Appraisal Fraud Explained

MOST POPULAR ARTICLES

CLICK HERE TO GET COMBO TITLE AND SECURITIZATION REPORT

I was speaking with a pharmacist last night who was questioning me about my contention that appraisal fraud was the root cause and vehicle of the deception that is called securitization. By now most people understand that there was something wrong with securitization but they don’t really understand that the actual breaking up the whole into pieces that were sold to investors was never completed, and in many cases, was never started.

But it is still a sticking point to most people that one should not be able to entirely escape a valid obligation just because the wrong Chinese hexagram was placed on the back of the wrong napkin. My answer is that they are entirely correct. The only way to extinguish an obligation is to pay it. My point on that score has always been that it WAS paid, not that it shouldn’t be paid. And I have further made the point that the obligation is offset by liability of the Banks to the borrower for lying to the borrower about the transaction. I have never endorsed any theory employing magical thinking which would discharge indebtedness  without payment or offset (which is the equivalent of payment, like a credit bid at auction).

Which brings us back to the point of appraisal fraud and how to explain to even a professional person how the value of the property was artificially hiked for the purpose of inducing the borrower to sign his name to documents that ruined his life forever. My previous explanations included some undeniable facts — like that each appraiser who wanted to continue working was required to look at the contract (violation #1) and was instructed to come in with an “appraisal” at $20,000 over the contract (violation #2 as to independence and objectivity of the appraiser).

I would say things like the appraiser was either specifically licensed or otherwise in a superior position of expertise such that the borrower and the other parties could rely on them, but in the securitized loan cases, they were reduced to clerical functions of simply rubber stamping the “values” being used by the Banks to justify the the money they took from investors.

I thought that pointing out facts like that it would be self-evident that appraisal fraud lay at the center of the universe of securitization and that appraisal’s twin, the securities ratings from Moody’s et al, was a twin black hole without which the mortgage mess and the appearance of securitization could never have been achieved. I was wrong.

Like the sticking point about the obligation not being discharged by anything other than payment, there is a sticking point about appraisal fraud which is that it seems inconceivable to most people that appraisers and bankers would intentionally use false values — even after those same people understand that the Banks were making a fortune on these bogus loans and the sale of bogus mortgage bonds to investors. Decent people just can’t get their minds wrapped around the idea that the appraisals cannot be justified by any means acceptable as an industry standard for appraisals. As expressed to me last night, “the appraisals must have been close to the actual value of the property.”

No, it wasn’t. And the proof of the pudding is what we have now, which is the same prices that were prevalent ten years ago before the run up. How did the appraisers get it so wrong? They didn’t. They were just following orders, which always sends chills down my spine because that is what Nazi war criminals said.

So how do I explain it? I’m trying out a new analogy so maybe people will finally get the fact that yes, they were duped by Banks who want us to believe that they too were duped but of course they haven’t brought a single lawsuit against a single appraiser. Why? Perhaps because the appraiser WAS just following orders from the banks and they can prove it.

So here is my pharmaceutical analogy. If you are a pharmacist selling many over the counter and prescription drugs, you pay attention to the purity and safety of the drugs and other items you sell in your drug store. The usual pharmacy has a aspirin on their shelves for anyone to buy. Despite the fact that aspirin is a powerful drug with multiple benefits and side effects it has become so popular that no attempts have been made to regulate it, except for the labeling and therefore it is available without prescription. Aspirin has been around for over 2 thousand years in one form or another, so we have a long history from which we can draw conclusions, but the actual mechanism by which aspirin works was not discovered until 1971.

Back to our pharmacist. With 2,000 years of history worldwide and a couple of hundred years here in this country, the pharmacist would ordinarily tell you that he feels no anxiety about leaving such a powerful drug out on the shelves and that we do know what it does and how it does it. If someone comes in to complaint about a bottle of aspirin, it is rare, perhaps once per month, which is the way it has always been for hundreds of years.

Now, assume that the average complaint per person for the whole population of those who visit the pharmacy for the last 100 years has been 1 per month, which is mostly explained by improper dosage or use. That provides a level of comfort about how to gauge the safety of the drug Aspirin. If there was a spike in deaths and problems reported to the pharmacists from customers and authorities, the pharmacist would assume, quite correctly, that there was some toxin in a particular batch of Aspirin and he would take it off his shelves. The assumption would be that the pill was bad because it was tainted by impure substances. As soon as the pill is removed from the shelves, the number of deaths and complaints drops to normal levels. Conclusion: the pill was a bad pill.

Now assume we have a similar statistic with home values that has been created and tracked by the Case-Schiller Index going back to the 1880’s. And in the main Index, they remove inflation as a factor and compare home prices to the average income of homeowners. The chart is flat, just like the experience with aspirin which showed a flat  chart with little variation until the bad pill came along. The flat chart is proof positive that comparing housing prices to median income is the proper way to judge market trends and for projections to have any meat to them.

Now imagine a huge spike in prices that lasts 6 years. Remember we are comparing the average housing price to the average income of the average family. So increases in population, or migration (a popular myth advanced by realtors to explain the sudden change in price volatility of homes) or other external factors that normally cause markets to rise and fall are not present. Without being an “expert” would you trust a change in the ratio of median income to housing prices? How could anyone pay for it if the median income per family was declining, which it was, and housing prices were going up, which they were? ANSWER: They couldn’t and they didn’t.

With inflation low, and migratory patterns being entirely insufficient to explain these huge monthly price increases, imagine yourself explaining to your adult child whether they should trust these prices. Knowing what we have explained just in this article, it is obvious what you would tell your child to do — rent, don’t buy, this can’t be sustained. The ratio is meteorically out of line with the only good measure we have of variation in housing prices — the ratio between income and price. You didn’t give that advice because you didn’t know that such indexes were available. But the appraiser did know and so did the Bank and the realtor. In fact, everyone at that closing table knew this deal was going to crash except the borrower who was relying on the Bank and the appraiser to justify the the deal.

Not only did they not tell the borrower that this was a bad deal based upon a value that could never be sustained unless median income went up over 100%, they sealed the deal with assurances that the purchase of a house was an “investment” and used the false increases in prices (caused by the influx of money and payment plans that would work for 6 months), because real estate always goes up and never goes down — a blatant lie known to be a lie by the appraiser, the realtor, the mortgage broker and the bank or mortgage originator — but not known to the average borrower.

In 2005, 8,000 honest appraisers signed a petition to Congress asking them to protect them because they were being forced to either lie on the appraisals or get out of the business because they wouldn’t get any business without lying like the Banks told them to. Of course nothing happened and the incident is long forgotten except by people like me who keep reminding you that it DID happen.

Does this help?

Tags: appraisal fraud, bankruptcy, borrower, countrywide, disclosure, foreclosure, foreclosure defense, foreclosure offense, foreclosures, fraud, LOAN MODIFICATION, modification, quiet title, rescission, RESPA, securitization, TILA audit, trustee, WEISBAND
Posted in bubble, Corruption, Eviction, securities fraud |