Demos (with a slash over the e which I could not seem to replicate) is a research institute based in New York City. Billed as a "network for ideas and action" they publish, on a regular basis, tracts and commentaries on a widely divergent series of topics - economic, political, and "other." Among its more recent publications are Households at Risk - the Bankruptcy "Reform" Bill and its Impact on American Families; Making Voting Easier - Election Day Registration in New York; and Swing & Miss - The Linkage Between Steroids in Baseball and the Rising Inequality in Our-Winner-Take-All Society.


Well, simply because this article is about to quote them in great detail, and there are think tanks and there are think tanks, and we are all as suspicious as can be about everyone, and we often doubt institutional agendas, and, well, just because! Anyway, if you want to check them out - particularly their Board of Directors, which is usually a good indication of agendas and which, in this case, is a pretty heterogeneous bunch of people - you can do so at

Credentials established. Let's now get into one of their more recent reports: Home Insecurity: How Widespread Appraisal Fraud Puts Homeowners at Risk. This report, written by David Callahan, is, if true, a pretty scary look at what may be a house of cards built by lenders, real estate agents, and consumers, aided and abetted willingly or not by appraisers and state and federal regulators.

The Demos report, issued late last month, is pretty stunning. First of all, its assessment of "Assets at Risk"

The report states that homeowners now spend a higher percentage of their income on mortgages and other debt than ever before, resulting in a debt-to income ratio which has risen over the last five years to record levels. Under this growing financial pressure, homeowners have increasingly turned to the equity in their homes to consolidate debt, pulling out a "record $458 billion" from equity between 2001 and 2004. While homeownership today stands at a record 69 percent, "Americans actually own less of their homes than they did thirty years ago." Equity, the report continues "fell to 55 percent in 2004, down from 68 percent in the early 1970s."

"Overall, the net effect of the surging real estate that the financial well-being of American households hinges...on the continued strength of property values. And...many Americans have taken on mortgages that exceed the true market value of their homes, thanks to appraisal fraud."

This type of fraud, simply stated, is commissioning, demanding, or falsifying an appraisal that justifies a value that may or may not be an accurate indication of that value.

The report makes a stunningly simple explanation of the reasons behind mortgage fraud: that the financial incentives of those involved in the mortgage loan process often work against the very idea of securing an honest appraisal.

  • Lenders or brokers are generally paid a commission based on the value of the mortgage and thus their livelihood depends on ensuring that the loan will close without any problems;

  • The surge in refinancing has increased the incentives for dishonesty - i.e. a homeowner who is refinancing to pay off other debt will need the new loan to come in at a certain level in order to pay off that debt. If the non-mortgage obligations cannot be reduced below the lender's required debt to income level, the loan will not get past the underwriters. Thus it becomes a circular problem; the lender's own rules contribute to the necessity to hit a dollar figure with the appraisal.

  • Those persons who originate loans are increasingly less likely to care if their loans default. In the old days banks originated loans and kept and serviced them until the debt was retired. Today most loans are quickly sold into the secondary market where only Freddie, Fannie, FHA, or the VA knows who will ultimately pay the price when a property that is foreclosed turns out to be worth far less than the appraisal in the loan file said it was.

  • Appraisers' livelihoods are dependent on a flow of work from lenders and brokers. An appraiser who does not bring in the desired value on properties may soon find him or herself losing clients and income.

  • Consumers are also to blame because they often look only at the short term. A prospective or current homeowner wants to buy the house or wants the cash out and fails to think ahead to the day that he may want to sell or refinance and find that he is "upside-down" with a mortgage that exceeds the value of his home.

Author Callahan references the 2003 National Appraisal Survey conducted by October Research which polled 500 appraisers in 44 states. 55% of the appraisers reported that they had been pressured to overstate property values. 25 percent of appraisers reported that they had experienced such pressure in at least half of the appraisals they were commissioned to perform. The report also cites data collected from 2000 to 2003 by the Mortgage Asset Research Institute (MARI) which indicated that incidents of appraisal fraud rose from 10 percent of all mortgage fraud in 2000 to 38 percent in 2003. MARI also was quoted as stating that the actual incidence of appraisal fraud was likely "higher than the data indicated"

But does it matter if property values are inflated? With skyrocketing prices, certainly real values will quickly catch up with anything an appraiser would dare put in his report, right?

And if it does matter, what can be done about it. Surely state and federal regulators must have an interest in what is happening in this sector of the housing industry.

We will talk about what Demos has to say about this and other appraisal related topics later this week.