Today, U.S. Senators Bob Casey (D-PA) and Mel Martinez (R-FL) were joined by Congressman Paul Kanjorski (D-PA) and Congresswoman Judy Biggert (R-IL) to announce the introduction of the bipartisan Fair Value and Independent Appraisal Act in the Senate. The bill, which is substantially similar to a proposal advanced in the House by Congressman Kanjorski and Congresswoman Biggert, aims to combat mortgage fraud and prevent "house flipping schemes" by requiring a second independent appraisal for high-risk, high interest mortgages.
"A disturbing byproduct of the increased rates of foreclosures is unscrupulous individuals trying to profit from other people's losses," said Senator Casey. "Stopping these flipping schemes will help give confidence to those buying homes that appraisals on their new homes are accurate and won't come back to haunt them later."
"There are some truly bad actors out there posing as legitimate appraisers. The ripple effect has worsened the mortgage crisis," said Senator Martinez, former Secretary of the U.S. Department of Housing and Urban Development. "There continue to be too many unchecked components in the appraisal process. This will protect both consumers and lenders by improving oversight and putting more checks in place."
"Appraisers play a critical role in ensuring the integrity of the home buying process, and it is essential that we adopt policies which preserve their independence from pressure," said Congressman Kanjorski, the Chairman of the House Financial Services Capital Markets, Insurance, and Government Sponsored Enterprises Subcommittee. "Homebuyers, sellers, lenders, and investors depend upon appraisers to provide verification of the true value of homes. The bipartisan legislation introduced by Senators Casey and Martinez includes key elements of my legislation which already passed in the House as a part of the larger subprime lending bill."
"Gang-bangers in Chicago discovered it was easier to commit mortgage fraud than to sell drugs," said Biggert, a former real estate attorney. "They are devastating neighborhoods and further undermining the housing market. This bi-partisan bill will help restore integrity to the appraisal process and stop scammers from victimizing even more homeowners."
In a flipping scheme, an unscrupulous mortgage broker purchases a discounted property that is often out of foreclosure. An appraiser then fraudulently inflates the property's value and it is purchased by an unsuspecting homebuyer. Later, when the buyer realizes the fraud they can find that their home is worth significantly less than what they paid. These homeowners often end up in foreclosure, the lender is left with a worthless property, the community is devastated by abandoned homes and the scammers walk away with thousands of dollars in inflated fees.
The Casey-Martinez bill is aimed at protecting consumers and financial institutions by addressing shortcomings in the appraisal process. It would ensure an accurate appraisal by, among other things, prohibiting interference with an independent appraisal and requiring lenders to obtain a second, independent appraisal before extending credit on certain properties. This would be done at no cost to the consumer, instead being paid for by the lender. The bill would also prohibit dishonest brokers and appraisers from artificially inflating the value of properties, while retaining the ability of legitimate investors to improve properties for resale. The Fair Value and Independent Appraisal Act would:
1) Require a physical property visit and a second independent appraisal for high-interest, high-risk mortgages for properties sold at a higher price within 180 days of its last purchase;
2) Ensure appraiser independence by prohibiting interested parties from improperly influencing or attempting to improperly influence a property appraisal;
3) Ensure that appraisers are qualified and follow certain minimum standards;
4) Require a mortgage originator to make available to the credit applicant all appraisal valuation reports no later than three days prior to the transaction closing date;
5) Sets increased civil penalties for violating these provisions.
Senator Casey and Senator Martinez introduced a similar proposal as an amendment to the Truth in Lending Act to protect all homebuyers.
The Casey-Martinez bill contains many of the appraisal improvement provisions found in H.R. 3837, the Escrow, Appraisal, and Mortgage Servicing Improvements Act, by Chairman Kanjorski and Congresswoman Biggert, Ranking Member of the Financial Services Financial Institutions and Consumer Credit Subcommittee. Chairman Kanjorski has been the leading advocate in Congress for appraisal reform for many years. In November, the U.S. House of Representatives passed H.R. 3915, the Mortgage Reform and Anti-Predatory Lending Act. With the help of Congresswoman Biggert, H.R. 3915 incorporated H.R. 3837 as an amendment on a unanimous voice vote. The similar appraisal reforms found in H.R. 3837 and the Casey-Martinez bill also respond to the mortgage lending problems that occurred several years ago in the Poconos, part of Chairman Kanjorski's Congressional District.