‘It’s Pay-The-Piper Time’ For Appraisal Fraud
The Wall Street Journal has this report on appraisal fraud. “As the housing market cools, Americans are confronting a problem that was easy to ignore during the boom: Inflated appraisals of home values. Critics have long warned that many appraisals are unrealistically high. That’s partly because generous appraisals help loan officers and mortgage brokers, who often choose the appraiser, complete more deals.”
“Prices are leveling off in many places and falling in some. Some homeowners are finding that the market value is below what past appraisals led them to believe.”
“For sellers, that can mean being forced to drop their asking prices. Some people hoping to refinance may be unable to lock in new loan terms. Lenders and mortgage investors, too, could take a hit if it turns out the collateral backing their loans is worth less than expected.”
“Dubious appraisals are a risk for the hundreds of thousands of people who in the past few years have bought homes with little or no down payment, or used almost all of their home equity to finance home improvements or other types of spending. ‘Now it’s pay-the-piper time for people, and they’re finding out they don’t have the value in the house they thought they had,’ says John Taylor, president of a Washington-based nonprofit.”
“In October, when Melinda and Steve Welch refinanced the loan on their four-bedroom home in Centreville, Va., the property was appraised at $682,000. Later they cut the price to $595,000, and recently accepted a bid around that level.”
“Eric Randle, an appraiser in the Los Angeles area, says he frequently receives faxes from loan officers asking whether he could appraise a specified home at a certain level. The implication is that an assignment will be forthcoming only if he’s willing to hit the desired number. Mr. Randle says he declines to work on those terms.”
“One of Mr. Randle’s appraiser friends recently received a fax from a mortgage loan officer in Bakersfield, Calif. The scrawled fax message listed an address in Los Angeles and said, ‘I need 2 get to 750K for this Appraisal. If not please provide a value range or call me.’”
“Consumers often play along with dubious appraisals. Danny Wiley, an appraiser in Nashville, in May was asked by a lender to appraise a condo in Spring Hill, Tenn. The buyer had offered to pay $139,000, but the contract required the seller to pay $10,000 toward the buyer’s closing costs. In effect, Mr. Wiley says, the price had been inflated by $10,000 to allow the seller to provide money to help the buyer cover closing costs.”
“Mr. Wiley estimated the value at $129,000. That should have killed the deal. But Mr. Wiley says the sale later went through, apparently after the lender found another appraiser willing to value the condo at $139,000.”
“Some lenders use appraisal-management companies to create a wall between the appraiser and the loan officers. But appraisers say these companies often choose the cheapest and fastest appraiser rather than the most qualified. ‘You get someone who is not intimately familiar with the local marketplace because they are willing to do it for less,’ says Jeffrey Jackson, chairman of the appraisal firm Mitchell, Maxwell & Jackson in New York.”
“Lenders often play down the issue. Tim Doyle, an official of the Mortgage Bankers Association, says he sees no ‘broad’ problem with inflated appraisals, outside of criminal rings. Even though mortgage lenders typically sell loans to investors shortly after making them, investors can force the lenders to buy back a loan if it goes into default and the appraisal was fraudulent, he says.”
“Even when all parties want an honest appraisal, that can be hard to achieve. In making their value estimates, appraisers rely heavily on prices paid recently for similar homes nearby. But those prices may be misleading. For instance, builders of new homes sometimes include in the sale prices such items as landscaping or contributions toward loan fees or settlement costs.So the resulting inflated price can become a misleading ‘comp’ for nearby homes.”
“I’m just the appraiser. I’m just the appraiser”, he cried as Vito continued to beat him. How else can you make these ridiculous Ponzi Schemes work. Where is Doctor Fried when you need a shill to buy your outrageously appraised dumps?
Could this go the same way as the WSJ reporting on back-dated options a few months ago? Shedding light on a pervasive problem that ultimately leads to some high profile prosecutions and a change in the market practice?
If it does, appraisals will get more conservative;
Then foreclosures ramp up since the new appraisals don’t allow people can’t replace an ARM with an ARM;
Then 2nd DOT lenders go away (or become a lot more conservative in underwriting) as foreclosures wipe out many of their loans and the appetite for new seconds wane;
Then real down payments are required again, drying up the remaining buyer pool (or puddle);
As inventory continues to rise . . .
It’s the drying up of easy money that will accelerate value erosion (landslide anyone?).
Appraisals getting more realistic could be the first step to this drying up of easy money.
I can’t remember if I saw this in Barron’s or elsewhere, but I recall reading recently that the new underwriting requirements are coming out this fall. They may include coverage of appraisals as well as other loan regs.
But you’re right, if it’s in the WSJ, it’s on the Wall Street radar. I’ll bet a lot of MBS traders read that piece over the weekend and spent much of today kicking off portfolio reviews. We’ll see how long it takes them to start putting on defense, if they haven’t already. I note that the improvement in bond prices that happened last week turned around today.
“appraisals will get more conservative;”
That is a given — a question of when, not whether.
It was a dark and stormy night as the appraiser slowly opened the gate and walked toward the massive, dark and brooding house. He could see in the kitchen window and some small reflection danced off the stainless cook top and bounced on the granite splash. ‘This will be a snap’, he thought to himself, already spending the $700 dollars that he was going to soak the sellers for his fraudulent appraisal. Then the mastif jumped him from behind and he felt his leg bone snap. (to be continued)
No time for the whole treatment, but see if this rings a bell:
And the flopper, never flipping, still is sitting, still is sitting
On the darkened slab of granite just outside my chamber door
And his eyes have all the seeming of a lender’s that is dreaming
And the halogen o’er him streaming throws his shadow on the floor
And my funds from out that shadow that lies floating on the floor
Shall be lifted - nevermore!
