Posted on 07/17/2006 8:26:48 AM PDT by ex-Texan
Pueblo - His down payment was a beat-up car that wouldn't shift into reverse.
His factory-made home had not been installed on his land, yet when he signed his first home loan, Frank Finn Jr. thought his family was getting a great deal. He borrowed $102,500, the cost of the land, home and installation. The appraisal showed his home in West Valley Estates, a community of factory-made homes, would be worth $130,000 - $55,700 above the ZIP code's median house price.
"We were so happy," he said. "I was like, 'Right on; geez, I'm really making out on this. I've already got $28,000 in equity."
Six years later, Finn is a foreclosed homeowner with ruined credit and monthly rent bills. So are his old neighbors.
Of 65 homes in West Valley Estates, 28 were foreclosed from 2002 to 2006. Nine others were deeded to lenders without a foreclosure. The appraiser of Finn's home and others in the development lost his license.
The sale price of Finn's home after his foreclosure: $57,700.
Finn and many of his former neighbors believe they were victims of appraisal fraud, a hidden crime that officials say is helping fuel Colorado's nation-leading foreclosure rate.
Reports of all mortgage fraud nationwide have tripled since 2003 to nearly 22,000 last year, the FBI said.
In the past five years, appraisal fraud has been involved in up to 40 percent of fraudulent mortgage reports, according to the Mortgage Asset Research Institute.
In Colorado, mortgage fraud is "a significant factor" in the rising number of foreclosures, and "bogus appraisals are a big, big part of it," said Colorado Attorney General John Suthers.
Suthers' office is pursuing six mortgage-fraud investigations, including cases involving inflated appraisals.
Lenders estimate "as much as 15 percent of all appraisals are overvalued" though not necessarily fraudulent, said David Berenbaum, a board member of the national Center for Responsible Appraisals and Valuations. "We're questioning a large volume of the loans today."
An inflated appraisal can lead an innocent buyer to pay too much for a home, putting the buyer at greater risk of foreclosure.
As part of a mortgage fraud scheme, a bogus appraisal can leave lenders with foreclosed properties worth well below the value of their loans and millions of dollars of losses on their books.
Mortgage fraud hurts "the whole community - you, me, everybody else," said Ivor Hill, a Pueblo appraiser who's on a state mortgage fraud task force.
"The lender takes a hit. The buyer's credit is ruined by a foreclosure. The tax base of the local community is skewed by inflated appraisals, and future buyers of other properties may pay too much for a house."
In Pueblo, local, state and federal agencies are investigating three real estate deals - including West Valley Estates - in which criminal wrongdoing is suspected. Two of the cases involve bogus appraisals.
In one case, the FBI is examining the sale of 22 homes by a Pueblo couple to an Aurora investor at inflated prices, sources told The Denver Post. All of the homes went into foreclosure, and the appraisal for one property was riddled with errors.
State among fraud leaders
Colorado has the worst foreclosure rate in the United States.
One of every 436 Colorado homes was in foreclosure in May, 2.8 times the national average, according to RealtyTrac, which tracks foreclosures.
Loose lending and aggressive building are the main culprits. Mortgage fraud also plays a role, officials say. There, too, Colorado is distinguished.
The state ranks fourth in the nation for mortgage fraud based on dollar loss and cases under investigation, said Denver-based FBI agent Jean Andersen.
For the past three years, Colorado has ranked among the top five states for mortgage fraud, according to the Mortgage Asset Research Institute. Last year, the state's mortgage-fraud rate was 75 percent above the national average, the institute reported. The group would not release the specific numbers.
The rankings are based on lenders' reports of suspicious activities such as falsified applications and inflated appraisals.
Inflated appraisals can lead to mortgage fraud and foreclosure in several ways.
An appraiser may boost the value of a house to benefit the seller, mortgage broker and real estate agent, who all gain from the higher sales price.
The victim is buyers, who may not realize they borrowed more than the house is worth until they try to sell or refinance.
