The Great Game

There is a property price bubble in the U.S.. Canada might be in one as well but Canada has a powerful engine driving new home constrution that the U.S. does not have: marijuana grow-ops. Standard practise for grow-ops is to buy a house, use it for two to three years, and then abandon it. After being used as a grow-op for that length of time, the heat and humidity will force the house to be condemned. Given that there are 50,000-100,000 grow-ops in Canada of which circa 10,000 will need new houses every year. Hence Canada has an economic engine eating houses, and a side-effect of legalizing canabis would be a fall in new home construction.

All of this ignores the topic of the article which is the problem of fraudulent appraisals in the real estate industry, whcih, if it is a systemic problem in the industry, has the portential to have large knock on effects on the larger economy. Secondly, it could be a sign that the housing bubble is about to burst. The dot-com frauds happened as that bubble started to burst. In both cases, the market began to expect profits that were not happening, to meet those expectations people began to use fraudulent methods. The rest, as they say, is history.

Jax

Real-estate appraiser Karen Long isn't very busy, and she thinks she knows why. Her unwillingness to fudge figures has given her a reputation. She suspects her honesty keeps away clients who don't want surprises.

"If you're not going to meet [their anticipated] value, they just walk away and find another appraisal," says Ms. Long of State Center, Iowa. "It goes on all the time."

No one knows exactly how often appraisers tinker with reality. But reports suggest that they face enormous pressure to tweak their numbers. Some observers predict they'll face even more if the real estate market cools.

"I don't think that anyone can assume that the appraised value of their home is based on reality. Appraisal fraud is so common that homeowners need to assume the opposite," says research director David Callahan of Demos, a public policy center. Demos released a report about appraisal fraud in March, sparking intense discussion in the real estate press.

Homebuyers and sellers may barely give a second thought to appraisers. After all, appraisers are typically hired by mortgage brokers or lenders, and their reports often come out during the final loan-approval process, after both sides have settled on a price. And while buyers pay for appraisals, the typical fees - several hundred dollars - pale in comparison with all the other costs.

But a too-high or too-low appraisal can spell big trouble for buyers and lenders. Imagine, for example, that an appraiser artificially boosts the value of a $200,000 home to $230,000. The purchaser - or someone who's refinancing her home - "may decide to tap this artificial equity, and it's not really there," says Alan Hummel, an appraiser in Des Moines, Iowa, and former president of the Appraisal Institute. "When they turn around and try to sell the property, they're upside down. They can't sell it for what they owe against it."

The lender, often a bank, may find itself on the hook too: If it needs to foreclose on a default loan, it might not get the amount it lent out.

In a 2003 survey of 500 appraisers by a private firm, 55 percent of appraisers said they'd felt pressure to overstate values, according to the Demos report. The National Association of Realtors has warned the United States Senate about the prevalence of appraisal fraud, and thousands of appraisers have signed an online petition calling for reform.

Who's putting the pressure on appraisers? Appraisers blame mortgage brokers and lenders who are paid by commission. For them, just as for real estate agents, more expensive homes translate into more money.

"There are a certain number of mortgage brokers who will try to push appraisers on every single deal," says P. David Rij, an appraiser in San Diego. "They always want more than what the property is worth."

If home sales hit the skids, perhaps due to higher interest rates, some specialists expect appraisers to encounter more pressure, possibly leading to more fraud. "It's possible it will get worse," says Mr. Hummel.

Members of Congress have pushed for appraisal reform, but they've been unsuccessful. "There's been an absence of strong federal action to reduce appraisal fraud, even though there's a consensus among professionals in the field that this is a major problem," says Mr. Callahan of the Demos center. He isn't sure what changes will work. But a good start, he says, might be to create a "firewall" between brokers and appraisers to prevent conflicts of interest and undue influence. Perhaps, he says, appraisers could be assigned randomly.

For now, real-estate specialists say there are several ways to avoid appraisal fraud:

• Hire your own appraiser, especially if you're refinancing and don't want to borrow more than the home is worth. Don't let the cost deter you, says Hummel. "We're talking $500 to know what risk you have in this investment."

• Make sure your appraiser is state-certified, and look for membership in a professional appraiser organization, Hummel says. Special membership designations, like "senior residential appraiser," are a good sign too.

• Ask for references. "I would ask if they have banks or credit unions they're working for," Hummel says. "They'll typically hire the competent appraisers."

• Be wary of out-of-area appraisers who aren't familiar with your neighborhood. Go online and figure out the sale prices of homes nearby.

"I'd say most [appraisers] are trying to do the right thing," says Charles Drecksler, a Marietta, Ga., appraiser. "But you have those who are skirting the issue." (Link)