The real estate industry has long been susceptible to price inflation, fraud, and other unsavory practices. Making it illegal to coerce an appraiser would be a good thing, but I hope that most appraisers wouldn’t see that as a way out of talking and reviewing agent recommendations when there is an issue with an appraisal.

I’ve not had any problems with an appraiser doing that, but I’ve heard stories about appraisers not taking input. Lenders seem to be the culprit in most cases of coercion that I’ve heard of.

You can read the summary of the Federal Reserve Proposal below in the first quoted area.

Additionally, in the news recently, is an appraiser that is suing WaMu for breach of contract, unfair business practices, interference with her ability to earn a living, fraud, conspiracy and slander. The bank is accused of pulling business from an appraiser who refused to make the appraisals favorably to the bank. Man, o, man. That’s bad news for the bank. What do you think about inflated appraisal? Send us a comment and let us know.

Federal Reserve Proposal Addresses Appraisal Coercion
Excerpt from Appraisal Institute’s Appraiser News Online Vol. 9, No. 1, January 15, 2008

The Federal Reserve Board recently proposed prohibiting creditors and mortgage brokers from coercing real estate appraisers to misstate a home’s value on all mortgages. The announcement was part of the Fed’s December 18 proposed changes to Regulation Z (Truth in Lending), which would restrict certain practices and require certain mortgage disclosures to be provided earlier in the transaction.

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In addition to prohibiting creditors and mortgage brokers from coercing appraisers, the Board also proposes to prohibit creditors from extending credit when creditors know or have reason to know, at or before loan consummation, that an appraiser has misstated a dwelling’s value. The regulation would apply to all consumer credit transactions secured by a consumer’s principal dwelling.

In its discussion on the topic, the Board said, “Pressuring an appraiser to overstate, or understate, the value of a consumer’s dwelling distorts the lending process and harms consumers… Inflated appraisals of homes concentrated in a neighborhood may affect other appraisals, since appraisers factor the value of comparable properties into their property valuation. For the same reason, understated appraisals may affect appraisals of neighboring properties. Thus, inflated or understated appraisals can harm consumers other than those who are party to the transaction with the inflated appraisal. Moreover, these consumers are not in a position to know of the practice or avoid it.”

The proposed regulation defines the term “appraiser” as a person who engages in the business of providing – or offering to provide – assessments of the value of dwellings.

The commentary to the proposed regulation gives examples of acts that would violate the regulation: implying to an appraiser that retention of the appraiser depends on the amount at which the appraiser values a consumer’s principal dwelling; failing to compensate an appraiser or to retain the appraiser in the future because the appraiser does not value a consumer’s principal dwelling at or above a certain amount; and conditioning an appraiser’s compensation on loan consummation.

The commentary also lists examples of acts that would not violate the regulation: requesting that an appraiser consider additional information for, provide additional information about, or correct factual errors in a valuation; obtaining multiple appraisals of a dwelling (provided that the creditor or mortgage broker selects appraisals based on reliability rather than on the value stated); withholding compensation from an appraiser for breach of contract or substandard performance of services or terminating a relationship for violation of legal or ethical standards; and taking action permitted or required by applicable federal or state statute, regulation, or agency guidance.

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The Nation’s Housing

Appraiser’s Lawsuit Puts Lenders on Notice

By Kenneth R. Harney
Saturday, January 26, 2008; Page F01

Real estate appraisers have complained for years about demands from loan officers that they fudge and inflate numbers to allow mortgage deals to close.

Now a California appraiser has sued the country’s largest thrift institution, Washington Mutual Bank, charging that she was blacklisted for refusing to provide favorable appraised values despite declining market conditions.

The lawsuit, by Jennifer Wertz, comes just two months after the state of New York sued an appraisal management company, First American eAppraiseIT, for allegedly giving in to pressure from Washington Mutual to inflate property values for loan applications — contributing to mortgage-market losses. EAppraiseIT and LSI, a unit of Fidelity National Information Services, were also cited in Wertz’s suit as contractors to Washington Mutual.

Wertz said in her complaint that she began performing appraisals for Washington Mutual in 2001 and earned “in excess of $100,000 a year” from her work for the bank. But last May, according to the suit, a Washington Mutual manager upbraided her for describing local property values in an appraisal as “declining.” The manager “insisted that [Wertz] change her report to indicate ’stable’ conditions so that the loan could be approved.”

All the relevant data suggested otherwise, however, and Wertz refused. The manager then allegedly told Wertz that she would be banned from all further assignments from Washington Mutual if she did not cooperate. Wertz declined to do so — citing federal, state and professional rules requiring her to provide objective and accurate reports free of outside influence. According to the lawsuit, Wertz was then cut off from Washington Mutual business through the appraisal management companies.

Wertz’s lawsuit, filed in California Superior Court in Sacramento, charges breach of contract, unfair business practices, interference with her ability to earn a living, fraud, conspiracy and slander, among other alleged violations.

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