The biggest fraud losses come when brokers, real estate agents and appraisers "are gathering in a conspiracy to inflate appraisals," said Andersen of the FBI.
Appraised at double value
John Scherling, an Aurora real estate investor, bought 22 houses in Pueblo in one month of 2004 from Jose and Joan Aguilar, borrowing almost $2 million. In 2005, all 22 were foreclosed.
A copy of the appraisal report for one of those purchases was obtained by The Denver Post.
The house sits at 921 E. Seventh St., in an aging neighborhood of low-cost rental homes.
Scherling bought the house in July 2004 for $102,000 based on an appraisal of $103,000. Two years earlier, Aguilar had paid $52,000 for the house, and after Scherling lost it to foreclosure, it sold for $47,000.
The appraisal had errors that falsely boosted the home's value, including misstated square footage and use of inappropriate comparable home sales.
Distances of the comparable properties were understated, and incorrect photographs were attached to the appraisal.
James Esters of Parker, a licensed appraiser
Tom Ruble and his wife, Loretta, stayed in Pueblo's West Valley Estates even as neighbor after neighbor left. (Post / John Leyba) since 2004, confirmed that he prepared that report. He did not deny that errors may have been made but said they were honest mistakes.
"Wow," he said of the incorrect photograph of 1339 Carteret Ave. "It's so easy to verify if it's wrong. Why would anybody do that? It had to be unintentional."
That report "was back when I first started" as an appraiser, he said. "I didn't know the ins and outs of the business."
Last month, Esters was disciplined by the state for allegedly misstating square footage and omitting information in two unrelated appraisals. He agreed to a $1,000 fine and other sanctions but retained his license.
Englewood-based Pulte Mortgage hired Esters for the East Seventh Street appraisal and was the lender on seven of the Scherling properties. Spokeswoman Melanie Hearsch said Pulte relies "on the credibility of licensed independent appraisers."
"When a licensed independent appraiser presents home sales as 'comparable' that are in fact misleading, it can be difficult to detect," Hearsch said.
Mortgage lenders concerned with risky loans increasingly use databases to track brokers and properties, but the system isn't foolproof. Industry insiders said brokers shop fraudulent loans until they find willing lenders.
Scherling and Aguilar did not respond to numerous phone calls or a reporter's visit to each of their homes. Scherling filed for Chapter 7 bankruptcy protection after his properties - including others in the Denver area - went into foreclosure.
The FBI is investigating Aguilar's sales to Scherling and to other sellers that resulted in foreclosures, according to sources familiar with the case.
Experts say a bulk sale at dramatically high prices, followed quickly by foreclosure, can be a strong indicator of fraud.
For example, a buyer and seller might have a secret agreement to split the seller's profit and let the property go into foreclosure.
"We do find a good correlation between early payment default and mortgage fraud," said Nick Larson, an assistant vice president with Mortgage Asset Research Institute. "If you find a loan where the first payment is missed, that is a very high likelihood of fraud."
Nationally, appraisers are feeling so much pressure to justify questionable home loans that nearly 10,000 have signed a petition calling on Congress to protect their independence.
In a recent poll, they were asked how often they felt their peers succumbed to pressure. The leading response: 41 percent to 50 percent of the time.
Some appraisers say corrupt mortgage brokers and loan officers have compromised the appraisal industry, which has long been considered the primary check against fraud.
"I am battling against appraisers who are on steroids - guys who are saying, 'What number do you want?"' said Matt George, a Littleton appraiser
who believes he has lost tens of thousands of dollars in business by refusing to fudge numbers.
Some mortgage brokers call several appraisers and only pay the one that provides the valuation they want, George said.
Home dreams now dust
Frank Finn remembers how easy it was to buy his first home.
HomesAmerica, a local prefabricated-home seller, offered to take a car - any car - as earnest money toward a new home in a new neighborhood.
Finn used his brother's 1985 Sunbird, which had a window that didn't work and no reverse gear.
