Matrix Blog

Posts Tagged ‘Mortgage Fraud’

Trying To Sway Some Action On A Stalled HR 1295, Says A Lot

February 21, 2006 | 12:01 am |

Appraisal Groups Call For Action on Responsible Lending Act [RISMedia]

As mortgage fraud remains a serious problem for communities across the country, the Appraisal Institute, the American Society of Appraisers (ASA) and the American Society of Farm Managers and Rural Appraisers (ASFMRA) continue to voice their support for congressional action to abate mortgage fraud, particularly The Responsible Lending Act (H.R. 1295).

Mortgage fraud is going to get a whole lot worse before it gets better. There is no incentive for Congress to act on HR 1295 anytime soon. As mortgage volume declines as rates increase, lobbying groups for lenders, mortgage bankers and mortgage brokers will be at full throttle.

The bill been stalled since the spring of 2005 when it was heralded as a step in the right direction. Now that one of its co-authors, Bob Ney, is in legal trouble, it seems like the fate of HR 1295 is sealed.

The bill places certain language in the legal pervue of applying pressure and a few other housekeeping issues.

The problem with this legislation is that it includes membership in these appraisal organizations as part of the solution. I think that membership in a private organization as a way to solve mortgage fraud is window dressing, honestly. Its great for the organizations but I fail to see how professionalism will improve on a large scale.

Do I think membership in these organizations enhance professionalism? Of course. But thats not the point.

The problem is about enforcement, civil and criminal penalties, standards and possible mediation solutions.

Bill Getting Eaten By Predatory Lending Concerns [Soapbox]
The Responsible Lending Act (HR 1295) [Soapbox]

Tags: , ,

[Solid Masonry] Bad Faith Turning Good or Vendors Beware?

February 14, 2006 | 12:15 am |

John Philip Mason is a residential appraiser with 20 years experience and covers the Hudson Valley region of New York. He’s a good friend and a true professional who provides unique insight to appraisal issues of the day. Here is his weekly post called Solid Masonry. Jonathan Miller

“Ameriquest Mortgage Co.’s recent $325 million lawsuit settlement with 49 state governments suggests all isn’t well in [the] home-loan industry.” But if you read between the lines, it may also not be well for the venders who service these lenders.

As indicated in the recent article Cleaning Up Subprime Mortgages [Boston Herald] it becomes all too clear just how far some members of the lending industry might have to go to make things right. And the sad truth is Ameriquest isn’t alone. While Ameriquest denies any wrongdoing, the settlement attempts to correct numerous issues concerning the application, processing and settlement of mortgages.

For one thing Ameriquest has agreed loan officers must also provide good-faith estimates of closing costs in a timely manner – and can’t “disparage, discredit or otherwise encourage (borrowers) to disregard” these figures.” In short, Ameriquest will have to adhere to the estimates they provide. It’s well known throughout the lending industry that some banks and mortgage brokers understate the good-faith estimates when borrowers are applying for loans. The technique steers borrowers away from honest lenders who are unwilling to play the “bait and switch game”. Some individuals claim these fraudulent estimates represented less than half the funds needed to close the loan. In addition, lowball estimates can be used to make higher lending rates look more attractive.

To be sure, this deceptive practice is a major issue for both consumers and honest lenders. But wait, national lenders smell a marketing opportunity, especially in light of a slowdown in mortgage applications during the past several months. In Kenneth R. Harney’s A Good-Faith Effort To Clean Up Estimates [Washington Post] he spells out how SunTrust and LendingTree have recently announced programs where they too (without any allegations of wrongdoing) will guarantee good faith estimates, in an attempt to lure more borrowers.

So what does all this have to do with venders? Well if this trend catches on, either through legal settlements, revisions to the laws pertaining to lender requirements or from promotional programs aimed at increasing market share, it will force lenders to sharpen their pencils. And guess who they’ll turn to? The easiest and most cost effective option is to ask the outside venders to lower their fees, as it requires nothing of the lenders and only impacts the profitability of the venders themselves. Only as a last resort will the lenders consider reducing their internal fees or profit margins.

While increased efficiency and reduced costs are good for consumers, the race to the bottom, in terms of vender fees, could further compromise the quality of services provided. At a time when real estate deals are becoming more complex and technical and many real estate markets are in some sort of transition, this could prove unwise and lacking in good faith.

Tags: , , , , , ,

Responsible Lending Defeated By Irresponsible Lobbying As Congressman Ney Steps Down

February 6, 2006 | 12:01 am |

For all the hoopla the Responsible Lending Act garnered last spring, it appears to have stalled and one of the bill’s co-sponsors, Representative Bob Ney, is implicated in the Abramoff lobbying corruption scandal [MSNBC]. Here’s more on that [LA Times].

