Appraisal Scoop

MARI Report Released - Appraisal Fraud "Significantly Lower" Than Expected

Inman News reported (click here) that: "In its annual mortgage fraud report, the Mortgage Asset Research Institute (MARI) said the sharp increase in mortgage fraud is partially because lenders are finding more cases of fraud in loans originated in 2006. But the slowdown in the housing market has also helped reveal fraud cases previously masked by strong price appreciation."

MARI’s MIDEX system classifies the types of alleged fraud involved in each incident reported by its cooperating subscribers. These classifications are shown in the Table below for loans originated in the five-year period from 2002 through 2006. The numbers on 2006 loans are very preliminary since fraud perpetrated in 2006 will continue to surface for another two years or more.

The Mortgage Fraud Types Table shows each type of fraud as a percentage of all fraud cases submitted to the MIDEX database. For instance, 55 percent of overall fraud incidents reported to the database for mortgages originated in 2006 contained application fraud, while the subprime equivalent is significantly higher at 65 percent. These percentages are hardly surprising given that the application form is comprehensive in collecting personal identity, employment, asset and liability information.

The MARI report states:

Even casual observation [of the Table above] indicates that the amount of appraisal fraud reported is significantly lower than one might expect in each of the years, especially in 2005 and 2006. The low levels of reporting are typically due to the fact that reported incidents involve more than one type of fraud. If a reporting lender finds misrepresentation in, for example, the verification of employment and occupancy status, that lender is not likely to pay for the review appraisal to verify appraisal fraud, even if the appraisal appears to be inflated. But these numbers are likely to increase as the lengthy process of reappraisal and value-verification is completed in many investigations. The slowdown in real estate appreciation should also accelerate how quickly appraisal/valuation fraud reports are submitted compared to prior years’ reporting trends.

Click here for the complete MARI Report.

Runt Rants - Comp Checks -- A "Legal" Opportunity?

The author is the owner of Acorn Appraisal Associates, a 21 year old firm offering a wide range of quality appraisal services to the Financial and Business Communities in the greater Houston SMSA

I was on an appraiser forum this morning and a frustrated appraiser posted the following....

"Thanks, got the usual call .......Comp check and if value is there they would send the request.  Has anyone ever told the LOs and Realtors that this is against the law???? and when you tell them it is, they don't believe us."

This is a pet peeve of mine. Comp checks are NOT against the law. They are NOT even against USPAP.   

USPAP is quoted below.

Research Illustration (AO-19)

The foregoing illustrations all include an appraisal assignment. In some situations, a client will request a service that is not an appraisal, appraisal review or appraisal consulting assignment as defined in USPAP. The service to be performed by the appraiser in the following illustration is:

* not an appraisal assignment (the appraiser does not develop a value opinion);

* not a real property appraisal consulting assignment (a value opinion is not a component of the analysis); and

* not a real property appraisal review (there is no appraisal to review).

The caller in this illustration is usually in the process of making a business decision and needs impartial and objective information but has not yet decided whether to pursue the matter at hand. The caller knows there is the potential for needing an appraisal, depending, in part, on what the sales data shows. The caller also believes that, if the data indicates that an appraisal is worthwhile, having that work completed by the appraiser in that subsequent assignment will lessen the time required to perform an appraisal. The prospective client may ask:

"We want you to check your data resources to see if there are sales within the past six months that are within one mile of [address]. If you find some, we may order an appraisal from you."

One possible response would be:

"If what you want is only the sales of properties shown in the databases available to me with the criteria you specified, I can do that research and send you the result. Then you can decide what you think your client’s property is worth. If I do only that, it is just research and is not an appraisal.

However, you need to recognize that there are risks if you decide to have the research done that way. If you decide to limit my work to just gathering the sales data using the research criteria you set, you are taking the risk that those criteria are both adequate and appropriate to find all of the market data relevant to your client’s property. You also take the risk that any appraiser’s analysis of that data would result in a value conclusion within the price range suggested by the sales data assembled using your criteria. There is no assurance that such would be the case."

