For anyone who assumed that the toughened real-estate appraisal rules imposed on the mortgage market last year would mean less monkey business in home valuations, here’s a shocker: Fraudulent appraisals soared in 2009, according to a lending-industry study released this week, and they now represent the fastest-growing form of home loan fraud.

The Mortgage Asset Research Institute found that, while overall incidences of loan fraud rose last year by 7 percent, the share of frauds involving property valuations increased 50 percent. MARI, a service of data company LexisNexis, collects information from more than 600 wholesale mortgage lenders who account for the vast bulk of loans originated in the country. Once a year, MARI reports its findings on fraud trends to the Mortgage Bankers Association.

Although the biggest source of mortgage fraud last year was intentional misinformation submitted by borrowers on their applications — bogus Social Security numbers or data on income, employment and assets — distorted valuations came in second. In previous annual reports, appraisal problems were far less prominent. As recently as 2006, just 16 percent of all mortgage fraud cases involved skewed property valuations. By 2008, 22 percent of reported fraud involved bad appraisals, whereas last year, that number rose to 33 percent, according to MARI.

The surge in appraisal shenanigans came despite the nationwide imposition of restrictions last year that were designed to limit interference in real estate valuations and to improve their accuracy. As of May 1, 2009, mortgage giants Fannie Mae and Freddie Mac prohibited loan officers and brokers from selecting appraisers, and effectively encouraged lenders to use “appraisal management companies” that assign appraisers from their own networks nationwide.

The new rules, known as the , stoked immediate controversy among mortgage brokers, appraisers, home builders and real-estate brokers. Critics charged that because management companies pay rock-bottom compensation to appraisers — often as little as $175 for an assignment that previously made them $350 to $450 — the new rules encouraged the use of inexperienced people, who frequently were not familiar with local market conditions.

Critics also charged that management companies forced appraisers to turn in their work within unrealistically short deadlines, even if they had to cut corners on quality and thoroughness.

Citing widespread evidence submitted by members about lowball and incompetent appraisals, the National Association of Realtors waged a lobbying campaign to persuade Congress to put the rules imposed by Fannie and Freddie on ice for 18 months. Congress has not acted on the matter.

Bill Garber, government affairs director for the Appraisal Institute, the largest trade group representing the industry, said the surge in bad appraisals last year “demonstrates what happens when lenders hire appraisers solely based on low prices and quick turnaround times.”

“This should send a loud signal to lenders to hire ethical and competent appraisers” if they want to avoid fraud in their loans, Garber said.

Freddie Mac spokesman Brad German offered a different view. Because the MARI study made no specific reference to the rule changes by Freddie and Fannie or to the use of appraisal-management companies, “we see no connection between [the code] and appraisal fraud.” Fannie Mae officials declined to comment.

Jeff Schurman, executive director of the Title/Appraisal Vendor Management Association, which represents the appraisal management industry, had no immediate comment on the findings, pending a review of the data.

The fraud report covered every major type of valuation method lenders use to underwrite mortgages, including traditional appraisals, electronic valuations and broker price opinions supplied by real estate agents, among others.

The biggest game fraudsters play: messing with or fabricating the information on “comparables” that form the basis of most appraisal reports. Rather than selecting nearby properties with broadly similar physical characteristics and recently recorded selling prices, bad appraisers typically come up with houses and characteristics that better fit their purposes.

Sometimes, they just left out the negatives. A hypothetical example: The property they were valuing was located near a busy and noisy highway or railroad tracks that would normally depress its value significantly. No problem. Poof — the appraisal report could omit those issues.

What did fabrications like these achieve? Primarily custom-tailored property valuations that were often off-base by 15 to 30 percent or more and allowed the sales contract and loan application to be approved. This, in turn, left lenders holding the bag when the mortgage went sour, raising losses and making the national foreclosure crisis even worse.

Kenneth Harney, WSJ

MICHAEL CASSADEI, age 53, of Schenectady and Galway, New York, was arrested December 14, 2002 following the unsealing of a five-count indictment by a federal grand jury in Albany.  The arraignment took place also today on the charges before United States Magistrate Judge David R. Homer in Albany. Cassadei was released with conditions.

The indictment alleges that defendant Cassadei, doing business as AAA Allstate Appraisal Services, violated Title 18, of the United States Code, Sections 1344(1), (2) and 2 by participating with others in a complex mortgage fraud property-flipping scheme by making and causing to be made materially false and fraudulent misrepresentations to a federally-insured financial institution.

By using his own appraisal business to generate misleading appraisals in support of the residential properties, Cassadei sold through nominees certain loan applications, down payments, seller-held second mortgages, and HUD-1 forms, and , and through whom he obtained the bulk of the proceeds of the resulting mortgage loans. All of the properties, which were located in Albany and Schenectady, went into foreclosure and caused significant losses to the financial institutions which held the mortgages.

The indictment further charges that Cassadei tampered with a witness by instructing the witness to lie to a federal agent who participated in the investigation. (An indictment is merely an accusation and the defendant is presumed innocent unless and until proven guilty.)

If convicted, Cassadei faces a maximum sentence of up to thirty years of imprisonment, a period of up to five years of supervised release, and fines of up to one million dollars on each of the four counts of bank fraud in the indictment, and up to twenty years of imprisonment, a period of up to five years of supervised release, and a fine of up to $250,000 on the witness tampering charge.

The federal and state agencies involved in this investigation include The case is being investigated by the Office of the Inspector General of the United States Department of Housing and Urban Development, the Albany Division of the Federal Bureau of Investigation, the Internal Revenue Service, Criminal Investigation Division, the United States Postal Inspection Service, the New York State Police Special Investigations Unit, and the New York State Banking Commission.

The case is being prosecuted Assistant United States Attorney Joshua S. Vinciguerra.