Quoth the flopper — “Nevermore.”
LOL!
OK, two more verses:
“Lender!” said I, “thing of evil!–lender still, if bank or broker!
Whether tempter sent, or whether tempest tossed thee here ashore,
Upsidedown, yet all undaunted, on this desert land enchanted–
In this home by horror haunted–tell me truly, I implore:
Is there–is there Equity in store?–tell me–tell me I implore!”
Quoth the lender, “Nevermore.”
“Be that word our sign of parting, bird or fiend!” I shrieked, upstarting–
“Get thee back into the tempest and the Night’s hard granite shore!
Leave no papers as a token of that lie thy soul hath spoken!
Leave my bankruptness unbroken! — quit the bust above my door!
Take thy beak from out my heart, and take thy form from off my door!”
Quoth the lender, “Nevermore.”
Now THAT’S funny….
If Bubbles would just release his lip-lock on that opium pipe, I’m sure we could come up with something *really* depressing. I need words that rhyme with “ticking”, “Strangelove”, and “nuclear”… Extra points for words that rhyme with “wasteland”, “disaster”, and “decimation”.
The literary quality of this blog is reaching towards the heavens!
Thanks, sm_landlord…
Thanks, but now I’m feeling guilty that I did not properly credit the “bard of bears”, Edgar Allen Poe, for his wonderful poem that I carelessly mangled for fun. If “The Tell-tale Heart” had been a poem, I could have had some fun with “ticking” time bombs. Perhaps Rainman can do something with that one.
I’m clapping .
ROTLMAO
Alright! Edgar Allen Poe fans.
BayQT~
But lo, a stir is in the air!
The wave—there is a movement there!
As if the towers had thrust aside,
In slightly sinking, the dull tide—
As if their tops had feebly given
A void within the filmy Heaven.
The waves have now a redder glow—
The hours are breathing faint and low—
And when, amid no earthly moans,
Down, down that town shall settle hence,
Hell, rising from a thousand thrones,
Shall do it reverence.
Two homes for sale in a neighborhood
And, sorry I could not purchase both
And be one buyer, long I stood
And looked at one as long as I could-
Dreaming of riches from capital growth.
Then took the other, as just as fair,
And having, perhaps, the better claim,
Because the appraiser was sitting there
Ready to simply blindly declare,
Worth of the house by signing his name.
And both that morning equally lay
Open, though both did buyers they lack.
Oh! If only I were able to sway
Two down payments - or even one that day.
I doubted if I should ever manage that.
I shall be telling this with a sigh,
Somewhere ages and ages hence.
Two homes for sale in a ‘hood, and I,
I bought them both.
Cause, you know, what the hell is the difference?
Here’s the link to the appraisers petition seeking to do something about inflated appraisals.
Take a few moments to sign and thanks to those (Thomas and Hoz?) who originally posted the link:
http://appraiserspetition.com
The appraisers should have done this five years ago, but they were gettin’ while the gettin’ was good.
It seems to me they know which way the wind is blowing, and are looking to cover their backsides. The mortgage brokers are going to be difficult to find (unless you’re checking out used car lots), and the RE agents are going to be back selling girl scout cookies. These people also have some protection built into the contracts the FB’s signed, but the appraiser is the one who provided the written statement telling everyone involved that it was all ok. Other than the mortgage holders, these guys have the most exposure, and they are feeling a draft.
In addition to a more vaild appraisal process, we also need to go back to the old lending standards. 20% down, PMI if less than 20%, but no piggybacks. Buyers need to have some skin in the game.
No I/O’s, ARMs less than five years. and my personal favorite..28% of gross for Princ&Int, Taxes and Insurance.
Can you imagine how prices would plummet if this were mandated overnight?
Yes, I can. I suspect this will happen. Albeit, not overnight, but maybe sooner than later. I have to believe that the underwriters will soon be hesitant to let people s-t-r-e-t-c-h, quite so far.
It’s one think to allow it during a boom, but with prices moderating, falling, etc., it would be pretty hard to allow it to continue. no?
Can you imagine how prices will plummet if this is not mandated?
Forget about your overnight mandate. First we need a steady barrage of hints by govt regulators to the media that “something needs to be done.” A potential future date will be suggested, with no follow-through whatever. After a long period of spreading the word, a real date for a regulatory tightening will be set, and at that point, some token change will take effect, with absolutely no teeth at first. Only after it sinks in to everyone that the policy change (which has no teeth) does not have any measurable effect on the housing market will the noose actually start to tighten.
(Taken from the government’s Crash Management 101 textbook.)
Pen . I like your suggestions. Because of the lending standards your suggesting ,(which lenders applied in the past ), downturns did not result in as much devastation.
Thanks. This is how it was many, many years ago.
As much as I hate to say it, sometimes people need to be protected from themselves.
it’s not protecting people from themselves, it’s protecting you and I from run-away prices because we all end up paying for the house-price ponzi scheme. (And I’m speaking as a homeowner! I couldn’t care less what my house is “worth”. I live in it.)
You actually,…cough, sputter, hack, hurl… live in your house? Inconceivable!
