Last week we wrote about how mortgage fraud is reported to be a prime mover behind artificially inflated property values in some local, fraud-prone areas. You agreed. We've never received more e-mail from our e-newsletter than we did last week, and far too many of you had fraud "war stories."

One appraiser wrote us:

"I was recently requested to complete an FHA appraisal on a home that had been flipped. A local [real estate agent] purchased the home for $7,500 had her maintenance crew put a poor paint job on the home then sold to three elderly friends living on a fixed income for $33,000. The loan officer agreed with the [agent] to use an FHA appraiser from [another market] instead of using a local FHA appraiser. The appraiser completes the appraisal for $39,000 with few or no requirements. It was a complete joke.

"The loan is completed and closed. The FHA underwriters got a hold of it and said, 'banker/loan officer, this loan looks like the home was flipped. Either get the receipts for all the repairs that were made on the home or get another appraisal from a FHA qualified appraiser.' We all knew there were no repair receipts.

"I was asked to complete a new FHA appraisal. It did not take long for me to understand how bad they did these elderly buyers. At my inspection, one of the older ladies nearly broke down crying as she told me her toilets did not work very well. The smell of sewage was making them sick. I investigated to find half the crawl space in a foot of raw sewage.

"When they moved into the home, she told me the renter had stripped the home of ceiling fans and light fixtures. She, not knowing what to do or what her legal rights were spent $500-1,000 replacing lights and making repairs on this FHA home.

"I rejected the home and explained the problems to the loan officer who begged me to do this favor for her. I know the second appraiser who was asked to do her this favor, he said no thank you. Finally, the third FHA appraiser completed an appraisal for the $33,000 getting the loan officer off the hook.

"This client used to be my biggest client but not any more. But my conscience is clear. I did the right thing."

Unquestionably, yes, you did.

We got far too many e-mails like this. Most were horror stories like the one above, involving one, single property whose value had been inflated (or attempted to be inflated). But the larger point of last week's piece bears repeating: The property above goes into the MLS and sales records as a $33,000 "comp." Without extraordinary due diligence on the part of an appraiser, an appraisal of the house down the street in comparable condition with comparable square footage and features will use a $33,000 sales price to justify the next value.

Appraisers are the front line defense against this type of unconscionable fraud, as our e-mailer demonstrates. Unfortunately, loan officers can cherry pick till they get a malleable appraiser, as the story also illustrates.

Another reader wrote us that in his MSA, "95 percent of the appraisals go to five percent of the appraisers." And to hear him tell it, it's not always the loan officer. "[Real estate agent] makes sale, then he/she tells loan officer to use their good old boy appraiser. As a result, the loan can't fail and borrower gets stiffed.

"This is what loan officers are telling me. They say their hands are tied. If they do not use the [agent's] appraiser then no more loans."

Lest we forget that that five percent of appraisers — and the third FHA appraiser in the first e-mail above — are also part of the problem, another e-mailer told us: "Let's not kid ourselves. Appraisers via lender pressure are a large part of the problem. There are too many of us and certification is the worst thing that ever happened to this industry. There are many, many appraisers who are basically untrained, and are hired because of one attribute that they possess, i.e., their ability to magically meet or exceed the 'estimated value' written on the appraisal order by the loan officer."

We wish we could wind this article up with the magic solution to the problem. (It would be even better if we could sell you software or technology that would eliminate the problem!) We know it's not AVMs or alternatives to full appraisals. An AVM on a home down the street from the "$33,000" FHA property above will factor in proximity, square footage, acreage, frontage and as-built features and say the next run-down, unfit for living in shack is also worth $33,000. An "AVM plus inspection" — which isn't, it's more of an "AVM plus a quick look to make sure the house is actually there" — won't catch it, either. The place was painted, right?

Thanks to everyone who wrote in, and also — especially — every appraiser who dedicates their working hours to fighting this nonsense. Without the 95 percent of appraisers who take their professional responsibilities seriously, every one of us would be at risk of being defrauded out of tens of thousands of dollars in a mortgage fraud scheme.

The Real Estate Commission and Board of Real Estate Appraisers of the state of Colorado issued a joint position statement on seller assisted down payments last summer, "to address mutual concerns" among appraisers and real estate brokers about the inflationary effect on property values. As far as we know, it's one of a kind; if you're aware of a similar policy statement in your state, please write the editor.

"Accurate sales data is crucial for appraisals and comparative market analysis (CMA) work products," the statement said. "Both appraisers and real estate brokers can effectively work together to maintain the safeguards that accurate sold data affords." (A CMA is an opinion on what a property would be likely to sell for by a real estate agent or broker familiar with the sales activity in the neighborhood.)

"This problem is particularly evident when appraisers fail to report, analyze and adjust for financing and seller concessions in their appraisals. Concessions should not be mistakenly viewed by appraisers as additional value to the property. To do so would result in the lender making a loan partially secured by the creative financing of the sale," it said.

It recommends that appraisers adhere to the following standards:

• Research and confirm subject property and comparable sales, including obtaining details of the contract and financing terms.
• Research and confirm all relevant information about a transaction, including determination of seller paid costs.
• Utilize all available data search tools, including the listing history and seller contributions features of multiple listing services.
• Make appropriate adjustments to comparables with seller contributions and inducements to purchase when developing work products.
• Comply with the applicable provisions of the Ethics Rule and Standards 1 and 2 of the Uniform Standards of Professional Appraisal Practice (USPAP).
• Comply with any supplemental standards required by agencies such as the Federal Housing Administration.

Good advice in any market.

"Seller assisted down payments" and "seller concessions" are terms often used interchangeably, and they can lead to the same valuation problems when examining comps. But concessions can be much broader. Concessions can include the seller paying the buyer's closing costs. On a $100,000 sale, if the seller agrees to pay $4,000 in buyer closing costs, the "sale price" is really $96,000. But it goes into the MLS and sales records as $100,000. Hardly worth worrying about on its own, until you compound it by dozens upon dozens of sales in a neighborhood over a period of a few years. Sellers may agree to pay buyers' discount points as well; this is recorded as part of the sales price.

The Appraisal Institute warned that "sales contracts can be written to include these concessions, resulting in an inflated sale price. The problem occurs when appraisers, intentionally, accidentally or under pressure from clients or other third parties, agree to support the contract price and issue a fraudulent or misleading appraisal report.

"Unfortunately, if these concessions are not accounted for, a cycle of overvaluation may be created which has the capability of compounding itself."