Cuomo sees 'rampant appraisal fraud'

News item from the L.A. Times: "Mortgage giants Fannie Mae and Freddie Mac agreed today to revamp their home-appraisal standards to eliminate the type of alleged fraud that contributed to the nationwide housing bubble."

"In a legal agreement with New York Atty. Gen. Andrew Cuomo, the two companies said they would only purchase home loans from banks that follow rigid new rules setting out how home appraisals can be conducted."

Cuomo: "Today's agreement with Fannie Mae and Freddie Mac begins to set right what had gone so horribly wrong in the mortgage industry -- rampant appraisal fraud."

Just asking: If there was "rampant appraisal fraud," why aren't we hearing about a crackdown on appraisal fraud in Los Angeles? Is it because L.A., home of the largest surviving housing bubble in America, was an island of honesty in a sea of fraud? You tell me.

Photo Credit: Getty Images

Comments

[sfvrealestate]

I'm going to go out on a limb here, and I know most of you won't like this, but since I'm in the industry, here goes. I believe that there was no appraisal fraud in the areas I've been working in -- sales of existing homes. An appraisal is based on comparables. Comparables are those properties that sold closest in time, closest in distance, and closest in size. Plus, from 2004 through 2006, home prices were going up 2% A MONTH, which was factored in my the appraisers and the banks. In other words, if an appraiser had comps to support a price of $700,000, by the time the property closed escrow (usually 30+ days later), the property would be worth $714,000. And this price increase happened every month for a long, long time.

Additionally, the banks, the buyers, and the rest of the industry were also interested in the home price that the market would bear (no different than now). If a house comped out at $700k and was listed for $700k, but had multiple offers of over $700k, was it worth $700k or was it "worth" more? Answer: more, much like the stocks and commodities market. No seller is obligated to take a lower offer than somebody is willing to pay, and if one bank wouldn't fund a higher loan, another surely would.

Okay, guys, fire away -- but please recall that I've been standing in the middle of this perfect storm for a number of years.

[LA-Architect]

I hate to disagree with you, BUT, I personally know one Mortgage broker use PHOTOSHOP to "Enhance" their property and had an Appraiser rubber stamp the valuation without even SEEING the property. Of course using comparable sales in a rapidly inflating environment made this easy, I wonder how many other so called appraisals used such a tactic.

[Ace]

Actually, for the first time, I agree with sfvrealestate.

If you set the appraisal value based on what houses in the neighborhood sold for, the prices will check out just fine.

Appraisal fraud is not the problem. Giving mortgages to people who cannot afford to pay them was the problem.

[NationalBubble.com]

If you want to know how brokers pressured appraisers during the housing bubble to come with the "right appraised value" you should read this book:

http://www.nationalbubble.com/finally-somebody-
tells-the-full-story-about-subprime/

[Cal]

SFV,

Your mistake is the misunderstanding from what appraisers DID do during the bubble versus what they should have done. A real appraisal has many levels to it but because of the tremendous pressure the appraisers received (nobody would do business with them if the appraisal ruined the deal) the appraisers were just a rubber stamp instead a true opinion of value. Just a simple look a the REO inventory (its type,location, quality versus the surrounding area) shows how massive pushing values had become.

You have your brokers license, that means at sometime in your career you took a simple appraisal course. Go back and find that book and read it and compare it to what you saw people do during the boom. You think they were adjusting for financing? cashback? lower quality vs comparables? etc

There are a million things they weren't doing (i.e a proper appraisal) to hit value. To say there was no fraud is either ignorant or stupid, imho.

[Andrew B.]

You know there's been appraisal fraud when you hear folks remarking that they have an appraiser who can give them whatever price they need. Or when you hear of folks refinancing houses and owing more money than they could ever hope to sell for. I don't know, perhaps this is more of a problem in areas with large numbers of "nonconforming" houses where banks have more difficulty second-guessing their appraisals. I live in the San Bernardino Mountains, and this seems to be the case here.

[denise]

how could you state there is no appraisal fraud? Today's mark-up is a byproduct of the first fraudulent transaction that snowballed.

