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Gary Crabtree, president of Affiliated Appraisers in Bakersfield, Calif., documented the practice recently for the FBI and state financial and real estate regulators. The basic scenario, said Crabtree, involves realty agents who have listed houses that aren't selling. To move the properties, they entice buyers - or friends - to "submit an offer [for the home] that is $30,000 to $100,000 above the current list price," with the promise that they'll get substantial cash at closing.

The realty agents then amend the Multiple Listing Service asking price up to the artificially inflated offer price. A house that had been sitting for months with no takers at $450,000, for example, might be relisted by the agent at $525,000.

Then, working with a cooperative appraiser who has promised to "hit the number," and an unscrupulous mortgage broker who simply wants the commission, they "change the [loan] documentation to reflect the [artificially inflated] sales price." The loans typically are for 100 percent of the price of the house. The seller nets the price he or she had originally listed - $450,000 in this example - and the buyer gets a portion or all of the $75,000 inflated differential as cash at closing.

The wholesale lender purchasing the loan from the broker doesn't look hard at the appraisal, and funds the excessive loan amount none the wiser. Public records do not reflect the $75,000 slush in the transaction. The realty agents and loan brokers pocket their commissions; the buyer pockets the cash from the closing proceeds, makes loan payments for a while and then stops. Within months, the property is headed to foreclosure.

"It's total fraud, of course," said Crabtree, who is documenting 32 cases of alleged appraisal hanky-panky for state regulators and the FBI. "You can throw a dart at just about any large subprime lender, and something like this [scheme] is going to stick."

Yet some lenders are in denial that they've accepted grossly inflated appraisals. Crabtree said he contacted one major East Coast lender with the documented details of a "cash back at closing" scheme that he submitted to state regulators. So far, the lender has not even returned phone calls, according to Crabtree.

To compound the problem beyond the individual foreclosures themselves, the inflated selling prices of the homes involved remain "in the system" for use as "comparables" for valuations in the coming months. That $525,000 recorded closing price on the house that wasn't selling at $450,000, in other words, might now be available on the public records as a "comp" for overvaluing future sales.

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