How To Mitigate Appraisal Fraud Patterns

Appraisal fraud is a component of many mortgage fraud schemes. This type of fraud is one of the more sophisticated techniques being used to commit mortgage fraud. As one of the fastest growing financial crimes in U.S. history, counter measurements to mortgage fraud are required. One of these measurements involves targeting the appraisers and verifying the appraisal is accurate.

Fraudulent appraisals are leading to lenders and buyers suffering billions in losses in the U.S. The expansion of the real estate market in recent years, combined with easier access to credit has resulted in additional attention needing to occur to help mitigate risk from appraisals.

How Appraisal Fraud Works:

There are a variety of ways that an appraisal can be fraudulent. This type of scam can occur from a variety of people participating in the fraudulent activity. For example, unscrupulous appraisers can artificially inflate the value of a property so they, along with mortgage brokers, property flippers, real estate agents and attorneys can profit from the higher appraisal. This fraud can also be found in markets where appraisers are pressured to inflate property value estimates.

Importance of Due Diligence:

There are several steps that can help mitigate the risk of appraisal fraud. It begins with working with legitimate lenders and buyers. These lenders and buyers must verify the mortgage originators, real estate professionals and appraisers involved in the real estate transaction. On the surface, this can seem to be a difficult task, but there are industry tools that exist to help with due diligence focused around preventing this type of fraud.

To mitigate the risk caused from a fraudulent appraisal, use the following steps.

1. Appraiser License Verification:

The first step a lender should take is to perform a check on those conducting the appraisal. By completing a professional check and monitoring licenses of appraisers, the lender is conducting due diligence. It is important to verify not only the license, but the states where the appraiser conducts business. Appraisers must be licensed in each state where he or she intends to value a property. To complete the professional check, lenders should look to the services of a company that provides appraiser license verification.

2. Evaluate Mortgage Brokers:

The second step a lender should complete is an evaluation of the mortgage broker involved. Nationally, the majority of mortgage loans originate from mortgage brokers. It is important to understand that the mortgage broker profits from the process of brokering a loan between buyers and lenders. A mortgage brokers gains when a fraudulent appraiser willingly inflates the value of the property, allowing the mortgage broker to make an increased profit.

The fallout from this type of mortgage fraud results in the buyer and lender left to deal with the risk of market fluctuations. These fluctuations can include housing depreciation, financial loss stemming from inflated housing values and an increased rate of mortgage defaults due to the fraudulent appraisal. The way lenders can help mitigate their risk of this fraud is to verify and credential business relationships among potentially risky mortgage brokers.

3. Other License and Professional Qualification Checks:

In the third step, lenders should check the reliability and qualifications of any other real estate professional that is involved in the mortgage process. Individuals that commit fraud often leave identifiable patterns. Before conducting business with a real estate agent, a diligent lender should check the person’s license status. A good protection against fraud is for banking professionals to work with trusted appraisers and real estate professionals that come with positive referrals.

The federal government is collaborating with mortgage entities and lenders to investigate mortgage fraud. In many of these investigations a fraudulent appraisal is at the heart of the investigate instance. Such collaboration also helps mortgage banks identify and potentially avoid various fraud schemes.