When a borrower applies for a VA (Veterans Administration) or FHA (Federal Housing Administration) loan there is the possibility of having the borrowers loan costs covered by the loan.

For example:  If a house has a current market value of $200,000 and it sells for $200,000, and, the loan if for $200,000 (a 100% loan to value ratio), everything is quite clear.  However, if the borrower has $10,000 in loan costs that they would like to include in the loan, what often happens is the appraiser is asked to provide an appraisal with a value conclusion of $210,000.  But, didn’t I say the house had a current market value of $200,000?????   Yes, I did.

Very, very often, the appraiser who is asked to provide an appraisal with a value conclusion of $210,000 will do just that.  And, that is fraud.  Appraisers know that the lender will use that appraiser’s services much more often if the appraiser does what the lender wants.  Greed is a powerful force amongst humans.

What I would like to know is why doesn’t the lending industry come up with products that allow a $210,000 loan ($200,000 in collateral backed loan funds, plus the $10,000 in closing costs) and not ask the appraiser to commit the fraud.  It seems to me that such a lending product could be created.  It seems to me that calling everything by its correct name would be useful.  That is, calling the appraisal without fraud (the one at $200,000) an appraisal and the one at $210,000 a fraud.  And, doing the $210,000 loan as a value plus loan costs deal.

Is it the mortgage insurance side that would not allow this????

For thirty plus years I have been competing with the appraisers that will produce the $210,000 appraisal without hesitation.  I have never seen the need for me to do that.  I have acquired a client base that does not require such practices.  But, a large part of the residential mortgage lending industry, for decades, has been operating within that fraudulent practice.

It is difficult for the appraiser to refuse such requests for fraud when they know that there are other appraisers available to the lender who will commit the fraud willingly just to keep the business coming their way.  But, if the loan was able to be made based on an appraisal of $200,000, there would be no incentive for the fraud.

I say, cut out the incentive for fraud.

Perhaps the new regulations will help.  The current condition of the residential mortgage lending industry suggests that perhaps this is an important topic.

Are there loan products that provide the value plus loan cost funding I am referring to?  Let me know if you know.

Ralph Olsen, IFA appraiser

Pacific West Appraisal Services, Inc.

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