It should be just as bad as the Depression. Consider the lending standards that were in place for buying stocks on margin back then. Same deal here only it’s houses. It’ll be just as bad.
Yeah. And whatever happened to debt-to-income ratio requirement from “back in the day”? I recall with my first house (1979) that was definitely asked as part of the loan application. If it was determined that you had too much debt, then changes had to be made…you had to pay stuff off before you could get that loan.
BayQT~
Now they just roll it all into the secong mtge and BINGO!. You pass GO, collect $200 at closing and head out to dinner.
And that’s a damn shame. Ethics and proper execution of procedure….all thrown out of the window during this boom.
BayQT~
If we went back to 20% down, i’d be jumping for joy.
Any people in the lending industry who have heard even the slightest whisper that this could actually happen?
Now *there’s* a petition I would love to sign!
Personally I think the free market should be allowed to fix these problems. The root of the problem IMO is the Fed giving away easy money. Get rid of the constant central bank bailouts, and the people with real money will demand the 20% down before lending it.
allow i/o if you have enough $$$ in the bank to pay off the house. That should be the only reason to ever get one.
“And a chicken in every pot and 2 cars in every garage”. Herbert Hoover around 1929.
Add to that, no HELOCs, you can use those badboys for anything. Say someone took a HELOC and then bought a condo or mobile home in Florida with the cash, no you have a bank sponsored home equity covering a questionable asset. At least back when when the bank gave you a loan they knew what it was going towards and got a fair appraisal. Now you can just take that cash and buy whatever the hell you want. So basically a large portion of loans that were originated years ago under more admirable loan practices could have basically been converted to liar-loans just through some dealings like that in the past few years.
There is so much stinking fraud in the mortgage lending cesspool we’ve had the past few years, it makes my head spin. But as usual, the lenders, appraisers, regulators, etc. completely ignored it when the market was booming and values were soaring. Of course, NOW the regulators are starting to crack down on liar loans/neg am, etc … NOW S&P is saying “hmm, maybe these 80%/20% loans to borrowers with stated income and 300 credit scores aren’t such a good idea — better tighten up those MBS credit requirements … and NOW the crap is starting to hit the fan. Typical
Add to that, for all the specuvestors, that the house is for a flip, rather than primary residence. Then you’ll really see S&P say, hmm.
But won’t everybody scream and yell about the undue pressure these “conservative” appraisals will have on the brokers who, according to the NYT article last week, are apparently licking their chops at all the resets coming their way? How can they refi if the appraisal comes in at less than the value of the home? I can see tremendous pressure to continue the nudge nudge wink wink mentality of appraisals to attempt ot facilitate the “soft landing”–the stakes are too great for everyone involved to come clean now.
I think FBs refi-ing to avoid the rate reset are in too deep to be bailed out by refi-ing. I suspect that they have neither the equity nor the cash flow.
I not sure if the current rate environment would even provide for a successfull delaying of the inevitable.
But then again, you may be right…time shall tell…
120 New Notices of Defaults every day in Las Vegas. No way these losers didn’t try to refie before getting into the foreclosure process. I’m betting lenders are starting to say NO.
Here is the Northeast, some courts are so backlogged with Petitions to Foreclose, etc., that it takes 45 - 60 days to even file the paperwork. I think this implies a 2 month lag in the data here.
Kalifornica better beef up their repo depts.!!!
I think FBs who bought in 2005 are F’d. Those who owned their homes for some time before that and have been pulling out $ in refi’s might be able to play the refi to another ARM game a while longer.
However, as those who bought recently begin to default, 2nd DOT lenders will be stung the most and will be less apt to blindly give their money away unless there is a higher interest rate or some assurances that the loan can be serviced, and in fact, repaid.
DOT?
Deed of Trust = DOT. The lender in second position (ie. the “piggieback” loan).
I, too, was wondering what the Dept. of Transportation had to do with anything!
Local bank where I live has both the 1st and the piggyback on many of their loans. Don’t know how widespread that situtation is.
Then it’s pretty easy for the “piggieback” to go away. The banks can stop that practice and still have a business. The dedicated 2nd DOT lenders have a harder decision to make.
What about the piggybacks that have already been done?
based upon the customer interviews that i have had over the past month, these mortgage-reset loans are not going to happen. most of the 80/20 borrowers are under water, the b/c credit borrowers did nothing to improve their creditworthiness and the “smart loan (option arm) borrowers” can rack up some substantial neg-am in a relatively short period of time when the six month libor is over 6%. i think the cottage industry is going to be cram downs on the existing lender instead of letting the house go into foreclosure.
please explain “i think the cottage industry is going to be cram downs on the existing lender instead of letting the house go into foreclosure”
a short sale without a short sale. lender provides new loan with more favorable terms, longer amortization, etc. all in an effort to keep the borrower in the home and out of foreclosure.
A cram-down is like a short sale, but is approved by a bankruptcy court as part of a re-organization, and the debtor continues to hold the asset.
The idea is that an undersecured mortgage holder is secured up to the market value of the asset, and unsecured as to the rest of the debt. The reorganization plan, as approved by the court, discharges the unsecured portion, ‘cramming down’ the creditor’s interest to the market value of the asset.
This reminds me of the stock market crash that morphed into a giant housing bubble. The cram-down sounds like a mere postponement of the day of reckoning, rather than a cancellation thereof.
