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The New Mortgage Fraud

  • January 24, 2011
Ines Hegedus-Garcia
ines@miamism.com

Oh yeah, this should be fun, but it needs to be put out there because it's happening across the board and the one that ends up loosing is YOU, the end buyer and and seller, so listen up!

Back in September of 2009 we started noticing a trend and let you know all about it - Appraisals Kill Deals.  The trend was about "artificially low" appraisals, but contributed it to conservative appraisers who were being "careful", because of the whole mess we had just left behind us.

Guess what? It's gotten much worse and after a little research and some unofficial interviews, we've come to the conclusion that banks are not being conservative ... many are dictating what appraisals they accept and even give instructions to professionals on how to go about appraising - sound fishy?  it is! and I foresee some major law suits!

So here's one scenario.  We had a Miami Shores home under contract with a very strong buyer with excellent credit and credentials.  The appraisal is ordered and when it comes back, the bank decides that it doesn't like the comparables  used and orders a second appraisal.  By this time, the buyer is livid!!  He doesn't understand how an appraiser, chosen by his bank, is rejected!  The second appraisal comes in over 20% lower than the first and when I looked at the properties used, they were not even comparable - wrong city, wrong square footage, wrong condition, no adjustments ......and ....THAT's the appraisal the bank liked, one that used conveniently low numbers in order for the bank to protect their investment - which meant the buyer had to come in with cash to make up for the difference between appraisal and selling price.

Second scenario. Out of town buyer finds property in Miami for an investment and decides to finance with a California bank they have an established relationship with.  When the appraiser shows up, he asks the listing agent about a couple of nearby sales to make sure he is using the right properties.  Conveniently enough, the appraisal comes back low and the higher sales he had inquired about were not even used!  When I explain to the buyer that he can request a second appraisal and that the seller has even agreed to pay for it, here's what he responded:

Since appraisers are supposed to know their market, (and I have no real sense of market values!) I have to think there is some basis behind his numbers

EXACTLY!!!  You would figure that the appraisal would be a way for a buyer to verify the property's value and feel good about their investment.

  • So why is it that appraisers need to see the contract price when appraising?  If the process was so objective, they shouldn't even know what the property is being sold for!
  • So why is it that sellers could pay for an independent appraisal when selling but that is no longer relevant?  Appraisals backed up by a financial institution are totally different than those without it.
  • So why is it that adjustments made by appraisers when comparing properties, don't really equate to reality? example:  comparing a totally renovated home with top of the line finishes to a home that is a fixer upper.

If an appraisal is not a fair way to check market value of a property, and if banks are able to manipulate the objectivity of these, then what exactly is protecting you?  There is no system of checks and balances and it will be left to a really smart and educated you to know the difference.  Our advice:  Do your homework, know who you are working with and be cynical about the process.


Douglas G. Kues 25th January, 2011

All points are right on the money....except for the questionable "why does the appraiser need to know the purchase price". Actually, it is a requirement of the Uniform Standards of Professional Appraisal Practice (USPAP) that mandates an appraiser review the purchase documents. Ideally, they remain impartial as to the agreed upon price, but they need to know, for example, if the $100k ocean racer or all the furnishings were included in the sale, or if the seller offered some outrageously attractive financing to close the deal.

But with regard to lenders seeking lower values to either avoid the loan or protect their investment....EXACTLY correct. When values were climbing, lenders were desperately in search of a 'target shooter' appraiser that would hit whatever inflated value they needed to make the commission. Now that values are declining, the 90% to 100% loan is no longer attractive (at 1% decling per month / 12% annual, the 10% equity position is gone in less than a year) the banks are scrambling to avoid being trapped. Starting with the BIG ones. There is a website being created to attract all appraisers that have been manipulated in such procedures (and it is nearly all of them) that should VERY interesting and exposure intensive for those that imposed their unreasonable and unlawful demands on the rest of us.

David from securebonds.co.za 26th January, 2011

Mortgage fraudsters can promise to help you out in your payments and then run away with your money and even property. Unless you're well-informed about the home-buying process, you may end up paying thousands of dollars in excess.

Ines Hegedus-Garcia 27th January, 2011

@Douglas - I understand the whole arms length transaction and knowing terms, it's knowing the price that I don't agree with. About 90% of our financed deals this past year have conveniently appraised at offer price - I find that ridiculous! What if a Buyer wants to know if they are buying a property that has some equity?

@Ben - Good luck with that!

@Peter - depends on your situation - in the case of our first scenario, the lender turned down a perfectly good appraisal because they did not like the comps used - I think that would be enough case for a law suit. You may want to talk to the appraiser, you have every right to do so.

Ben Goheen 25th January, 2011

It seems like you have some valid points here Inez. Just remember, not ALL of us appraisers are bad. I have to say that I kind of get defensive when I see more and more of these articles about appraisers killing deals. It's an opinion of value, and we occasionally make mistakes like every person in this business does.

I look at it this way: at the end of the day, who's making the big money and has the most to loose? Not me with a $350 check in my hand - but rather the Realtors and lenders who are making thousands in commission.

I'm not saying these 2 examples aren't legitimate complaints. But how does a low value benefit the appraiser?

