Many of us have heard of, or will soon find out about, the now infamous Baltimore story. One borrower bought multiple houses on the same block, renovated one unit and copied its photos to make the others look renovated on paper. He changed appraisal terms statements, submitted identical photos to multiple lenders and navigated a maze of loans that started as 12-month bridge products and turned into 30-year loans. The apparent fraud amounted to approximately $200 million. He paid enough in the short term to properly transfer the loans. Then the defaults entered the DSCR world, where lenders had to solve them.
That story exposes the Achilles heel of modern valuation, when people think they can game with images and PDFs instead of dealing with actual properties. Virtual tours and Matterport models – a 3D digital twin of a physical space, created using Matterport technology – are useful, but nothing replaces a trained appraiser walking through a property.
Boots on the ground are important. Phones are still ringing. A simple conversation with a borrower or the investor often prevents fraud nightmares. Yet in too many lending processes, no one speaks to the borrower, and they only do so via text message. That convenience is exactly what fraudsters take advantage of.
The double-edged sword of AI
For every legitimate, efficiency-enhancing advance, someone builds a weaponized version.
Voice cloning has already evolved from a clever demo to a wire fraud tool. There are documented cases where a voice virtually identical to that of a borrower or a manager convinced someone to divert funds. That’s not science fiction; it’s a real loss vector that requires stronger authentication protocols than a simple “it sounded like Joe.”
At the same time, AI isn’t the bad guy in every scene. It is also one of the best options for protecting the sector. The same pattern recognition and synthesis capabilities that produce compelling fake audio can also analyze thousands of appraisal reports and virtual tour recordings in seconds. Processes that once seemed futuristic now make it possible to merge multiple reports, extract and compare data, and flag inconsistencies that would escape manual review.
This is where the industry needs to be aggressive, not timid. Valuation management companies face a choice: remain the type of broker that simply turns orders or build real capabilities. Only a handful have invested in the technology talent to develop scalable solutions. This is important because strong systems can help detect photo reuse, mismatched state annotations, and geographic anomalies that indicate coordinated fraud.
Saying hello goes a long way
Human contact remains essential. A quick phone or video call can reveal credibility issues that no PDF will ever show. If a lender never speaks to a borrower, that practice needs to change. Private lenders especially need rating products designed for use by investors and partners who understand them.
Good inspection protocols are just as important. Virtual tools are great, but they must be accompanied by local expertise. Sending appraisers on site when necessary, randomizing validations, and adding a layer of local review for clustered acquisitions are all safeguards. When several houses in one block are suddenly renovated, it should be treated as a warning sign and not as an opportunity to make loans faster.
AI: trap or protection?
Adopting AI should go both ways: embrace it where it helps and defend against it where it harms. Machine learning can be used to perform duplicate ratings, detect reused footage, and detect textual inconsistencies. At the same time, lenders should improve wire transfer safeguards and multi-factor authentication processes to protect against voice cloning and social engineering schemes. The single check email authorization model is outdated.
Appraisal needs also vary by loan type, and that distinction is critical. An appraisal for a Fannie Mae loan is not the same as that for a debt service coverage ratio loan or a housing transition loan. Knowing those differences is not optional; it is risk management.
Market pressure adds fuel
Market realities cannot be ignored. If rates fall and demand rises, affordability will worsen. More people are going to rent. Investors will provide that rental housing, and private loans will fuel that growth. More investors means more loans and more opportunities for fraud.
The future should include better data, smarter cross-checks and products designed for investor realities. It should also include virtual tours that improve both speed and verification, and AMCs investing in technology rather than just passing on orders.
It should also include a healthy dose of skepticism. When a shiny new technology promises miracles, ask the tough questions. Who built it? Who tests it? Who benefits if it fails? If a process can be gamed by swapping a few images or cloning a voice, it must change.
Act faster than fraud
Fraud will evolve. That is inevitable. The better question is whether the industry will evolve faster. The tools and talent are already there. The challenge is to use them in ways that do more than just cut costs, to use them to protect the capital and people who depend on sensible valuations.
The practical message is simple: build relationships, invest in technology with real safeguards, keep appraisers on site when needed, and when someone offers a paper trail that seems too good to be true, pick up the phone. It will save time, money and regret.
Mike Tedesco is Vice President of Private Lending at Class Valuation.
This column does not necessarily reflect the opinion of HousingWire’s editorial staff and its owners. To contact the editor responsible for this piece: [email protected].
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