The following article is by Steven R. Smith, MSREA, MAI, SRA, Smith Realty Advisors, The opinions expressed are the author's and do not necessarily represent those of the Appraisal Scoop blog.
While driving back from an interesting field inspection of an alleged 25,00 SF home in 90210 yesterday, I called an appraiser acquaintance that I had been told knew another lady appraiser who was in prison.
We had a nice talk. We had met once before and traded emails. She had attended the local motivational seminar I created last year entitled "Appraising In A Declining Market" and had started graphing Market Trends and including them in her reports.
We talked about the issues it had created for her, the client on Friday that blasted her for killing a deal, etc.
But the real purpose of my call was that she knew of an appraiser in State Prison and knows one who is under indictment currently.
The person she knows, she met in a grind-em-out appraisal school in Woodland Hills, CA, where an appraiser makes his living putting 40-50 appraisers through a program at a time. She described the school as worthless except for getting an appraisal license.
My contact is a smart lady and ethical person, with a Masters degree who had a real career before starting a family in her late 30's. We talked about the attraction appraisal has to women returning to the work force, both from her experience and mine.
My most recent encounter was by two women at a French party last month, both of whom want to do it part time. I understand their logic and can see doing it after you have spent four good years in classes and working in an environment where real training occurs. Starting out part time does not make sense to me. You can't learn what you need to know part time.
What I am leading up to may be a fundamental or core problem with the way licensing has attracted people into appraisal. Stories of the $150,000+ income level start at cocktail parties and are promoted by the likes of the Allied Schools, representing all Prep Schools. None of which mention due diligence, responsibility, or liability.
Click below to continue reading . . .
These two women met in an " Appraiser Prep School" and had kept in contact over the last couple of years. My contact described her friend as a Ditzy Blonde. The Ditzy Appraiser worked with another woman who would send out Trainee's to do inspections and take pictures, had a staff of unlicensed people in the office who typed them up, and even worked on PR to bring in business.
They used a forms program template, which allowed for fast report preparation and delivery, customer service, etc. The Supervisor got into trouble and lost her license, but not before she had built up the business to $25,000-$30,000 in monthly billables, and taken several nice exotic vacations, lived a lifestyle unimaginable a few years before. She was making more money than any ethical and honest professional appraiser with years of experience and credential's.
OK, so the boss looses her license, in the mean time the Ditzy one gets hers, and they reverse roles. Now the Boss goes out in the field and does the inspections. and the neophyte with the AL license who never really learned how to appraise, only how to remove Red Flags and make the report look good enough to go through and get funded. Every body is still making big bucks, everyone has a wealthy life style.
The original boss lady gets her husband involved and they fudge a Experience Log for him, and OREA catches it. Now, all three are fined and published on the License Board web site. The boss is convicted and sent to prison, the husband is fined. The Ditzy one has been investigated and is now charged with several criminal counts but does not seem to understand the seriousness of the situation. Her attitude is more along the lines of everyone is doing it than taking things seriously. Her computers have been seized, police showed up with the SWAT team {they like to make big impressions on White Collar Criminals, helps soften them up so they confess faster, more readily}
Meanwhile, the boss is in prison, divorced and lost custody of her children, lost her home and car and toys and the Ditzy one doesn't seem to care. Neither seem to understand what they did was wrong, is wrong, and that a felony conviction will impact the rest of their lives.
While this is a true story and names have been withheld to protect the guilty from being embarrassed by peers finding out about them and their activities, I am very interested in interviewing appraisers in prison or felon's who have been released that were appraisers. I'd also like to ask for help as I know there are appraisers in prison all across America.
There are some in County Jails, State Prisons and Federal Prisons. Some serving up to 60-months, and some who have already served as much time.
I'd like to survey or have help doing so, a couple dozen appraiser felons across the country whether in local, state or federal lock-ups. and I'd like to structure an interview with the exact questions being asked of each, like a control group interview.
As far back as 1999 when I first began researching appraisal liability issues for a graduate school paper on Professional Liabilities, My research started the last week of January and by the end of February I began running into criminal cases. The first big one I remember was in Ashbury Park, New Jersey. It was a Flipping Ring and there were five appraisers who were caught in it It was widely published in the Ashbury Park Press. Those appraisers were all sentenced by 2001 and should be out now as none got more than five years in federal prison, or maybe they are just about to be released.
By May of 1999 I was at the Board of Directors meeting of my local Appraisal Institute Chapter, www.sccai.org asking to be allowed to put on a seminar on Property Flipping and Appraisal Liabilities. We put the first seminar on in September, it was home grown and even homespun, but we had 89 people show up from six Southern California Counties. I contacted every metro Chapter of the AI and scheduled as many seminars as possible as soon as possible and began traveling to teach this topic as a local seminar.
