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Posts Tagged ‘Mortgage Fraud’

[Hicks on Sticks] End Of Year Musings

January 14, 2007 | 9:37 am |

Butch Hicks is an appraisal veteran that hails from Northern Virginia. I first met him when he was the President of RAC (Relocation Appraisers & Consultants) and was struck by how he got straight to the point, and peppered it with a southern drawl. He is a leader in the appraisal industry and has an affinity for crunching housing market data like I do. In this post for his Hicks on Sticks column in Soapbox, Butch recaps the appraisal world for the year just completed.
…Jonathan Miller

As the end of the year draws nigh, I find myself (as I always do at this time of year) reflecting on things that have impacted (or might) that little world that I find myself in (the residential realty market of Northern Virginia) on a daily basis (like all self-employed folks, I never really escape thoughts of my ‘work’ life). As I reflect back on the year that was 2006, a few topics, likely to impact 2007, spring to the front of my mind.

Real Estate Bubble

The bursting of the real estate bubble, long predicted in some quarters, must have turned into a slow leak in many markets as there simply is little in the way of press attention to that subject. But an attempt to convince folks in my local market (Northern Virginia) that the bubble never burst would probably fall on deaf ears. Since the late spring of 2005 values in some submarkets have fallen almost 30%, not an insignificant number. Admittedly, I’m not sure that what ‘number’ would constitute a burst bubble and I can’t recall ever having seen one defined in all the 2005 press clippings I reviewed regarding such, but 30% is not an insignificant one. In many local submarkets, anyone who bought in 2005 with a high loan to balance ratio is now ‘upside down’ (a term used to describe those situations in which current value is exceeded by the existing mortgage balance). Perhaps your market just lost a little air and the burst bubble was just a slow fizz; but as in politics, I suppose, all is local.

The Coming Impact of Risky Mortgages

The Center for Responsible Lending (a nonprofit group that opposes predatory lending) in Durham, NC recently released a report that indicated the Washington region is likely to be hit hard by increasing foreclosure rates of homeowners with high-interest mortgages. Even the National Association of Realtors chimed in with a supporting opinion, when Pat Vredevoogd Combs, president of that organization, said that “Far too many families are at risk of losing their homes to foreclosure.”

In recent years, high-rate lending has grown rapidly, and this type of lending has been credited, in some quarters, with helping to boost homeownership levels to near record levels. In 1999, about 5% of mortgage loans were described as high-interest but by the end of 2006 that number had quadrupled to about 20% (one of five). Analyzing about six million subprime mortgages made from 1998-2004, the Center for Responsible Lending concluded that should the real estate market remain weak, foreclosure rates in Northern Virginia could more than double for loans made in 2006.

The Center for Responsible Lending report came on the heels of a quarterly study released by the Mortgage Bankers Association, which found that about 948,000 households with high-cost loans were either behind in their payments or were already at some point in the foreclosure process. Officials at that trade group however indicated that the center’s report was overly negative because many of those homeowners in trouble would be able to refinance or sell their homes.

But, speaking locally, can they? I’ve had several discussions recently with various Northern Virginia agents that present a far more likely scenario. Each of these agents was working with a client facing several hard choices. Their client (seller, or potential seller) had purchased a property late in the sellers market of 2000-2004 and as such had paid top dollar for their home. These homes were financed with a high loan to balance ratio mortgage (interest only or adjustable with low teaser rate) that came with a three year bump that is now coming due. The homeowner cannot afford the expected rise in monthly payments (more than 50% in each case) and is unable to sell the property for more than the current loan balance. It doesn’t take one very long to figure out the most likely scenario for homeowners in this position.

