California appraisers say they're pushed to inflate home prices Mortgage industry is rife with scams, many appraisers say

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Ask any real estate appraiser: Being badgered to overstate home prices is a fact of life, they'll say.

"We get pressured every single day to inflate our values," said Dan Tosh, principal at Tosh & Associates, an appraisal firm in Brentwood. "We get people telling us we'll never work again, or they won't pay us because we won't play ball."

New York's attorney general sued a leading appraisal management firm Thursday, saying it had knuckled under to a big bank's pressure to pump up home prices. The practice might have helped fuel the current mortgage crisis and the dramatic home price appreciation of the past few years.

Many real estate experts say appraisal inflation is pervasive in an industry in which pressure to close deals is all-consuming.

"This makes things such as Enron and WorldCom look small by comparison," said Ted Faravelli, executive director of the California Association of Real Estate Appraisers and principal at San Jose's T.E. Faravelli & Associates, an appraisal firm. "It was an epidemic."

In a nationwide survey released early this year, 90 percent of 1,200 appraisers said they had felt "uncomfortable pressure" to adjust property values. Mortgage brokers were named as the most common culprits, followed by real estate agents, consumers, lenders and appraisal management companies. The increase in pressure was dramatic compared with that found in a similar survey in 2003, when 55 percent of appraisers reported feeling pressured.

"Pressure on appraisers reaches pandemic proportions," said David Hutton, senior editor at October Research Corp., the Ohio company that conducted the study. "The New York lawsuit ... may be just the tip of the iceberg."

Appraisers are hired by mortgage brokers, bankers, real estate agents and home buyers as independent experts to give an informed analysis of a home's market value. Home loans, for both sales and refinances, rely on appraisals to assure lenders that the home is enough collateral for their money.

Appraisers, who make a flat fee of anywhere from $200 to $500 for a job, do a walk-through of a house and research recent local sales of comparable properties and then write a report on their opinion of the home's market value. Appraisers are licensed by the state and must complete relevant coursework and accumulate sufficient experience to earn the highest level of licensing.

Why would financial or real estate professionals lean on appraisers to hit higher numbers for homes values?

"It's called compensation; it's called money," Faravelli said. "Mortgage people (brokers and lenders) work on commission. If the deal doesn't get closed, they don't get paid. If the appraiser gets in the way of their money, they'll find someone else."

As home prices spiraled up during the most recent real estate frenzy, con artists found plenty of ways to skim off the top. Inflated appraisals were one of the tools in their arsenal.

"In the mortgage fraud cases we're uncovering, the linchpin of most of the fraud is a doctored or questionable appraisal," said Tom Pool, a spokesman for the California Department of Real Estate. "It's a fairly common scam for properties to be overvalued and then purchased at an inflated price, with the difference coming back to the real estate broker or others involved in the scam."

For instance, in a $500,000 home sale, unethical mortgage brokers or real estate agents could lean on an appraiser to give a price estimate of $600,000. A lender would then fund a mortgage at that amount, the home seller would get the $500,000 price, and the scam participants would pocket the $100,000 difference.

Regulators say it is difficult to clamp down on the practice without a smoking gun.

"We know what happens; we know appraisers are pressured, intimidated, coerced, but we can't take an action typically because we can't prove it," said Anthony Majewski, acting director of the California Office of Real Estate Appraisers, the state agency that oversees the profession. "If someone has a piece of paper that says, 'I need $550,000 on this deal or else,' that's pretty good evidence" - but extremely rare.

The case filed in New York may have a smoking gun: The attorney general's office uncovered e-mails from the appraisal firm First American eAppraiseIT that appeared to discuss pressure from lender Washington Mutual to pump up prices.

A California law signed and implemented just last month makes it a crime for anyone with a vested interest in a real estate transaction to try to coerce an appraiser.

"I have heard numerous claims about the insidious practice of appraisal inflation," the bill's sponsor, Sen. Michael Machado, D-Linden (San Joaquin County), said in a statement. "More recently, inflated appraisals have been identified as a contributing factor to the subprime mortgage meltdown California is currently experiencing. I introduced SB223 to stop the practice, once and for all."

Similarly, federal legislation is pending that would toughen penalties for those who try to manipulate appraisals. Rep. Paul Kanjorski, D-Pa., introduced a bill last month to promote appraiser independence.

Still, enforcing the new laws may be difficult for the same reasons Majewski cited: actual proof of coercion is difficult to come by. Appraisers say that requests to fudge the numbers are generally couched in code language.

"They say things like, 'What are you willing to do for us to do business?' - wink wink, nod nod," Faravelli said.

He said his own appraisal business has suffered because he refuses to be what unscrupulous mortgage professionals call "a team player." He has switched the bulk of his practice to working as an expert witness in mortgage-fraud cases.

Similarly, Tosh of the Brentwood appraisal firm said: "We struggle to stay alive, we can't get work with a lot of people because we refuse to do what they tell us."

Both men had numerous stories of clients who abruptly dropped them after they refused to change an appraisal.

"One of the major complaints we hear from appraisers is there are veiled and sometimes not-so-veiled threats that if you don't hit this number for us, we're not going to pay you or use your services again," said Pool from the Department of Real Estate.

That explains why some appraisers cave in to the pressure: Those who won't cooperate, don't get work.

Faravelli said that appraisers who gave in have told him they figured the rapidly rising market would cover their tracks anyway. "The pervasive attitude was, 'I know it's not worth this amount today, but six months from now at the current rate of appreciation I'll be covered so it's OK,' " he said.

When appreciation hit the wall and stalled out early this year, fake appraisals suddenly became more apparent. People with risky mortgages who could no longer keep up with rising payments started to default on their loans. As foreclosures multiplied, mortgage holders were left stuck with homes worth considerably less than the amount lent on them. While market forces obviously depressed prices, if they were artificially high to begin with, that widens the gap.

Pumped-up appraisals "create what I call phantom equity," Faravelli said. "Appraisals are arguably the easiest part of the entire process to tweak. After all, it's just an opinion, and everyone has one."