Many Foreclosures Resulted From Inflated Appraisals

Posted on November 6th, 2007 by saman

According to several government sources, some leading real estate appraisal firms colluded with savings & loan associations and others to artificially inflate the value of nationwide residential properties so that owners were able to qualify for sub prime mortagage. The resulting foreclosures have resulted in the current rash of foreclosures, sinking home prices and what many are calling “a housing meltdown.”

In a recent New York state case, Attorney General Andrew Cuomo filed a civil lawsuit against eAppraiseIT, a subsidiary company of First American Corporation, for colluding with Washington Mutual, the nation’s largest savings and Loan in inflating home appraisals. He said that Washington Mutual had handpicked appraisers who would inflate housing prices. The company has subsequently severed its connection with eAppraiseIT and denied that it has or ever had any incentive to have appraisers resort to inflating home prices. The company also said that it uses third-party appraisers just to assure that appraisals are accurate and unbiased. First American Corporation has said that the charges have no legal foundation.

Nearly 265,000 mortgage loans to individuals and families were subject to the inflated appraisals according to the New York state Attorney General’s office. They said that they had reason to believe that an early proposal would have increased property assessments by up to 5% with a cap of $50,000, but that it was rejected in favor of the unethical appraisers.

It is apparent that investors were injured when they bought mortgages for properties with inflated values and that they might very well suffer for years by being forced to make mortgage payments on these loans. Homeowners who have been foreclosed also end up indebted for more than they should have been and are now faced with high debts for many years to come as a result of inflated appraisals.

Unfortunately, the appraisal process serves as the center of home buying transactions and is generally accepted by everyone involved. Many ‘improper’ loans were made to consumers during 2005 and 2006 driven by a bond market backed by home loans that was highly in demand. In many cases, people were sold on Adjustable Rate Mortgages (ARMs) that began at a low ‘teaser rate’ interest which automatically reset to a much higher rate between one and three years later, making many unmanageable by the homeowners and resulting in foreclosures. More than fifty lenders have ceased operations and tens of thousands of people in the industry are now unemployed as a result. Moreover, it is now considerably more difficult for new homebuyers to qualify for the loans they need in order to buy a new residence.

New York state Attorney General Cuomo also said that based upon E-mails he has, both eAppraiseIT and First American Corporation violated the ethics of independent appraisals when they were coerced into a system designed to defraud both homeowners and investors. The results have been clearly a disaster for many. Many legal steps are now pending to prevent situations like inflated appraisals from taking place in the months and years ahead. Regrettably, it’s far too late for many!