A Warning to Mortgage Lenders

In late September, federal banking regulators issued an advisory to the lenders they supervise, telling them that they should not make non-traditional mortgage loans to borrowers who may be unable to repay them (I suppose making traditional loans to such borrowers is okay???). Almost immediately, six states had issued similar warnings to their own lenders, a number that had grown to 19 and the District of Columbia by year end. In Virginia, Edward Joseph Face, commissioner of financial institutions, was hopeful that the state corporation commission would decide on it’s version of a warning. “I don’t think we’ve ever seen this many adjustable interest-only loans on the books in all of historyI am concernedThere are so many out there and when the rates start adjusting, it’s not clear that borrowers will have prepared themselves” Face reported.

Personally, I believe it’s all too clear.

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[Hicks On Sticks] Comp Check Battles

November 27, 2006 | 11:32 am |

Butch Hicks is an appraisal veteran that hails from Northern Virginia. I first met him when he was the President of RAC (Relocation Appraisers & Consultants) and was struck by how he got straight to the point, and peppered it with a southern drawl. He is a leader in the appraisal industry and has an affinity for crunching housing market data like I do. In his first post for his Hicks on Sticks column in Soapbox, Butch deals with the ethics and practicality of doing comp checks (which in their pure form, completely violates USPAP). I am thrilled to have him contribute to Soapbox. …Jonathan Miller

“Bill Hicks my friend (if he was a friend, he would have called me Butch), how are you doing? My name is Slick E. Lender and I’m with AllQualify Mortgage. We have just begun an expensive ad campaign in Virginia and anticipate a lot of appraisal work for you as a result and I’d like to establish a relationship with you as the sole appraiser for our use there.”

And so begins yet another phone request for a comp check.

“Ok,” I respond, “what comp do you want me to check?” This, my ‘old’ response, usually resulted in a pained and questioning “huh” from the other end of the phone line. “You asked for a comp check,” I reply, “so which one do you wish me to check?”

These requests for comp checks, whether made by phone or fax, have increased dramatically with the advent of the internet, the slowing of the realty market and rising interest rates that have all but chocked off the refinancing deals of the recent past. Like all appraisers, I assume, I take a different attitude toward such requests from my regular clients as opposed to those like Slick E. but of late my patience has worn a bit thin on all of them.

I’m not going into a discussion here of how providing comp checks in order to lasso an appraisal request might place the appraiser in jeopardy as regards USPAP; I assume all appraisers are aware of such, though the evidence might indicate otherwise (on numerous occasions, I’ve been told by requestors that I’m the first to ever have bought that issue up). Also, I must admit, it’s a little difficult to get terribly angry with those making such requests because I recognize that a primary reason they are doing so is because so many of my fellow ‘professionals’ easily accommodate them.

Worse, to some degree, are those faxed requests that eat up otherwise clean paper. I’ve begun a collection of the worst offenders (another subject for later), you know, the ones with the Appraisal in Appraisal Request crossed out and replaced with a handwritten “Comp”. Lenders, having now caught on the fact that some appraisers (like myself) do not provide comp requests, have now resorted to blast faxing such to every appraiser in a given market. Experience tells them, I suppose, that someone will bite and the chase for ‘the number’ is on.

There was a time when I would respond for such requests by simply sending all sales in a subject neighborhood to the requestor and letting them decide at that point whether or not to proceed with a formal appraisal request. It’s not that difficult to do with my current MLS system but it does take a little time. Time is money however and for that reason I eventually halted even that process. But, what the heck, I’m in the appraisal business and I earn a living by collecting a fee for such, so my new view is to take advantage of a technology that is in some fashion, competing with me. is now my friend. Since appearing on the scene, I have taken to measuring its performance against mine on actual sale cases. How, you may ask, do I do that? Simple! Since I do a lot of relocation work, I have something to measure my own performance against. By capturing Zillows value, along with my own on every relocation assignment and tracking the history of the subject as it goes to settlement, I have concluded that in most cases, the Zillow value is in excess of my value estimate and the eventual sales price (in fact, of late, the Zillow value is generally higher than even the subjects initial list price).

Back to earning the fee part earlier noted (not to mention saving myself the aggravation), I have devised a new tactic. Now, when I get that call from Slick, I simply point him to the Zillow website. If, after obtaining a ‘value’ there, he wishes to proceed, fine, I can accept the assignment with no problem and a very clear conscience.

