Appraisal Fraud

| | Comments (2) | TrackBacks (1)

This article is a reprint.

I enjoyed finding your blog today. It was enlightening, particularly in the area of real estate appraisals. Mortgage fraud is something I've been reading about lately. Since the FBI says 80% of it involves collusion and usually with the appraiser, it made me wonder why underwriters don't just ask for second appraisals when a loan looks like it could be part of a flipping scheme (e.g., the owner hasn't had it for long and the new appraisal has it coming in much higher than the last one). Have you looked at this area at all? I'd be interested in your point of view.

Appraisal Fraud is more of a problem than it was. A couple of years ago, the appraisal was treated and regarded differently than it is now. On the one hand, appraisers were regarded as gods sitting in judgment of a property, which never was true. They're human, subject to human foibles and tendencies. On the other hand, it has perhaps swung a too far in the opposite direction, with many appraisers doing whatever the loan provider wants in order to continue to attract business.

A good balance is somewhere in between. Appraisers don't want to work any harder than necessary, of course, but they've got to remember that they are, first and foremost, businessfolk selling a service. I agree with the law that says minimum appraisals are prohibited, as it protects everyone. On the other hand, when I ask an appraiser to reconfirm if comparables don't support a value of $X, what I'm trying to do is protect my client. This gives me a chance to re-work the loan, or re-open negotiations with the seller, before my client has wasted hundreds of dollars for an appraisal that doesn't help. Eighty to ninety percent of the time, the appraiser who tells me the value isn't there gets paid anyway, because I can re-work the loan or renegotiate the deal to the point where everybody's happy and the transaction proceeds. If the appraiser just goes out, takes the check, and drops an appraisal that's $20,000 low on my client, I have a screaming mad client on my hands who is poison to my business because in their eyes I was the one who "tricked" this money out of them, and perhaps a seller and seller's agent who are angry as well because I hired an "incompetent" appraiser, with repercussions next time I write an offer for one of my clients, and nobody is happy, least of all me.

On the other hand, an appraiser who is willing to manipulate the data to come up with value no matter what is one I want to stay away from, and it's because of fraud. If there's no default and the loan gets paid back in full, appraiser fraud doesn't matter. But that's not the usual thing that happens with appraiser fraud.

I keep writing that a certain percentage of all attempted real estate transactions are fraudulent, and a good agent and especially a good loan officer keeps their eyes peeled for evidence. Real Estate transactions are very large dollar amounts. A one bedroom condo around here goes for over $200,000. This is more than most families make in a couple of years. An average single family residence might be $500,000 or more. This makes the temptation level considerable, and there are always folks around who have an eye for the quick easy dollar and never mind the effects on others or the prospects of prison if caught. Sometimes the lender is the intended mark, sometimes the other party to the transaction. I could tell you about all varieties of scams, but appraisal fraud is one of the most common.

Before we go any further, let's examine what an appraisal is. Accountants value goods using a method called "Lesser of Cost or Market," or LCM for short. This means a given property is valued for accounting purposes at either the purchase price (cost) or appraised value (market), whichever is lower. But this has been modified from its original form for real estate lending purposes, because in the real world real estate appreciates in value. At purchase, the cost or value argument still applies. No matter what, the lender will not lend based upon a value greater than the purchase price. Later on, however, they will, because land does not depreciate, it does not in general vanish or get used up, and it does increase in value (Pretty much universally over time frames of a decade or more).

This gives scam artists all the leeway they need. Some of them are relatively harmless, in that all they're looking for is a better rate on a loan that they do intend to repay. This doesn't mean it's smart to cooperate with them, as many agents and loan officers who did are likely to discover quite soon, as the loans default and the lender investigates why. The balance sheet reads a little differently when you discover that cooperating with the guy who just wanted to cut a few corners is going to cost you your license.

