Big Shitpile and Fraud: It’s the Appraisal, Stupid

One of the reasons I’ve written many times about the massive housing fraud (aka ‘Big Shitpile‘). One of the many forms of fraud, but one that has gone relatively unmentioned, is appraisal fraud–the fraudulent over-valuation of a house’s price. Bill Black explains (and you should read the whole post; underlining mine):

There is no honest reason why a mortgage lender would inflate the appraised value and the size of the loan. Causing or permitting large numbers of inflated appraisals is a superb “marker” of accounting control fraud by the lender because the senior officers directing an accounting control fraud do maximize short-term reported (fictional) income (and real losses) by inflating appraisals and stated income. Lenders and their agents frequently suborned appraisers by deliberately creating a Gresham’s dynamic to try to induce them to inflate market values, leaked the loan amount to the appraisers, drove the appraisal fraud, and made it endemic. A national poll of appraisers in early 2004 found that 75% of respondents reported being subjected to coercion in the last 12 months to inflate appraisals. A follow-up survey in 2007 found that the percentage that had been subjected to coercion had risen to 90 percent. Appraisers reported that when they refused to inflate appraisals 68% had lost at least one client and 45% were not paid for at least one appraisal in the prior 12 months. In 2005, Demos warned of an “epidemic” of appraisal fraud.

As with inflating income in order to minimize the reported debt-to-income ratio, inflating the appraisal allowed everyone with a financial stake in the lies to minimize the reported loan-to-value (LTV) ratio and allowed everyone to pretend that the loan was far less risky because it had such a large (but yet again fictional) equity cushion. Given that we know that appraisal fraud was endemic, that endemic appraisal fraud is impossible without being led or permitted by the lenders and their agents, and that no honest lender would permit or cause widespread inflated appraisals, the logical inference is that the lenders and their agents led both the stated income and the appraisal fraud. Appraisal fraud is particularly pernicious because the borrower does not know it has occurred. He may be told that the home he offered to pay $400,000 to acquire (subject to an appraisal contingency) has a market value of $480,000 when its true market value is $350,000. This constitutes fraud in the inducement.

Unfortunately, thanks to the Obama administration policy of ‘looking forwards, not backwards’, at least some of the charges have now passed the statute of limitations, so these fuckers probably got away with it (although I would love to be proven wrong).

If economists ever hope to make sense of what happened in the last decade, they will have to grapple with fraud, something that is almost never mentioned.

This entry was posted in Economics. Bookmark the permalink.