By the Fall I had contacted the national Seminar Development Committee about doing a national seminar and was told that it would take a year to get into their schedule. They assigned a nice young man to me who had written seminar's to their format, Thomas Boyle, MAI out of Portland and a national BOD member. He helped temper me. I guess some thought I was inflammatory. They actually made us take out the pictures of indicated appraisers because they said "until they re found guilty it would not be fair to publish their pictures", even though they were already floating out on the Internet{?}.
to get things going faster, I contacted McKissock and we put together a seminar that I started teaching for them in January of 2000. Actually, in their system, they send teachers out for five days at a time, so I would teach Real Estate Fraud and The Appraisers Role, along with USPAP and three other subjects. I soon learned I did not have the pipes to teach 7-hours per day, at least not back to back, due to scar tissue on my vocal cords. What had started out as a mellow baritone voice with almost a four octave range that sounded like Eddy Arnold or Jake Hess, had turned into more of Joe Cocker gravely sound. Constant hydration and Throat Coat Tea helped me make it through the day. Scotch helped at night as I sat and ate alone in city after city from coast to coast, taking the message to as many as fast as possible for any group in any venue.
After 50 seminars, I stopped in May of 2003, when I realized that many know exactly what they are doing. And after being castigated again in the evaluations by some of the dirty appraisers in the audience, I found myself in a defensive posture with the head of the Instructor Subcommittee, when I got a letter telling me not to irritate and make the audience mad. I guess my stories made too many people feel guilty or made them think I was talking about them and their appraisals personally. I wasn't. Our case studies were all ones I had from my owner experience or from other USPAP instructors who had sent me good case studies.
The three primary case studies were of property Flips in which the appraiser was duped, quite readily, into hitting the Sales Price on phony deals. Any appraiser who searched for market data by Sales Price is subject to being duped, subject to creating criminal liabilities for themselves. How much liability?
No appraiser that I have read about or heard of has been sued for an appraisal done more than seven years ago. My take on liability is that if we add up the values of every property appraised by use or every appraisal signed by us for each year over the last seven years, then we know the amount of contingent liability we have.
In 1999 when I discovered Property Flipping in my Region, I interviewed three dozen residential appraisers, including members of my Chapter, designated or not, and non-members that I knew. Each time I would ask if they were seeing any Flipping going on. No one had seen it, not one, not in any form whatsoever. All were blind to the problem, all were being used and did not know it. Realizing this, my intentions were to help save appraisers from criminal liabilities. What a naive thought.
Along the way I have met federal and county prosecutors, I have spoken at dozens of state and national conferences for any group that would have me from the California District Attorney's Association to the California Mortgage Brokers Association, to the Mortgage Bankers of America, the REO Managers Association, along with a myriad of national and state appraisal associations.
In 2002 I wrote "Predatory Lending Client Pressures and Appraisal Frauds" which was published in the Appraisal Journal, and turned into a CE seminar, followed by "Mortgage Frauds, Cases and Consequences". along the way there have been over a dozen different articles written to try and help the residential appraiser stay out of criminal trouble.
This year, I have been researching and writing on a book entitled "Real Estate Fraud, Mortgage Fraud and Appraisal Frauds". Things are not as far along as they should be from the federal level in that resources were diverted away from many programs after 9/11. for about five years it was open range for mortgage frauds, all of which require inflated and misleading appraisals.
Whether it is application fraud, documentation fraud or valuation fraud or a combination, the appraisal stays in the file for the life of the loan. The fraud may not be discovered for years, and the statute of limitations does not begin to run until the fraud is discovered.
The last I heard, the FBI had over 26,000+ cases they were investigating, and each of them could include from a few to hundreds of properties.
Here in CA we have Real Estate Fraud Units operating in the District Attorneys offices, with special funding of up to $2.00 per property transfer. Not that all Counties are aggressive about what they do. Some prosecutors have never indicated an appraiser, others have worked many cases. It seems to be a top down issue from one County to another.
My own County had never charged an appraiser for professional activities, though some have been charged in unrelated matters. About the best I can do is ask other appraisers to send me fraud appraisal's when they see them and accumulate enough to show a pattern and then turn them in for Unfair Business Practice or Unfair Competition which are BPC violations that carry 6-month County Jail sentences and $2,500 fines for each count.