[toby]

sfvrealestate,

You're arguing that you believe there were no appraisal fraud because by the time the appraised house would hit the market, because of price increases, the house would inherently sell for more than the appraised value. Thusly rendering the appraised value meaningless.

Umm, No. In fact, that condition usually appears when there is rampant fraud.

In fact rising prices is what masks appraisal fraud.

AND since most fraud is clustered (meaning You would be more likely to buy 8 homes in the same sub-division
and comment fraud than buy 8 homes in 8 different states, or even regions of the same state.)...

In fact, hyper price increase is usually caused by a combination of rampant appraisal fraud, mortgage fraud and documentation fraud.

You almost never find one without the other. But to say there was no appraisal fraud because prices were always going up...

Well that's like saying "I can't be sick, I only have a fever."

[KYLE]

SFVRealEstate may be correct that appraisals were in line with comparables.

The current bubble burst has proven the fallacy of using just this narrow criterion as the basis for making home loans particularly when our tax dollars ultimately are going to be used to back these loans.

Appraisals should be just one piece of a complex puzzle used to determine loan worthiness:

1) Affordability - Income to payment ratios
2) Debt - Total debt to income ratios
3) Mortgage to rent ratios
4) Down payment %
5) Historical norms

[ILuvLA]

And this is why the Contrarian's view that the Schiller index is wrong is so completely screwed up.

You *want* to use an index that includes appraisals when we know that there was wide-spread appraisal fraud?

sfvrealestate, the problem was in re-fis and second mortgages, not necessarily when people were actually buying houses.

[Hugh]

To say that there was no apprasial fraud is just plain ignorant. Comparables can be easily be manipulated through the use of non-comparable properties at the discretion of the appraiser conducting the survey as there is no perfect comparision and the appraiser can manipulate which comparables to pick. Second, the appraiser has discretion to adjust the baseline price as established by comparables. As an example, categories such as curb appeal and amenities can be used justifying an adjustment to the baseline price established by the survey of comparables.

Finally, appraisals are not only based on sales comparable but on the income capitalization and replacement costs.

[truthbtold]

After 10 years in technology I took a short time stint at in the Mortgage Business in 2002 after the tech crash left a lot of talented people without a job due to the fraud of a lot of company CEOs and their accounting executives. The only thing you could find where a sales person could still make six figures was in Real Estate or Mortgage Banking.

I soon learned it was a boiler room, chop shop industry like none I have ever seen. Anybody can get into real estate and generally what I saw was the lowest educated least professional group of hacks I've ever seen in any industry. Even penny stockbrokers have to produce better results for their clients than the misdirection most of my co-workers and the managment were perpetuating. This was especially true when it came to Appraisals and in too many gross cases in regards to Income Statements.

I tired to see myself as someone who could bring about some change and build my own little domain as a reputable professional among so much mediocrity. I thought I could help someone who refinanced from a 12% rate when they first bought their house with little credit to a 6% rate and shorten the term of the loan. Or in the case of a family who had a child who was a burn victim and needed to cash out some of the equity from their home which was nearly paid off for a nominal loan that allowed them to remodel the home to care for the child with a small monthly payment that was under $300 per month. Not what people wanted. Not the Mortgage Company, not your coworkers and especially not most of the borrowers.

People intentionally pushed the values on their own homes and would challenge any mortage co and its sales staff not to accept their over inflated greed or they simply would take their deal to someone who would help them regardless of morals, ethics or consequence.

After realizing that the business was set up the way the customer wanted it to be set I left and took time to ride out the tech storm. It wasn't easy but it was better than learning the ugly truth and becoming a life long RE hack. Now, telecom and the Internet are no longer embarrasing industries and are actually in fact booming again.

I hope the Real Estate & Mortgage industries will learn what Tech learned at the end of 2001... clean up your act and get the best people and do deals that are fair and profitable.

[TrojanDLA]

"If there was "rampant appraisal fraud," why aren't we hearing about a crackdown on appraisal fraud in Los Angeles? "

How do you "crack down" in Los Angeles? Licensing of appraisers is through the state government, but California is suffering a budget crisis, so it's highly doubtful their stretched resources will be cracking down on anything other than annual registration fees. The attorney general of California is spending all his time with "environmental issues".

