Appraisal Scoop

Can an Appraiser get in trouble over a List of Sales or a Verbal?

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

This morning I received a private email with an excerpt from a post on an appraisal forum. The following is the post:

I know of an appraiser who was doing the same thing - merely reporting sales to his "buddy" LO all with the clear understanding it wasn't really an appraisal-they just want to know the properties "range of value." The LO used the comp searches to fund loans, without the appraisers knowledge. Several deals went south and the appraiser was named a party to a civil action. He never received a dime. It will cost him several thousand dollars to either defend himself or buy his way out the the action and may be subject to disciplinary action by the state regulatory agency.

My contact wants to know -- Is there any veracity to the story?  I recall this took place in Southern Cal.  Comp checks have been used as a valuation tool to fund loans - true or false. True, not false.

I replied privately and then thought to make the topic public.  So, I will try and write from memory what I said in response, with some new thoughts thrown in to boot.

With the advent of Desktop Underwriting and the technologies available, loans can be funded and sold to FNMA and FHLMC with an array of valuation products or documentation in file.

Remember, the Seller/Servicer may originate directly or through loan brokers, package and then sell a pool or loans at a certain yield rate to the Secondary Mortgage Market which includes FNMA/FHLMC and other firms, including Wall Street firms.  Each player in the Secondary Mortgage Market may have their own set of rules in terms of valuation documentation. I'll bet Zillow would suffice in some cases, fewer than 10,000 per month though, not a lot.

Seller/Servicers buy Commitments from the Secondary Mortgage Market players to buy pools of loans in $100,000,000 to $1,000,000,000 blocks.---

Entities from mortgage bankers like Countrywide to big banks like WAMU will put together a pool and sell it at a net price, keeping the additional Fees (Fees are good for Stock Prices and Bonuses. Management likes Fees. Fees make Stock Prices go up and Bonuses go up. Fees is good even if RESPA is violated. Fees is good).

Loan Pools are sold Servicing Released or Servicing Retained.  They are sold with or without Buy Back Warranties or Guarantees. Some Loan Pools are enhanced, resulting in better pricing for the Seller, by providing assurance that All the Appraisers are Insured. {Let me know when you start to see Red}.

Another form of enhancement is to get Private Mortgage Insurance on all the loans. This may be one of the main reasons FNMA changed the Certification language last year, to make sure the PMI companies had a clear path to sue the appraiser. And they do, they usually sue in Federal Court. Why, because they are in some other state, other than where the appraiser is.

Servicing is merely another source of income for the lenders and is valuable.  The larger the Servicing Portfolio, the more valuable a company is.  A lender with billions of dollars worth of Servicing is a far more attractive target than one with none.

Back to Valuation.

The following is a list of products that are used in collateral underwriting and their rank.

Runt Rants - The Geezer Unleashed

These last three weeks have been uncommonly busy for me!

First a series of meetings here in town...me, who doesn't do meetings any longer. Then an out of town meeting with regulators. Next, an out of town three day wedding trip including a wedding party golf tournament. Finally, a rush back to Houston to jump on a plane for the a la mode convention in Las Vegas. Our return was early yesterday morning. Today I'm beginning to get my Circadian Rythm back in order. Maybe tomorrow will feel normal.

All of the events were very useful to me and our business. Not just from the business objectives to be achieved at each, but from a broader perspective; the observations of the larger stage that our business operates upon, and that larger stage's impact on our business.

Meetings with a new business partner

The first week was spent largely with John Ross, the former adminstrative head of the Appraisal Institute. What a wonderful individual. Rancher roots in Wyoming. The ranch still operated by his family. Folks from the land are always wise in ways others are not. The purpose of that week was a get acquainted session, with me and with my Bright Horses. I'd known John for years with infrequent email conversations. Now I and my Bright Horses know him personally, and he knows us. Nothing like a back yard cook out over beer and scotch to reach mutual personal understandings.

Regulator Presentation

That week ended with a presentation to the Texas Appraiser Licensing Board Investigator Staff to inform them of our business plans and to receive their input. The drive to Austin with the Senior Bright Horse was revealing. Half the trip was spent discussing the cases of suspected fraud that Acorn is seeing as a result of Client review work. A messy situation. Our presentation to the Investigators eventually diverted into a discussion of how our work might be used by them to assist them in the growing task they have to properly and efficiently address the appraisal complaint and fraud issues now and in the future.

