Mortgage Servicing Fraud
occurs post loan origination when mortgage servicers use false statements and book-keeping entries, fabricated assignments, forged signatures and utter counterfeit intangible Notes to take a homeowner's property and equity.
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Ho-hum
By Sharon L. Lynch and Bob Ivry

Jan. 17 (Bloomberg) -- Home appraiser Julian ``Tony'' Perez conjured $7.5 million out of thin air in the first six months of 2001 by overvaluing 33 condominiums in the Atlanta area.

Perez valued eight unfinished properties at the Deere Lofts development on April 2. Some were missing ceilings, cabinets or sinks. Each had been bought the previous week for $90,000 to $167,000. Perez said they were worth $177,000 to $330,000, according to the U.S. Attorney's Office in Atlanta.

``These are the worst condos ever,'' Perez said last January during testimony at the federal trial in Atlanta of developer Phillip Hill, who used the appraisals to resell the properties. ``Those values are super over-inflated, probably double what the amount of that property is probably worth.''

Perez and appraisers like him helped exaggerate U.S. mortgage values by as much as 10 percent, or $135 billion, in 2006, according to Susan Wachter, a real estate professor at the University of Pennsylvania's Wharton School in Philadelphia. Such appraisals artificially inflated the value of collateral supporting mortgage-backed securities and are contributing to record foreclosures because borrowers end up owing more than their houses are worth.

Lenders and investors in mortgage-backed securities depend on independent appraisals to value their collateral. Buyers use them to make sure they aren't overpaying.

`Blesses the Loan'

Mortgage lenders, eager to make bigger loans and win market share during the five-year housing boom, relied on both higher appraisals and the proliferation of subprime and adjustable-rate mortgages, said Wachter, who has consulted for mortgage buyer Freddie Mac and General Electric Co.'s U.S. home loan unit.

``There has to be an appraiser who basically blesses the loan,'' she said. ``There are lenders who are deciding what terms to extend and then there are appraisers indicating it is appropriate or isn't appropriate.''

Lenders and mortgage brokers routinely pressured appraisers to boost values, said Jonathan Miller, a New York property appraiser for more than two decades who writes a blog about the problem.

Protections established by the Washington-based Appraisal Foundation, a non-profit that sets industry qualifications and standards, came under attack in the 1990s as banks cut their appraisal departments to save money, Miller said. The system was further corrupted when lenders began moving mortgage applications to third-party brokers who only got paid if a loan closed, he said.

Market Mentality

``There just became less and less emphasis on quality,'' Miller said. ``You started to see more and more loan products that would keep payments low, and I see that as correlating with appraisal pressure because those products only work in a rising market.''

Ninety percent of appraisers surveyed in a study published last year by Richfield, Ohio-based October Research Corp. said they felt pressure to make bogus valuations. Five years ago, that figure was 55 percent.

Almost three-quarters of the appraisers said that mortgage brokers asked them to bend the rules.

Perez said in court that he did it because it ensured steady work from brokers connected to Hill's properties. In some cases, he valued condos that needed substantial work as if they were complete. He also used the sale prices of more expensive apartments nearby to justify inflated values.

The decision cost both Hill and Perez. Hill landed a 28- year prison sentence for using the appraisals to defraud lenders out of $112 million and Perez pleaded guilty to conspiracy to commit wire and mail fraud and is awaiting sentencing. He declined to comment.

Appraisers who resist pressure to inflate values said they may be blacklisted.

`Squeeze Another $20-$25,000'

Paul Bodeving saw his business dry up after he was hired by an appraisal management company to evaluate a four-bedroom, 3,500-square-foot house in Grants Pass, Oregon, last February.

After examining the value of comparable homes, Bodeving determined the property was worth $837,000. The appraisal management firm asked him to ``squeeze another $20-$25,000'' in value so the lender could close the loan, Bodeving said. He refused and rarely gets work from the company anymore.

``It's absolutely horrible,'' he said. ``We've never had the pressure we have now.''

Debbie Huber, a Las Vegas home appraiser, says a third of the mortgage lenders who want to hire her are looking for a guaranteed value before she appraises the property.

Pistol-Packing Appraiser

``We get calls like that every hour of every day,'' said Huber, past president of the Nevada Appraisal Commission, the state agency that oversees appraisers.

The problem became so severe in Florida that appraiser Pamela Crowley said she started an e-mail distribution list in 2003 for real estate appraisers to report suspicious sales and refinancing deals.

Crowley said she was forced out of the appraisal business because she refused to report property values that were higher than the actual worth. She has turned the e-mail list into a Web site, and says she now works with a snub-nosed .38-caliber pistol at hand because she's afraid of retribution.

``There are a lot of people who made a lot of money on this whole game and I was hurting them,'' Crowley said.

Appraisers also are being pressured to overlook imperfections in homes or ignore housing trends in a community that might bring a property's value down, said John Oakvik of Tozzer, Oakvik & Associates Inc. in Fort Lauderdale, Florida.

Oakvik said he got a call in October from a mortgage broker who asked him if he'd made a mistake when he checked a box on an appraisal report that said home prices were falling in the area.

`No Red Flags'

``She asked me to change the box from `declining market' to `stable market,''' Oakvik said. ``Mortgage brokers just want a generic report, no red flags.''

Appraisal practices are drawing the scrutiny of prosecutors. At least seven states have opened investigations into the mortgage industry, including ties between appraisers, lenders and brokers.

In New York, Attorney General Andrew Cuomo subpoenaed Fannie Mae and Freddie Mac, the two biggest buyers of U.S. mortgages. He also sued First American Corp.'s eAppraiseIT LLC for allegedly caving to pressure from Washington Mutual Inc., its biggest customer and the largest U.S. thrift, to inflate values.