Some appraisers have found a way to turn this topic into work for themselves: Real estate scam emerges -- 'Crash and inflate' method generally leads to foreclosure 
I have asked the ADA in charge to speak at our Appraisal Fraud seminar in August and he has agreed. One of the first DA's I met, Eddy Kotkin of Riverside County, said from the podium at an appraisal seminar in Costa Mesa that "A licensed professional cannot be willfully blind or willfully ignorant to things that normal Due Diligence would have revealed" That got some appraisers in the audience seeing red.
There were not too many questions at the end of the day, mostly shirt tails and coat tails beating a line for the exit doors. I like Eddy, he has left the DA's office and is in private practice now. He is a client who refers good clean work to us.
Knowing the Prosecutors, and Investigators at the enforcement level and hearing their stories, makes one realize how many ditzy appraisers there are that have licenses regardless of age, sex, race or other categories one might place on them.
Licensing did something no one expected it to do. It attracted the Criminal Mind. Some of the largest appraisal operations at the residential level are nothing but appraisal fraud mills. One that was busted in the Central Valley last year, had 24 Trainee's who solicited business, billed it out and signed their supervisors name, then collected and gave him half the fee. The woman who rolled over on the boss, admitted her share in 2005 was $320,000, though she had two unlicensed people she sent in the field and two in the office to help push the files through. This type of operation is known to exist not just here, but everywhere. Though we hear there OREA knows of over four dozen that are bing investigated. We expect several big busts to make the papers this year. This will be the year of the appraiser in terms of press coverage, as the market continues to erode, and as investigations are completed.
Real Estate Frauds are not new, I have documentation in America all the way back to the Colonies. What is new is how fast Mortgage Frauds grew since 1993, in tandem with the growth in appraisal licenses. Real Estate Frauds can take all forms, here is one Assessors link to show how they are trying to warn the public.
- REAL ESTATE FRAUD ALERT www.oc.ca.gov/assessor/pdf/
RealEstateFraudAlert.pdf - http://www.irs.gov/compliance/enforcement/article/0,,id=162992,00.html
- www.fbi.gov/page2/march07/mortgage030907.htm
- http://kansascity.fbi.gov/dojpressrel/pressrel07/mortgagefraud052107.htm
- http://www.mortgagefraud.org/display/ShowJournal?moduleId=78225&categoryId=5902
Check your area to see which public agencies or departments are aware of and have resources devoted to these issues. Do not be naive or it is likely you will be used. Ignorance is not bliss for the Licensee.
So far, appraisers have been indicted, and either confessed or been convicted of Bank Fraud, Mortgage Fraud, Communications Fraud, Mail Fraud, Computer Fraud Wire Fraud, Appraisal Fraud and have had RICHO charges too.
What is an Appraisal Fraud? An inflated or misleading report. Sure, intent needs to be proved, but that is easy when the appraiser started with a predetermined price and ignored proximate, relevant, pertinent data to go out of the way to find sales to help make the deal work. Not only Ditzy appraisers do this, a large segment of appraisers do it.
Who is involved in investigating and prosecuting cases that can involve the appraiser? The Justice Department, FBI, Postal Inspectors, HUD Inspector General, State Inspector General's, County Prosecutors, and License Boards. The last thing an appraiser needs to worry about is the License Board, unless you are in Illinois, where they can fine you $60,000. In my State, the maximum is $10,000 but most escape by giving up their license. More have given it up than have had it taken away.
Last time, in the 1980's the activities of appraisers that helped lead to the S&L Crisis was that of the Commercial Appraiser, the Designated Appraiser. They caught one MAI in prison who was still signing reports. The old AIREA changed their Ethics Rules to include the fact that if convicted of a Fraud, they would strip the Designation. In that case, when asked how much he had made, it was over $1,000,000 in one year, him and one secretary. The lawyer who related the story to me is also an MAI Appraiser and was an Expert Witness in the case. He said they asked him to give the money back and he said he could not give it all back because he had given a 15% Tithe to his church. So he was a religious fellow too.
The current cycle is a Residential Housing Crisis. As I predicted in December that price declines would be measured in all metro markets for the first time since the Great Depression, by April the national data showed the first, though small, national decline. As this year progresses and declines become greater and losses mount, and appeasers are being sued by buyers on deals from 2003-2006 when they find out the properties were never worth the Sale Prices, and Congress gets pressured to act, the Residential Appraiser will become very visible, even the Ditzy ones.
Sadly, the appraisers who have suffered the most financially so far are those who had ethics when they came into the business and found a way to hold onto them. Unfortunately, ethics is not what attracted most to the field, but money, all the stories of money. Money magazine should go back and do a new survey, should seek out ethical appraisers who are suffering economic coercion and starving for telling the truth.