Coming in ‘low’ is not a problem; the value is what it is. I don’t worry about irate phone calls from anyone (borrower or lender) any longer; experienced appraisers learn to develop a thick skin.

Experienced appraisers also learn which battles to fight and ones involving comp checks are no longer a priority of mine.

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[Sounding Bored] Lessons From Cuomo: Don’t Dust Off (Or Add) Regulations, Build A Wall

August 11, 2006 | 1:03 pm | Columns |

Sounding Bored is my semi-regular column on the state of the appraisal profession. This week go apolitical (briefly) about the lack of understanding over what appraisers are supposed to do.

Well, not literally.

I heard Andrew Cuomo speak many years ago at an Appraisal Institute chapter meeting in New York 10-15 years ago where he was discussing his innovative HELP Homes project, a nonprofit development company, Housing Enterprise for the Less Privileged where he built subsidized housing and had met with great success. His father was governor and Andrew had an impressive presence. I thought to myself, this guy is going places – he’s sharp. This was confirmed when he was appointed Assistant, then Secretary at HUD.

But it would seem to be all downhill after that. Here’s the perspective of conservatives which is not too flattering.

While he was in office, he created the Appraiser Watch Initiative which tied mortgage defaults to appraisers, as if appraisers were responsible for whether a borrower makes their mortgage payment or not. While I understand what he was trying to accomplish, (getting rid of appraisers in collusion with property owners and developers), the reality is that appraisers do not look at the credit history of the borrower as part of their valuation expertise. The initiative angered many in the appraisal profession. The disconnect between reality and government in this example was no less than amazing.

At the same time, HUD seemed to be trying to make appraisers into home inspectors.. Even more amazing.

Fast forward

Cuomo was the keynote speaker at a recent appraisal convention and seemed to say all the right things. There is a certain irony here.

I remember ranting about this HUD stuff to quite a few of my colleagues at the time as a typical example of the disconnect that exists between the purpose of the appraisal function and the constraints appraisers have to work within.

Cuomo’s handling of HUD as it relates to appraisers and the rampant fraud that came with the lack of oversight on his watch has become a campaign issue in the New York’s governor’s race. The article Integrity and Reforms v Fiasco and Embarrassment [NYO] summarizes the politcal battle nicely.

Its reminds me of the advent of appraiser licensing. It was a noble attempt to clean up the profession but a dismal failure. Everyone wants to control and regulate the appraiser.

Controlling appraisers doesn’t solve the fundamental problem.

You need to protect appraisers from the lending industry they work for and depend on. Create a wall of independence so the public is protected, by keeping the appraiser’s judgement influenced by being pressured to survive.

If you don’t keep the appraisal process pure and keep the pressure away from the appraiser, they are unable to deliver an unbiased report. Its against human nature.

The good appraisers are disappearing fast and there’s no way to regulate that.

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[on Matrix] Appraisal Inflation Is More Widespread Than You Think

July 25, 2006 | 12:01 am |

Here is an appraisal-related post on our other blog Matrix: Appraisal Inflation Is More Widespread Than You Think that discusses the issue of appraiser inflation and how many institutions are actually in on it.

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[Sounding Bored] Appraisers Make Mistakes

May 31, 2006 | 12:01 am | Columns |

Sounding Bored is my semi-regular column on the state of the appraisal profession. I explore how to get an appraiser to re-consider the error of his or her ways.

Appraisers are human, well most of the time. One of the rights of passage for a real estate broker is to deal with the fact that on occasion, the appraiser is going to disagree with the sales price of the transaction.

A wise appraiser once told me: Everyone in the sales transaction is smarter than the appraiser because they already know the number. The real estate listing broker and selling broker, the mortgage broker, the lender and of course the buyer and seller all know the number. The appraiser is the last one to the party.

But sometimes it happens and when its does, life can be difficult for the appraiser. The buyer and seller threaten to sue, the mortgage broker may never use the appraiser again, same goes for the lender. The real estate brokers may never refer the appraiser their clients again.