Then the wedding

The last of the Bright Horses marrying into a really wonderful family. Abb now has four sisters in addition to a wife, and every one of them will change and impact Abb in some way; he with only a male sybling before. Very few of the business folks at that wedding left without Acorn's business cards. I must have given out a hundred or more. Not likely any of those folks will have a need for our services, they being located several hundred miles north of our normal market, but you just can't predict how relationships beget other opportunities. Most of our staff attended that wedding. I wonder how many business cards were handed out by them?

Finally the a la mode convention

My wife and I attended. My first experience with the a la mode convention.

Senior Bright Horse insisted that we stay at the Wynn, several miles from the convention, but he wanted us to experience the top hotel in Vegas. His skill with Orbitz quickly came up with a package that was surprisingly close to the convention package, so we relented. I'm glad we did. Another business experience and lesson. The Wynn opened last year and has been the destination spot ever since. We saw why. Beautiful archetiture, very tasteful. Rooms with wonderful amenitities and views of that city. An international buffet style resturant that would rival the niche restuarants in each of the many cuisines featured.

Continued below . . .

Pocket Laser Targets - Appraiser invents the "Better Mousetrap" for use with laser measuring devices

Leland Hill, of Associated Appraisers of America, spoke at the recent a la mode convention in Las Vegas on a class called Field Data Techniques.  I think that I would have called it "Boys and Their Toys" as Lee, Michael Elliot, and Rober Smoote (Apex) trotted out every manner of technology gadget for appraisers.  ONE of the things that was presented caught my attention because I know the inventor. 

Below are comments by Leland Hill on the Pocket Laser Target:

Many appraisers use Distos for measuring. I’ve been using Distos for several years. And while I can usually find a target and I’ve become very proficient using the Disto, I have found occasions where you just cannot seem to find a target without becoming very creative.

To address that problem, my good friend Paul James came up with some new Disto Targets that are just awesome. Paul took the time to research and test several different materials, finishes, and target sizes. He asked me (along with Michael Barnes) to help test them. Paul came up with a winning design using light weight aluminum that will not crack or break and fits neatly in a back pocket (that’s why non-breakable is important – in case you forget and sit on them).

Many of us also know Matt Johnson of www.LaserMeters.com and www.AppraiserDepot.com . Matt now has Paul’s targets for sale on his site:http://tinyurl.com/yrzpz3

For anybody that uses a Disto, I highly recommend that you get a set of these. I promise you they will come in handy from time to time. 

If this sounds too much like a commercial for some of you, I apologize. Neither Paul nor Matt asked me to do this – I did it on my own. I think the Targets can benefit Disto users with their workflow and just wanted to let folks know how they can get them. 

Click below to get ALL of the details on the Pocket Laser Target straight from the inventor, Paul James . . .

DaVinci, a Revolutionary Field Data Gathering and Sketching Application For Appraisers Debuts At a la mode Convention

I just got back from Las Vegas last night, where a la mode labs introduced its first prototype - field inspection management software application this week.  Convention attendees saw DaVinci in action for the first time at the a la mode labs booth in the event's exhibit hall at a la mode annual convention.

ALL of the attendees were given a CD with the new prototype application to take home and try.  For those that could not attend, you can download and try DaVinci out for free at http://www.alamode.com/labs.

I'll post the official news release below, but it's important to note a few things!

This is prototype software!  There's no tech support for this!  If you get errors or something doesn't appear to work correctly, or if you just have some feedback and suggestions, please send an email directly to labs@alamode.com.  Their labs team can then read and respond to the message.

The build that's available for download at www.alamode.com/labs is just a prototype and is not final software. It hasn't been through a QA (Quality Assurance) cycle nor has a beta test cycle been completed on it. They hope you'll install it, try it out and send them your feedback. A la mode will then use that feedback as they continue to fix, refine and improve the product.

This is the FIRST TIME, that I've ever seen an appraisal software company let appraisers in on the development process this early on!

According to Chris Low, Product Management, a la mode, inc.

