Ohio Attorney General, Marc Dann filed suit against 10 lenders for violating the state's new predatory-lending law. The lawsuit claims that the lenders pressured appraisers to inflate the value of homes to allow them to close the loans.
(PHOTO: Ohio Attorney General, Marc Dann)
"Predatory lending is driving Ohio's shameful home foreclosure rate," Dann said in a statement. "Today's crackdown on appraisal fraud will help protect consumers and move us one step closer to driving unscrupulous lenders out of our communities."
Ohio has an incredibly high rate of foreclosures and subprime lending has been particularly problematic. The new law and the action taken by Dann may just be a turning point for the state. The suit asks for permanent injunctions to prevent the companies from engaging in such practices, civil penalties of $25,000 each, and reimbursement to consumers.
Personally, I have always found the appraisal mechanism to be somewhat flawed. When the lenders order the appraisals, they provide the appraiser with the loan amount, and the sales price if it is a sale transaction. Ummm... can anyone explain why the appraiser would need that information? By providing that information to the appraiser, the lender is providing a target amount that the appraiser is supposed to justify (wink, wink, nod, nod).
Why not just provide the owner's name and address, and ask for an "honest" appraisal? I don't mean to imply that a reputable appraiser cannot provide an honest appraisal when they are provided with the extra information, but why leave any doubt? We all know that in just about every sale transaction, the appraisal comes back for exactly the sales price. On refinance transactions, the vast majority of the appraisals come back for just enough to justify the loan. Is that a coincidence?
When the appraisals are based on the sales price, and the appraiser's job is just to "look harder" for comps to justify it, we are letting the Realtors and lenders exercise too much control over the inflation of home values. The more appraisals that are "tweaked," the more comps there are to justify the next one. Then we end up where we are now... with homes over-valued and depreciating. Home prices have reached the point where the appraisals just can't be justified. Not to mention that now that appraisers are starting to get "busted" for some of their work, others are a bit more gun-shy to stretch the values.
The appraisal is there to protect the lender. They should really want an honest, unbiased appraisal. My suggestion is to stop providing the loan amount and sales price and see what happens. Let the appraisers do their job and report the actual value... THEN make the decision to approve or disapprove the loan.
Robert A. Franco
SOURCE OF TITLE