Appraisal fraud, however, is usually aimed at a large quick score. I'm going to keep my examples basic, lest I inadvertently release a couple more ideas into the wild. Let's say you own a property that's worth (pinky finger extended) one million dollars. You owe $900,000. If you sell, you're going to net about $30,000. But if you can persuade a buyer that property values are increasing much faster than they are, many will bite off on an increased sales price. You tell the appraiser "Appraise it for $1,250,000 and it's worth $25,000 to you!" He does so. You pay him his $25,000 and your net is still around $235,000 to $240,000. It's fraud, but fraud that many folks have gotten away with because the buyer doesn't realize he's been had and keeps paying the bank. Or you can't keep up the payments but want to walk away with as much cash as possible. Instead of a distress sale, where you'd be very lucky to break even with a sharp buyer's agent, you pay the appraiser $25,000 to appraise it at $1.25 million, refinance for cash out to maybe 90 percent of that value, pay the appraiser and walk away with a cool $200k, never making a single payment on the new loan.

Appraisal fraud can also be intentionally low. A buyer wants to buy the property, pays the appraiser to appraise it low, and renegotiates the price. I had this tried on me about two years ago. It didn't work.

Now once upon a time, there were real constraints to keep an appraiser from pulling this, on residential properties at least. To a certain extent, there still are but those guidelines have been relaxed due to the hypercompetitive market we've had the last few years. For instance, it used to be that the lenders would accept a value for a property on a refinance no higher than an annualized increase of 10 percent for the first couple years. That's gone by the wayside, as lenders get used to the fact that values are increasing faster than that. With many lenders, it's whatever the appraiser says the day after the sale. This is an invitation to fraud. Invitations to fraud do not excuse fraud, but they certainly make it easier. It used to be that no matter what, you couldn't pull cash for six months after a sale. That's now changed.

Underwriting in many lenders no longer has to pass a "smell test," where the lender pulls up the local market and sees what similar properties have really sold for recently. They're competing for loans! First time they tell the folks "no" that loan officer may not give them any more chances to do loans, choosing instead other lenders with more accommodating employees and policies. They have to do loans to stay in business, and avoid layoffs, but those lenders with more accommodating employees and policies are going to be in a world of hurt if the local market cools much further.

Now appraisers that do this are subject to discipline and legal penalties, starting with the fact that the lender has the option of never accepting one of their appraisals again and going up through loss of license and jail time. I'm not up on the penalty structure, but fraud that costs in excess of $100,000 is a serious felony. They've got the appraiser's name, license number, and other identifying information. In my opinion, aiding and abetting fraud is stupid and if you can't get them to fly straight, walking away as quickly as possible is your best option, but real estate compensations (and the amounts at stake) are large enough that many will do it. If you're not a pro yourself, your best protection is a good agent that's working for you, not splitting loyalty between both sides of the transaction, and making sure somebody working for you is there at the property to meet the appraiser.

Caveat Emptor

Original here

Categories

Delicious Bookmark this on Delicious StumbleUpon Toolbar Stumble It!

1 TrackBacks

Listed below are links to blogs that reference this entry: Appraisal Fraud.

TrackBack URL for this entry: http://searchlightcrusade.net/mt/mt-tb.cgi/2725

» Appraisal Fraud from Searchlight Crusade

I enjoyed finding your blog today. It was enlightening, particularly in the area of real estate appraisals. Mortgage fraud is something I've been reading about lately. Since the FBI says 80% of it involves collusion and usually with the... Read More

2 Comments

In 1999 I did research for a class project on Appraiser Liabilities. It quickly turned from civil to criminal. In the last couple of years, the consequenses of inflating values has been coming to roost. In the month of March 2007, more appraisers have been indicted or convicted/confessed in criminal mortgage lending cases than in all of 2000.

By the end of this year, there will be more convictions in one year than in all of the S&L Crisis. The License Law and USPAP only exist to judge appraisers. It is being used in civil and criminal courts. Forget the fact that some State License Boards are impotent, appraisers are being sued big time.

Those who played fast and loose these last several years, inflating values to help make deals work, have huge liabilities and even criminal issues coming.

I know, I have researched and written CE seminars and journal articles on Mortgage Frauds, Predatory Lending and Appraisal Frauds. Presently I am writing a book on the topic. This is an exciting time, new cases every day.

Merl Watson said:

Read: "The Truth About Real Estate Appraisal" by Stephen G. Bishop, a former appraiser who threw his license in the trash when he saw what real estate appraisal really is.