"They haven't set pricing for this product yet, since we're still in the development phases. But we plan to offer it for download at no charge for limited time. So go get it, install it, and have fun with it. In the near future (as soon as we get home from the convention), I'll have more information on documentation, online classes about DaVinci, and tips and tricks. Please stay tuned."

Click below for the complete news release from a la mode:

Arizona - Inflated appraisals could result in felony charges and prison time up to 10 years

According to Inman News, "Mortgage fraud will be a felony in Arizona under legislation headed to the governor's desk."  Click here.

House Bill 2040 would make deliberate misrepresentations to lenders -- such as inflated appraisals or falsified borrower incomes used to obtain loans that exceed a home's true worth -- class four felonies, punishable by up to three years in prison.

Those who engage in "a pattern of residential mortgage fraud" or a conspiracy would face class two felony charges, punishable by up to 10 years in prison.

Click here for the complete story.

Appraisal Order Forms May Cost 10 Companies $25,000 for Each Appraisal Ordered

Recently Ohio Attorney General Marc Dann announced that "multiple lawsuits have been filed in four Ohio counties against ten companies for undue influence on an appraiser.  (video on Marc Dan)

AG Marc Dann sued the 10 mortgage lenders as part of an initiative to enforce Ohio's predatory lending laws, which were effective on January 1, 2007. Dann's suit alleges that the lenders pressured appraisers to inflate property values, causing borrowers to pay more than their homes were worth. Dann is asking for injunctions, civil penalties, and reimbursement for affected consumers.

The complaints state that these companies have committed unconscionable acts or practices in violation of the Consumer Sales Practices Act by knowingly compensating, instructing, inducing, coercing, or intimidating appraisers for the purpose of improperly influencing the independent process."

According to the indictments obtained by the Originator Times, Dann’s office is alleging that appraisal order forms used by all ten companies contain a "suggested value," "estimated value," or similar titled space and therefore is a violation under the Consumer Sales Practices Act of Ohio.

In the case of Wall Street Mortgage Bankers, their form also included instructions to the appraiser that read,

"If the preliminary research shows that the value is not there please DO NOT do appraisal and contact the agent."

Dann's office maintains that "appraisal inflation occurs when the appraisal value of a home is far higher than the true market value of the property. This can happen when the broker or lender pressure the appraiser to “puff up” a property value based upon the desired loan amount, or the figure needed to “make the deal work” as opposed to the actual value of the property to be purchased or refinanced."

Dann went on to say, “I’m committed to ridding this state of appraisal inflation and other symptoms of mortgage fraud that has ripped families apart and led to an unprecedented number of foreclosures in this state. I won’t allow this unethical exertion of power over appraisers who face this choice of doing the right thing or losing business entirely to continue.”

• Click here to read the Columbus Dispatch's article on the lawsuit.
• You can also check out the Crain's Cleveland Business article.
• Click here to reach Ohio's Office of Consumer Affairs.

Appraisal Fraud Prevention - Due Diligence

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.

My office uses a commercial data source that costs something like $8,800 per year for two counties, but is one of the costs of doing commercial appraisal work. It is a much higher cost than any and all data source costs of being in the residential appraisal business exclusively.

Sadly the quality and volume of data has declined, the level of detail has declined, most income properties have no income or expense information, no vacancy information and in many instances, no improvement information or details.  Most land transactions have no information about what was included such as Tract Map approvals, density, HABU in terms of Intended Use, fees paid, etc.  The data becomes little more than a lead sheet to start investigating a sale with.  Often the best piece of information are the phone numbers they come up with.

We develop many of our own comparables starting with public record information and just a buyer/seller name and maybe the Tax Stamp info, or maybe not even that. Every sale we start with at this level may take several hours or days of networking and phone calls to get verified to the point we understand it transactionally and have enough physical details and/or income information to be able to process it into an indicator of value. About half of our comparable leads start out this way, with limited data.

Appraisers who make a living exercising this level of due diligence in tracking down data leads and verifying them, have a tendency to look down on those who grab raw data from 3rd part vendor sources and use it at face value.  Appraisers who operate at this level of due diligence are not easily fooled when phony sales, or Cash Back sales or Flips are deposited in the databases.