Ines Hegedus-Garcia 9th February, 2011

Here's a new one - for the appraisers on this: Appraiser decides not to count 605 square feet of living space of permitted garage conversion with floor plans and zoning approval(included in the home's central air conditioning), into NET LIVABLE AREA - where it is clearly a family room. All because there are steps down into the space. This issue causes a $100,000 discrepancy with first appraisal. << now THAT's what I call subjective ART!

lyn 31st March, 2011

I agree with this article. This is a wide spread problem that is killing sales. Perfectly qualified home buyers are not able to buy due to these low appraisals and its a tradgey! How can our economy recover if we are not able to purchase homes? The low appraisals are making to almost impossiable to buy a home! The appraisals can get very expensive fast at 450 an appraisal only to find its low again! This trend needs to stop! Most people don't have the money to make up the difference and the deal is killed! It is a disease that is spreading accross the country! Hopefully in the future this will stop!

Ben Goheen 25th January, 2011

Every lender has interesting requests these days, even the ones who are typically easy to work with. One of my good clients who is in a more rural area (homes on 1-40+ acres) is now using underwriters in New Jersey. They flip out at almost all appraisals since they've never seen an acre of land.

For this same client, their closest office is about 40 miles away. Most homeowners hear how far away I live and I can just see them start to get nervous. But I'm in that area 2-5 times a week so I definitely know that market very well.

Appraisers ALWAYS have liability, no matter what the opinion of value is. E&O insurance baby - I hope to never need it but $1M lets me sleep just little better at night.

I'm actually meeting with a homeowner who is questioning my appraisal. He had 2 done and mine was quite a bit lower. The property is only a few miles from me so I definitely know the market. Plus my appraisal was done almost 3 months after the other one, and 2 of the comps I used (lower value of course) weren't available to the 1st appraiser. It should be an interesting conversation. :)

Vermont Resident 24th January, 2011

PLEASE answer my questions! I am a homeowner- no mortgage. live in Vermont. I receive
Social Security Disability and SSI. SSI does not allow me to
have over $2,000. in the bank or I lose the SSI. Benefits in
Vermont are stacked like dominoes. If I lose the SSI I lose
the Food Stamps and the Fuel Assistance and the Medicaid.
I own my own home and one car. I have no mortgage. A deceased
relative left me the entire home, paid for, because of my
disabilities. The temperature in Vermont tonight is well
below zero degress. Federal Fuel Assistance to Vermont was
drastically reduced this year, in the fall, by the Democrats, by the way. It is possible we will be notified of more fuel assistance at the end of this month, but it hasn't happened yet.
When I finally sell and move south to Florida, which is where
Vermonters tend to go, (and love it, from what I've heard), then
I have to have a contingency contract to only sell my house on
the day I buy another house - remember - I can't have over
$2,000. in my bank account or lose benefits, which would not be
restored possibly for a year!
So, how do I find out what I need to know to sell and move?
The big scare is property tax, I've been looking at listings
that don't show property tax. Also, I'm under 65, I don't qualify for senior citizen discounts. Vermont has a property tax based on income, but that might change soon. Go to http://www.leg.state.vt.us and see H. 60 they may do away with income based property tax. What I think I need to do is to buy a house for the same amount I sell for, but I just don't really have a clue. WHERE DO I GET THE INFORMATION A LOW INCOME FOOD STAMP RECIPIENT ON MEDICAID NEEDS? REMEMBER, WITH FOOD STAMPS AND MEDICAID YOU ARE ALLOWED TO OWN ONE HOUSE AND ONE CAR. WHERE IS THE GUIDE TO BUYING AND SELLING REAL ESTATE WITHIN THESE PARAMETERS, WHERE A PERSON DOES NOT WANT TO LOSE THEIR BENEFITS OR SHOW PROFIT? JUST RE-LOCATE FOR HEALTH REASONS? BECAUSE OF THE FUEL ASSISTANCE BEING LOWERED AND THE POSSIBILITY OF PROPERTY TAX GOING HIGHER FOR THE 2012 TAX SEASON, A LOT OF VERMONTERS MAY BE READY TO SELL. HELP US! IT'S COLD AND LONELY UP HERE!

Peter 26th January, 2011

I'm pretty positive CitiMortgage did just this to me--on two appraisals. But how do I prove it?

Ines Hegedus-Garcia 25th January, 2011

Vermont,
one answer: talk to an attorney
First figure out what you can sell for in Vermont to know what you can buy in South Florida to see if it's economically feasible. This should include what the holding costs will be. For ex. RE taxes, insurance and utilities knowing the limited income.
Then consult an estate planning attorney with some real estate expertise or two attorneys to see how you can work around the medicaid rules. Attorneys may be able to hold the proceeds in escrow so that they don't hit the bank account until he buys the next home.

Hey BEN,
Of course not all appraisers are bad and FYI, part of my unofficial interviews were with appraisers who refused to work with certain banks because of those banks "requests".

The question about inadequate appraisals is not about the appraiser making a mistake, it's about that person not knowing the area and not taking the time to do research. In the Miami Shores example, the guy went out of Miami Shores and changed the city in his descriptions!! <

Ben Goheen 31st March, 2011

Lyn - This article (http://goo.gl/fEUwC) talks about how some states are dealing with the issue. I agree with the author, you can't just ignore distressed properties.

I've seen traditional sales that are in much worse condition than most foreclosures. So should it be worth more just because the homeowner has been able to make payments and not default?

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