Posted on 03/12/2006 6:23:37 PM PST by ex-Texan
Not a week goes by that appraiser John Meyer does not get a request to "hit the number" on a home's value to ensure a loan goes through.
"I had a guy from New Jersey last night call, and he wanted me to do the appraisal if I can assure him I would hit $800,000," Meyer said recently. "I told him I couldn't do that."
Walker appraiser Fred Vander Wal has similar stories.
"I had two last week screaming at me about what they wanted me to do," Vander Wal said. "It was a 7-year-old home, and it was just trashed -- holes in the walls, carpeting all ruined. They said, 'They're not going to loan on this if that's the real condition. Can't you tone it down a little bit?'"
That would be appraisal fraud, and Meyer said it's "one of the primary problems out there."
A recent example is the $325 million settlement by lending giant Ameriquest for what 49 state prosecutors call deceptive lending. Many of those allegations included inflated appraisals.
Marge Eppes believes her Holland home was subject to an inflated appraisal. In 2002, she was trying to refinance the loan on her 3-year-old, three-bedroom home at a lower rate. The appraisal came in at $148,000.
Eppes, 53, said the mortgage company told her it was not enough to cover the refinance.
"Two months after that, they sent another person out," Eppes said. "They said it was worth $175,000."
The closing fell through for other reasons, and Eppes has since refinanced with another organization, but she was troubled by the difference in values.
"Appraisers that appraise your home for far more than it is worth do no one a favor," she said.
But appraisers across the country say they are asked to do it. A recent survey by Ohio-based October Research Corp. found 55 percent of appraisers reported being pressured to overstate home values.
"We get the requests all the time," said Meyer, owner of John Meyer Appraisals in Kentwood. "They say, 'Unless you can come up with another $20,000 more, we're not going to pay you.'"
That's why he asks for his money up front if the client is new.
Growing problem
The FBI calls mortgage fraud the fastest-growing white-collar crime in the United States. It cost lenders and consumers more than $1 billion in 2005 -- more than twice the amount for 2004, the FBI said.
"It's becoming an issue in Detroit, and I would speculate that we will have an increasing issue here in Grand Rapids," said John King, the FBI's supervisory agent in Grand Rapids.
Who gets hurt in appraisal fraud? Take your pick: homeowners, lenders, the neighborhood, the economy.
A federal case recently outlined how Kansas City-area lenders and investors lost nearly $12 million in schemes that depicted hundreds of run-down urban homes as renovated properties primed to reap thousands of dollars in annual rents.
An appraisal is used to determine the size of a loan and how much the lender will charge. The appraisal can affect how much homeowners can borrow and the asking price when the houses go on the market.
Inflated appraisals can stick homeowners with loans that exceed their home's worth. If they attempt to sell, they will not get enough money to pay off the loan, and they are left with a crushing debt.
"We run into it all the time," said Fred Skidmore, an associate broker with Coldwell Banker Schmidt Realtors on Plainfield Avenue NE. "They've refinanced within the past year and a half, and the refinance appraisal came out higher than what we're able to sell it for today."
To settle with their lender, "they'd have to come to the table with money," he said.
In other cases, people can lose their homes if they cannot make payments on the inflated loan and are forced into foreclosure.
In the past seven years, home foreclosures nationwide have increased by more than 50 percent to 2.9 million, according to the Homeownership Preservation Foundation in Minneapolis.
Remember the savings and loan debacle of the late 1980s that required a $200 billion taxpayer funded bailout?
"A lot of appraisers were complicit in that," Meyer said.
Reputable lenders want nothing to do with appraisal fraud. If a lender sells a loan to the secondary market and problems arise with a bogus appraisal, the lender is forced to buy it back.
In addition to appraisal inflation, appraisers can be involved in other scams, including flipping property with falsely appraised values, loans for nonexistent properties or disappearing second mortgages.
Lenders' safeguards
Judy DeJong, vice president of underwriting for Heartwell Mortgage in Grand Rapids, said her company has several checks and balances.
"We have a list of approved appraisers; we have a list of unapproved appraisers," she said. The company runs background checks on the appraisers it uses, asks for a copy of their license and verifies it online. They also expect appraisers to have errors and omissions insurance.
"We do want them to be responsible for the work that they are doing for us," she said.
DeJong said they also guard against an employee being tempted to order an appraisal at a targeted amount.
"We don't want a loan officer to have that function," she said. "The processor is the person who orders the appraisal; they are not paid a commission. And you also have an underwriter reviewing that appraisal when it does come in."
Fifth Third Bank also separates that task.
"Our loan officers are not involved in choosing an appraiser," Fifth Third spokeswoman Peggy Janei said. "That is something our mortgage operations group does. So there is a clear-cut differential and separation of responsibility."
Vander Wal said much of his business is reviewing others' appraisals, many of which are problematic. He declined to name companies requesting them or the original appraisers for fear of losing business.
"Out of the reviews I've done in 10 years, easily 95 percent of them had serious problems," he said. "They would overvalue the properties by 20 or 30 percent."
"We've reviewed some in which we looked at the appraisal, and everything looked right," he said. "We pulled the listing cards (with the sale information) and every one of the sale prices was inflated by $20,000 over what they really sold for."
He did not know the motive, but the extra money may have given the owners some extra spending money or allowed a buyer to have a 100 percent financing on the house without the mortgage lender realizing it.
Real estate lawyer Nyal Deems, a partner with Varnum Riddering Schmidt and Howlett, said some instances are egregious.
"A really sad example is one where you find it was treated as a three-bedroom house and it turns out it was a mobile home parked on a lot," he said.
As a result, the buyer took on significantly more debt than the property is worth.
