Lawsuit Seeks to Deflate The Puffery in Appraisals

Perry "Pat" Turner, an appraiser in the Richmond area, said pressure to inflate values is so widespread that "it amounts to organized fraud by loan officers based on their need to generate fees and close deals, and then pass the loans on to Wall Street," where they get packaged into mortgage bonds, some of which are now experiencing heavy default rates.

"And they all think they're never going to get caught," Turner said.

A national survey of 1,200 appraisers last year by October Research, publisher of the industry newsletter Valuation Review, found that nine out of 10 appraisers said they had recently been intimidated or otherwise pressured to raise valuations on homes -- up from 55 percent in a similar survey in 2003.

When appraisers refused to cooperate with demands to fluff the numbers, according to the study, two out of three of them lost the client's business altogether; nearly half did not get paid for the work they had performed.

Gregoire says the First American-Washington Mutual case illuminates a serious loophole in the regulatory system: The federal government has urged banks to outsource their appraisals to ostensibly independent appraisal management firms such as eAppraiseIT in order to separate loan officers from the choice of, or direct contact with, appraisers.

"No one is checking to see how free from influence these [management companies] really are," he said. "States don't regulate them -- they're not even considered appraisers. They're brokers of appraisal services, so nobody is looking."

In areas where prices are falling and appraisal numbers are getting fudged, that could prove to be sobering news for everyone involved -- especially unsuspecting buyers.

Kenneth R. Harney's e-mail address is KenHarney@earthlink.net.