A cramdown doesn’t postpone the day of reckoning it recognizes it without an asset sale, essentially one side realizes the loss. The stock market is the only market where cramdowns effectivly don’t happen (because it’s almost always liquid).
Speaking as a banker, the only reason I would take a “cram-down” is if I had the knowledge that payments would be made going forward to keep the revised loan current, and the potential to regain my potential loss through a share of the upside (if it exists) when the house is eventually sold.
Loafer
So how do you do a cram-down after the paper is repackaged and sold in risk-weighted tranches to buyers? Who do you negotiate with? How do you unwind the repackaging? This sounds attractive, but *very* complicated.
That’s a great point. It seems to me that this debt bubble is much worse than even the 1920’s one, because lenders and borrowers are so much further removed from each other this time around (all in the name of “flexible” markets, thanks Greenspawn). The end result won’t be just a recession or even just a depression, this time. It’ll be a complete gridlock. At some point lenders as a group will be pulling back so fast (or trying to) that we’ll get derivatives implosions and the like, and no one will even know who owes who what, and the legal channels for working out these millions of individual issues will be completely swamped. The time-based nature of so many derivatives will amplify the problem many-fold. When it happens, I don’t know; maybe we get more bailouts first. But these would just put off (and worsen) the inevitable gridlock.
Own precious metals. Hell, own a naturally irrigated farm, for that matter. It’s gonna be a nightmare.
Oh, sh!t. I was hoping that someone had an answer for my question other than buying canned food and digging a hidey hole. Come on, somebody tell me that I won’t be living my life out in an abandoned missile silo with a loaded AK-47 under the bed!
Seriously, FutureVulture, do we have work on our Australian citizenship, or otherwise how do we get out of this? Any ideas on how to get large amounts of physical gold out of the country?
Gee, maybe we’ll return to a time when banks were in the moneylending business, not the debt repackaging business. A lack of OPM (other people’s money) will go a long way to restore some sanity to lenging conditions.
Any ideas on how to get large amounts of physical gold out of the country?
Cast it into the shape of emigrating Mexicans?
Actually, I don’t equate a huge economic disaster with the complete breakdown of law and society. But I do think we’re underprepared for disasters in general. OT, but bird flu is a real threat that could actually cause a complete breakdown IMO. Depends on whether a 1% lethal or 80% lethal strain ends up going pandemic.
You can, by the way, buy gold outside the country NOW, then you won’t have to move it if/when TSHTF. Aside from the Swiss bank alternative, there is for example the Perth Mint in Australia, which sells certificates for precious metals stored in their vaults. These aren’t extremely convenient, but can be bought and sold without traveling to Australia.
This reminds me of an old “Mission Impossible” episode I saw as a kid where they busted some bad guy who was trying to transport platinum out of the country by casting it into a bumper on his car [can you say "heavy-duty shocks"? yeah, I knew you could]. Not a bad idea, though.
The Jewish refugess of 30-40s Europe had the right idea with sewing gemstones into the linings of their clothing — easy to hide, easy to sell. Bear in mind: diamonds are an illusory market with phony scarcity (thanks, DeBeers), so think OTHER gemstones.
Oh, BTW, if you’re thinking of moving to Australia, you’ll have to leave your AK-47 and most any other thought of gun ownership behind.
Lastly, I don’t see ANY real safe haven from the RE crash; it seems that everywhere from BooFoo, Idaho to Bumburry, NSW has got overpriced homes/land. Cash is, and will reign supreme as, KING!!
["Your words are noticed, comrade . . . ."]
The trustee.
Every securitisation has a trustee to run it. The negotiation would be with them.
Regards,
Loafer
Consumers often play along with dubious appraisals. Danny Wiley, an appraiser in Nashville who is a member of the national Appraisal Standards Board, in May was asked by a lender to appraise a condo in Spring Hill, Tenn. The buyer had offered to pay $139,000, but the contract required the seller to pay $10,000 toward the buyer’s closing costs. In effect, Mr. Wiley says, the price had been inflated by $10,000 to allow the seller to provide money to help the buyer cover closing costs.
Mr. Wiley estimated the value at $129,000, the same price at which numerous identical units in the same complex had recently been sold. That should have killed the deal. But Mr. Wiley says the sale later went through, apparently after the lender found another appraiser willing to value the condo at $139,000. Mr. Wiley declines to identify the parties involved in the transaction, citing client confidentiality.”
FWIW, no one in real estate can hide under client confidentiality.
Thats just pure nonsense! “Client confidentiality” is only allowed in cases regarding confidential information gathered by attorneys in matters of civil or criminal matters. After all Accountants and other professions have no such protection.
So if a Realtor gives you that line, he has no protection under the law. Word to the wise!
“FWIW, no one in real estate can hide under client confidentiality.
Thats just pure nonsense! “Client confidentiality” is only allowed in cases regarding confidential information gathered by attorneys in matters of civil or criminal matters.”
Sure. And if this guy were summoned to testify about this incident in a legal case, he’d have to talk. But he has no obligation to tell the reporter jack sh*t.
This was one of the reasone we have a Savings and Loan debacle in 1980’s.
You’re showing your age.
lol! I read lots of books! over 20- but under 40- yrs.
Ah yes, those of us in Maryland can remember an insolvent insurance fund and the governer mandating withdrawal limits from S&L accounts. And of course we taxpayers ended up bailing out those who had accounts in Maryland thrifts, despite the fact that the government mandate to bail them out was only implied. I suspect that history will rhyme.
