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Data analysis technology and appraisal fraud. (Features).

Article Excerpt
Abstract

Real estate fraud normally relies on a misleading appraisal, whether by intent or incompetence. An appraisal fraud requires an initiator, a compliant appraiser, and an appraisal report. Most current fraud cases involve 2-4 unit residential properties that are reported on one of the several standard forms. Also, narrative reports can be used to mislead the reader. In fact, appraisals for small non-residential and 2-4 unit residential properties may be the most susceptible to fraud.

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Real estate fraud normally relies on a misleading appraisal, whether by intent or incompetence. An appraisal fraud requires an initiator, a compliant appraiser, and an appraisal report. Most current fraud cases involve 2-4 unit residential properties that are reported on one of the several standard forms. Also, narrative reports can be used to mislead the reader. In fact, appraisals for small non-residential properties and 2-4 unit residential properties may be the most susceptible to fraud.

Many appraisers performing fraudulent work are newly licensed and don't have traditional internship experience. They are not professionally trained; they do not subscribe to the high standards of the Code of Professional Ethics of the Appraisal Institute, nor any in-depth understanding of USPAP. Being drawn into the business in times of active markets and low interest rate refinancing activity, they are often the least competent. With subsequent downturns or higher rates, they become the most susceptible to the influence of the fraud initiator.

Federally mandated state licensing laws have unknowingly lowered the bar to this lowest common denominator, while creating a false sense of security to the public. An accommodating and impatient loan industry has fought for even greater laxity to reduce loan turnaround time and to minimize transaction costs. During an economic downturn, borrowers' greater inability to repay can exacerbate the problem. Growing defaults over thin equities (allowed by permissive policies) will aggravate potential losses from fraud.

Inadvertently, technology has become a culprit. Traditional appraisal practices and procedures, established many years ago, were designed to accommodate sparse data that had to be nurtured, developed, and refined prior to use. Three comparable properties on a grid and an appraiser's good intention, reputation, and experience were paramount. Weeding out other sales was a justified practice and kept the product competitive.

An abundance of sales data exists today that can help create a better analysis or it can aid deception. Unfortunately, available technology has outpaced appraisal practices. The combination of data analysis technology and outdated appraisal practices, sustained by rigid forms, make deceptive appraisals easier to concoct.

Misleading Form Reports

Form reports, when properly used and understood, would prevent most misrepresentation. Ironically, its conciseness, in some cases, is also its weakness. It is easier to place inaccurate information in a box, or to just leave the box empty. These are errors (or misrepresentations) of commission and omission. Another method of misrepresentation is generalization. Generalization is information that would tend to be true for most properties in an area but does not apply to a subject property.

The boxes on these form reports contain a variety of information. Many seemingly subjective variables of property value can be made objective but are not. Each box is similar in size; therefore, they appear to be similar in importance, making the "box" mentality a convenient tool for deception.

Misrepresentation

Misinformation (Commission)

Certain elements of factual data are easily discovered through a normal technical desk review by doing a comparison of data in the report against source data. For example, when using a comparable that's distant from the subject, the unreasonable distance can be understated or generalized. "Comparable 3, although over one mile distant, is used because it is similar...