Foreclosure Appraisal Issues Reflect in Fraud Detection

MBA (3/4/2008 ) Palaparty, Vijay
Appraisal issues relating to foreclosures—overvalued or undervalued properties, cases of fraud and flips—increasingly affect the current mortgage servicing space. However, careful appraiser and appraisal review, combined with technology, could alleviate issues, according to panelists speaking last week at the Mortgage Bankers Association’s National Servicing Conference & Expo.
“Appraisal problems arise out a lack of time or tools for thorough review of the appraisal,” said Kathy Coon, chief appraiser and director at FNC Inc., Oxford, Miss. “There is also a disadvantage in appraisers reviewing appraisals in so many geographic locations.”

In the foreclosure appraisal process, the origination appraisal is critical, Coon said. She said the origination appraisal highlights inconsistencies between the original appraisal and foreclosure appraisal, also calling out significant variances in value. “Determine if the foreclosure appraisal is valued low or high,” she said. “Another question to ask is whether the original appraisal was in error or was a loss due to the economy and/or poor condition of the property.”

Coon also believes conflict of interest between parties such as contractors, realtors and investors add to the problems. She detailed the Uniform Standards of Professional Appraisal Practice guidelines that advocate ethical and competent conduct. Some of the qualities found in USPAP provisions are impartiality, objectivity, independence and avoiding personal interest as well as the cause or interest of any part or issue.

“Appraisal reports must be credible, include all relevant information, have support, contain sufficient information and cannot be misleading,” Coon said. “It is a violation of USPAP to intentionally overvalue or undervalue a property. Consistency is also crucial. The appraisal report must be consistent throughout—information, explanations, analyses and conclusions should be found in all sections. Reviewing for inconsistencies is one of the most valuable tools for detecting unsupported appraisal values.”

Coon propagated a thorough review process that incorporated technology and the selection of reputable vendors—both management companies and realtors. “Monitor the appraiser’s quality and hold them accountable. Furthermore, develop an ‘A’ list of appraisers; it will save time required for review and will also create more dependability for reviews and litigation,” she said.

On the technology side—auto downloads from servicing systems and automated determination and managing collateral information for the life of loan could help appraisers, she said.

“Industry changes are needed as well and I strongly advocate complete independence of appraisers and also mandatory disclosure of realtors and homebuilders—accurate property information, accurate details on comparables, historical sales data and seller concessions factors should be part of the disclosure, which if available in all states, could help the appraisal process.” Coon said.