A faulty or even fake appraisal is said to be at the basis of every fraudulent mortgage transaction. But not every appraiser is at fault, or at least willingly so.

James Blaydes of Blaydes & Associates, a Peru, Ill., appraisal firm says that in many cases, appraisers can't stand up to pressure put on them by mortgage brokers. Either they "hit the numbers" as instructed, he said at the Mortgage Bankers Association's National Fraud Issues Conference in Chicago recently, or they are blackballed.

It's not quite "The Sopranos," the perhaps true-to-Mobster-life TV show where someone who refuses to play along ends up with broken legs or is sometimes whacked. But if an appraiser refuses to inflate a valuation, Blaydes said, he won't be getting any more business, at least from that particular broker.

Speaking for the Appraisal Institute, which has been calling on lawmakers to address mortgage fraud since 1981, when the problem was believed to be in its infancy, the Illinois appraiser said there are plenty of ways to fudge a valuation besides packing the final number.

Among other things, appraisers can ignore the best comparables, or use properties in better neighborhoods as comps, he said. They also can mis-describe a property, such as labeling a commercial building as single-family. Or they can fail to mention physical problems.

But appraisers aren't the only ones who commit such flagrant fouls, Blaydes told the conference. Sometimes loan brokers do their own dirty work.

They have been known to alter an otherwise honest appraiser's work by changing the values of each comparable, he said, deleting noted physical issues or other undesirable influences impacting the subject property or even forging their own appraisal reports.

Upstanding appraisers are doing their best to fight fraud on their own, Mr. Blaydes told the conference. But they need help, and not just from federal and state legislators.

While bills being considered in Congress will "go a long way" toward helping to combat fraud, the AI spokesmen said, lenders can help themselves by separating the appraiser selection process from loan origination and by preventing loan officers from having any contact with loan officers.

"That's something we can do ourselves," agreed Erik Stein, executive vice president and director of fraud risk management at Countrywide Home Loans, Simi Valley, Calif. "Loan officers shouldn't get to pick the appraiser."

Stein said faulty appraisals are "the single most important issues in collateralized lending."

"All fraud is bad, but the reality is, if the house is worth what the appraiser says, if I have value in the collateral, I'm going to break even."

Blaydes also highly recommended that lenders monitor appraiser rosters by checking with state and local regulators to determine if any disciplinary actions have been taken against a particular appraiser, and running at least an automated valuation on the subject property prior to funding a loan as a quality control measure.

And he called on lenders to protect themselves by filing "well documented complaints" against bad appraisers and brokers, and aggressively pursuing civil suits against the evil doers.

"If you see this kind of stuff going on, there's no way you're going to clean this up" unless detailed complaints are filed, he said. "It needs to be reported."

Countrywide's Stein agreed with those recommendations, too. "Make fraud cost, not pay," he told the meeting, by, among other things, installing an independent hotline so appraisers can report pressure and keeping an internal "Do Not Use" list of suspected bad actors.

"Get involved," he implored. "You are not going to make a change unless you do."

Both speakers said lenders also would do well to support adequate funding for state regulators. "The lower you go" in the regulatory hierarchy, Stein told the meeting, "the greater your chances of actually getting something done."

Emblematic of the scope of the mortgage fraud problem throughout the country is what's going on in Illinois, where three out of ten appraisals are found to be forged, according to Robert Gorman, an East Hazel Crest, Ill., appraiser. "That's a significant number," he told the meeting. "And that's only the ones we know of. Who knows what we don't know?"

Gorman said in some cases, appraisers who have had their licenses lifted continue to make valuations using someone else's identification. They swipe the names from class rosters, loan files, and even industry websites, he said.

In other instances, he also said, the "appraisers" were never licensed at all, and are part of a larger scheme to fleece lenders.

Gorman told of one crew of 13 fake appraisers who are working out of a factory on Chicago's South side. The authorities would like to shut down this appraisal factory, he said, but they can't. "They're not licensed, so there's nothing we can do," he said. "So they are still there."

The crooks don't stop at just fake valuations, either, he added. "They go so far as to forge errors and omission insurance documents and any other documents (lenders) might ask for" to make sure the appraiser is on the up-and-up.

Gorman said one easy way for lenders to spot a scam is to make sure the address where checks are sent is the same as the address listed on the appraiser's license. If it's not, he said, it's a pretty good indicator that something's amiss.

"If you just follow the money," he said, "you can solve a lot of your problems."

Blaydes, meanwhile, said the Illinois Coalition of Appraisal Professions and the Chicago Chapter of the Appraisal Institute are working to change licensing laws so that new hires are listed as "trainees" and supervisory appraisers are limited to working with no more than three trainees at any one time.

Absent the trainee designation, he explained, out-of-state lenders have no way of knowing a fledgling appraiser cannot legally perform a valuation without his work being signed off on by his supervisory appraiser.

Sometimes, he added, supervisors work with as many as 10 trainees at a time, which is far too many for "proper supervision."

Published: June 7, 2006

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When Lew Sichelman first started writing about housing in 1969, he was the youngest real estate writer in the country. Now, 37 years later, he's one of the oldest -- and most decorated. He has been rated the top housing columnist in the country by the National Association of Realtors as well as by his peers in the National Association of Real Estate Editors. Indeed, NAREE has recognized his work on numerous occasions. One year - due to his advancing age, he can't recall which one - he earned top honors in the annual NAREE Journalism Contest in three out of the four major writing categories. It was the first time one writer has won so many NAREE awards in a single year. Known for his ability to make even the most difficult topics understandable, Sichelman also has been honored by the National Association of Home Builders and the Mortgage Bankers Association. He began providing in-depth coverage of and consumer-oriented information about housing and housing finance at the Washington Daily News, where he was real estate editor. He held that same position for nine more years at the Washington Star, which purchased the News in 1972. The Star, a so-called "writer's newspaper" which also had the misfortune of being an evening paper, was put out of its misery in 1981, and Sichelman, who had begun self-syndicating his column in 1978, decided to become a full-time columnist. Today, his column, "The Housing Scene," is distributed by United Media to newspapers throughout the country. He also is on the staff of National Mortgage News, an independent newspaper which is considered the bible of the mortgage business. And he writes for numerous other publications, including MarketWatch.com, where he answers readers questions once a week, Sports Illustrated (don't ask), RealtyTimes.com, BigBuilder and others. Sichelman is married, the father of five and grandfather of eleven.