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Posts Tagged ‘Mortgage Fraud’

Mortgage Fraud: Hiding True Occupant Of Apartment From Lender [part 6 of a series]

September 22, 2005 | 8:03 pm |

Today our firm got a call from a major national lender and was asked to change the occupant noted on the appraisal from tenant to owner. It wouldn’t fit the loan package they had arranged for. This particular national lender makes requests like this all the time.

The people making the request are usually clerical and have no idea what they are really asking from us. We get the impression that appraisers usually comply with these sort of requests in hopes of maintaining the relationship.

The client pressed hard for us (politely) to change the occupant information, even when we clearly explained why we couldn’t and that what we were being asked to do was fraudulent.

For this assignment, the tenant’s lease expired in 2 months. We gave the lender 2 options:

1: We change nothing in the report
2: We make the effective date for two months from now when the lease expires, disclosing that we inspected it two months prior and that the unit was occupied by a tenant with the terms of the lease disclosed, that the condition was unchanged between the effective date and the inspection date, all as a extraordinary assumption. (phew!)

They called back an hour later and chose selection 2.

Just another day…

Hello out there…where are the bank regulators?

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Mortgage Fraud: Bouncing Checks If The Numbers Don’t Work [part 5 of a series]

September 21, 2005 | 10:50 pm |

One type of fraud we see on a somewhat regular basis occurred today. Here’s how it went.

We received a first time order from an out of state mortgage banker to perform an appraisal of a high end condo worth over $7M). The unit owner had wanted to have “their appraiser” perform the assignment but the lender wanted us to do it because they were more comfortable with our reputation.

We require payment before we release an appraisal for clients we do not have a track record with. The lender asked us to collect at the door. The couple paid us for the appraisal and we completed and delivered it to the lender as agreed.

The check sent by the applicant subsequently bounced (this was a complex property and an above average appraisal fee). We called the husband to request a new check to be sent to pay for the appraisal fee owed but we could not reach him. We called the wife who indicated that she will give the message to her husband but said “we did not do our job and bring the value in at the amount they wanted.”

The couple ended up hiring that other appraiser and guess what? Their value was higher than ours. The lender told us that they will not accept the other appraisal. The irony here is that the deal worked with our value estimate so this is a matter of pure ego by the couple.

I was so annoyed I called the appraiser. They (shouldn’t have spoken to me about it) said they knew that the purpose of the assignment was refinance but said that the lender ordered it directly (the lender – our client – denies this). If the appraisal was actually ordered and engaged by the borrower, not the lender, and the appraiser knew that it was a refinance, they should not have accepted the assignment and they violated the terms of their certification. This has been a “no-no” for a long time See OCC letter [PDF]. If I find out that this is true, I will submit their name to the appraisal review board in our state.

So now we are in a situation where we have been engaged to complete an appraisal. We completed it. The borrower appears to have intentionally bounced the check in order to get back at us for not “making the number.” Our report may actually be used for the deal but we have not been paid for it. The borrower will end up paying for two appraisals. Nearly everyone loses.

The lender indicated they will pay us by debiting the funds on account with the borrower. If this doesn’t work out, we will likely sue the borrower for bank fraud or send the lender to collection. I was told by a major lender about 10 years ago that intentionally bouncing a check is bank fraud. Of course we have to prove whether its intentional.

Moral: We have become viewed as an impedement to the deal and the originator and ourselves, may also be victims. Hello out there. Does anyone really want to know what the value is?

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Feeling The Need For Speed And The Double Standard

September 14, 2005 | 7:32 am |

Our firm just did a desk review for a national lender on a one family property in our market area. This is the same lender that gave me a hard time last month for being too slow and suggested that if we didn’t get the reports in faster, we would be removed from the panel because we are 2 days slower than everyone else.

Yesterday, I reviewed a report done by another firm who is much faster than us. Our firm was actually in several of the comps used and the square footages were grossly understated. The comps were taken from other locations that were vastly superior. The property had significant functional and external obsolescence issues which were not noted in report. The name of this firm is well known in the market for this type of work product, but boy are they fast!

Incidentally the property was over appraised by more than $1.5M for a cash-out refinance. mmmm…48 hours faster….$1.5M over appraised….thats…$31,250 per hour in additional exposure for the lender.

We run across these discrepancies of this size nearly every week. Of course, no one remembers how fast the appraisals were done when the loan goes sour.

The problem is on both sides of the transaction. Large lenders can readily track turn times but have not figured out quality. Not surprisingly, there are many individuals (not deserved of the title “appraiser”) who can meet this need for speed.

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Mortgage Fraud: Customized Time Adjustments To Fit Every Mortgage [part 4 of a series]

September 14, 2005 | 7:09 am |

Yesterday (and nearly every day) our appraisal firm received a fax from a mortgage broker with a checklist. This checklist included all aspects of the loan package that the bank felt needed to be corrected by the mortgage broker. There was only one item pertaining to the appraisal and it was the cryptic:

Appraiser is to remove time adjustments

It never ceases to amaze me how cavalier this type of request is. The underwriter generally has no concept of what they are requesting. Essentially they are asking us to misrepresent the market so that the mortgage can meet their own portfolio criteria by reducing the perceived risk associated with the collateral. Isn’t this fraud?