It is perfectly understandable for a lender or a broker to pre screen a prospective borrower to make sure that the proposed deal is potentially workable before the lender or broker invests their time and the borrower's money. Wouldn't you expect that of your lending officer if you wanted a loan?

Click below to continue reading . . .

AppraisalPort / FNC - Class Action Suit Seeks $5 Million in Damages

In a lawsuit filed May 9th, 2007, FNC has been sued for:

• False Advertising under the Lanham Act
• Intentional Misrepresentation (Fraud)
• Negligent Misrepresentation
• Conversion, Misappropriation, and Breach of Bailment
• Breach of Implied Contract

Click here for the source document: FNC Complaint

"The Plaintiffs bring this action as a class action on behalf of all appraisers, including both individuals and entities engaged in performing appraisals, who have used the AppraisalPort web service of FNC since its inception through at least April 2007, and who were damaged thereby."   

The Plaintiffs are requesting that the Court award them damages and/or recoupment of profits in an amount greater than $5,000,000 to be determined at trial.

The complaint starts off with a brief history of how AppraisalPort functions, the AI Ready data standard, and how appraisers interface with the service and their clients. 

It also describes the FNC Collateral Management System that "allows lending institutions to manage the process of ordering, obtaining, storing, reviewing, and analyzing information about the collateral securing real estate mortgages, i.e., primarily the information from property appraisals."

According to the complaint, "FNC has repeatedly assured and represented to appraisers who use its AppraisalPort service that FNC does not have access to the appraisal report data transmitted from the appraiser to a lending institution via the Appraisal Port service."  Several references from interview, newsletters, and their own Web site were referenced to support that claim.

The complaint alleges that, "On or about April 2007, these representations . . .were removed from FNC's website, apparently because FNC obtained information the appraisers were planning a lawsuit based on these representations."

Click below to continue reading . . .

The "Conditioning" Of Appraisers

Author: Ted Faravelli, Jr., is a real estate case consultant and state-certified appraiser specializing in forensic valuation services, litigation support and expert witness testimony. With more than twenty-three years of experience, he has consulted in over 100 cases and has been designated as an expert witness to the California Superior Courts of Sacramento, Marin, San Francisco, San Mateo, Alameda, Contra Costa, Santa Clara, Orange and Los Angeles Counties.

con•di•tion – noun

1. a particular mode of being of a person or thing; existing state; situation with respect to circumstances
2. a restricting, limiting, or modifying circumstance: It can happen only under certain conditions.
3. a circumstance indispensable to some result; prerequisite; that on which something else is contingent: conditions of acceptance
4. something demanded as an essential part of an agreement; provision; stipulation: He accepted on one condition.
5. Law.

a.    a stipulation in an agreement or instrument transferring property that provides for a change consequent on the occurrence or non-occurrence of a stated event.

b.    the event upon which this stipulation depends.

    6.  Appraisal.

a.     the process of extracting unlimited free services from an appraiser.

b.     a psychological technique used by lenders to produce outcome-based appraisal results.

Few things elicit such an emotionally charged response from an appraiser as the word “condition.” But what exactly is it about the word that invokes rage, resentment, angst and disgust?

Appraisers are in a service profession, they provide their expertise in the form of opinions. What they offer is essentially their time, not unlike any other service-oriented professional. Fees for service are usually set by mutual agreement; that is the client typically will set the fee and the appraiser can usually take it or leave it.

Once agreed the appraiser receives the assignment, completes and submits the report to the client; then starts the “conditioning” process. The timing is usually a factor in that the client may have the appraisal report for several days or likely weeks prior to demands that the “conditions” be satisfied immediately, if not sooner, as they are always prior to doc or prior to funding.

Let us examine a recent set of “conditions” received at an appraiser colleague’s office.

