FDIC Suit on Appraisal Fraud is Dubious

In 2005, I wrote a report for Demos on how widespread appraisal fraud imperiled both homeowners and the real estate market. Appraisers were giving the thumbs up to inflated values and banks were loaning out billions based on these estimates. We know how that story ended.

Since the bust, there have been several efforts to hold appraisers responsible for their misleading valuations. Most notably, Attorney General Andrew Cuomo took on this issue and ultimately imposed a controversial new set of appraisal rules on loans backed by Freddie and Fannie.

Now comes a suit by the FDIC, in its role as the receiver of the bankrupt Washington Mutual, against the appraisal firm LSI and some of its partners.

You can read the full suit yourself, but here's the gist: The FDIC wants LSI to cough up $154 million for doing shoddy and inflated appraisals for WaMu, leading the bank to make millions in bad loans to properties that were overvalued.

The problem with this suit is that it contradicts much of what we know about appraisal fraud, as well as WaMu's own sorry record in this area.

As I documented in my report, appraisers were seldom the bad guys when it came to jacking up real estate values. Rather, the pressures to hit higher numbers typically came from brokers or lenders who had a financial stake in getting deals to close. And WaMu was among those pressuring appraisers.

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Still Cutting Corners to Make Deals Happen

The go-go years of the housing bubble brought out the worst in nearly everyone involved in the real estate business. Agents shameless shopped offers, mortgage brokers helped borrowers fudge their loan applications, and property appraisers turned in inflated value estimates.

You might think, after these practices helped torpedo the whole economy, that things had changed and that regulators would be cracking down. Well, you'd  be only half right. The real estate sector is still poorly regulated, governed by a patchwork of state and federal laws that are enforced with different levels of vigor, often depending upon the state. In Washington, the National Assocation of Realtors wields enormous power, ranking as one of the capital's biggest spenders on lobbying and campaign contributions. OpenSecrets.org puts NAR in the top five of its list of "heavy hitters" influencing government with special interest money and muscle. With that kind of power, it's easy to avoid proper oversight.

The appraisal process remains a particular problem area. The incentives can be huge to pressure appraisers to hit the right numbers and make sure a deal goes through -- especially when there are aren't a lot of deals happening. And so we weren't surprised to hear that, ccording to one recent report, appraisal fraud is on another upward swing.

Appraisal Fraud 101: Interview with Pamela Crowley

Pamela Crowley has been one of the real leaders in exposing the widespread practice of inflated home values through appraisal fraud. Here's a solid CBS news segment about Pam and the issue.