The clueless flipper flitted happily about the overpriced condo. The realtor and the appraiser surveyed the abundant happiness with joyful contentment. The mortgage broker looked over the finance papers and blissfully sighed at the everlasting appreciation.
I can picture this pretty easily. I bet it would like Disney’s Zippity-do-dah or Poohbear, Tigger and Christopher Robin….
And they were all in la la land thinking the gravy train would never end .I can hear the mortgage broker right now . “If you don’t like the adjustable ,just refinance it to a fixed rate in a couple of years .After all ,real estate always goes up .”
…except, that poor little puppy chasing the chuck wagon, couldn’t stop fast enough and slammed into the Solid Cherry cabinets with granite counters and ss appliances..
Awww, poor little puppy.
You mean “poor little bitch.”
I’ve been saying shit was gonna hit the fan for a while now. There is too much fraud. I am an honest, ethical, yes very competent appraiser in OC, but I havent gotten a single order in 2 weeks. And its not for lack of marketing skills or experience. I am Certified and have been at it for 6 years. My competition? Brand new appraisers with less than a years experience as licensed appraisers. These guys hire 3-5 trainees and form an appraisal sweat shop. The trainee is clueless, and so is the licensed guy. These are the guys getting all the work right now in Orange County. These are the guys who mostly inflate values by all means, do not disclose property physical or locational issues. These incompetent, sorry excuses for appraisers actually think its their duty to help make the “deal” work. They actually think they are “good” appraisers, because they can “find” the value. They dont know anything about appraising other than how to fill out the form, where to put the value, and where to sign it. These guys were selling ties at Nordies 12-18 months ago. Now they are trusted to independently, ethically, and competently evaluate $900K properties? Yea right. The tide is indeed turning. Word is that in September the feds will issue new rules, not guidance, regarding underwriting standards. Talk about the straw the broke the camels back. Look out below. As for me, I’m certain when the banks get more and more bad loans, they will call the ethical, knowledgable appraisers to help them sort through all the garbage, and the “skippy” appraiser will be back to washing cars for a living, or better yet, he’ll become a real estate agent or mortgage broker. Scumbags.
just remember, when the sh!t hits the fan, it is never evenly distributed…
Hey, OC Appraiser! Tell us what you REALLY think!
Seriously, though, I feel your pain. When this all shakes out, the honest appraisers will float to the top once again. Hang in there. You are still needed.
BayQT~
The cream always rises to the top. Unfortunely, the scum does as well..
I’m sure your a good appraiser . I can tell by the way you loathe these rubber stampers .
I think the investors should hire appraisers to double check appraisals before they buy the loans . That would put a stop to this nonsense.
Most of these “investors” during the bubble wanted the numbers to hit just as bad as the seller to get the loan. Most them were just as cupable as the shady appraiser.
I do hope you are, in the long run, rewarded for your honesty and courage.
OC..quick question…
Doesn’t anyone, someone, somewhere, review the appraisals for any sort of reasonability…
I would think there would be some sort of internal audit going on.
Im my area, I have seen homes sell for stupid money, and I just think, “How the hell could a bank lend $300k, $400k or more on that sh!thole dump?” Especially, if it was half the price four or five years ago. Isn’t there any sort of cap on annual appreciation?
A lot of appraised values are being cut at the (wait for it) underwriting stage. That is probably the only place where lending standards have started to tighten up. It’s a start, albeit too late in the day.
Yep, can speak from experience. Just sold (mid June) our SFR in South Florida, and the closing was delayed a full month while the underwriters poked into the appraisal and buyer’s debt-to-income. Lemme tellya, I chewed my nails down to about the shoulder blade while waiting. Bought in 1989 for $145, sold for $455. Might have gotten $30-40 more if we’d been able to move a year ago, but I have NOTHING to complain about.
OC, tell you what! Im going to write my Congressman tonite. Can you give more info to the committee chairs addresing the issue.
I will write to them as well. I can support you !
Glad to hear that there is at least one honorable appraiser left in the world. Good luck to you.
P.S. If the only business is going to Mortgage Broker shills, I think it’s pretty telling about where the market is already heading–if you can’t reasonably justify a value, you need to try to unreasonably justify it.
But wait the market will solve all our problems………oh it won’t it actually caused the problems?????? I think some people’s heads should be exploding right around now.
OCAppraiser-
I read a short article about the new lending rules *possibly* being issued in the Fall.
Can you please keep us updated on anything you hear about this?
I’m wanting a quick correction and know that tighter lending is the only way to get there so am very eager to hear the latest on this.
OC,
You should really send this post, in letter form, to your local paper, and other media outlets.
Thanks for the post. Great.
Hi OC,
Have you ever approached landsafe or any other nationally “accredited” appraisal service? If so, what is your take on that kind of setup.
I know many smaller shops are requiring their appraisals to be done by such companies because of the number of deals that fall through because the value got cut at the last minute after an appraisal review.
Sorry to hear you have to work with such dirtbags. The sad truth is that after all this, appraisals will probably be done by a gov agency.
And this has all happened before, not that long ago, and everyone ignored it rather than learn from it and change. The pols proposed federally regulating appraisers after the early 1980s RE debacle, a proposal which was opposed by everybody. So when another bubble hit, appraisal fraud blossomed again. And again. This is an ongoing part of our RE business climate.
