Research Highlights Importance of Ameriquest Settlement Exposing Widespread Appraisal Fraud, Predatory Lending Practices

Release Date: 
February 3, 2006

New York, NY — Today Demos, a national public policy organization that conducts research on economic security issues in the United States, re-released its 2005 reports Home Insecurity: How Widespread Appraisal Fraud Puts Homeowners At Risk and A House of Cards: Refinancing The American Dream in response to the Ameriquest Mortgage Company's announcement this week that it will refund consumers targeted by its predatory lending practices.

Home Insecurity reveals that mortgage appraisal fraud is found across the U.S. The reports' key findings include:

* Serious conflicts of interest pervade the mortgage industry, stemming largely from the refinancing craze. Lenders, brokers and real estate agents have an increased incentive to inflate the value of residential properties.

* Appraisal fraud often encourages homeowners to borrow more money than their homes are worth, putting them at risk of not being able to sell for a high enough price to pay off their mortgage.

* Up to half of all property appraisers have reported feeling pressure from lenders or brokers to overstate property values. Appraisers who have not complied with strong-arm tactics report not being paid for work and being blacklisted.
* The inflation of home prices through appraisal fraud may be helping to push real estate prices up to unsustainable levels and contributing to a housing "bubble."
* Predatory lending targeting minority and low-income aspiring homeowners often involves appraisal fraud. Developers collude with dishonest appraisers in the aggressive marketing of new homes offered at inflated prices.
* Government oversight of the appraisal process is woefully inadequate. Key participants in the mortgage industry are unregulated in many states and oversight of lending institutions is weak. State boards that license appraisers and investigate reports of fraud often lack enough resources to enforce existing laws.

Key findings from A House of Cards include:

* Households cashed out $333 billion worth of equity from homes between 2001 and 2003, the beginning of the refinancing boom--levels three times higher than any period since Freddie Mac started tracking the data in 1993.
* A majority of households that refinanced between 2001 and 2003 used cash equity from their homes to cover living expenses and pay down credit card debt, further eroding their home's cash value, which many families rely on for economic security.
* Between 1973 and 2004, homeowner's equity actually fell — from 68.3 percent to 55 percent. In other words, Americans own less of their homes today than they did in the 1970s and early 1980s.
* In 2002, the financial obligations ratio — the percentage of monthly income to the amount needed to manage monthly debt payments--reached 18.56 percent, a single year record since data started being collected in 1980.
* As the Federal Reserve continues to raise interest rates, a mortgaged family with an adjustable rate mortgage will experience a significant increase in their monthly mortgage payments. The combination of higher mortgage payments coupled with rising costs of basic living expenses represents a growing financial threat.
* The rise of appraisal fraud fueled inflated home prices over the last several years. Even though it is underreported, appraisal fraud was the fastest type of mortgage fraud reported by major lenders in 2000, and could leave many homeowners owing much more than the true market value of their home.
* Homeowners who reduced their home's equity during the refinance boom could suffer devastating effects if home prices begin to fall. As a result, a homeowner could owe more on their mortgage than the house is worth--known in the industry as being "upside down" in a house.

Home Insecurity and A House of Cards also offer real-world policy solutions to address the growing threat to the security of America's homeowners.

To download a copy of either report, or for more information, visit archive.demos.org.

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