There would be a crackdown if California had an enforcement arm to do it. Without government intervention, it's up to the banks to file civil suits, oh wait, the banks were the cause of appraisal fraud and I'm sure they want to reveal what "really happened'.

Now that the boom is over, fraud has taken a new twist: the "short sale fraud":

http://www.realestatewebmasters.com/
blogs/trojandla/4509/show/

[Laker]

i spoke with two different Realtors. Both told me they have seen appraiser fraud. One of them personally was "kicking back" 0.5% of the sale price to to appraiser when the numbers were cooked 10-15% higher...
This agent explained this by the fact that if he would not do that, he would lose the commission to someone else. He said it was very easy to do, and he assured me that everybody else did the same.
You see, this just fed up on itself in a catch 22 or viscous cycle. Since money was almost free and available, buyers could afford to outbid each other, and climb to whatever cooked number was produced by the appraisers.
Now that money is not freely available, the cooked numbers are no longer valid...In fact, as the article suggest, in 2004-6, from the moment the appraisal was written till the escrow closed, the value increase by 2%... Well today it is very similar just the other way around. 1st, there are hardly any sales so, there are very little comps. Even if you find some, you should reduce the number be 2% (minimum) as this will be the value when escrow closes (usually in 30 days)...
Very similar to buying brand new car and driving it out of the dealership lot...
If if you put something down (20% or whatever) the day after escrow closes, you are financially up side down on the value of the home...

[Mike S]

Last time I checked,an appraisal was an estimate--not a fact--and once piece of the puzzle when a lender is deciding to .

I've railed again and again about homeowner responsibility, but this is about lenders blaming the 'little guy' who doesn't have the deep pockets to launch a massive PR campaign.

Lenders were free to loan or not loan, and as a couple of the comments suggest, their greed and laziness left them biased and illogical about using ALL the information before them to determine whether it was financially prudent to loan a half million $'s to some Joe washing dishes at Norm's.

Guess it is too much to expect leaders at these companies to hold themselves accountable for their greedy, lazy [in]actions.

I just wish folks could quit blaming everybody except themselves for their stupidity.

Mike S.

[me2]

I have a few mortgage brokers as clients. During the boom, I saw first hand the sleaziness of the industry while working on computers at their office. I heard agents say, and I'm not kidding, "your house is like an ATM". All of the agents were late 20's to early 30's, cursed, swore, talked about customers in demeaning terms after they hung up off the phone, and were generally crass and had the attitude of "I'm gonna get mine". I would never do mortgage business with them. This environment was ripe for all kinds of fraud.
I was in their office a few weeks ago, and what new sleazy industry were they in now? Credit repair.

Cuomo, let's put some walk behind the talk and start prosecuting this fraud, yes?

[the problemwithcaring]

I believe that there was no appraisal fraud in the areas I've been working in -- sales of existing homes...An appraisal is based on comparables....If a house comped out at $700k and was listed for $700k, but had multiple offers of over $700k, was it worth $700k or was it "worth" more? Answer: more…

Posted by: sfvrealestate | March 03, 2008 at 11:28 AM

(Cue umbrage-taking cable news host in booming voice:)

FOR LYING and sayin:
An appraiser's job is to simply rubber stamp comparables, for ignoring widespread evidence that appraisal fraud indeed took place in the San Fernando Valley and telling people "it didn't exist," and for shilling the same RE dribble that the amount someone once upon a time paid for something is what that something is forever worth -- Judy - you are today's worst.person.in.the.wooorld!

[JohnnyB]

truthbtold wrote;

"I soon learned it was a boiler room, chop shop industry like none I have ever seen."

That does sum it up nicely.

I had a colleague who was in finance and making a pretty decent salary. He had an appraiser brother up a little north of LA. He related to me how much that brother was making hand-over-fist in what is really a "sealed" segment of the industry... where nepotism is the norm and who-ya-know is the only way "in". And, the money is LARGE. And, the job is EASY.

Beyond that was the job description. To say the method of operation used during this bubble was totally "objective" could not be further from reality.