So why would an appraiser want to go through this? Because its their responsibility, their job as an appraiser to estimate the value of the collateral (in a mortgage appraisal assignment).

Appraisers aren’t perfect, but they have everything to gain by being thorough, accurate, and honest. Encouraging an appraiser to engage in illegal activity in this era of widespread mortgage fraud could lead to a sanction against you and even to criminal prosecution for you and the appraiser. No transaction is worth that.

But what if the appraiser meant well, but either made an error or just didn’t understand the market?

The NAR in the latest issue of REALTOR Magazine provides the best way for a real estate broker to handle the situation and understand the appraiser’s position. Actually, the method they present is respectful to the appraiser and the process should only be engaged if the broker truly believes a mistake was made.

You never want to demand or coerce an appraiser to revise the appraisal. There must be a reason for the appraiser to reconsider an opinion of value other than “This is what we need to get the deal through.”

I have to say that I was impressed by their tact.

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[Commentary] Appraisers Are Sheep

April 21, 2006 | 12:01 am |

This article reminded me how the appraisal industry is self-destructively meek – a bunch of sheep (aka scapegoats). Three plead guility in $8 million real estate ‘flipping’ scheme involving Decatur, Springfield [HR].

An appraiser was part of a 3-way flipping scheme involving 150 properties and about $8M yet…

While Ciota and Knox got profits from the transactions, Wiese received only his standard appraisal fees

The scheme would not have been possible without the appraiser yet he did not see the value of his crime. That means one of two things:

  • A: The appraiser did not see his actions as criminal or did not know better.
  • B: There were plenty of other appraisers in the area who would have gladly worked for the same fee preventing the appraiser from receiving a higher fee for his services.

I’m banking on B.

With the daily reports of mortgage fraud, I don’t think I have ever seen an appraiser who got a piece of the action or an inflated fee in one of these mortgage fraud scams. Isn’t that amazing?

This seems to correlate with past patterns of meekness in the appraisal industry. I am not suggesting anything criminal, just the fact that the whole world walks over us and its mainly our own fault.

  • There is no separation between the sale and underwriting function in many lending institutions allowing loan reps to directly pressure appraisers to “make the number.” Many succumb to the pressure.
  • Field reviews are a way to “get your competitor off the approved list of your client.”
  • There is no real review function any more so quality is not much of a concern and speed is readily quantifiable and rewarded (absent of quality reviews).
  • National appraisal management companies see appraisers as form-fillers.
  • The appraisal review function is performed by inexperienced, young entries in to the professional responsible for large swaths of the country.
  • Appraisal trade groups were asleep at the wheel during the licensing law process in 1991.
  • Appraisers are used as a scapegoat by some lenders to explain to the applicant that they were turned because of a low appraisal when the loan turndown was for poor credit (this one drives me crazy).
  • Appraisers were scapegoated for the S&L crisis in the late 1980’s.
  • Appraisers are being squeezed out of the lending process as banks seek to commoditize the reports down to the level of a flood cert.
  • USPAP is out of sync with real world business practices.

These are the real crimes here…

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[Commercial Grade] Hope for the New Scope

April 20, 2006 | 12:01 am |

Commercial Grade is a weekly post by John Cicero, MAI who provides commentary on issues affecting real estate appraisers, with specific focus on commercial valuation. Today John talks about his hope for a usable scope.

Disclosure: John is a partner of mine in our commercial real estate valuation concern Miller Cicero, LLC and he is, on Thursdays, one of the smartest guys I know. …Jonathan Miller

In his article Scoping Out the New Appraisal Standards The RMA Journal, May 2006, author Thomas Boyle explains that the new standards “effective July 1will mark the final step in a fundamental paradigm shift in appraisal.”

There’s been a lot of buzz about the new USPAP appraisal standards and appraisers are supposed to be spending the first half of 2006 getting acclimated to the new rules, so that we’ll be ready when they go into effect in July.