All the parties with interest and influence in this area chose to allow the market to self-regulate, and thus chose to accept the risk of fraud. Bed. Made. Lie.
I’m not sure that federal regulation is the answer. I suspcet that the answer is having appraisers hired by the people who are ACTUALLY putting their money up. If the big purchasers of MBSs hired appraisers to look at a percentage of the property backing therepackaged loans we would get people who WANTED accurate appraisals. Of course this would slow the financing system to a crawl.
That’s exactly why this mess started, appraisals aren’t for John and Sue homeowner to have a nice fuzzy feeling about their home purchase, they are for the people putting the money up. Those people haven’t cared about the appraised value a bit. Once they get stung a few times they will and things will swing the opposite way, capital is funny that way. I’d put dollars up to doughnuts (getting closer to an even bet these days) that in hard money lending appraisals are pretty accurate.
Appraisals may be done FOR the investor but, despite the theoretical “independence” of the appraisers, they’re hired (or not hired) BY the people who are selling the loans to the secondary market. This is the sort of conflict of interest that more often than not will lead to dishonesty.
Jim , you have the answer . The appraisal has to be done by the investor .
The Appraisal Fraud has been around for a while and been written about before. I first read about it around 2001 from the WSJ. Most homeowners who sold I have meet has heard about it, no shock to them at all. Actually they rather not discuss it.
I think some need to write to their Congressperson and powers in the media. Think about.
he frequently receives faxes from loan officers asking whether he could appraise a specified home at a certain level.
Isn’t it standard operating procedure to provide the appraiser with the Purchase & Sales Contract? Appraisers have always known the value that the borrower and lender are trying to reach. (Ostensibly, the appraiser needs the P&S to determine if there are any contigencies to the Contract or any seller contributions.)
And, it has always been common practice for a loan officer to pick up the phone and ask if the value is there before having the borrower spend $450-$650 on an appraisal. This was especially common on a rate/term refinance where the borrower is trying to not only drop his rate but drop mortgage insurance as well as cover closing costs. (With the advent of 80/20 and increased rates, this has gone by the wayside.) It’s not a crime and it’s not a coercive tactice for a loan officer to make the inquiry before proceeding with the transaction.
The fact of the matter is that between 2003 and 2005 people were bidding over the listing price; in some cases, borrowers opted to pay the difference between the sales price and the appraised value. Multiple offers were common. Houses sold within a day or two of being listed. The comps were there. Now they’re gone.
Appraisal fraud undoubtedly occurred. And, if they ever release the data, it’s probably linked to insider fraud, flipping and high LTV, subprime cash-out refinances.
It’s nonsense to have say 38% appreciation in one year on a property that nothing has been done to it . The Lenders/appraisers should of made the flippers /buyers put extra money down until the values were established . Look at what is happening now in Florida and Arizona ,the prices are turning to shit because of no demand at these inflated by 38% in one year prices .
This was left on my blog today by Cal:
“Just my opinion of course, but I cant see volume recovering without either a price correction or wages catching up.
Also if the Fed actually comes through with the guidance on those exotic loans, the mortgage market is going to go back to being much tighter than it was the last 3 or 4 years. Reducing qualified buyers even more.
This is a copy of the proposed guidance:
http://tinyurl.com/d3feg
Read “LOAN TERMS AND UNDERWRITING STANDARDS” for the fun stuff.
July 24, 2006 | Cal”
On a related tangent, see CR’s latest post:
http://tinyurl.com/ra7nz
Great stuff.
One more thing: make sure you send an email to regs.comments@occ.treas.gov with the subject line “OCC Docket Number 05-XX” and let ‘em know you support the proposed guidance for nontraditional mortgage products. Would hate to see the lobbyists kill it due to lack of public response.
Would hate to see the lobbyists kill it due to lack of public response.
Thanks Im sending an email out tonite.
Would hate to see the lobbyists kill it due to lack of public response.
Thanks Im sending an email out tonite.
Oh, no…
We have Flip This House, Flip THAT House, HouseHunters, (and a host of others). NOW, ladies and gentlemen, a new show is on the horizon. HGTV will premier “My House Is Worth What?”, August 2nd. Only 4 episodes are listed. This should be VERY interesting.
http://www.hgtv.com/hgtv/shows_hhww/
BayQT~
Wow…. finally catching on.
Speaking of which, watched a property ladder marathon type thing with my gf, trying to keep her on the non-buying side of the equation. The last episode they showed? Property was on the market after the show for almost a year and sold for alot less than their goal and seriously doubt they actually cleared a profit. Noticed I haven’t seen too many current market episodes, if any.
I sold my house June 05 for 570k in LA area (SF Valley). The original square footage was 1427, we added w/o permits an additional 125 sq ft (enclosed a porch w/o changing roofline) bringing sq. ft to 1552. The appraisal was done for the 1550 sq footage.
However, the lender would not budge on the unpermitted sq ft and required an appraisal at the original 1427 sq ft. Now this may not seem like a lot of space, but in the small post-war bungalows in LA square footage is like gold. Unbelievably, our appariser magically made the numbers work.
Just 10 months earlier our home sold for 450k (Aug 04), but we ended up not taking the job and we got out of escrow, contingency. This just shows you how crazy and strange the market was for the past few years.
BTW, we bought that house in 1998 for 169k.
