Appraisers who have weathered the last few years are now feeling a new type of pressure. In the past, appraisers often felt compelled to submit higher-than-market appraisals to convince borrowers that properties were worth their hefty asking prices, and keep the mortgage pipeline primed with deals. Now, however, they are facing the opposite pressure. Tight credit markets and gun-shy lenders mean appraisers are often pushed to be conservative with their valuations and come in below market.
“Whereas before the crash there was house-flipping, there’s now house-flopping,” said Susan Wachter, a professor of real estate and finance at the University of Pennsylvania’s Wharton School of Business.
So-called “flopping” means “under-appraising a property for a quick sale for the profit of those who are in the deal and have inside information,” she explained.
Essentially, low appraisals enable a below-market sale, which then allows the buyer to quickly resell the property at a higher price and pocket the proceeds. Whether the appraiser is in on the fraud or is simply pressured into a low valuation, the end result is the same. House-flopping can be especially problematic when short-sales are involved. What should be a reasonable way out for underwater homeowners becomes prohibitively complicated when banks are unable to trust the appraiser to establish a property’s current value. Suspicious banks simply don’t agree to short sales.
One-third of all loans investigated in 2010 included some type of fraud relating to the appraisals or valuations, according to a new report by the LexisNexis Mortgage Asset Research Institute, which aggregates and analyses public data. That’s up from 23 percent in 2007. New York is especially bad, with 38 percent of loans originated in the state containing some form of appraisal misrepresentation. Only Florida is worse.