1. The first “condition” was for them to change the lender’s name to a new client.
2. The second “condition” was for the appraiser to change the occupant status from tenant to “owner”.
3. The third “condition” was for the appraiser to state “there is no pending litigation” at the subject complex.

Click below to continue reading . . .

Cash Equivalency, Terms, Time, Location and other Adjustments Often Omitted

AUTHOR: Steven R. Smith, MSREA, MAI, SRA, Smith Realty Advisors, 936 San Jacinto St., Redlands, CA 92373, Real Estate Appraisals, Consulting, Expert Testimony, Forensic Reviews, Fraud Research and Analysis, Litigation Support, Fraud Training  909-798-8855, fax: 909-798-0139

Yesterday in a discussion with a InlandCAAppraisal Forum member about Seller Carried Paper, Cash Equivalency came up.

Seller Carried Paper in a real estate transaction requires adjusting since the definition of Market Value is in terms of Cash to the Seller, not Paper. Mortgages secured by Trust Deeds is a commodity that can be bought and sold, at par, at a premium or at a discount. There is a whole secondary mortgage market that buys and sells mortgage and mortgage backed securities.

Lenders will buy commitments from FNMA or FHLMC to buy millions of dollars of loans at a certain yield rate. There are auctions every month. Points added to the loan, enhance the yields. Delivering loans with a higher yield than the market, results in a premium being achieved. Easy to do if the rates are going down, harder to to when they are going up.

What could an individual seller do if they carried the loan and wanted cash, whether it was a 1st or 2nd? They too can sell their paper and get cash. The amount is going to be based on whether the rate is at market, above or below, the terms and the Loan to Value.

In a $400,000 sale, if the seller carried a 1st of $320,000 (80%) and the market rate for a FNMA loan was at 6%, and their rate was higher, say 6.5%; would  they be able to get a premium if they sold the Loan?

What if, using the same example, their rate was 5.5%, which is usually more typical. That is sellers carrying paper might usually result in a lower than market rate. A discount would be required in order to sell it.

Whenever we are appraising and one or more of the comparables involved seller carried paper, there is always the possibility that a discount needs to be addressed, but how?  The old SREA had a seminar on this in 1980-82 when we were dealing with this very issue, because the FNMA rate had gone to 15% and Sellers were Carrying Paper at 10-12%, and builders were offering 3-2-1 Buy-Downs of the rate (12% the first year, 13% the 2nd year, 14% the 3rd year).

Buy-Downs come at a cost, which needs adjustment. Incidentally, there was no real estate market above the 12.5% level, it slammed shut. Between the summer of 1979, specifically after September 6th, the volume in our office went from 400-500 appraisals per month down to 25 and stayed at that low level until May of 1980 when all the new loan programs came out, the Buy-Down, Arm's, and Neutron loans.

Adjusting for financing, be it Seller Carried paper or Buy-Downs, takes time and involves primary research to do correctly.

When Seller Carried paper is at a much higher LTV than could be obtained from a lender, there may be an additional discount needed. Example, Land Loans often will only be made at the 50% LTV level. If a seller carried 80%, even at market rates, the discount would be high.

While working on multiple land assignments I visited the local broker who had most of the listings and sales, to verify terms, motivations, etc.  I told him I had to adjust for Cash Equivalency on Seller Carried transactions. He said "you can't do that, without them there is no market".

Click below to read on . .

Runt Rants - The Glass Is Half Full!

The author is the owner of Acorn Appraisal Associates, a 21 year old firm offering a wide range of quality appraisal services to the Financial and Business Communities in the greater Houston SMSA

Last week, Ken wrote about the Inter-agency proposed letter regarding Sub Prime lending guidelines and a coalition of appraisal organizations comments regarding those guidelines.   

This week Ken's article will share his advice on how to:

• improve your business,
• reduce the hassles,
• increase your efficiency,
• enjoy life and your business more
• bring in better, more efficient clients and
• cease doing business as soon as you can with the underbelly of the lending industry.

