America's chief mortgage financiers are rolling out a new weapon in their war on fraud: property appraisal forms that require sales details on all home transactions.
"We expect these forms will result in more accurate and fully supported appraisals," said Joseph L. Minnich, a spokesman for Fannie Mae, the nation's largest mortgage buyer.
By requiring details about appraisers' market research and the existence of private buyer-seller arrangements called concessions, the lending process "will at least raise a red flag" about the chances of fraudulent activity, Minnich said.
Appraisals, which can cost $200 to $500 for a single-family home, are commissioned by lenders, which choose the appraiser. Buyers usually pay the bill as part of their closing cost. Federal law requires that a buyer be given a copy of the appraisal if they ask for it in writing.
Appraisals are intended to provide a neutral professional's calculation of a property's worth, rooted in recent sales of similar, nearby properties.
Stricter appraisal reporting requirements took effect Nov. 1 for Fannie Mae and Veterans Affairs Department loans and will become mandatory Jan. 1, 2006, for Freddie Mac and Housing and Urban Development Department loans, Minnich said. As Fannie Mae's senior business manager in property and appraisal standards, Minnich co-authored the new forms, a two-year process involving housing regulators, lenders and appraisers.
Fraud statistics underscore the need for tighter controls.
This country has been awash in mortgage money in the past few years -- $3.8 trillion in 2003, $2.9 trillion last year and an expected $2.8 trillion this year, the Mortgage Bankers Association said. Mortgage fraud cases have swelled in tandem, FBI statistics show. The bureau reported 642 cases pending at mid-year, up from 436 two years earlier. Known losses stood at $429 million last year, up from $225 million two years earlier.
Regulators always demanded honesty in real estate transactions, of course, but their written directives weren't always clear, said Alan Hummel, government relations committee chairman of Appraisal Institute, a Chicago-based trade group.
"This form makes it very plain," Hummel said. "Now, it will be easier to enforce the rules."
The Appraisal Institute pushed for stronger governance, citing widespread instances of lenders, sellers and realty brokers pressuring appraisers to "make that deal" by supplying a valuation to justify the mortgage loan size involved.
"This is a step in the right direction," Hummel said. "This puts the appraiser and [lender] on notice that they're accountable."
Paul Vozar, president of Vozar Appraisal Service Inc. in West Allis, Wis., and a longtime advocate of tighter controls on real estate transactions, agreed.
"If appraisers are able to do what we're supposed to do -- check contract prices, determine the extent of concessions involved -- this could really make a difference," he said. "If the seller makes a concession of $5,000 on a $75,000 house, it's now a $70,000 house."
The new forms will require that the appraiser ask about behind-the-scenes deals and disclose what they know.
"And if a house is sold twice in a two-month period, with the sale price going from $80,000 to $100,000, you want to know whether improvements were made to increase that value," Vozar said.
Brad German, public relations director at Freddie Mac in McLean, said "it will be harder, with this format, to create the conditions for inflated appraisals."
Regulators can make appraisers ask about private sales terms, but they can't make buyers and sellers answer such questions, said Rick Staff, vice president and senior staff attorney for the Wisconsin Realtors Association in Madison.
"Seller concessions may not be public record. We have a strong confidentiality law in this state," Staff said. If a home seller decides to keep mum whether the recorded price is the full price, he said, "our agents have a duty to respect client confidentiality" and not disclose it either.
The new form can be seen at www.efanniemae.com.