So much for congress to act on predatory lending and tightening appraiser accountability [Businessweek].

The bill was introduced on March 15, 2005 and referred to referred to the Subcommittee on Housing and Community Opportunity [Thomas] on May 13, 2005.

The Responsible Lending Act HR 1295 [Soapbox] met with mixed reactions with several agencies going on record stating that it would weaken laws against predatory lending [Soapbox].

Tags: , ,

[Commercial Grade] Misleading Appraisal Reports Can Be Treated As The Cost Of Doing Business

February 2, 2006 | 12:59 pm |

This week John Cicero discusses the disparity in fines for administrative versus substantive violations.

Disclosure: John is a partner of mine in our commercial real estate valuation concern Miller Cicero, LLC and he is one of the smartest guys I know (although I don’t get out much).

-Jonathan Miller

I just received my January 2006 newsletter from the New York Department of State [DOS]. Picture of Pataki on the cover…very official looking. Nearly two pages of the four page newsletter are devoted to identifying individuals who have violated some aspect of our state licensing laws. Here are some of the punishments meted out:

  • A fine of $750 for failure to provide evidence of continuing education
  • A fine of $300 for failure to confirm a closed sale
  • A fine of $750 for failure to retain appraisal reports and supporting data within the prescribed period
  • A fine of $750 for communicating a misleading appraisal report
  • A fine of $1,500 for failing to exercise “reasonable due diligence in developing and preparing an appraisal report”

I find this fascinating
To the DOS, a violation is a violationdoesn’t seem to matter that one violation refers to maintaining files and another refers to doing low quality work and violating ethics rules. In my opinion, the fines for the first three examples above are probably appropriate, a fine to remind the culprit that as professionals we are obligated to abide by a certain administrative process…

But $750 for communicating a misleading appraisal? That’s about as serious as it gets in our business. And while there are appraisers who do get their licenses/certifications revoked, I suspect that the vast majority of the violators get off with a similar fine.

I know that the State Licensing board works hard but has limited resources at their disposal, in fact, I believe that funds generated from license fees are earmarked to other areas of the government. I think the licensing laws needs to be revised to separate out the adminstrative errors from those that are negligent.

Of course, I don’t know the details of these violations and I am not singling out New York as I can imagine there are other states with the same license law structure, however…

…to the impartial observer the implementation of the licensing law seems to give a green light to those appraisers that would bend their ethics when convenient. Chances are, if caught, they’ll only have to pay a fine that amounts to nothing more than a fraction of the appraisal fee…its simply the cost of doing business.

Tags: , , ,

Taking Orders, Separating Mortgage Functions

January 30, 2006 | 11:37 am |

William Apgar, the former head of FHA said it is time to change the way appraisals are ordered in the article Unraveling th Pyramid [BrokerUniverse].

This article addresses the fundamental issue with appraisals today – the independence of the appraisal function. To paraphrase: Its so important that on Oct. 27, 2003 the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, and the National Credit Union Administration, issued a Joint Statement that requires the separation between loan production, appraisal ordering, and the appraisal review function. In May 2005, the regulators again issued guidelines and warned that financial institutions may not understand the risk of aggressive lending standards.

To say that our mortgage system is unique would be an understatement. The American Dream of home ownership has become a reality for more people than anywhere on the globe. Lending money based on the securitization of loans backed by real estate has been the rock on which this phenomena has been built. Fundamental to this system is the fair, objective and unbiased valuation of the real estate that secures these loans and provides the confidence Americans have in the value of their home. For this reason the industry has created and depended upon a profession that has been central to our mortgage economy – the independent fee appraiser. This profession is wholly based on its separation from all others within the mortgage system. It cannot be tainted by self-interest or the desire of others to profit from a mortgage transaction. It is the cornerstone upon which the value of real estate is dependent. In fact, one of the key features of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 was to make certain that trained and certified licensed professionals completed the valuation process.

Tags: , , , , ,

No Right To Copy

January 26, 2006 | 4:22 am |

In the Working RE article Appraiser Wins Copyright Suit: Now What?

“Tim Vining, MAI becomes the first appraiser in the U.S. to successfully sue and win for copyright infringement of his intellectual property his appraisal.

The culprit is a real estate broker who lifted Vining’s work for use in a sales brochure. According to Vining, who specializes in the appraisal of agricultural properties in Washington State, this was not the first time he found his work in reports that he did not author and for which he was not paid. This time he decided to do something about it.

