Through the din of reports about mortgage fraud, title industry kickbacks, and a general upswing in errant real estate industry activities akin to organized crime, a new report turns the focus to real estate appraisals.

Appraising, the science of determining the value a home, when used to falsely inflate values, sets a dangerous precedent that can not only ruin the household budget, but the nation's economy as well, says "Home Insecurity: How Widespread Appraisal Fraud Puts Homeowners At Risk" recently released by public policy think tank, New York City-based Demos.

The report says too many home owners risk financial ruin because appraisal fraud allows them to borrow more than their home is really worth. Should home values tumble and reflect the homes' true market value, home owners with "upside down" mortgages (mortgage balances larger than a home's true value) who face hardship that forces them to sell their home will have to come up with the difference.

Widespread depreciation in over-inflated home values could have a devastating impact should it affect local, regional, and national economies many of which today are driven, in part, by the booming housing market.

"Appraisal fraud is part of a bigger, more ominous picture," says David Callahan, Home Insecurity author and Director of Research at Demos.

"The inflation of home prices through appraisal fraud may be helping to push a real housing bubble. Some observers believe that appraisal fraud helps explain high foreclosure rates in certain parts of the nation," the report says.

The report says up to half of all appraisers feel pressure from lenders or brokers to overstate property values to close a sale. Appraisers bow to pressures because they fear losing future work. Appraisers who have not bowed to pressure report retaliatory measures including not being paid for work and being blacklisted by lenders and brokers, the report says.

In a RealtyTimes.com story earlier this year, Texas appraiser Bob Burnitt called the industry "the most corrupt 'profession'" and left the industry after repeated firings because he wouldn't fix appraisals.

The Demos report also found:

• Serious conflicts of interest are pervasive in the mortgage industry. Lenders, brokers, and real estate agents often have an incentive to inflate the value of residential properties. Appraisers too often go along with requests to overstate the value of a home out of fear of losing work and being blacklisted. More than half, 55 percent, of all appraisers have reported feeling pressures from lenders or brokers to overstate property values.

• Appraisal fraud is not new, but the refinancing boom has created incentives to boost the practice.

• Appraisal fraud is a predatory lending tactic. Predatory lending includes over priced loan costs -- including boosting home values -- often aimed at minority, older and low-income home buyers.

• Government oversight of the appraisal process is inadequate. With mortgage brokers unregulated in many states, the key participants go unmonitored, making fraud difficult to track and curtail. Oversight of lending institutions is often very weak. State boards that license appraisers and investigate reports of fraud often lack the resources to fully enforce the law.

The report recommends a host of reforms, among them:

• Appraiser independence. Prohibit all contact between appraisers and lenders and brokers. Sanctioning appraisers who go along with requests to inflate property values would level the playing field among honest appraisers.

• Punish wrongdoers. Anyone who pressures appraisers to overstate property values should face stiffer punishment from the federal government. All states should expressly prohibit pressuring appraisers. All states' mortgage brokers should be licensed and accountable to a regulatory authority. This calls for increased enforcement capability so that laws can be enforced effectively.

• Streamline the complaint process. The complaint process should be more uniform and the means for filing complaints made more efficient and effective.

• Educate consumers. Consumers urged to buy homes, treat their equity like a bottomless ATM, and to exchange high-interest credit card debt for low-interest mortgage debt are unwitting accomplices who inadvertently encourage appraisal fraud with demands to quickly seal the deal without paying attention to the appraisal step.

Published: April 12, 2005

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A journalist for 35-years, Broderick Perkins parlayed an old-school daily newspaper career into a digital news service offering editorial content and consulting services. Perkins' San Jose, CA-based DeadlineNews Group includes the flagship news site, DeadlineNews.Com, offering real estate, personal finance and consumer journalism, and a backshop, the Deadline Newsroom.