Jan. 17 (Bloomberg) – Home appraiser Julian ``Tony’’ Perez conjured $7.5 million out of thin air in the first six months of 2001 by overvaluing 33 condominiums in the Atlanta area.
Perez valued eight unfinished properties at the Deere Lofts development on April 2. Some were missing ceilings, cabinets or sinks. Each had been bought the previous week for $90,000 to $167,000. Perez said they were worth $177,000 to $330,000, according to the U.S. Attorney’s Office in Atlanta.
These are the worst condos ever,'' Perez said last January during testimony at the federal trial in Atlanta of developer Phillip Hill, who used the appraisals to resell the properties. Those values are super over-inflated, probably double what the amount of that property is probably worth.‘’
Perez and appraisers like him helped exaggerate U.S. mortgage values by as much as 10 percent, or $135 billion, in 2006, according to Susan Wachter, a real estate professor at the University of Pennsylvania’s Wharton School in Philadelphia. Such appraisals artificially inflated the value of collateral supporting mortgage-backed securities and are contributing to record foreclosures because borrowers end up owing more than their houses are worth.
Lenders and investors in mortgage-backed securities depend on independent appraisals to value their collateral. Buyers use them to make sure they aren’t overpaying.
`Blesses the Loan’
Mortgage lenders, eager to make bigger loans and win market share during the five-year housing boom, relied on both higher appraisals and the proliferation of subprime and adjustable-rate mortgages, said Wachter, who has consulted for mortgage buyer Freddie Mac and General Electric Co.'s U.S. home loan unit.
There has to be an appraiser who basically blesses the loan,'' she said. There are lenders who are deciding what terms to extend and then there are appraisers indicating it is appropriate or isn’t appropriate.‘’
Lenders and mortgage brokers routinely pressured appraisers to boost values, said Jonathan Miller, a New York property appraiser for more than two decades who writes a blog about the problem.
There just became less and less emphasis on quality,'' Miller said. You started to see more and more loan products that would keep payments low, and I see that as correlating with appraisal pressure because those products only work in a rising market.‘’
**Ninety percent of appraisers surveyed in a study published last year by Richfield, Ohio-based October Research Corp. said they felt pressure to make bogus valuations. Five years ago, that figure was 55 percent.
Almost three-quarters of the appraisers said that mortgage brokers asked them to bend the rules.**
The problem became so severe in Florida that appraiser Pamela Crowley said she started an e-mail distribution list in 2003 for real estate appraisers to report suspicious sales and refinancing deals.
Crowley said she was forced out of the appraisal business because she refused to report property values that were higher than the actual worth. She has turned the e-mail list into a Web site, and says she now works with a snub-nosed .38-caliber pistol at hand because she’s afraid of retribution.
``There are a lot of people who made a lot of money on this whole game and I was hurting them,‘’ Crowley said.
Appraisers also are being pressured to overlook imperfections in homes or ignore housing trends in a community that might bring a property’s value down, said John Oakvik of Tozzer, Oakvik & Associates Inc. in Fort Lauderdale, Florida.
Oakvik said he got a call in October from a mortgage broker who asked him if he’d made a mistake when he checked a box on an appraisal report that said home prices were falling in the area.
`No Red Flags’
She asked me to change the box from `declining market' to `stable market,''' Oakvik said. Mortgage brokers just want a generic report, no red flags.‘’
Appraisal practices are drawing the scrutiny of prosecutors. At least seven states have opened investigations into the mortgage industry, including ties between appraisers, lenders and brokers.
Lenders including Lehman Brothers Holdings Inc., the biggest underwriter of mortgage-backed bonds in 2007, say they too have been victimized by fraudulent appraisals.