It is coming. We have a five year cycle to go through. In the Population and Housing article published earlier this week, we showed come Cities increased greatly and decreasing greatly in terms of Population. We also know that those two cities are operating differently in terms of price trends, one going up double digit, and 29-Palms which lost 9.5% of their population in 2006, has gone down 29.5% from the peak. How many appraisers in the Region know this? What do we each know about what is really happening in our own areas? Do some cover too wide of an area to know anything about what is happening?
Think about joining us for the Appraisal Fraud seminar in August, or think about brining it to your area. You can make it a real PR day by inviting clients to come, bring the upper management from your best clients, buy a table for 10 and invite your worst competition, the local Hit Men and Women of the area, the ones you loose the most business too. Check the www.sccai.org web site, the registration will be put up as soon as we get our speakers confirmed.
I want to get State, Local and Federal speakers to share their experience, along with Review Appraisers who see Aappraisal Frauds that come in the front door. They tell me it has increased in the last several years by 400-500%. This does not get reported, only statistics on funded loans, not those batted down by the reviewers.
This year I have read more than 30 books, non-fiction books, than I have since college. One of the best I bought used for $4.99 on Amazon.com. Here is the link. It was published with a Grant from UC Irvine in the amount of $250,000. Anyone who knows how to go after Grants, whose appraisal volume has dwindled for telling the truth, has the time and wants to participate is welcome com pursue funding for additional research into these {aforementioned} topic's. The following book should be read by every appraiser, every page and every footnote in my opinion. It will open your eye's to what went on before in a way no other will, it is an education in banking and mortgage lending in and of itself, and I can say that because I have had several hundred class hours in both subjects through college/university and professional intensive courses. Under certain conditions if you buy four books, Amazon will waive the shipping. Others worth reading, and can be found in libraries too, include Irrational Exuberance by Robert Shiller, Phd., The Economics of Innocent Fraud by John Kenneth Gailbraith {OK so it is an old book, it is still eye opening}, Mania's Panics and Crashes, by Charles Kindelberger, and for history buff's in the east coast, 4th of July, Asbury Park by Daniel Wolff. These are just some of the titles I have at home, the rest are at the office.
Read these books and then take HABU & Market Analysis and your life as an appraiser will be changed forever. Doing form reports fast and cheap will become a thing of the past for all who develop true knowledge, awareness, skills and understanding of the arena in which they play. We have been like Christians in the Coliseum of Real Estate, toyed with by those with the gold.
Our lack of awareness of what is going on around us, how we have been used and set up, does not change the fact that while our in dusty blithely pushed out appraisals with predetermined values, forces were lining up to hold our feet to the fire. The day of reckoning may well be at hand, we are not even half way though the year and more appraisers have made the news in terms of criminal cases than ever before. Momentum is building, pressures from lobbies on Congress are building. Our feet will be held to the fire. for those with clean underwear, no problem. For those with dirty hands, possible prison time.
For all those who just got their license and do not have too much invested, my recommendation is to move into a growth industry, appraisal is shrinking, if not dying in one sense. The boom is over, the wave has crested, it did so more than a year ago now.
Want to limit liabilities as an appraiser, give up the license. Unlicensed people cannot be held to the same standards as licensed ones. The money is not as good, but the risk is smaller too.
If you stay in the business, become a doubting person, question every transaction on every subject and every comparalbe relied upon. Measure Supply, Demand and Value Trends and report what is happening as it is happening, tell the truth.
Enough, my voice is getting weak, besides, there is no way to know if anyone is listening. If I have opened anyone's eyes in any way, let me know. We can only be responsible for our actions and those we supervise but if I can in any way know that I have helped others see and understand things that would prevent criminal liabilities, that would be a good thing, that would make my heart sing.
If all of this only seems depressing, learn to sing. I sing in the field, songs like "Looking For Comps In All The Wrong Places" and "Paper Trial's To You I Hope We Meet Again" or my favorite "YOU Got To Know When To Hold Them and Know When to Fold Them" . If anyone has dirty hands or knows an appraiser who does, I suggest checking out extradition free countries. The next five years are going to be scary.
We were all licensed for the Public Good, which includes Buyers, Lenders, Investors, Insurers and Federal Agencies. What we do carries a huge ethical burden beyond any expected from any other group. Not knowing this, has allowed the current situation to develop. The more aware one becomes of the ethics expected of the appraiser, and the criminal liabilities, the more sobering it is.
Send some feedback, share with friends in the business, enemies too. Say a prayer to the appraisal gods where ever they are, but know that no one is coming to the rescue of the appraiser or appraisal industry.
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
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