Appraisal fraud is a form of mortgage fraud that involves manipulating the property's appraisal value to deceive lenders and inflate the loan amount. It typically involves collusion between the appraiser and other parties involved in the mortgage transaction.
In an appraisal fraud scheme, the appraiser intentionally overstates the value of the property to secure a larger loan or sale price. This can be achieved through various methods, such as selecting comparable properties that are not truly comparable or making false statements about the property's condition or features. By inflating the appraisal value, the fraudsters can obtain a larger loan amount than the property's actual worth.
Appraisal fraud can have severe consequences for both lenders and borrowers. Lenders rely on accurate property appraisals to assess the risk associated with a mortgage loan. When the appraisal value is artificially inflated, lenders may provide loans that exceed the property's true value, resulting in a higher risk of default and financial losses.
Borrowers can also be negatively affected by appraisal fraud. If they purchase a property based on an inflated appraisal, they may end up paying more than the property is worth. This can lead to financial difficulties, such as being underwater on the mortgage, where the outstanding loan balance exceeds the property's value. Additionally, if borrowers default on the mortgage, the lender may foreclose on the property, resulting in the loss of their investment.
To combat appraisal fraud, various measures have been implemented. The Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted in response to the 2008 financial crisis, introduced stricter regulations for the appraisal industry. It established the Appraisal Subcommittee (ASC) to oversee state appraisal licensing and enforcement programs.
The ASC, in collaboration with the Appraisal Foundation, developed the Uniform Standards of Professional Appraisal Practice (USPAP), which provides ethical and professional standards for appraisers. These standards aim to ensure the independence and objectivity of appraisers, minimizing the potential for fraud.
Lenders have also implemented additional safeguards to detect and prevent appraisal fraud. They may use automated valuation models (AVMs) or hire third-party appraisal management companies to provide independent appraisals.
It is essential for borrowers and lenders to be vigilant and report any suspected appraisal fraud to the appropriate authorities. The responsibility lies not only with regulatory agencies but also with individuals involved in the mortgage transaction. By identifying and reporting fraudulent activities, stakeholders can contribute to maintaining the integrity of the mortgage industry and protecting themselves from potential financial harm.
Appraisal fraud is a form of mortgage fraud that involves manipulating the property's appraisal value to deceive lenders. It can have severe consequences for both lenders and borrowers, leading to financial losses and increased risks. To combat appraisal fraud, regulatory measures and industry standards have been implemented, emphasizing the independence and objectivity of appraisers. Vigilance and reporting are crucial in detecting and preventing appraisal fraud, contributing to a more secure and transparent mortgage market.
Summary:
Mortgage fraud is misrepresentation in mortgage contracts designed to benefit one or more parties to the contract.
Sometimes it can be as simple as an applicant lying about financial information to make himself seem more credit-worthy. Sometimes it can involve a few people, such as a real estate agent, an appraiser, and a lender, all colluding to split the profits on a property that isn’t worth as much as they say it is.
When committed by an applicant looking for approval on a loan that he or she can’t legitimately afford, it is known as fraud for housing. Mortgage fraud can also take the form of fraud for profit, when an appraiser, a home inspector, a lender, a real estate agent, or another small group of co-conspirators work together to misrepresent the value of a home for the purposes of securing a larger loan or sale price.
The FBI is the primary agency which investigates mortgage fraud, and increasingly so since the housing bubble of 2008. Naturally, fraudsters would be better off steering clear of the FBI.
There are many varieties of common mortgage schemes that the FBI has identified. Among them are foreclosure rescue schemes, loan modification schemes, illegal property flipping, condo conversion schemes, equity skimming, silent second mortgage, HECM (home equity conversion mortgage, or reverse mortgage) fraud, air loans, and others.