Scenario:
I’ve come to know of a few people who’ve lost their homes because they took a mortgage that they couldn’t afford and when they wanted to sell off and move out, they came to know that their houses received over-inflated appraisal at the time of buying. The person I know of had his home appraised for $80,000 although the home had a value worth only $50,000. So, when they defaulted and tried selling to pay off the loan, what they could get was much below the appraised value, and they didn’t have much to pay the deficiency. So the lender decided to foreclose and ultimately they ended up renting an apartment. Why it that the appraised value at times is too higher than what the home’s worth for and at times it gets too low?? Isn’t it an appraisal fraud? I’ve also heard that lenders often force appraisers to inflate/.deflate appraised values? Is it true and aren’t there laws to prevent such things in the industry??

Solution:
Appraisers are mostly hired by banks and lenders to determine the market value of homes against which the latter will be offering the loan. The purpose is to find out if the lender will be able to provide a loan worth the home value as determined by the appraisal.

Now, as per the requirements by large banks, appraisers over inflating property values are not encouraged. Also, if appraisers don’t follow their strict guidelines for comparable, banks won’t use them for their services. The fear of losing their jobs is something that actually makes them push down the home values. The reason is, deals are made or broken on the basis of whether the home appraises for the sale price or not. So, if a lender wants to make a deal and the appraised value is much lower than the sale price of the house, he’d like his appraiser to inflate the value.

Now, say if a borrower had taken out an ARM (Adjustable Rate Mortgage) a few years ago and wishes to refinance now to a fixed rate, he can’t because the appraiser may fail to provide him with an appraisal worth the inflated value that he has received at the time of getting the ARM. The borrowers then have no choice but to accept a foreclosure if at all they cannot go for a short sale or deed-in-lieu.

However, there’s another side to this story. There are some lenders who intentionally ask appraisers to lower the value because they feel the latter have used bad comps that were not legitimate or even comps that didn’t exist. The appraisers then have to redo the appraisal after which the value comes out to be much lower as expected by the lender.

Well, if appraised values are intentionally inflated or deflated from its original value, it is certainly a kind of fraud. And, there should be laws to take care of such issues so that lenders and appraisers can work together keeping in mind each other’s benefit. However, the State of California has recently passed a bill stating that it would be a crime if any lender forces an appraiser to accept a pre-determined value in order to make a deal. This is what other states need to think of in order to protect borrowers from overpaying for their homes or ending up in foreclosure.

Author's Bio: 

Samantha Taylor is a contributing writer and moderator of Mortgagefit.com forums. She specializes in mortgage and real estate field.