The sad thing is that many appraisers, in order to keep their relationship going, will simply comply. We see this frequently when we do appraisal reviews. The same appraiser will tell Bank A that the market is flat while Bank B gets a report on another property in the area that the market is rising. The adjustments are made up under other amenities so the value is the same and everyone is happy. Isn’t this fraud?

A few years ago, a local lender issued a policy forbiding time adjustments. I sent them a letter explaining that this was unethical and that this was an underwriting policy, not an appraisal matter and we were sorry but we would be forced to resign from their appraisal panel. Since we were their primary and most trusted appraiser, they exempted only us from the policy. Of course, other members on the appraiser panel complied so they could continue to receive work.

Just imagine if all appraisers withstood this systematic pressure? Of course its important to remember that it is unfair, unethical and probably illegal that we are put in this position in the first place.

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Fee For Service Armageddon: How Low Can You Go?

September 13, 2005 | 8:56 pm |

From the Movie Armageddon – actor Steve Buscemi says, as they are sitting in the Space Shuttle on the launch pad:

You know we’re sitting on four million pounds of fuel, one nuclear weapon and a thing that has 270,000 moving parts built by the lowest bidder. Makes you feel good, doesn’t it?

The commercial appraisal industry has evolved from a group of professionals providing critical input for underwriting or other decision making to a pure commodity. In retaining the services of an appraiser, the basic theme is “the low fee takes it.”

These buyers of appraisal services either cannot distinguish a good report from bad, or simply don’t care. Therefore, most lenders – notice that I didn’t say all – will make their selection based on that person that is willing to sell his services for cheapest fee.

Can you imagine selecting your cardiologist or divorce lawyer using the same criteria?

With the advent of on-line bidding systems, lenders can now solicit bids from a dozen or more firms, which inevitably places even more downward pressure on fees.

The irony is that the same groups that make an entirely fee-based decision are the ones lamenting the dreadful quality of appraisal reports that are the norm today.

HmmmI wonder if there’s any relationship there?

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Bill Getting Eaten By Predatory Lending Concerns

September 8, 2005 | 11:07 pm |

Officials from 4 states today came out agains the pending Ney-Kanjorski bill would weaken laws against predatory lending.

“The Ney-Kanjorski bill pending in Congress and supported by much of the lending industry would gut the strong laws in these states. Another bill, sponsored by Rep. Miller of North Carolina and supported by consumers and civil rights groups, would let states keep strong laws and protect their consumers.”

I do find it odd that the lending industry is nearly unanimously in favor of more restrictions (this bill) since subprime lending has been very profitable for many. The appraiser component of the bill, is more of an empty but magnanimous gesture. In a prior post, I felt that the bill has language intended to protect appraisers from pressure, but the reality is that there are no real preventative measures included. In other words, nada.

See: [The Responsible Lending Act (HR 1295)]

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Mortgage Fraud: Selecting Appraiser’s Right Name For The Report [part 3 of a series]

September 7, 2005 | 7:27 am |

Today our appraisal firm had a typical request from a client who happened to be a mortgage broker. We had submitted an appraisal that was performed by a licensed assistant in our firm. The report was reviewed carefully and the lender that received the report said it was fine except for one thing, they didn’t accept a licensed assistant as the signer. As it turns out, the mortgage broker had submitted our report to a different lender than we had been told, at the last minute. In the competitive world of interest rates, this is a common occurrence.

The call goes like this [names withheld to protect the guilty?]:

Mortgage Broker: The appraiser that signed your report is not approved by the lender we are submitting the report to. [because he was a licensed assistant]. The report looks fine but we need the appraiser’s name changed.

Appraiser: What do you mean?

Mortgage Broker: Just have another appraiser sign the report.

Appraiser: Do you mean, claim that they inspected the property and performed the analysis?

Mortgage Broker: Yes, all of the other appraisers we use do this.

Appraiser: No, we can’t do that. We did complete the report in compliance with the lender you indicated you were sending it to. However, we can send a certified appraiser to the property again quickly and do the report over at a discounted fee since the research has been done. The appraiser needs to verify the research and may or may not agree with the original result.

Mortgage Broker: Oh, ok. That’s fine. But please hurry.

Note: This client is one of the good ones – they will try to ask for this sort of thing but accept our logic and keep using us, indicating there is hope for humanity, or at least wholesale lending.

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White Lies: Study Shows Occupancy Fraud in 53% of Claims

September 6, 2005 | 9:08 pm |

The Prieston Group, who provide fraud insurance and other related services, released a study today analyzing mortgage fraud. Granted this is a press release and does not disclose the number of claims in the study, it does show some interesting results.

