Overvalued!

"If you're not going to meet [their anticipated] value, they just walk away and find another appraisal," says Ms. Long of State Center, Iowa. "It goes on all the time."

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No one knows exactly how often appraisers tinker with reality. But reports suggest that they face enormous pressure to tweak their numbers. Some observers predict they'll face even more if the real estate market cools.

"I don't think that anyone can assume that the appraised value of their home is based on reality. Appraisal fraud is so common that homeowners need to assume the opposite," says research director David Callahan of Demos, a public policy center. Demos released a report about appraisal fraud in March, sparking intense discussion in the real estate press.

Homebuyers and sellers may barely give a second thought to appraisers. After all, appraisers are typically hired by mortgage brokers or lenders, and their reports often come out during the final loan-approval process, after both sides have settled on a price. And while buyers pay for appraisals, the typical fees - several hundred dollars - pale in comparison with all the other costs.

But a too-high or too-low appraisal can spell big trouble for buyers and lenders. Imagine, for example, that an appraiser artificially boosts the value of a $200,000 home to $230,000. The purchaser - or someone who's refinancing her home - "may decide to tap this artificial equity, and it's not really there," says Alan Hummel, an appraiser in Des Moines, Iowa, and former president of the Appraisal Institute. "When they turn around and try to sell the property, they're upside down. They can't sell it for what they owe against it."

The lender, often a bank, may find itself on the hook too: If it needs to foreclose on a default loan, it might not get the amount it lent out.

In a 2003 survey of 500 appraisers by a private firm, 55 percent of appraisers said they'd felt pressure to overstate values, according to the Demos report. The National Association of Realtors has warned the United States Senate about the prevalence of appraisal fraud, and thousands of appraisers have signed an online petition calling for reform.

Who's putting the pressure on appraisers? Appraisers blame mortgage brokers and lenders who are paid by commission. For them, just as for real estate agents, more expensive homes translate into more money.

"There are a certain number of mortgage brokers who will try to push appraisers on every single deal," says P. David Rij, an appraiser in San Diego. "They always want more than what the property is worth."

If home sales hit the skids, perhaps due to higher interest rates, some specialists expect appraisers to encounter more pressure, possibly leading to more fraud. "It's possible it will get worse," says Mr. Hummel.

Members of Congress have pushed for appraisal reform, but they've been unsuccessful. "There's been an absence of strong federal action to reduce appraisal fraud, even though there's a consensus among professionals in the field that this is a major problem," says Mr. Callahan of the Demos center. He isn't sure what changes will work. But a good start, he says, might be to create a "firewall" between brokers and appraisers to prevent conflicts of interest and undue influence. Perhaps, he says, appraisers could be assigned randomly.

For now, real-estate specialists say there are several ways to avoid appraisal fraud:

• Hire your own appraiser, especially if you're refinancing and don't want to borrow more than the home is worth. Don't let the cost deter you, says Hummel. "We're talking $500 to know what risk you have in this investment."

• Make sure your appraiser is state-certified, and look for membership in a professional appraiser organization, Hummel says. Special membership designations, like "senior residential appraiser," are a good sign too.

• Ask for references. "I would ask if they have banks or credit unions they're working for," Hummel says. "They'll typically hire the competent appraisers."

• Be wary of out-of-area appraisers who aren't familiar with your neighborhood. Go online and figure out the sale prices of homes nearby.

"I'd say most [appraisers] are trying to do the right thing," says Charles Drecksler, a Marietta, Ga., appraiser. "But you have those who are skirting the issue."

States scrutinize title insurance premiums

From coast to coast, the arcane world of title insurance is coming under intense scrutiny amid allegations of kickbacks and overpricing. One major title insurer has agreed to refund millions of dollars to customers nationwide, and several large insurers face investigations in several states including California, Florida, and Colorado.

The main charges involve alleged kickback schemes involving insurers, real estate brokers, lenders, and homebuilders. Questions remain about whether insurers charged too much for too little.

Title insurance is designed to protect homebuyers and lenders if a property is linked to past problems. If the title company misses a problem that's discovered later, the insurer provides reimbursement in the event of a loss. Problems title examiners search for include liens - essentially IOUs to the government for things like unpaid taxes or parking fines. Issues may also arise when a previous owner sells a house without a co-owner's permission, or someone makes a belated probate claim on the property. "These are things that happened in the past that should have been caught, but were not for one reason or another," says Lorri Ragan, spokeswoman for the American Land Title Association, which represents title insurers.

Depending on the size of a mortgage, title insurance can cost from a few hundred dollars to more than $1,400. In some states, especially on the West Coast, homesellers pay for the insurance, says Ms. Ragan. On the East Coast, it's more common for buyers to pick up the cost, she adds.

In recent years, title insurers have begun seeking reinsurance, essentially a form of insurance for insurers. While reinsurance helps insurers spread their risk, some investigators wondered if it was necessary in the title insurance industry, where the number of claims are low and premiums are high. Obtaining reinsurance when the risk of claims is low is "like paying someone $100,000 for an insurance policy when everyone knows there won't be a single claim," says Peter Rousmaniere, a consultant in Woodstock, Vt., who writes about title insurance.

Title insurers pay claims on only about 5 percent of their policies, adds Norman Williams, a spokesman for the California Department of Insurance. To make matters more suspicious, some reinsurance companies were in partnerships with lenders, brokers, and homebuilders. California investigators allege that they steered their customers to title insurers in return for half the premiums. "It was a quid pro quo, a kickback," Mr. Williams says.

Ragan of the title insurance trade group declined to comment about the accusations against several major title insurers. The companies have reportedly denied wrongdoing, but some have stopped their reinsurance operations, and one, First American Title Insurance, is paying $24 million in refunds to customers nationwide as part of a settlement with the state of Colorado.

A First American spokesman wasn't available for comment. But a company official told the Arizona Republic newspaper that the payments were "the right thing to do. We want to put it behind us and take this step."

Meanwhile, First American announced that it's instituting a standard rate for title insurance for refinancing in California. In a statement, the company said the rate should result in an average price drop of 30 percent.