WOW  . . . .Let's get started:

The news these days is filled with the "Sub Prime Meltdown", mortgage fraud, lender pressure on appraisers, falling real estate markets, a broken relationship between the lending industry and the appraisal profession.

Comparisons to five years ago suggest the situation today is just as it was then. Lenders are bad people. Regulatory efforts and enforcement are failing. Appraiser education is declining. No progress has been made in any of these areas is implied.

The situation would seem to be getting worse by the day. That's a lot of gloom and doom being aired. Depressing. Yet so foreign to my personal experience!

As to the point that nothing has changed; I think the opposite. Much has changed, and for the positive!

Consider these examples . . .

• The sub prime melt down is in full bloom in the media beginning the first quarter of 2007, but that's fluff, that's after the fact.
• Secondary market investors had seen this coming as much as two years ago and began instituting changes in their risk management to protect themselves.
• Portfolio prices began dropping in the market as a result of that investor tightening.
• Late last year it was reported that some CMO offerings had to be withdrawn from the market....no buyers at any affordable price point.
• Regulated Institutions continued the path demanded by their regulators to distance themselves from the appraisal ordering function.
• Regulated Institutions included in their contracts the requirement that quality control formerly done by the institution would be performed by the AMC.
• Regulated Institutions refined that development by increasingly distancing the loan officer from the appraiser. It now takes a significant act to be able to converse with the loan officer in many Institutions
• A much needed market correction is in progress...markets that enjoyed double digit price run ups for several years running started slowing in 2005, flattened and even turned negative in 2006, and in some areas may reach the bottom of the cycle in 2007, in some others the bottom is 2008

Click below to continue . . .

Appraisal Institute Names New Chief Executive Officer

Appraisal Institute President Terry Dunkin, MAI, SRA, announced to its members Friday, April 27, that Frederick H. Grubbe has accepted the position of Chief Executive Officer of the Appraisal Institute. He will assume his responsibilities as of June 1, 2007.

Grubbe comes to the Appraisal Institute with more than 20 years of experience in nonprofit and government-related organizations. For the past six years he has served as president and chief executive officer of the National Fraternal Congress of America, an association of fraternal benefit societies, where he was responsible for overseeing business and membership operations.

In addition, he has held high-level positions with the Million Dollar Round Table, the U.S. Office of Consumer Affairs and the National Highway Traffic Safety Administration of the U.S. Department of Transportation in Washington, D.C. He served from 1989 to 1991 as White House liaison and Special Assistant to Samuel Skinner, the Secretary of Transportation. Grubbe holds an MBA degree from Loyola University Graduate School of Business and a BA from Northern Illinois University.

“We can look forward to Mr. Grubbe bringing his background and experience into play as he assumes responsibility for overseeing the continued growth and prestige of the Appraisal Institute. I am impressed with his emphasis on consensus building and communication between members, leadership and staff,” Dunkin said.

Source: Appraisal Institute

See Also: RISMedia

Trimming The Fat? Lenders Admit To Lowering Appraised Values

"You face foreclosure. You quickly move to refinance but qualify only for a double-digit subprime rate.  You take it, pay for an appraisal and learn your house is worth $425,000. Then the lender reduces your appraisal by $100,000."   That's the way the Examiner article Low appraisals hurt subprime borrowers begins.

"A loan officer from Quality Home Loans, a lender that downgrades appraisals, said, “Appraisals can be downgraded for a lot of reasons, like market saturation, houses that stay on the market too long, or if when doing a public records search we see that though additions were made to a residence, the proper permits were not obtained. So then we disallow those additions.”

One has to question that practice on a number of levels!

