> Advice For Borrowers
New Federal Policy Extends Liability For Inflated Appraisals To Mortgage Lenders
by Kenneth R. Harney
The Bush administration has sent a shot across the bow of mortgage lenders who attempt to influence or pressure appraisers to inflate home valuations or ignore property defects. In a ruling that is winning applause from appraisers, housing secretary Alphonso Jackson says the government will now penalize lenders who knew -- or should have known--that the appraiser they hired submitted an intentionally inaccurate valuation on a home. The new rule will only cover appraisals submitted in connection with the one million-plus new home mortgages originated annually for the Federal Housing Administration (FHA). But appraisal experts say the move sends a wake up call to lenders throughout the home real estate marketplace: Don't fudge the numbers on appraisals, or you just might end up with a hefty financial penalty or even sitting in a federal prison. Jackson's rule seeks to put an end to a controversy that has swirled around the FHA program for years: When an appraiser inflates a valuation to "hit the number" on a home sale contract or ignores obvious structural defects that lower the market worth of a property, can FHA punish not only the appraiser but the lender who hired the appraiser and reviewed the valuation? Jackson's answer is an emphatic yes,provided it can be established that the lender knew, or should have known following the review, that the appraisal was erroneous. Under prior federal policy, it was unclear whether FHA could examine the facts and circumstances of an erroneous appraisal, and hold the lender, broker or loan officer liable for the errors. In several cases where faulty appraisals led to radical overvaluations on FHA properties, the government decertified the appraiser from future FHA work, but did not proceed against lenders who clearly knew--or should have known--that the valuations were wildly excessive. In one case, a young, newly-married couple buying their first home was left with $50,000-plus in repair bills after an appraiser working for a Pennsylvania lender ignored major structural problems and code violations. FHA urged the lender to assume some responsibility for the inept appraisal and pay for at least some of the repairs. But the lender refused and the government concluded that its own rules were not specific enough to fine or otherwise punish the lender. Under Jackson's new rule, which takes effect nationwide August 19, lenders in such cases will be vulnerable to fines and other administrative actions from FHA. Appraisers-- who complain that inflated and "see no evil" valuations often are the result of pressure exerted on them by lenders--cheered the new move by the government. Don Kelly, vice president of the largest appraisal organization in the U.S., the Appraisal Institute, said "they're doing the right thing" in exposing lenders to financial liability for bad appraisals. Kelly said inflated valuations may allow real estate deals to close, but "they are inherently anti-consumer." The Institute has for years urged Congress and the federal government to crack down on lender pressure, threats and interference in appraisals. "By sharing the burden (of legal liablity)," Kelly told Realty Times, "lenders are going to be less likely to tell appraisers to "hit the value" needed to close a sale or mortgage. | 
