Appraisal Fraud: The Real Deal exposed in Declining Market

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Editor’s Comments and Analysis: There is little doubt that but for the rapid increase in housing prices, many buyers would have done nothing. The pressure was on to get on the train before it left the station. You might be stuck in the position of never being able to afford a home.

What buyers (and investors didn’t know was that the appraisals were faked. In 2005 8,000 appraisers signed a petition to Congress to intervene because they were under pressure to allow for super charged values in their appraisals that would not withstand the test of time. They warned that the results would be catastrophic. Of course, Congress and the Bush administration did nothing despite 8,000 upstanding appraisers concerned about whether they could ever work again under the intimidation of the banks.

For reasons that defy logic, both pro se litigants and attorneys have steered clear of this claim, apparently under the mistaken impression that because the borrower paid for the appraisal, they owned it and their reliance on it was their own problem. In fact, the story goes, the borrower liked seeing the high appraisals. It made them feel good about the “deal” they were getting. None of that is a proper defense against appraisal fraud against the originator and all those who pretend to take title to the loan all the way up to the top of the pyramid where the loans are claimed to be authentic (which they are not) and where the REMIC trusts allow intermediaries to use their names in foreclosure action claiming the REMIC owns the loan (which they do not).

The Truth in Lending Act, and most statutes restricting deceptive lending refer to verification of the value of the property being the lender’s responsibility. The industry standard Appraisal Independence Requirement (AIR) states that the order must be placed by the lender, that just because you paid for it doesn’t mean it is your or you can use it for any other purpose, and that ownership of the appraisal report is with the lender not the person who eventually paid for it (the borrower).

Reliance on those appraisals by the Buyer is a natural, reasonable and intended consequence which the banks laid out in front of the buyer. The typical appraisal came in $20,000+ higher than the refi or sale of the property making everyone feel warm and cuddly at the time. The appraiser reluctantly in most cases complied with demands from the bank and after being showed the number required to close the deal, complied or face never working again.

As many homeowners found out, the appraisals were not based upon fair market value by an independent examiner who believed that the price would hold and was therefore a fair estimate of the range of value of the property. In many cases, people found out days or weeks after they closed the deal that homes in their neighborhood were being sold for far less than the deal they just made with the bank, leaving them underwater in a fraction of time usually allocated to evaluate the accuracy of the appraisal.

The manipulation of the appraisers led to manipulation of the appraisals which led to large scale manipulation of whole regional markets, hiding the fact that the appraisals were inflated by comparison to other similarly inflated appraisals on nearby equivalent property. Developers of planned communities were raising prices monthly as much as 10%-20%, to support the appearance of a rapidly rising market. Wall Street knew that the prices were far out of line because the most reliable indicator of general market prices — the Case Schiller Index — clearly showed that at no point since the index began in the 1880’s was their such a variance between housing prices and the ability (median wages) to pay for them.

The reason for the inflation of “value” was simple — Wall Street was running out of people to sell on taking loans so they inflated the value of the homes in order for them to move more money around and continue selling bogus mortgage bonds. Had they not done so, the crash would have come around 2004-2006 rather than in 2007-2008-2009. Investors would have stopped the gush of money into mortgage bonds and the PONZI scheme would have collapsed then instead of a little later.

So you have “lenders” right along sellers, selling the borrower on the value of the property to complete the deal. Buyers and people refinancing their homes don’t know what appraisers and banks know about verifying values. So they reasonably rely upon representations from the “lender” as to the value of the property. Of course the lender isn’t really the lender and the value isn’t as stated.

This is one of the reasons the REMICs didn’t show up on the notes and mortgages. Wall Street inserted “bankruptcy remote” vehicles to sit as surrogates or nominees of the real lenders who were advancing money in order to insulate the investor lenders from potential liability and to insulate the banks from potential liability.

The homeowner is entitled to receive just compensation for a false appraisal and false representations that the appraisal has been verified by the lender. Neither representations contained in the appraisal nor the representations of verification by the “bank” lender were true. Had the borrower known this, and especially had the borrower known that the lender had an interest in only closing the loan without any risk of loss, the borrower would have an opportunity to ask questions about who he was really dealing with and then make a choice as to which lender he really wanted to do business with. This is fundamental guarantee of the Truth in Lending Act — to give the borrower enough information that they can make an informed choice of one deal over another.

To the extent that the borrower was injured by the failure to disclose the reality of the situation, the borrower should be able to receive the financial damage caused by the misrepresentation. tot he extent that the act was intentional by the “lender” and all the participants up the faked securitization chain, they should also be liable for punitive or exemplary damages under both common law, and state and Federal Statutes.

Below is an article written by Dione Spiteri who founded US Appraisal Group ten years ago “on the principle that everyone deserves to have a positive appraisal experience and to increase confidence in the appraisal management experience overall.” I suspect she might be an excellent referral source for expert appraisers to look at those appraisals from 2001-present and give their opinions as to whether industry standards were followed and if not, why not.

Following are top tips consumers should know about appraisals:

1. The person ordering the appraisal, not the person paying for the appraisal, owns the appraisal report.
2. Research sales in the market area and consult with local realtors. Feel free to give the information to the appraiser and understand that the appraiser will always consider the data, but may use different data in the report if it is deemed to be more relevant or recent.
3. Understand that appraisers cannot communicate values, fees, or discuss the appraisal with you at any time when the order was placed by your lender.
4. Understand that if there are foreclosures and short sales in your market area, your home may compete with them for buyers in an open market, and they can affect the value of your home.
5. Don’t expect the appraiser to give the exact same amount of dollar value to improvements in your home as what you spent on them.
6. Do expect the appraiser to have competence in your market area and access to local MLS data.
7. Do understand that a professional appraisal is a supportable opinion of value. It is not the feelings of the appraiser but rather a supportable prediction of what your home would sell for if offered on the marketplace for a reasonable amount of time.
8. The inspection portion of a real estate appraisal is just one small portion of the appraisal process. Substantial work must be done before the appraiser inspects the property to research market information and neighborhood trends. Once the inspection is complete, the appraiser may spend hours analyzing the data to produce a credible report.
9. Educate yourself on the components that determine value in your property. Homes tend to be an extension of personal tastes, but the appraiser’s responsibility is to determine which of those tastes translate into a higher market value for your property.

See the full article here

Tags: AIR, appraisal fraud, Appraisal Independence Requirement, Diane Spiteri, ownership of appraisal report, US Appraisal Group
Posted in bubble, Corruption, Eviction, securities fraud |