1. Equity - It seems to me that this practice [lowering values] could lead to claims of discrimination if a policy of adjusting appraised values is not adhered to in an equitable manner.   For example, “Imagine your neighbor with the identical house in the same condition gets 100 percent LTV, and not only do you get double-digit interest rates and only 60 to 70 percent LTV, but now they drop the value of your home by tens of thousands of dollars” .
2. Double-Dipping - The reasons quoted above may be legitimate for a value differential, but is an unlicensed loan officer or processor qualified to assess if those issues have already been addressed?  Do the comparable sales already reflect the changing market conditions? Are they qualified to determine the level of adjustment?  AND come on . . .What loan officer is verifiying building permits?!!
3. Legality - I understand the need to make underwriting decisions based on credit reports, appraisals, and other criteria . . .but I don't agree with actually changing the results of those reports.  Where does it stop!   Can a loan officer run a credit report and then change the FICO score? 
4. Responsibility - Who bears the responsibility for that report once the value has been changed?  I can foresee a borrower filing a complaint against an unwitting appraiser for an unsupported "Low" value.

There have always been reports, by appraisers, of clients demanding that appraisals be delivered without any "security" features enabled on the electronic file.  Doing so would make it simple for anyone to alter the report.   Of course they always claim that this is so they can add their watermark (or something similar) and that "We NEVER change your report!".

The Examiner article (click here) gives fuel to the fire that there may be MORE changes going on than one might think?

Zaio Reinvents The "Drive-By"

According to the Chicago Tribune article A focus on appraisals in a snap

What Zaio claims to be doing is automating the process while still incorporating the appraiser's judgment.

A kind of "instant appraisal" already is available in the marketplace in the form of AVMs, the best-known supplier of which is Zillow. But AVMs are based on algorithms of public data, and their critics say they are unreliable -- more an estimation tool than an appraisal.

Zaio, instead, is trying to reinvent the "drive-by appraisal," in which a trained appraiser visits the property, photographs it and evaluates its exterior, based on industry-accepted criteria.

Drive-bys are often used for refinancing, home-equity and other loans that typically do not call for the more rigorous, full-walk-through appraisals usually needed for a purchase loan. Producing a drive-by can still can take a week, Ross said. And the delay sometimes derails deals that are well under way, as appraisals trickle in that do not match expectations, he said.

For the complete article - click here.

Comp Checks - Value Opinions Put Appraisers "On The Hook"

CNNMoney.com tackles the "Comp Check" issue in their latest series For sale: Scenes from a bubble. 

The The appraisers: Price estimates made to order segment tells a story of a 27-year old Californian that was convinced by his loan officer his home had appreciated $82,000 in 12 months, even though "everything he had read said the market in his area was cooling."

How did this happen?  As appraisers know, that scenario is all too common.

First, the loan officer sent a broadcast email to a number of appraisers looking for a target value.  (see Fishing For Appraisers - The Comp Check "Bait & Switch" Technique). 

Then, as soon as one of them took the bait, the loan officer called the borrower with the Good News! 

According to an appraiser MONEY hired, Kim's house is worth only $580,000 and was at the time he refinanced the house. Yes, different appraisers often have different takes. In Kim's case the appraisers disagree about whether an enclosed porch counts as part of the total square footage.

The article is rather unique in that MONEY interviewed the appraiser that prepared the final appraisal report.  He's quoted as saying, "Is there a problem out there? You bet there is." He adds, though, that he resists and that in Kim's case pressure wasn't an issue. "I never push values," he says.

"Appraisers who do comp checks know that they have to inflate values to get the order and get paid," says Pamela Crowley, a former appraiser who recently launched a site to catalog lending abuses, MortgageFraudWatchList.org.

Pamela says "When I started asking for the EVIDENCE of the pressures we appraisers are subject to on a daily basis, it was because all my loud mouthed activism was constantly being met with, “Where’s the evidence. We can’t do anything without the evidence.”   

That's when she got the idea for the Mortgage Fraud Watch List. MFWL is a database of addresses, submitted by real estate professionals from all 50 states, where a sale or refinance transaction has suspicious activity. 

I've been in contact with Pamela and hope that she'll share some of her experiences here on AppraisalScoop.com