WHILE IT'S DIFFICULT to prove in a housing market with the extreme home-price appreciation seen during the last several years, appraisal inflation is adding to home buyers' and mortgage lenders' risk, according to industry watchers.

Most cases of appraisal inflation happen as a result of peer pressure, in which appraisers feel the need to over-value a property to hit the home price desired by sellers, lenders, and real estate agents, says William Apgar, former federal housing commissioner and now a senior scholar at Harvard University's Joint Center for Housing Studies.

In a 2003 survey conducted by October Research Corp., a real estate research firm, about 55 percent of appraisers admitted to feeling pressure to overstate a property's value. Of those, almost 40 percent said they had changed an appraisal as a result.

Both buyers and banks stand to lose from inflated appraisals. When homeowners try to sell their homes, they can owe more than the house is worth. The current pace of price appreciation can bail out inflated appraisals, but they leave borrowers with more mortgage and less equity than they should have, Apgar says. Banks that hold mortgages on overvalued homes may find themselves undercapitalized.

Bank regulators in March issued new appraisal guidelines, instructing lenders to encourage independent appraisals by not allowing anyone in a position to profit from loan volume to order appraisals.

Apgar and others, including the Appraisal Institute, an association of 18,000 appraisers, think that Congress, too, should work to eliminate conflicts of interest in the appraisal process. Enhanced appraisal standards have been proposed by Ohio Rep. Robert Ney in his Responsible Lending Act; as of press time, the bill remained before a House subcommittee.

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