The main difference, as I understand it, is that the concepts of complete and limited appraisals will become obsolete; rather, each and every assignment must be individually scoped out and tailored to it. Mr. Boyle goes on to explain that “with this freedom comes responsibility. The appraiser, not the lender, is ultimately responsible for determining the appropriate Scope of Work.”

Under the new USPAP, the dialog between client and appraiser before the assignment is critical to fully establish the scope of work to be undertaken. It remains to be seen how the new standards will work with the on-line bidding systems and email quote solicitations that many lenders have adopted. Without the dialog up front, will you be bidding against another appraiser that has scoped out the assignment differently? And with extensive dialog up front, what’s the point of an on-line bid?

If the new USPAP serves to eliminate on-line bids and forces lenders to scope out the best appraiser for the job, it will be a “fundamental paradigm shift” indeed.

[I swore off using the phrase “paradigm shift” a while ago -ed]

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Pointing Fingers, Taking Responsibility

April 10, 2006 | 12:01 am |

A non-profit organization is under investigation in Indiana for saddling unwitting buyers with houses worth less than their mortgage []. While this is nothing new, I was struck by the lack of action by officials.

In 1998 she bought a house from the Fort Wayne Neighborhood Housing Partnership with a mortgage two-thirds higher than the home’s assessed value. She said she was misled about the price of a homebuyer training course and about grants she was told she would not have to repay.

She was shown an appraisal that compared the house in a struggling neighborhood to three properties in a vastly different, historic neighborhood more than a mile away._

How is this possible? No one seems to blame the appraiser in this case. Why not? If the appraiser did their job (I don’t know if it was an internal appraisal or outside the agency – I assume it was outside), then this case would likely be a moot point since the deal would not have moved forward. I still find it amazing that there are so many in our profession that think of this as another assignment for a standard fee (we are not even good as an industry at being criminals) yet it causes someone so much pain.

House-flipping scams occur most often when someone buys a cheap property, does some modest renovations, has an appraiser overstate the value and then sells it to an unsuspecting buyer, Smith said. That leaves the homeowner and the bank holding the bag.

Why is there a dettachment of the appraiser from the process? Why can’t the institutions go after the E & O policy holders of this type of appraiser rigorously? What is stopping them?

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[on Matrix] Bank Mergers Increases Need For Moral Flexibility

March 20, 2006 | 11:01 am |

Here is an appraisal-related post on our other blog Matrix: Bank Mergers Increases Need For Moral Flexibility that discusses issue of bank mergers and how the lack of competition influences an increase in crime. The post relates this to the current state of the appraisal profession and its flawed structure.

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When Machines Take Over The Earth, Or At Least The Appraisals

March 6, 2006 | 12:01 am |

This recent editorial Tough action needed to stop the deceit [KC Star] illustrates how far gone the appraisal industry is. Betrayal of public trust is something that you can’t undo very easily. The sad thing is that its not an easy fix.

Although we are responsible for the lion’s share of the problems, don’t heap it all on the appraisers because thats incredibly simplistic. Its like telling someone who is overweight “Well, just eat right.”

Here’s a recap of the problems with the appraisal industry today:

  • The lobbying efforts of the lending industry and the GSE’s to reduce costs and reduce the appraisal report to a commodity. Faster turn times and lower fees all that seems to matter since thats all that can be readily measured.

  • The government solution to this problem was to create licensing and pile on the requirements yet appraisal fraud is seemingly as rampant as during pre-licensing (pre-1991). Enforcement non-existent because of lack of resources and is largely a clerical function. In fact, a portion of licensing fees in many states are re-directed to other departments in the government.

  • The appraisal organizations have been largely out of touch with the needs of residential appraisers for decades and have had a limited lobbying role in Washington. This is evidenced by the large drop in membership since licensing. If their services were essential to the appraisal industry prior to licensing, then this would not have occured. Self-policing has not been effective and was largely the impetus for licensing in the first place.