When lenders discover bad loans, they'll go after the mortgage broker and the appraiser, Deems said.
"If someone is trying to stay in business, it usually behooves them to try to structure a settlement instead of having all that bad press," he said.
But "the ones that are just fly-by-night and burning their money as fast as they get it, they don't. They go out of business.
"It's like everything," he continued. "The good ones are good and have good certification, and the others are out there just hustling a buck, and you've got to be careful."
The state Department of Labor and Economic Growth licenses appraisers and investigates complaints.
Last fiscal year, the department received 200 complaints against appraisers. In the previous year, it was 324 and the year before that, 213.
Barrington Carr, the manager responsible for enforcement, said his department is "complaint driven."
"We don't have people out there policing the industry," he said. "We rely on the public to notify us."
Vander Wal wishes the state would better police the industry.
"We honest appraisers pray that someday there will be that department," he said. "Every appraisal should be reviewed by peers -- every appraisal that at least impacts somebody in the state of Michigan."
The house below is for sale in New York for only $ 389,000. No biggie. There must be an apprisal out there for $ 400k. Right? Right . . .?
Want to learn more about mortgage fraud and illegal activities by lenders and realtors ? [Ckickity click click] Scroll down to the bold caption about predatory lending and organized crime in the mortgage industry. Or, maybe you are just curious and want to eyeballs other pos homes? Pos homes are out there. More going on sale soon in your area.
Good post. I've turned down several loans lately because of cherry picked appraisals. I'm not putting my name or risking my bank on something that stinks.
What happens when the folks who paid 400k for the house find they can only sell it for 100k?
So ho does one actually determine the value of a home? By it's condition and attributes? Or by what the market will bear? My home has trippled in what the market will bear in just 4 years. That doesn't make sense to me even though it pleases me.
Excellent post! I would submit that some of the inflated value is caused by local governments, who also inflate values by over-valuing homes in order to collect the property taxes on them. I believe a t least a portion of the pressure to boost appraisals might be driven by tax value as well...
Value based on computer guess, no consideration for number of house that have been on the market for a year or longer. Real estate agents over pricing to get a listing.
I don't like this. te eraltors get the commisions, and the bank gets the fat mortgage paymenst - but the rest of us pay in the form of inflated prices and a shakey finacial market.
"Buring down payment", seller pays buyer closing costs, all these tricks are just plain dishonest.
Not to be rude - but do you understand the concept of the market establishing valuations? If they sold near appraisal, the appraisals were accurate.
I know this opinion may get some people excited. Some will be outraged. But this is my opinion. Many thousands of other people agree with me. Sad, isn't it? More Proof Here
I frequently perform broker price opinions to back up appraisals on real estate transactions. Once in a while I am told that my value is substantially different from the appraisers. If I am asked to adjust my value, I ask for a copy of the appraisal. I usually find that older or more distant comparables were used, that dissimilar locations were used without adjusting for the factor, or that condition was misstated.
It is difficult to tell if this is attempted fraud or a lower level of competence.
I know this opinion may get some people excited. Some will be outraged.>>>>>>>>>>>>>>>>
Down at the sawmill we suspect there be much truth in what you say.
Looks like you've done a fair bit of study of the housing market. There are ways to make money in a declining stock market, such as selling short and anticipating where the cash outflows will go to. How does one make money in a declining housing market?
Probably a little of both. I recently caught an appraiser who not only gave the targeted price, he hadn't even made the correct adjustments. As if I'm stupid - or expected to look the other way like other lenders. My rejection was recieved with a chorus of "come on! You KNOW it's going to resell for more than even this! I already have buyers lined up, etc.!"
He found another lender and guesswhut? Turns out the property DOES have major problems and is now radioactive. He & his new lender have a white elephant and I sleep better at night.
That same house in the DC metro area would go for $500,000. Location, location, location.
Wait till it hits bottom, when a home is nearly impossible to give away, then buy foreclosure properties from lenders who need to liquidate. Make rentals out of them, and sell out when interest rates get cheap again, and your renters are looking to buy.
This is 1981 all over again. We used to talk about one, two and three martini appraisals in those days. The boom of the late 1970's crashed to Earth with a bang, I expect no less out of the current slump. In fact, I predict it to be worse.
Twenty-five years ago, the baby boomers were trying to start families, today, they no longer need the four and five bedroom homes, most can get by quite comfortably with two and three bedrooms, especially if there is a family room. People were slightly more conservative about borrowing in those days, you didn't have 125% loans back then. Also, you didn't have adjustable rate mortgages waiting to blow up on the homeowner, adjustables came into wide use in the mid-Eighties, after the deflation had already been wrung out of the market. And, look around you. How many of the housing units in your area were built within the last 25 years? They weren't part of the bust in the early Eighties, but they will be part of the coming one.
Loads of people loved the "party": the homeowners who sucked paper equity out of their properties to keep their credit cards from being maxxed, the lenders who made exhorbitant fees from all the multiple refinancings (add in the others in the closing costs industries), the real estate agents who would sell houses as soon as the ink on the listing agreement was dry - without having to do any real work in selling the house, the shoddy builders who are just overeager carpenters ("hell, anybody can build a house, I'll show them,") who are starting to stiff their subcontractors, and the tax assessors who can ramp up the value in the homes of people who didn't play the game.
I spent many of the years since 1976 in title insurance, and I've seen it all come and go, and its going again. I'm glad to be out of that industry and in something relatively safe. It's going to be a bumpy ride.
The ride has already started. Foreclosures are up adn I figure another .5% increase in the fed rate and alot of people will be hurting.
I wonder...
I just bought my house for a bit over 150K.
the house next too me, which has about 500 SQ FT less space is going for just about 10K under that. It's only been a year....
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