Appraisals not Assessments Should Determine Losses in Mortgage Fraud Cases

An Appraisal Institute official told the U.S. Sentencing Commission that appraisals rather than tax assessments should be the standard for computing losses in mortgage fraud cases.  Institute President Sara W. Stephens told Board members that they should adopt a special rule where properties have not been disposed of by the time of sentencing that would determine the fair market value using real estate appraisals prepared in accordance with the Uniform Standards of Professional Appraisal Practice.

The Dodd-Frank Act requires the Commission to review and, if appropriate, amend federal sentencing guidelines applicable to mortgage and financial institution fraud cases and to consider whether the guidelines appropriately account for the potential and actual harm to the public and financial markets from those offenses.  Under this directive the Commission has proposed amendments that require using tax assessments to determine the fair market value of properties when the property has not been sold.

Stephens told the Commission that conditions and quality inspections are necessary as part of a credible and thorough valuation of a property and tax assessments do not include such inspections.  She also noted that tax assessments rely on public records which can be inaccurate and reduce the reliability of the valuation.  Reassessments also vary widely by jurisdiction and some areas rely on assessments that are decades old.  "In these cases," Stephens said, "if a tax assessment is used in the calculation of a mortgage fraud sentence, it is likely to overstate the loss to the bank, and potentially inflate the sentence of someone convicted of mortgage fraud.  Fairness requires use of a real estate appraisal."

The Appraisal Institute and the American Society of Farm Managers and Rural Appraisers both oppose the proposed amendments.  Stephens said the two organizations recommend that the Commission establish a special rule relating to the qualifications of real estate appraisers including an earned designation from a nationally recognized professional appraisal association "based on demonstrated competency that requires approved classroom training in appraisal practice, experience requirements, and preparation of a demonstration appraisal report or appraisal review report or a comprehensive qualifying examination."