  • Appraisers do share in the blame however, and in a very big way. As an industry, we have been unprofessional in the sense that our loyalty can be sold in exchange for volume. Many of the remaining appraisers that are competent and ethical are leaving the business, which is an incredible loss of a significant intellectual resource to the lending community.

We’re the only profession where you are begged to be dishonest.

AVM’s have already replaced appraisers in home equity lending and there is talk about testing it for first mortgages. However, AVM’s are well-known to be inaccurate and are not the panacea for responsible lending.

It doesn’t have to be this way. In some ways, a correction of the housing market will remove much of the fly-by-night elements of the lending industry.

The solution? Its not as the editorial suggests: Curbing the problem will require a change of culture within the industry itself, as well as a tougher regulatory climate and stricter licensing laws. Also needed: more rapid response by professional boards to complaints. These suggestions are simply window dressing and demonstrates the lack of understanding as to the real issues (which is one of the problems of righting this ship):

  • Protect the appraiser from the sales function of the lending process. This needs to be done with banks, mortgage bankers and especially mortgage brokers. In other words, build a clear and succinct wall between the sales and underwriting functions and the appraiser sits on the underwriting side.

  • Create some sort of mediation board of review within each state that is legally binding. Make the appraiser professionally liable for fraud and negligience but at the same time, allow them to protect themselves against unfair accusations. Provide a practical process for lenders and appraisers to submit suspect appraisers for review but protect the appraiser from frivolous actions.

Until these two issues are dealt with directly, there will be no change in the status quo and eventually, the profession, as it relates to lending, will be obsolete. This will not be because of competition from technology, but because of the lack of trust by the lending community.

Lets rebuild ourselves into an industry of appraisers and lose the “form-filler” moniker.

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Checking Insulation To Protect Appraiser From Production Staff

February 27, 2006 | 8:38 am |

John Taylor is the president and chief executive officer of the National Community Reinvestment Coalition in Washington who wrote How to Insulate Appraisers from Production Staff [American Banker]. He states that:

We believe that appraisal inflation is so pervasive that it requires this type of action. Over 8,000 appraisers have signed a petition circulated by the Appraisal Institute alerting the public to this pressure and warning them that their home may be overvalued. A recent survey of appraisers found that half had been pressured to increase appraisals by 10% or more.

His suggestions to reduce appraisal pressure is to:

  • Restructure internal operations so that loan officers do not select or interact at all with appraisers or approve them for rotating lists.
  • Isolate mortgage brokers from the appraisal process in the same manner.
  • Hire independent appraisers or appraisal management companies. Do not hire an appraisal company that is a subsidiary of the lender ordering the appraisal or of the title company supplying the title, because all stand to gain financially from a higher home price.
  • Never depend solely on automated valuation for an appraisal; each home must be seen by a qualified appraiser.
  • Sign a code of conduct developed by the Center for Responsible Appraisals and Valuations, agreeing to resolve differences between themselves and appraisers through the center’s arbitration pro-cess.

Federal regulators, such as the Office of the Comptroller of the Currency, have urged lenders to ensure the independence of appraisers from their loan production staff. Creating this independence, however, requires more than a few superficial steps that an aggressive loan production staff can easily dodge. Lenders must build a corporate structure that does more than simply hide the conflict of interest.

Currently, there is no promising solution for this problem. Associations that represent lenders and appraisers generally tout self-policing or the pending Responsible Lending Act (HR 1295) bill (which is currently stalled in Congress), but these issues amount to window dressing since the problems are inherent in the structure of the lending system and don’t address appraiser indepenedence.

A potential solution is not politically popular since few representatives want to go on record with a solution that will potentially increase loan application costs (near-term) and reduce turn around times.

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Not Everyone Is Ready For An Appraisal Of Reality

February 27, 2006 | 8:13 am |

As comedian Robin Williams once said:

Reality, what a concept

Kenneth Harney writes that Appraisers supply a dose of reality [LA Times].

See Not Everyone Is Ready For An Appraisal Of Reality [Matrix]

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