They ranked mortgage fraud by type:

Some highlights of study:

  • Appraisal fraud: 9.7% of all claims.
  • Occupancy fraud: was by far the highest type at 52.9% of all claims – “borrowers — or someone acting on behalf of borrowers — misrepresents whether they plan to live at the property.”
  • Mortgage fraud: 48% of all claims in Georgia had some sort of fraud.
  • Average LTV in survey was 81.7%
  • Full doc loans were 55.5%

Remember, these are percentages of claims filed, not total numbers. I suspect the actual transaction numbers with some sort of fraud are much higher.

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Mortgage Fraud: Time Adjustments Can Underwrite Reality [part 2 of a series]

September 5, 2005 | 10:22 am |

Freddie Mac’s Weekly Primary Mortgage Market Survey for September 1st shows fixed rate mortgages dropping for the 3rd consecutive week. shows that this trend has continued since the first week of August and mortgage rates took a steep drop after Hurricane Katrina hit. The federal government OFHEO released 2nd quarter housing stats that showed a 13.4% increase in prices over the past year. Granted I have some issues with OFHEO stats, but they do show an important trend.

Then why do most appraisals we review show no time adjustments?

The answer is usually, “the underwriter wouldn’t accept the report with the adjustments included.” However, the sales price or refi estimated value was reached in the final report anyway. How? Other amenities were over or under adjusted to make the number, thats how.

A form of appraisal fraud and appraisal pressure

This a form of appraisal pressure or fraud that occurs so frequently that many underwriters and appraisers don’t even realize that this violates lending and licensing regulations. According to USPAP, the appraiser is not supposed to present a report that is “misleading” to the reader. Characterizing a rapidly rising real estate market as “flat” fills the definition of misleading.

Our firm receives this sort of pressure nearly every day.

The solution: do not remove your time adjustments if they are clearly supported by the market. Time adjustments are an underwriting issue, not a valuation issue. The appraiser is reporting an existing market condition. If the appraiser chooses to comply, then the appraisal must be made subject to a “hypothetical condition” per USPAP.

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Flipping In Secret

August 29, 2005 | 9:36 pm |

A survey of recent condo sales in Miami showed that nearly half the condo owners were LLC’s. It is believed that these are mainly speculators. Corporations and foreigners often create an LLC when purchasing real estate to protect themselves from liability. Speculative flipping appears to be on the rise in metropolitan areas around the country.

If you have been appraising for a while, remember the painful experience the FDIC’s bailouts starting with Vernon Savings and Loan in Vernon, Texas in the late 1980’s? This was often claimed as the straw that broke the camel’s (FDIC’s) back and a flood of bailouts soon followed. One of the reasons for the collapse was the high volume of property flipping, with the same property often transferring several times in the same day. While the stories are different today, flipping is still occuring.

Buyers and sellers are increasingly withholding information that as appraisers, we are bound to verify. According to USPAP, we are supposed to report all prior transfers within the past three years. Our licensing requires us to disclose what we were unable to verify that is needed for the valuation.

It is now even more important than ever to get a copy of the contract and review it. We are stumbling into undisclosed flips more than in prior years. Flipping appears to be one of the reasons Fannie Mae recently redesigned their appraisal forms.

How do we determine if there is a flip? Usually, an experienced appraiser will notice that the sales price, even considering an optimistic appreciation assumption, doesn’t make sense and match the names in the contract with the owner on record. For the appraisal firms that do high volume with trainees, I hope you have good E & O insurance. 😉

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Just Get – R – Done

August 23, 2005 | 11:54 pm |

The danger of appraisal inflation is not apparent to many consumers.

The consumer begins to believe the inflated value as valid and it is validated each time the property is over-appraised. When its time to cash out, the fall from the clouds can be unforgiving.

But problems arise when the appraisal is higher than the home’s actual value. Such overvaluation can lead homeowners to overborrow. And later, when they resell, they could learn that the till they thought was full of money contains much less — or nothing at all.

At the end of the day, the homeowner just wants the job done. Herein lies the problem.

Its called “detached from reality.” The mortgage is not being done for the homeowner at all. Its being done on the lender’s behalf to assess the collateral. However, the typical lender sees the report only after it has been through the food chain.

See: The beginning of the end, or how this mess got started

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Fannie and Freddie Now Have To Tell

August 20, 2005 | 11:48 pm |

Its hard to imagine its finally happening, but regulations proposed in early 2005 were just finalized that make Fannie and Freddie now responsible to detect and report mortgage fraud to OFHEO [Office of Federal Housing Enterprise Oversight [Note: PDF]].

This is a first step (albeit tiny) in creating some sort of enforcement activity against mortgage fraud considering the trillions of mortgage dollars under their watch. However, I am not sure what ability they will have to undertake this responsibility.

Now its time to turn attention to state enforcement, to ensure they have adequate budgets to fight appraisal fraud.

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