Thinking, thinking… if an appraiser has comps for a particular new home at $600k but doesn’t know the builder has given the buyers $50 or $100k in inventives, is he wrong to value the house at $600k? All of the records show it and it’s fully supported by proper comps. Now when that buyer goes to resell the property down the line and can only get $500k for it, has there been appraisal fraud? I think not.
It’s the collusion between the builders and the speculators and everyone else that has driven things to this point. The question is: will it shatter or slump?
The lender/underwriting on the deal must see the incentives in the purchase contract and make allowances for it . The appraiser might not know anything about it . If the buyer/sellers/realtors/escrow officers seek to hide the incentives from the lender that would be collusion and fraud on a material fact in a real estate transaction.
While its not against the law for a broker to call an appraiser to see what value can be obtained, it is against the Uniform Standards of Professional Appraisers Practice (USPAP), for the appraiser to report his/her findings, without due process of keeping a workfile for 5 years and signing limiting conditions and certifications, which 99.9% of all appraisers dont do. These are called comp checks, and no self respecting appraiser does them, because we know that the MB is just shopping for the highest value. These guys will call 5-6 appraisers until they get the one that promises the value. Promises value before even setting foot on the property, mind you. There is also a violation in accepting an appraisal order that is based on a “predetermined value opinion or outcome”.
Companies like Landsafe are whats called an AMC (appraisal management company). I contract with one, but that is only because they agree to pay my fee, depending on the complexity of the assignment. Most AMC’s are notorious for gouging appraisers also. While they dont give any value pressure, they shop markets for the appraiser who will do it for the lowest fee. That is typically the new appraisers, so the quality is sub-par. Banks like this model because it allows these AMCs to bundle title services with appraisals, but at what cost? I think some big banks are about to find out. Take WAMU for instance. They just fired 350 top notch staff appraisers, to be replaced my an AMC, which will now pay a new appraiser $120.00 for a report, while charging WAMU $400.00. WAMU pays good money for am inferior product.
Banks have staff appraiser reviewers, who basically sit at a desk somewhere across the country and look for red flags on a report. If no red flags appear, then all is well. These reviewers, who are termed “desk reviewers” are usually unlicensed in the state they are reviewing and have geographical competency issues, another violation of USPAP.
Larry, this article by the WSJ is one of the best I’ve seen in a while. I’m sending copies to all my local papers, to see if they will pick it up and print it. I think its time the public find out what really is going on. And I think as they see their house slowing go down in value, they will demand it. Wanna know how to find out if you are dealing with an ethical appraiser? Ask him if he does comp checks. If he says yes, go find another appraiser. Larry, one more thing, if the congressman doesnt believe you, tell him to have his house refinanced as part of the “sting”. Tell him to call any mortgage broker in the area. Tell him to tell the mortgage broker what he thinks his house is worth, and I guarantee you, if the value is in the range within the given mile radius, that exact number will appear on the report. Its all a sham folks. You’ve all been duped into taking out ever growing lines of credit. One more piece of advice. Before you buy a house, hire your own appraiser. Pay a little extra for piece of mind. Its either that, or go with what the broker’s appraiser “buddy” says your house is worth, and guess what that will be? Buyer beware.
This is fascinating stuff OC Appraiser. Please keep talking!
OC appraiser
Thanks for your info. It is most interesting.
I am not in the real estate business, so I don’t understand a lot
of the mechanics of how the appraisal / loan business works.
But I do live in Irvine (OC) and have observed the effects of inflated
appraisals that you describe.
My question is this: Why isn’t such fraud prosecuted? Is it
not actionable? Is it too difficult to prove? Doesn’t anybody
(except a few individuals like yourself) care?
“HGTV will premier “My House Is Worth What?””
Awesome premise for a FB horror movie, too. Could breathe new life into the Nightmare on Elm Street franchise. A suburban community is stalked by a menace worse than Freddy Krueger — plummeting real estate prices.
“Lenders often play down the issue. Tim Doyle, an official of the Mortgage Bankers Association, says he sees no ‘broad’ problem with inflated appraisals, outside of criminal rings.”
I’ll bet my life this a-hole never originated a loan in his life.
Published July 19th, 2006, by the NAR. Front page.
Renting can cost more than seven times annually than owning, according to a newly revised consumer education brochure from the National Association of Realtors®.
http://www.realtor.org/press_room/index.html
These guys are starting to make me nauseated. This is an outright lie given current rent / price ratios.
Hey NAR! Got any more of that window pane? They’ve cut my soma ration and I need to reconnect with your reality!
What a joke. Did the NAR forget to mention how some buyers from 1988-90 saw no appreciation for 10 years? How about those that sold for a loss. Did the NAR mention how many in the Oil Patch handed the keys to the banks and walked away? No equity no gain just bust. Yea the NAR a bunch bastards.
And can you in fact buy your 1000 a month home for 210K? It would be more like 250K where I live, and 270K if you include legals and purchase taxes.
Also there don’t appear to be any property taxes, insurance or maintenance costs. Talk about selective use of statistics :angry:.
I took them to task for this.
NAR Releases Deceptive Rent vs Buy Brochures:
http://tinyurl.com/qtsfj
Bubble Meter Criticism of the National Association of Realtors Quoted in Washington Post Express
http://tinyurl.com/lr2u5
I bet NAR loves me.
David
http://bubblemeter.blogspot.com
Righty. ANd please tell me where I can buy a house for 210K in Mass where I will not need an armor plated car, and body armor to walk to my front door, or where my potential neighbor is not pimping crack out the side window?