What does this mean for the average appraiser? Firstly, this case means that appraisal reports can be copyrighted. It is easier to prove in a narrative format than on a form but it is possible.

What is very interesting is that the copyright fee does not have to be registered “to prove infringement and win an award.”

Statutory damages were not awarded in this case because “he had not registered his work with the Copyright Office within 90 days of creation. If a work is registered ($35 fee), statutory damages can be as high as $150,000 per occurrence plus attorneys fees and costs. “

Creative work, including appraisal reports, is protected at the moment of creation.

The article speculates that this would have an impact on AVMs if appraisers would register some of their reports with the Copyrright Office by “poisoning the well.” AVM’s would not know which data was protected.

This is a curious point for me as it relates to form reports that are farmed for their data without compensation. How would the appraiser be able to track this misuse or prove it was their data?

One of the long running issues on this topic has been whether the appraiser owns the data or not. I would conclude that once raw information is improved beyond what is available to the public, the appraiser owns the rights to the data. However, they give up certain rights to the data once they place it on an appraisal report and send it to a client. If the appraiser knows the their data is being farmed (nearly all appraisal data is being farmed or will be shortly), then I am not sure how the argument can be made that they have not given up their rights to it. However, this is unclear to me.

From my own experience, I am more concerned others copying the content that I have developed, not simply the data. I have had several incidents regarding plagiarism of my report presentation.

The first time this happened, it involved a market report that I write about the market I cover. Another firm (a brokerage firm), copied every single line of text in the report and just changed the names. I called them and sent them a note and got not response but they changed the content of their report gradually over subsequent issues.

On another occasion, I was asked to review an appraisal report in a matrimonial action that was completed for both parties. Once side was uncomfortable with the result and showed me the report. When I got to the addendum, I discovered that the appraiser had copied my 8 page addenda word for word, even using the same fonts and layout. The attorney relayed this information to the court and the appraisal report was thrown out. I was then hired by the court to perform the valuation. I sent the appraiser a “cease and desist” letter with the instruction that I was to get a written apology and assurances that it would not happen again. He did. So far he hasn’t.

Shortly after this incident, I ran across my work in another appraiser’s report and was going to contact him in the same manner. Before I called my attorney, I read that he was indicted along with a number of others for mortgage fraud. I believe he is now in jail.

A few years ago, my wife was reading our hometown paper and she called me at the office to tell me that it was my writing with the data changed. We contacted this company and they changed the format of their report but it still contains elements of my original work. I decided not to go after the broker since it was not in a market that I covered.

Someone once told me this quote, of which I scoffed at:

There is no such thing as original thought.

I am starting to believe this.

Tags: , ,

Being Hyper-Agressive Will Cost You

January 24, 2006 | 8:41 am |

In fact it will cost you $325,000,000.

“The Law News Network – Attorney General Eliot Spitzer and the Attorneys General and banking regulators of 48 states today announced a $325 million agreement with the nation’s largest subprime mortgage lender to overhaul its existing sales, appraisal and closing practices” [LawFuel].

Ameriquest primarily makes refinance loans to homeowners seeking to consolidate credit card and other debt and generate overall monthly savings. After refinancing with Ameriquest, however, consumers were often trapped in mortgages they could not afford, and were left with little or no equity in their homes.

Marketing Opportunity
Of particular interest to me was that the settlement requires Ameriquest to:

Overhaul its appraisal practices by prohibiting sales personnel from selecting, contacting, or attempting to influence appraisers

That is encouraging but there are two major questions here as it relates to appraisers:

  • How does an organization with wide-spread problems in their appraisal process, which sees influencing appraisers is part of the aggressive culture, reform itself? How would they know where to begin? How would they know what is right and wrong?
  • And why are these issues with Ameriquest ANY different than the majority of wholesale lenders?

Tags: , , ,

Changing Market Gears, Getting Smart

January 3, 2006 | 12:01 am |

In Kenneth Harney’s column Appraising a Shifting Market [Washington Post] he explores how appraisers are dealing with a changing market. The advice is based on good common sense and really applies to all markets at all times, not just in a changing market.

  • Stay current, stay local.
  • Understand behaviors of each price strata. In the Tampa area, for example, the entry-level segments are more solid than the middle and upper price brackets.
  • Get input from local agents, they are on the front lines. Specific transactions may not be representative of current market conditions due to extenuating circumstances.
  • Withstand the intense pressure from all parties to the sale but be open to considering data that was missed in the original appraisal.

