Technology Combats Valuation Fraud

The current state of the real estate industry, not to mention the subprime meltdown, can be attributed to a number of factors, not the least of which is fraud in the valuation process.

Being on the appraisal side of mortgage lending for more than 30 years, and now a system administrator for AppraisalCONCIERGE - databases with 9,000 or more appraisers - I know all too well the influence and pressure put on appraisers to reach a certain value on a property.

Fraud on an institutional level is rare. The real problem stems from the way property values are calculated within the industry. Loan originators, many who are commission-only, sometimes pressure appraisers to fudge their numbers to make mortgages work.

In fact, too often I have witnessed overzealous loan officers or brokers using their favorite appraiser, and asking for a "particular" value to be met on a home to have a loan approved. In this situation, the appraiser in need of current and future work will do what is necessary to try and achieve that value.

An appraiser under pressure may use comparables that are not truly "comparable" for a number of reasons. He or she may also ignore sales that do not support the value of the property or inflate the value of the "curb appeal" of a home or of its view.

A recent article from CNN/Money stated, "...as the Appraisal Institute recently testified to Congress, appraisers are under increasing pressure from lenders, mortgage bankers and real estate agents to 'hit their number' when appraising property." This furthers my point in believing we need to have complete appraisal independence so that true values are reflected and the possibility of fraud can be lessened.

In preparing an appraisal report, there is much subjectivity involved. For example, in West Los Angeles, a high-rise condominium facing west has a view of the setting sun and the beach, while the condominium across the hall is facing east with a view of the very congested 405 Freeway. So, the question is, how much is a view worth in today's market?

The increased use of automated valuation models (AVMs) is a technology that provides a more objective approach of evaluating a property and the use of the data that is collected in the process. Generally, an AVM will assume that the subject of the evaluation and the comparables are in "average" condition. All of the available public data is then gathered, analyzed and a point of value or range of value is reached.

While this may be helpful as a starting point, or even as a second opinion, the problem lies in the lack of subjective evaluation of the data or the subject.

Using AVM technology is helpful, but there is no one present to understand the actual condition of the home or to appreciate the view.

No matter how advanced the technology is, human involvement must be present in the appraisal process to ensure a true valuation.

But, more importantly, that involvement must be objective and free of any undue influence.

Additional technology being adopted on an industry level to help mitigate fraud includes the random selection of appraisers. With such systems, a lender or broker who needs an appraisal simply submits the order and an approved appraiser is randomly selected from the system.

All communication between the parties is then monitored, guaranteeing that payment is made to the appraiser when a final report is delivered to the ordering party.

This results in protecting any individual appraiser from undue influence or pressure while ensuring appraiser independence, which is now mandated by industry-wide regulations from Fannie Mae and Freddie Mac, as well as the new Home Valuation Protection Code.

Before the market fully recovers, confidence must first be restored in the valuation process - most notably, the appraisal process.

Lenders and requestors need assurance that appraisals are performed free of any undue influence and that the market value reported is accurate to the property, its condition and its surrounding neighborhood.

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