210 around here will get you a dilapidated condo conversion in what used to be section 8 housing, and to boot with the old neighbors. What a crock of s*it
From the article
“In contrast, a $210,000 home purchased today with a downpayment of $10,000 and a 30-year fixed rate mortgage at 6.5 percent would cost a steady $1,100 per month and yield a net worth of $138,521 after 10 years, assuming an historic 4.5 percent annual appreciation rate.”
Ummm, running these numbers I get a monthly P&I of $1,264 without insurance and taxes. They have understated the “fixed” costs by almost 15%.
Anyone know someone at the WSJ or other publications who can expose these faulty numbers and outright fraud?
Never mind. If you click on the actual brochure sample they do have the correct numbers. I guess they only lie to the realtors they are getting to try and buy this crap.
The whole system is a house of cards… Even if you are an honest appraiser…. If the comps in the neighborhood are inflated 10-15%.. what is your “honest” assessment going to based off of? Smoke and Mirrors.
As touched on in Ben’s post, fraudulent appraisals can effect future genuine appraisals which rely on comparable sales in the area, to establish a value. And like a pebble droped into still water, the those fraudulent appraisal are distorting other future appraisals in the area, which in turn continue to distort appraisal values, when comparables are used to establish real estate values. And those fraudulent appraisals could have been a very small minority. That coupled with greed, lax lending practices, low interest rates on borrowed money, holes in the regulatory system, there is an issue with over inflated real estate prices.
And with people highly leveraged with ARM’s which are due to re-set, and interest rates on the rise, there is a situation similar to the bust of 1929 approaching.
Somone following suicide and murder stats, along with forclosures?
I understand suicide rates increased quite a bit after the 1929 bust.
Of course REO sales will have the same sort of wide-reaching ripple effect.
Consumers often play along with dubious appraisals.
That pretty much sums it up. “Oh please, let me pay more than this house is actually worth!”
There is a truth hidden in that twisted plea. Oh, the mentality. This will end in tears for many.
One point that is being missed — there are three ways to appraise a property: Cost Approach — replacement value to simplify ( how much would it cost to build deducting depreciation for wear and tear);
Income Method — what rent would the property warrant; Price Method — those comps. The problem is that the price method dominates… this is also the ‘guestimate’ realtors use in pricing and that ‘drive by’ pricing. In a valid appraisal with meaning all three valuations should be within a very tight range. Any lender that doesn’t question massive differences is an ass or crooked… see, those fundamentals are inherent…. if one doesn’t accept or understand this point, or the appraisal doesn’t include all three values there is no use or value to the appraisal…. simply gibberish and talking points.
The “cost approach” for appraisal is no longer valid. What it “costs” to build a house is immaterial in this day and age.
After the Nov 03 Cedar Fire in San Diego, Public Adjusters were quoting $350- $400 per square foot to rebuild 1200 SQ FT homes in Scripps Ranch. Their rationale was to recover the full value of the insurance policy; which the banks had inisted cover the full amount of their loans.
I owned one of these McMillian homes in the mid 1980’s. Cost then, $142,000.00.
BTW $400/SF can build one heck of a house!
First, the income method for a property is flawed if it does not include future price changes. Now, heres the fun part. If you assume future price changes are negative, then buying a house needs to be CHEAPER than renting.
In my corner of Suffolk county rents and house prices are converging. But, I just saw a seller drop his asking price by 10% …. something like one year of rent.
The “market approach”, also known as the “sales comparison” approach to value is the most widely and appropriate valuation method for single family homes and condos because typical market participants, ie buyers, do not base their decision on replacement costs or income streams. Remember, its what “typical” buyers do. Also, determining land site value in an neighborhood that is 100% built out is pretty much impossible and would lead to an inacurate number. As far as using comps that have been inflated. I agree, they are out there, but a good appraiser has a duty to use due diligence in selecting comparables for use in the report. Its not hard to determine if a comparable has been inflated, versus its peers. Its also pretty easy to give less credence to a comparable in a high end market that was purchased with 100% financing. Seller consessions, whether by the agent/owner or new contruction builder have to be disclosed. Appraisers need to dig for this data. If a builder doesnt want to disclose to me the consessions, I start knocking on doors to find out what the new buyers got. Its the job of an appraiser to dig for this data. To promote and protect the public trust. This has all been forgotten over the years and the new “skippy” appraisers could care less about the public and more about how many clients they have to suck-off. Agents in OC are notorious for publishing closed sales data in the MLS that is NOT the actual closing price, per public records. They do this because its a way to stear a new appraiser into hitting a value, using incorrect data thats on the mls, and it also helps keep NAR sales data positive. Yea, they are all playing with a stacked deck of cards and I feel like the gaming commission. When I enter the room, they roll their eyes and wish I was a brand new appraiser trainee who they can control. Too bad most appraisers in this county allow themselves to be whored out for a quick buck, while doing a huge diservice to the consumer and general tax payers.
I wrote this story months ago, better: http://www.voiceofsandiego.org/articles/2006/01/03/housing/import-521.txt
Some scoop.
I do hope Curt was being sarcastic — OC Appraiser is correct — however if all three aren’t within a narrow range then the *appraisal* of value is including ‘exuberance’ that is subjective— so is ‘value’ now solely what people are willing to pay or is there something intrinsic? Obviously including that ‘exuberance’ into an appraisal will jack prices and ‘get’ the valuation the lenders want…