Please be civil. Avoid profanity - I will delete the vast majority of it, usually by deleting the entire comment. To avoid comment spam, a comments account is required. They are freely available, and you can post comments immediately. Alternatively, you may use your Type Key registration, or sign up for one (They work at most Movable Type sites) All comments made are licensed to the site, but the fact that a comment has been allowed to remain should not be taken as an endorsement from me or the site. There is no point in attempting to foster discussion if only my own viewpoint is to be permitted. If you believe you see something damaging to you or some third party, I will most likely delete it upon request.
Logical failures (straw man, ad hominem, red herring, etcetera) will be pointed out - and I hope you'll point out any such errors I make as well. If there's something you don't understand, ask.
Nonetheless, the idea of comments should be constructive. Aim them at the issue, not the individual. Consider it a challenge to make your criticism constructive. Try to be respectful. Those who make a habit of trollish behavior will be banned.

Leave a comment

Copyright 2005-2020 Dan Melson All Rights Reserved

Search my sites or the web!
 
Web www.searchlightcrusade.net
www.danmelson.com


The Book on Mortgages Everyone Should Have
What Consumers Need To Know About Mortgages
What Consumers Need To Know About Mortgages Cover

The Book on Buying Real Estate Everyone Should Have
What Consumers Need To Know About Buying Real Estate
What Consumers Need To Know About Buying Real Estate Cover

Buy My Science Fiction and Fantasy Novels!
Dan Melson Amazon Author Page
Dan Melson Author Page Books2Read

The Man From Empire
Man From Empire Cover
Man From Empire Books2Read link

A Guardian From Earth
Guardian From Earth Cover
Guardian From Earth Books2Read link

Empire and Earth
Empire and Earth Cover
Empire and Earth Books2Read link

Working The Trenches
Working The Trenches Cover
Working the Trenches Books2Read link

Rediscovery 4 novel set
Rediscovery set cover
Rediscovery 4 novel set Books2Read link

Preparing The Ground
Preparing the Ground Cover
Preparing the Ground Books2Read link

Building the People
Building the People Cover
Building the People Books2Read link
Setting The Board

Setting The Board Cover

Setting The Board Books2Read link

The Invention of Motherhood
Invention of Motherhood Cover
Invention of Motherhood Books2Read link



The Price of Power
Price of Power Cover
Price of Power Books2Read link

The Fountains of Aescalon
Fountains of Aescalon Cover
The Fountains of Aescalon Books2Read link



The Monad Trap
Monad Trap Cover
The Monad Trap Books2Read link

The Gates To Faerie
Gates To Faerie cover
The Gates To Faerie Books2Read link
**********


C'mon! I need to pay for this website! If you want to buy or sell Real Estate in San Diego County, or get a loan anywhere in California, contact me! I cover San Diego County in person and all of California via internet, phone, fax, and overnight mail. If you want a loan or need a real estate agent
Professional Contact Information

Questions regarding this website:
Contact me!
dm (at) searchlight crusade (dot) net

(Eliminate the spaces and change parentheticals to the symbols, of course)

Essay Requests

Yes, I do topic requests and questions!

If you don't see an answer to your question, please consider asking me via email. I'll bet money you're not the only one who wants to know!

Requests for reprint rights, same email: dm (at) searchlight crusade (dot) net!
-----------------
Learn something that will save you money?
Want to motivate me to write more articles?
Just want to say "Thank You"?

Aggregators

Add this site to Technorati Favorites
Blogroll Me!
Subscribe with Bloglines



Powered by FeedBlitz


Most Recent Posts
Subscribe to Searchlight Crusade
http://www.wikio.com

About this Entry

This page contains a single entry by Dan Melson published on October 24, 2008 7:00 AM.

Killing the Goose That Lays The Golden Eggs - And All of Its Descendants was the previous entry in this blog.

Will I Qualify for the Loan to Buy Real Estate During The Market Meltdown? is the next entry in this blog.

Find recent content on the main index or look in the archives to find all content.

-----------------
Advertisement
-----------------

My Links