorado attorney general's Mortgage and Foreclosure Task Force.

If the lenders don't get the amount they want for the loan, they will "blackball" the appraiser and hire someone who will provide that amount, he said.

"They commit fraud to stay in business," Hill said. "They're doing it to make money. It's just greed."

In a report last year, Demos, a New York City think tank, quoted an unidentified Denver appraiser who wrote on a Web site that "finding a mortgage broker client who wants a fair market value on one of their deals is like finding a needle in a haystack these days."

The appraiser suggested that the "real estate market in Denver was artificially propped up by dishonest appraisal practices following the tech bust and the economic downturn of 2001, with homeowners now paying the price," according to How Widespread Appraisal Fraud Puts Homeowners at Risk, written by Demos co-founder David Callahan.

When a house whose appraisal has been inflated is used as a comparable by other appraisers, those buyers will pay too much for homes, creating a domino effect, Hill said.

Hill said that local governments also can be hurt by inflated appraisals because they unwittingly use them for projecting property tax revenues. In one major subdivision in Pueblo, the property tax collection was 15 percent lower than what had been anticipated because of fraudulent appraisals, he said.

Matt George, principal of Centennial-based Eagle Appraisals, noted he has completed more than 20,000 appraisals since 1974 and said that "fraud is rampant in our industry."

He often reviews appraisals completed by other people for lenders. He said he has found that more than 50 percent are inflated.

In one case, a house that couldn't sell for $500,000 was appraised at $550,000 for a refinance, George said.

It later went into foreclosure.

"The lender was furious," he said.

But Brad Evans, a Realtor with Keller Williams, said consumers must take responsibility for all aspects of buying a home and shouldn't sign on the dotted line if they suspect any deception is taking place.

"Appraisal fraud opens up a can of worms bigger than I can imagine," he said. "In many cases for it to work, the appraiser, the lender, the broker and the borrower are all complicit."The ABC's of home appraisals

• An appraiser's job is to inspect the size, condition and quality of a home and review, verify and analyze market data for the home to determine its value.

• Loan amounts rely on the value calculated by the appraisals.

• Lenders typically require real estate appraisals for both purchases and refinances.

• The appraisal protects lenders so they don't lend more than a property is worth as well as buyers so they don't pay too much.

• Appraisers must be independent and should never assign a value just because a lender or real estate agent wants a specific price.

• An appraiser will inspect a home inside and out, as well as use county and other real estate data to compare the house to similar ones that have sold in the neighborhood to determine its value. A good appraiser looks at the comparable homes to make sure they really are similar.

• In addition to obvious things such as the size and condition of the home, the number of bathrooms and bedrooms, an appraiser will add value for things such as a well-done renovation, but will subtract value if the home needs work, such as a new furnace or a paint job.

• A detailed professional appraisal can run 30 to 35 pages.

rebchookj@RockyMountainNews.com or 303-954-5207