Consideration was given to entitling this column, “Preventing Mortgage Fraud.” It is true that much mortgage fraud stems from appraisal fraud, however, not all mortgage fraud relates to appraisals. Also not all appraisals involve mortgage loans, so, given our focus in this column on property evaluations, the title will remain as it was first written. That said, much of this writing will involve mortgage fraud, as well as inflated or fraudulent mortgage-loan appraisals.

Some may wonder whether fraud in our industry is a material issue. To put the challenge of fraud into prospective, I offer the following recent industry-fraud reports:

• In response to questions about the Obama administration’s efforts to prosecute those responsible for the mortgage meltdown, in March FBI Director Robert Mueller reported to the House of Representatives Judiciary Committee that his agency had 3,000 open investigations into mortgage fraud, using 94 task forces and 340 agents.
• According to the U.S. Office of Thrift Supervision, FBI investigations into suspicious loans increased 400 percent in the five year period from 2005 through 2009.
• The 2009 FBI Mortgage Fraud Report states that lenders circumvented the Home Valuation Code of Conduct, designed to eliminate collusion between the appraisers and those earning income from closings, by allowing non-commissioned employees to order appraisals.
• The Mortgage Bankers Association reported last year that 14 percent of all home mortgages were delinquent or in foreclosure. CoreLogic, a company that produced a research report, entitled “2010 Mortgage Fraud Trends,” reported that 25 percent of all foreclosures manifest evidence of fraud.
• The Office of Thrift Supervision recently reported that 80 percent of all mortgage fraud involves collaboration or collusion by industry insiders.
• An estimated $14 billion was lost in mortgage fraud in 2009 alone, stated Tim Grace, senior vice president of fraud analytics at CoreLogic. “While the industry has done good work, there is evidence that fraud patterns are changing and becoming increasingly more hidden,” Grace said. The survey also reported a combined total of $75 billion in losses over the four-year period of 2006-09.
• According to the Financial Crimes Enforcement Network, lenders filed more than 35,000 suspicious-activity reports on questionable loans during the first half of 2010.
• According to the Federal Deposit Insurance Corporation, in 2009, 140 banks failed, costing $37.4 billion. According to the FDIC’s website, 351 banks failed in the period from Jan. 1, 2007, and March 31, 2011.
• Acting U.S Attorney Nora D. Dannehy stated that most mortgage-fraud cases involve false representations on mortgage-loan applications and inflated property appraisals and that an estimated 83 percent of all mortgages are legally problematic.
• The Mortgage Asset Research Institute (MARI) reported that suspected appraisal/valuation fraud stood at 22 percent in 2008 and that the rate jumped to 33 percent in 2009, based upon suspicious-activity reports from lenders.

Most but not all of the information above is factual in nature. My research intentionally came from a broad range of independent sources in an attempt to obtain the most reliable set of data possible.

Regardless of your profession, political persuasion or understanding of finance and economics, these facts must be sobering, if not alarming. We simply cannot continue on this road. There are those, including myself, who say that what we see above is the root cause of the financial woes we have experienced during the current economic crisis.

In relating the above facts to the appraisal profession, it is difficult to be precise as to what part of the corruption the evaluation profession actually bears responsibility for. It could be said that in all appraisal fraud there were others who were equally complicit in each transaction. Even if this is the case, the appraiser is still committing appraisal fraud when he or she submits an appraisal that is known to provide false opinions. The MARI report states that 33 percent of mortgage fraud is committed by appraisers. Given my experience in the profession, I see this as a reasonable estimate and accept it as a basis for addressing appraisal fraud for purposes of this column.

If one-third of the mortgage fraud is caused by appraisers and if the annual cost of fraud is 14 billion, as it was in 2009, that equates to our profession costing our economic system somewhere in the neighborhood of $5 billion per year. We have approximately 100,000 licensed appraisers within the industry, meaning that each appraiser costs our system $50,000, on the average, per year. I would estimate that the average appraiser, after expenses, makes no more than $50,000 per year. That includes the ill-gained compensation received by those who perpetrate fraud. I say this because few appraisers get windfalls from participating in fraudulent practices. Most do it only to preserve their job, based upon my inside information into the profession.

What can be done to prevent appraiser fraud? First, I submit to you, given the above scenario, that most appraisers who commit fraud while performing appraisals do not do it because they want to. They are lured into it in order to pay their bills and to continue practicing their profession. If they believed that their client wanted an uninflated, fair and honest appraisal, most would be relieved and provide just that. We must begin sending them that message.

Recently, there has been progress made in this direction. New regulations are in place, which are intended to prevent lenders from pressuring appraisers to inflate values. More should be done. There are still appraisers who fear for their jobs if they do not hit some predetermined numbers. This must stop.

True appraiser independence and fair compensation will go a long way toward obtaining accurate appraisals. Most appraisers, who work within a professionally managed system and believe that their client wants him or her to provide a fair, unbiased, accurate appraisal, will do so.