Inflated Appraisals Lead to Florida Real Estate Scams

Deliberately inflated appraisals are the key component in residential real estate schemes in the Southwest Florida housing market and across the country.

As a result, appraisers and others are calling for reforms to protect the integrity of the system and make it easier for honest appraisers to do their work.

But exactly what to do about the problem is up for grabs.

“In the end the public ends up picking up the tab,” said Woody Hanson of Fort Myers-based Hanson Real Estate Advisors, which specializes in resolving high-stakes disputes over appraised values — often in court cases.

The News-Press has turned up 47 sales in Cape Coral in which the Lee County Property Appraiser’s Office says appraisals were inflated.

Padded appraisals allow sellers to make bigger profits on sales or buyers to pick up extra money from Florida mortgages.

Appraisers who stay on the straight and narrow can find themselves out in the cold if lenders, Florida mortgage brokers and real-estate agents stop using their services, Hanson said. “They soon find themselves in a situation where they cannot say no.”

How can the problem be solved?

Hanson suggests stricter enforcement of federal legislation passed in 1979 requiring careful scrutiny of appraisals by lenders.

Others say a new approach may be needed.

While many elements of a real-estate deal are public record — mortgages, deeds and similar documents can be found in many counties with a few mouse clicks, the identities of appraisers and appraisals are private.

That should change, said Ralph Roberts, a Detroit-based real estate agent once considered the top-selling agent in the country and an author of books and articles on mortgage fraud. He is seeking to organize a national fraud task force and plans to put the creation of a national database of appraisals at the top of the list.

“It’s something that we have the technology to do, at least for all of the deals that would be coming up, and it would make a real difference,” Roberts said. “The way the system is now, these guys get to operate in secrecy. There’s no reason that we shouldn’t be able to see those appraisals.”

Others say such a solution wouldn’t work. “That isn’t going to happen,” Hanson said, because of an ingrained secretiveness in the business. “I’ve had appraisers in litigation who won’t turn over files regarding property.”

Matt Simmons, an appraiser with Maxwell & Hendry Valuation Services in Fort Myers, said he likes the idea of a national database that would rank appraisers on their skills. Federally regulated lenders would have an obligation to use competent appraisers on the list, so appraisers would get repeat business by being honest.

Bills target problem
Patrice Yamato, president of the Florida Association of Mortgage Brokers, said legislation working through Tallahassee this year would be a good start: It would make it easier for authorities to file charges against all the players in a mortgage scam.

It would start by criminalizing Florida mortgage fraud.

That sounds simple enough, but until a couple of years ago no state in the union had specific laws on the books that made mortgage fraud — which usually involves people lying or misrepresenting facts on statements to lenders — a criminal offense.

In Florida and elsewhere, prosecuting people who committed such offenses required authorities to turn to theft, forgery or organized fraud statutes.

Florida Senate Bill 240 and House Bill 340 would make mortgage fraud a third-degree felony. People charged with misrepresenting themselves in two or more transactions would face up to 15 years in prison and a $15,000 fine. The legislation would allow authorities to use racketeering statutes to track down scammers’ money to repay victims.

The bill is being reviewed by the Senate Judiciary Committee. If passed, the law would take effect Oct. 1.

Pointing fingers
Wayne Archer, director of the University of Florida’s Bergstrom Center for Real Estate Studies, isn’t sure legislation holds the key to curbing fraud.

“Banks could stop this if they wanted to,” he said. “When we talk about laws or appraisers, we really need to remember that banks have more of the power than anybody because they’re the ones with the money. Good lending practices would do a lot to stop this.”

Banks assume some Florida home loans will turn sour, and when money is flowing the way it did before real estate’s slide, there’s more than enough to cover losses, some industry insiders said.

“Let’s face it,” Archer said, “there was a lot of money to be made.”

Tightening lending standards or giving agencies more money to investigate cases won’t stop fraud, some say.

In fact, a common component of many bogus deals are lenders or mortgage brokers — either as part of a scam or as dupes — pressuring appraisers to heighten values, fraud experts said.

Don Kelly, chief of external affairs for the Chicago-based Appraisal Institute — the main trade association for the industry — said his group tried unsuccessfully to get federal legislation that would make it a crime to pressure an appraiser to inflate value. He’s hopeful the law will go through this year.

Meanwhile, he said, appraisers should protect themselves the best they can. “Appraisers need to diversify their practices so they’re not just working for lenders and brokers.”

Part of the problem in enforcement is that it’s sometimes a fine line between out-and-out fraud and the general atmosphere of carelessness in the mortgage industry now, said Mark Mathosian, regional director for the Florida Department of Financial Services.

“There’s a heck of a lot of creative financing out there, some of which is sure to be found to be illegal,” he said.

“I remember at one time it took two months to get a Florida mortgage loan. It took two months to get everything verified. Then it got competitive, and the market dictated the lenders couldn’t take that time. Before you know it, there’s almost no verification taking place.”

SOURCE: The News-Press