HomesAmerica's sales team, Tami and Grant Hall, arranged the details. Their mortgage broker, Diana Vanriper, had a newly licensed appraiser, Jerry Friberg, value the lot owned by developer Henry Crane.
His first appraisal shows a bare field and an estimated value, with a seven-room factory- made home included, of $130,000. By comparison, the median house price - which includes factory-made and standard construction homes - in Pueblo in 2000 was $95,200; in Finn's ZIP code, it was $74,300.
"They made it so easy," Finn said.
But from the outset, "it got kinda fishy. They didn't want any lawyers or insurance people around," he said. "There was a rush to get the papers signed. ... They had a backloader ready to dig out the lot with the snow coming down."
He signed a $102,500 home loan in December 2000. Two months later, he moved into the newly installed home at 2312 Canyon River Court with his wife, Maria, and their young children.
"For the first six months, it was great," he said.
That ended with a notice from the developer that the neighborhood covenants required them to landscape their property - and they could be taken to court if they didn't.
Finn tried to borrow landscaping money by refinancing his home, but appraisers that he hired independently told him it was worth just $80,000.
Friberg stepped in again. He appraised the home, with no landscaping, no basement and no garage, at $136,000.
That enabled Finn to refinance, but the new loan carried a 9.25 percent interest rate that could jump in two years. Because of the refinance, Finn owed $20,000 more on a home he bought without cash. His mortgage payments jumped almost $300 a month - and were due to go higher.
"There was no way I could stay there," he said.
All around him, he saw families leaving their new homes. Finally he told his wife they had to let their home go, too. She wept.
"My wife really took it bad," he said. "It broke her heart."
After Finn's foreclosure, the house Friberg appraised at $136,000 was sold to an investor for $57,700.
Finn's appraisal became one of nine in a complaint that cost Friberg his state license. Friberg could not be reached for comment.
According to appraiser Ivor Hill, Friberg valued at least 20 homes in West Valley Estates at 40 percent to 50 percent above their real worth.
Vanriper, the broker who hired Friberg to value West Valley Estates homes, blames irresponsible homeowners, not faulty appraisals, for the foreclosures and plunging house prices.
"This is certainly not fraud," she said at her Pueblo office.
The buyers "didn't make their payments, and they didn't care. They just walked away."
Vanriper disputed Hill's assessment that Friberg appraised the homes at 40 percent to 50 percent above their worth. She said other appraisers, whom she would not name, were putting similar values on factory-made homes.
Hill said he knows of nobody else whose appraisals rivaled Friberg's.
Grant Hall, who now sells factory-made homes in Arizona, said he and his wife never suggested that Friberg reach a particular value.
"We did not feel the sales price that was happening on the transactions was out of line," he said. "Six years later, it's obvious that the market changed very drastically there."
Developer Henry Crane said declining values in West Valley Estates mirrored a national price collapse of factory-made homes that left buyers owing more than they could recoup. He also cited the absence of down payments as a contributing factor to foreclosures.
"If you get into a deal too easily," he said, "it's too easy to get out."
Down the street from Finn's old home, Loretta and Tom Ruble have been making their mortgage payments for five years.
While neighbors around them vanished, they made improvements to their home and yard.
Then they joined the complainants who took Friberg's license.
Now they question why he was the only person blamed for the ruinous consequences to their neighborhood.
"That one was empty, that was empty, that one was empty, they've all been foreclosed," Tom said, pointing to a row of homes across the street that resold for less than he paid five years ago. "What can I do? I'm stuck here."
The Rubles maintain an island of tidiness in the face of weedy lots, shabby fences and front yards used as parking lots.
"It was supposed to be elegant. It was supposed to be a nice neighborhood," she said, with a park, entrance arches and alleyways. She glanced across the street at a house squeezed in sideways, mobile home-style. "It was not supposed to be a trailer park thing. That's pretty much what it is."
*Ping* !
Are not banks, which lend the money and will be on the hook for a foreclosure, be vigilant in the appraisers they hire and trust? Or is it just about getting more and more loans...