Get those who are pressuring you to provide data that is comparable and can be verified. The appraisal that was completed was a result of our best effort at the time. If we missed something that clearly shows we are low, we will consider the new information in the context of what was already presented, but that doesn’t happen very often, because the data usually doesn’t exist.

An appraiser whom I deeply respect once told me in a sarcastic tone: Isn’t it amazing how everyone is so much smarter than the appraiser?” Lenders, mortgage brokers, real estate brokers, developers, buyers and sellers all know the right number. We are just here to fill out a form.”

Depending on how the market does over this next year, appraisers may turn out to be smart afterall.

Tags: , ,

Unraveling The Pyramid Of Bad Practices

December 19, 2005 | 1:08 pm |

A friend of mine passed along an article by William Apgar called Unraveling the Pyramid. Mr. Apgar is the former Federal Housing Administration commissioner and senior scholar at Harvard University’s Joint Center for Housing Studies and lecturer in Public Policy at Harvard’s Kennedy School of Government.

I found it to be a great article because someone with the gravitas of Mr. Apgar addresses the primary reason that the appraisal profession is in deep trouble and why I started Soapbox to begin with:

The appraiser has not been allowed to remain independent.

The Article

“It cannot be tainted by self-interest or the desire of others to profit from a mortgage transaction. In fact, one of the key features of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 was to make certain that trained and certified licensed professionals completed the valuation process. Ever since FIRREA, legislators, bank regulators and consumers groups alike have weighed in on the issue of ensuring sound residential real estate valuations. On Oct. 27, 2003 the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, and the National Credit Union Administration, issued a Joint Statement that requires the separation between loan production, appraisal ordering, and the appraisal review function.

The reason for this independence is obvious; everyone, except the appraiser and borrower, benefits monetarily in fees and performance bonuses from a higher-priced home. As it is not uncommon today for a lender to be on both sides of the equation, making the loan and picking the appraiser, the federal regulations seek to separate the appraisers’ work from other aspects of the transaction. That is the idea, anyway, but not always the practice. In practice there are lenders that hire staff appraisers who are picked by and report to the lender’s loan officers. Certain lenders and title companies own or are part owners in appraisal companies.

There are agents and brokers that refer appraisers to lenders who are referred to borrowers by the same agents and brokers. This is all perfectly legal under RESPA, but gets in the way of independence. In May 2005, following the Joint Statement, the regulators again issued guidelines, warning that financial institutions “may not fully be recognizing the risk inherent in their aggressive lending standards.” In June, on the heels of this “shot over the bow” The National Community Reinvestment Coalition, a nationally recognized consumer group, released a report entitled Predatory Appraisals: Stealing the American Dream. [Soapbox] As they determined in their study “problematic appraisal practices exist as a serious impediment to responsible lending, impede fair housing and equal access to credit, and place the American Dream of homeownership and the safety and soundness of the mortgage marketplace at risk.” Today, no one can accurately assess how many homes are overvalued in the U.S. housing market and for how much. There are those who argue that there is no such thing as appraisal inflation and therefore, no problem exists; if a buyer is willing to pay an asking price, then the price isn’t inflated. True enough. But, when appraisal inflation becomes systemic to the loan process and when almost half of appraisers say they are pressured to inflate appraisals by others involved in the loan closing, then maybe it is time to change the way appraisals are ordered. The increased use of creative mortgage products and slowly rising interest rates, combined with predictions of falling prices in the hot real estate markets, concerned Julie Williams, the then- acting Comptroller of the Currency.

In a speech given in March 2005 Ms. Williams raised price declines as part of her warning about the growing credit risks stemming from aggressive retail lending. She said, in an article titled Amid the Housing-Bubble Din, Something Different? [American Banker] that some of the increasingly popular hybrid mortgage products “are often predicated on continued healthy price appreciation for residential properties. No one knows how these loans will perform if housing prices stabilize or fall or, worst yet, if the value of homes fall below what the borrower owes.”

This is a time of transition for the mortgage marketplace. Economists agree that although there is no nationwide housing bubble there are “regionalized bubbles” where housing prices seem to have risen to unsustainable levels and price declines have been predicted over the next two years. The mismatch between income gains and higher real estate values in some cities is particularly striking. How can someone earning $70,000 a year afford a $500,000 home? They can’t over the long run. Regulators have taken steps in the past several months that could exert strong influence on lenders and all vendors providing services to lenders.

Due to the volume challenges of the past two-to-three years, for some time now lower price and fast turn time have been favored over accuracy concerns. It remains to be seen if the real estate market changes and increased delinquencies put lenders in a more cautious posture. The ascendancy of credit risk over production in overall lending management may actually be on the near horizon, where it should have been all along. I applaud NCRC’s report, their veracity on the subject of predatory lending and for asking the hard questions. This issue is systemic, as the entire process from regulators to lenders to the third party interactions of loan officers and the Realtors/builders is broken.