As real estate markets go from hot to cold, regardless of the product type, frauds increase.  Some frauds are created simply to fool the uneducated, unwary, uninquisitive appraiser.  Plant two bad comps in a database and fraudsters can fool the vast majority of appraisers.

Click below to continue reading . . .

Runt Rants - Comp Checks -- A legal opportunity -- Update

Introduction by Ken Verrett (Runt Rants) : Owner of Acorn Appraisal Associates, 

A few weeks ago Comp Checks were the subject of a Runt Rant column. That column resulted in some feedback here.....most noteworthy a suggestion by Taylor D. converting the call to another alternative, a neighborhood market summary.

The purpose of the column was to shine light on a sensitive topic, how to meet the needs of a legitimate client's legitimate need to do the right thing for his prospective borrower. I contend that the Scope of Work Rule in USPAP gives us the responsibility AND the authority to develop such solutions. Others disagree.

Joyce Potts, SRA posted a link to the Comp Check column on Appraisers Forum, a large and well organized appraisers forum. She linked to the column for the same reason it was written; to generate discussion on a sensitive topic. (click here)

Mrs. Potts link generated a wide ranging and sometimes emotional thread which went on for several weeks, and exceeded 400 responses! I was made aware of that activity last week and visited AppraisersForum to review the comments in the thread. Whew! Took me over an hour to read the 40 pages of comments that were generated.

The conversation ranged from emotional to strict interpretation of USPAP to views of USPAP providing alternatives to meet legitimate client demands. A worthwhile hour to spend. I'd recommend it to everyone interested in not only the comp check issue, but ANY issue in which we are embroiled today.

Through it all shined Ms. Potts!

What a gal! Attacked on many sides for just bringing the issue up, she managed the discussion with a professionalism and leadership and humor that we need in our profession. Were I a Client in need of any appraisal services or consulting services in her market, she'd be my first and only choice! It turns out that she and I disagree on fundamental points. That's OK. I know her views are her own based on her extensive experience. I can engage in dialogue with such a person, knowing that we fundamentally agree; that we both are honest, ethical, and want the best for our profession, our Clients, and our communities. With that foundation, we can discuss, learn, and get better.

Ken Verrett

Click below for Joyce Potts', SRA comments on Comp Checks! . . .

A Conversation About a Naive Appraiser

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 . . .

How To Stay OUT of the courtroom - Attorney advice on Appraisal Report Preparation

Author: John C. Carlson, Certified General Real Estate Appraiser:  29 years of appraisal, expert witness and litigation experience.  John is an Associate Member of Certified Fraud Examiners and specializes in high value single family homes and commercial and industrial buildings.

I attended the AI "Appraising Special Purpose Properties Seminar" in Norwalk, CA yesterday. One of the speakers was Ms. Lindsay McMenamin, ESQ, an attorney for Gaglione & Dolan. She is a former SRA & now an attorney for this firm who specializes in defending real estate professionals, especially appraisers. One of the firms main clients is Liability Insurance Administrators in Santa Barbara.

McMenamin had some interesting statistics RE: appraiser lawsuits (Fall 2001 thru Feb. 2007):

• 200 lawsuits nationwide, 97 in CA
• 82 of 97 suits in CA involved Residential Appraisers
• In 58 of the suits there was $0 paid out.
• In 12 of suits $10,000 or less was paid
• Largest loss was $65,000 - this involved a Commercial appraiser.

She identified the following 11 problems and ways to protect yourself:

1. Have a "Letter of Agreement" with your clients.

2. Have a Cover Letter in your appraisals.

3. Identify problems encountered in the appraisal process several times throughout the report in many different sections. 

4. Specifically identify Intended User & Intended Use of report. Be very careful when providing copies to anyone unless they are one of the Intended Users

5. Try not to do "copy-overs".  She noted one appraisal that, as I remember, was a property somewhere in So. California, that had San Francisco area data in it....Big OOPS!! 

(Last year I opposed an appraiser in a trial where the Date of Value was in 2004. ALL of the opposing appraiser's market area data was from an appraisal that was completed in the market area, but in.....2006!  The appraiser did not provide any data relevant to our 2004 DOV - the Judge did not like this!)

To continue reading, click below . . .