"Or is it just about getting more and more loans . . ."
*BINGO!* . . . Greed trumps all ! 'Nuff sad.
EVERYBODY knows this. But while it served everyone's purpose, nobody said a word. Our agent brought in his old college buddy to do the appraisal on our house. And voila...the appraisal was right where we wanted it. Coincidence? Think not.
Ah, you proceed from a false premise: it is the very rare financial institution that holds a loan any more. They are packaged up into "mortgage-based securities" ASAP and foisted on Wall Street. The money-maker for the bank these days is, as you wrote, simply to get the loan written and sold off.
Hence the milder form of appraisal fraud: "The buyer has a contract to buy the house at $X contingent on an appraisal. Mr. Appraiser, if you can't make your appraisal come in at $X, we're gonna find somebody who will."
Excellent post!
First, this guy is NO victim. Appraisal fraud or not. The appraisal had NO BEARING whatsoever on his failure to pay his mortgage.
When you say "Home values are too high in 71 cities", what you should really say is, home values are set to fall in those places. The value, can not be too high, though the asking price may be.
I don't understand. Can you explain that a little more?
I didn't see anywhere in the article how having an inflated appraisal causes the homeowner to quit paying on the mortgage.
Are mortgage companies demanding the difference be paid immediately based on independent audits or something?
If you've ever had your bank turn down a loan application because they thought the property was over-valued, then this is a pretty good indication that you have an excellent bank. The same goes for a property insurance company. Even if the bank extends a loan based on an inflated property appraisal, an insurance company will generally be very careful about what their exposure is on a property.
A few years ago, my wife and I refi'ed to get a lower rate. On banker told us point blake that with reason she could "adjust" the numbers to get us more money. The were pushing for us to take money out. We did not.
From what little I understand about this it seems that lenders in turn sell the mortgages to Government backed companies (ala
Fannie and Freddie), but correct me if I'm wrong. If that is the case then the Gov't and you and me are left holding the bag.
Banks will lend money to illegals who could be deported at any moment.
Does that answer your question as to their motivation?
As a former residential appraiser, this sums up the B & C market perfectly.
Now, many loan applicants in the A market don't experience the practice, because they're coming into a transaction with a decent down payment and certainly acceptable creditworthiness.
Where this goes on is in the bad credit arena, where borrowers have virtually no money to put down, and want to roll all the costs into the loan. (psst, the loans are at rates that would make you and I run the other way).
So, since a borrower needs about 105% more than the purchase price (to cover all the fees), the mortgage company needs an appraisal at 20-25% more than the property is valued at.
I heard this a multitude of times: "If you come in at a lower number, don't bother sending us the appraisal." This after most of the appraisal work had been completed.
Ouch!
How far out are you? (I'm expecting mine to bump from 235 to about 285 or so, and we're in Mableton)
But, what has happened with housing is no different than the stock market, or the Federal Reserve System. They are all ponzi shemes requiring "growth" in value of their shares, while lessening value elsewhere.
Too many people look at their home as an investment, not a place to live. They are willing to pay exhorbitant prices, because "one down the street sold for that much". In Marinsburg, the indiginous population has been priced out of the market, and farms are selling for millions.
I live near DC. Many of the builders are now advertising they are selling "at cost". That should warn a lot of people, but it doesn't. A home is not an investment. Land may be, but you must have a warm place to lay your head at night!
I bought Apple stock for $13 and sold for $83, after a 2-1 split. I made a killing. You can buy Apple stock (and should) for around $50 right now. It is "undervalued". I got some nice pices of paper when i bought the stock. I sold the same pieces of paper. The difference is what some fool figured he could make a buck on. I did it then! I bought last month at $56!!!
I work in an appraisal office, and the problem is that Mortgage Companies and Mortgage officers, send work to appraisers that will get them the sales price value, regardless of real data. Many Mortgage officers, have become like Real Estate agents, they get paid or get paid more if the loan closes. Easy way to end it, is to outlaw any mortgage officer working on commission.
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