It certainly will take a collaborative effort from the entire industry to unravel the pyramid of bad practices that have occurred over the past ten years.”

Webmaster’s Note: Lets hope we start seeing some movement in the right direction soon. The American public is not served well by the current state of the profession.

Tags: , , , , ,

Chameleon-like Criminals Are Stealing Appraisers Identities With Little Risk

December 14, 2005 | 9:29 am |

In the David Jackson article, Crooked appraisers fuel scams: Stolen identities used in mortgage swindles [Chicago Tribune] he reports of a loose network of appraisers who steal the identities of honest appraisers and sign off on millions of dollars of fraudulent appraisals.

It used to be that an appraiser’s identity might have been stolen and used hundreds of times. Now with many of the appraiser databases on the internet and their license numbers in the public domain, its not that hard to assume an identity, especially in a mortgage environment where much less attention is paid to underwriting than in years past.

On top of this, there is virtually no enforcement. This article indicates that the State of Illinois had one appraiser on staff and he recently retired. Most states have no more than a few staff members to handle thousands of complaints.

There are many appraisers have not only their license # on their business card, email signatures and stationary but scanned images of their license on their web site. Take a look! [Google]

Tags: , ,

The Lending-Appraisal Industries: A Marriage Not Made In Heaven, Or In Texas

December 5, 2005 | 12:01 am |

The marriage of an appraiser to the County Tax Assessor-Collector in the same Texas appraisal district was determined by the attorney general to break the law [Daily Times (TX)]. It was determined to be a conflict of interest.

“Isn’t that crazy? We thought it was funny that we had to wait for an attorney general’s opinion to tell us whether we could or couldn’t,” Rector told the Houston Chronicle on Tuesday. “I bet that’s never happened before.”

I can only imagine if the same ethical standard was applied to the lending-appraisal industries as a whole. The avoidance of even the perception of a potential conflict would render the structure of the lender-appraiser relationship illegal.


Tags: , , ,

A Better Bullseye Is Not Enough To Stop Bad Appraisers From Being Bad

December 2, 2005 | 12:01 am |

In Erick Bergquist’s article GSEs Restructure Appraisal Documents to Clarify Liability [American Banker], he discusses growing appraisal and mortgage fraud, both GSE’s are requiring the use of new appraisal forms to be more direct on who has the responsibility (liability) and therefore make it easier for Fannie Mae, Freddie Mac and state licensing boards to go after the bad apples.

Here’s the portion of the article that expresses my concern over the false comfort that this action will provide. FNMA is under incredible pressure right now from many different angles so I believe they are anxious to promote this as a step in the right direction, to show they are doing something about fraud. Well it is a right step. I just hope its not the only step.

Jonathan Miller, the president of the New York appraisal firm Miller Samuel Inc., said he had mixed feelings about the changes.

“From a big-picture perspective, it makes the appraisal industry more accountable,” he said. “The fraudulent appraisers have more of a bull’s-eye painted on their back for future litigation.”

However, Mr. Miller said there is only so much the changes can do. For one thing, “this is just a form, and if people are making up information and being misleading on the old forms, it’s optimistic to expect this will have a significant impact on the integrity and quality of appraisals submitted.”

Also, he said the update is “a baby step” that does not address the main cause of faulty appraisals: the lender-appraiser relationship. “Loan officers or anybody paid on commission should have no direct contact with the appraiser whatsoever.”

Though Mr. Miller called one of the new certifications – a warning that appraisers can be subject to civil fines and penalties – “highly commendable,” he had reservations about the other one, which reads, “The borrower, another lender at the request of the borrower, the mortgagee or its successors and assigns, mortgage insurers, government-sponsored enterprises, and other secondary market participants may rely on this appraisal report as part of any mortgage finance transaction that involves any one or more of these parties.”

That certification, as it is worded, could significantly increase appraisers’ liability to almost anyone else in the mortgage process, he said.

Tags: , , , ,

Get Weekly Insights and Research

Receive Jonathan Miller's 'Housing Notes' and get regular market insights, the market report series for Douglas Elliman Real Estate as well as interviews, columns, blog posts and other content.

Follow Jonathan on Twitter

#Housing analyst, #realestate, #appraiser, podcaster/blogger, non-economist, Miller Samuel CEO, family man, maker of snow and lobster fisherman (order varies)
NYC CT Hamptons DC Miami LA Aspen
Joined October 2007