Sfvrealestate, I really believe you’re on the shakiest of grounds when attempting to “validate” the appraisals of the past 7 years. The valley is so overpriced as to be almost comical... comical in the sense that people really bought, and yes bid… out-bid… and over-bid on these properties in a “free mortgage” and “free credit” mania.

Take a step back and see where we are now… it’s a mess… an overpriced mess.

Were these folks by and large bidding up prices with THEIR OWN MONEY? No…

Would the prices have risen so drastically without free mortgages and free credit? No…

Were there incentives to maximize the loan value at every step in the RE buying process? Yes…

Ask appraisers themselves if they were pressured… I read somewhere a while back that a survey revealed around 90% who said they were pressured at least once during this bubble.

RAMPANT APPRAISAL FRAUD

Keep at it Cuomo, you’ve got HUGE support for your efforts to crack down on a completely corrupted industry…

[Inland Empire]

Even more horrifying than the appraisal dilema is the lack of decent mental health services in this state. Many of the respondents here could be benefit from intensive counseling.

[omg pot calling kettle]

Even more horrifying than the appraisal dilema is the lack of decent mental health services in this state. Many of the respondents here could be benefit from intensive counseling.

Posted by: Inland Empire

Did you really post that after the non sequitur, Alzheimer-med induced attack you posted when someone dared used the IEhandle? Lol

also: you live in the IE. lol

[Laker]

HEY Trojan DLA check this out !!!!

This is exactly what happened to me about two months ago....

I placed an offer for a house that was listed as short sell. The offer was $750,000. I didn't get response. Me and my RE agent called many times to find out the status and we barely got feedbacks from the listing agent. In fact, I got story A, while my agent received completely different story B. Then we were told the house is not longer for sale....then i asked my friend to call, and guess what, the property was still for sale... then 2 months later i discovered that the property "was sold" for $680,000.

I drove by couple of weeks after the sale, and what a surprise, the owner still live there, nothing has changed....well something did change, they mortgage bill. Since they bought at December of 06 for more than a million dollars and now had their family member/friend/relative "buy" it for them, and now they reduced their mortgage payment by 30-40%....sweet!

I offered $70,000 more...but guess what, my offer never got to the bank...it probably was shredded and flushed down the toilet.....

I'm thinking now to report this to the bank/fed but would like to do that anonymously.

WOW!! it is amazing that i actually seen that in action under my own eyes.
(I also placed this comment on the article page)

[CD]

Send email to our California Attorney General : the Honorable Jerry Brown. Lets ask him why Cuomo is doing all the work in New York and why he Jerry Brown is not coming out with some kind of fraud investigations on RE shenanigans.

[aldo818]

Hey guys,
I'm no RE expert but I did take enough RE courses to understand that the dominant process of home value estimation is done via comparison to similar homes in the area.

Remember, sellers were getting 10 to 20 offers from people that did not even see the homes much less have them inspected for structural soundness. Most homes went for $50k over the asking price only because EVERYONE saw that homes were jumping in value by 15-20% a year for about 6 years. It's weird but I felt like the mentality was to purchase whatever home you could find before the price went to $2MM. It seemed like a panic and not a rational market in my eyes.

I'm not saying that there was no apraisal fraud. I'm just saying that it wasn't a main ingredient for this bubble. The bubble lands directly on the shoulders of lenders and brokers.

The thing that I don't understand is why the sales people aren't being held accountable for guiding their clients into this bubble.

[arroyogrande]

"I believe that there was no appraisal fraud in the areas I've been working in -- sales of existing homes."

From Trisha's long-running real estate empire blog:
http://trishasblogsite.blogspot.com/

"...I'm hoping to God that I can find a lender that will be willing to do a refi without sending an appraiser through the interior of the house. The downstairs doesn't even look livable. Bank of Oklahoma may be able to assist. I spoke with the manager at one of the branches today. He's going to have a lending officer call me at 3pm. Supposedly, for in-house loans, they just get the value of the house from comps on a pc...If we have to go through their mortgage side, we may not get lucky on the appraisal--they might have to do a full walkthough. I guess I'll find out today!..."

Interesting...

- arroyogrande

[Uncle Billy]

The lenders had/have blacklists of appraisers. Question is... are they full of appraisers that pumped up appraisals, or rather those that wouldn't "play ball," or both?