Cuomo said in November he uncovered a ``pattern of collusion'' between lenders and appraisers to bolster home values.

$4.7 Trillion Market

The investigations call into question $4.7 trillion worth of mortgage securities guaranteed by Fannie Mae and Freddie Mac, and may limit the availability of home loans to borrowers with good credit, CreditSights Inc. analysts Frank Lee and Sarah Rowin said in a Nov. 8 report.

``If there is a disruption in Fannie and Freddie trying to buy conventional loans, that would be very, very bad right now,'' Lee said.

The valuation crisis in the credit markets may cost banks and investors $400 billion, according to November estimates by Deutsche Bank AG analysts.

Lenders including Lehman Brothers Holdings Inc., the biggest underwriter of mortgage-backed bonds in 2007, say they too have been victimized by fraudulent appraisals.

New York-based Lehman sued 14 people and five companies including Passarelli & Potts Appraisal Service and appraiser Fred Passarelli in federal court in Tampa, Florida, alleging ``grossly inaccurate'' appraisals that valued residences in the Sunset Bay development at about $733,000 when they were only worth $73,000.

Inaccurate Appraisals

Jurors ruled Dec. 13 that Equitable Title of Florida Inc., based in Clermont, breached its contract with Lehman in handling closings and that Passarelli & Potts of Winter Park, Florida, was negligent in its appraisals. Jurors said both actions led Lehman Brothers' Bancorp unit to fund millions of dollars in mortgage loans secured by properties worth a fraction of their sales price.

Passarelli's contract was with Interlachen Residential Mortgage Co., a defunct Florida company, which passed the appraisals on to Lehman, said Eric Lanigan, Passarelli's attorney.

Legal Ruling

``Our position is that Lehman Brothers had no right to rely on Passarelli's appraisals,'' Lanigan said in an interview. ``If you had no right to rely on it, and you knew you had no right to rely on it, then you rely on it at your own risk.''

Equitable Title was ordered to pay $2.8 million. Passarelli & Potts Appraisal was ordered to pay $4.5 million. The jury originally said Passarelli & Potts was liable for $6.9 million, then reduced the amount by 35 percent, saying Lehman was responsible for that portion.

Lenders made about $2.7 trillion in new mortgages and home refinancing deals in 2006, according to the Washington-based Mortgage Bankers Association.

For some appraisers, including Perez in Georgia, going along was the key to staying in business.

The Georgia case in which Perez testified hinged on 300 inflated appraisals, according to Assistant U.S. Attorney Barbara Nelan. Hill and companies he controlled bought 50 houses and 250 condominiums and made money by recruiting straw buyers to repurchase the properties at inflated prices.

Even before Perez pleaded guilty, he paid for bucking the system, said his lawyer, Page Pate.

``He liked the steady stream of business,'' said Pate. ``My client refused to inflate a few appraisals and they cut him off for a long time.''

To contact the reporters on this story: Sharon L. Lynch in New York at sllynch@bloomberg.net ; Bob Ivry in New York at bivry@bloomberg.net .

                        Last Updated: January 17, 2008 12:18 EST

http://www.bloomberg.com/apps/news?pid=20601009&sid=aspX9JNoyFRE&refer=bond
Quote 0 0
As a borrower, how would you ever know when an appraisal is too high?

Maybe by looking at other properties in the area and comparing?  Or hiring
an appraiser for the prospective unit or house you want to buy?

A borrower would never be warned, you would be well served to hire an
appraiser yourself.  Why would a lender extend too much mortgage money?

What person in their right mind would over pay for a house by $100K?

Of course, and as usual, the reporter does not mention the theft of
the borrower's money in this transaction as though that doesn't merit
a single paragraph?

Do you feel the appraisers in this story deserve a pass on their conduct?

I don't think so.

At the very least this scam is putting your integrity up for sale. 

I am pretty sure they want to blame the borrowers and the banks.

Sometimes in life, you have to say no to money in exchange for your
integrity or possible prison terms.  Saying NO is not that hard to do.

I'd start looking for another line of work if I were faced with their choices.

Overpricing homes value has contributed to the borrower's loss of cash,
their home and sometimes their health and general welfare trying to cope
with the results of a loan that was set up to fail.

Everybody knew they were contributing to this cause against the borrower.
They shouldn't be shocked they are going to prison. 

I would give this reporter a D for this article. 

Dee




Quote 0 0
Joe B
This is a morbid curiosity question...

     Has anyone ever heard of someone using an appraiser to get a lower price in order to negotiate with the seller? In other words, if you think a home is overvalued by $25K, couldn't you also get an appraiser who agreed to not price above that amount?

     It seems to me that this can cut both ways. I obviously see the up-side, as I think we can all attest if we read the news. However, why can't it go the other way?

Just curious if anyone has actually heard of this.

     As a follow-on question. When you hired your appraiser for your property review, did he or she ask for the current sales price, or what you were planning on offering ahead of time?

     Again, I know this is OT, but I am curious about our collective experience on this.

Thanks!

JB
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Joe B.:

You ask an EXCELLENT question!  And I have an anecdote to share from my days as the president of a Massachusetts mortgage company.

We had an applicant whom I shall call SMITH.  SMITH had relocated from the West Coast and had a very high powered executive job.  He had excellent credit, good income, plus the resources necessary to make a substantial downpayment (~35%).

SMITH had shopped around and FOUND US.  Our firm specialized in REFINANCES.  We had good rates and gave a fair deal.  We had essentially ZERO business from broker referrals and therefore did NOT rely upon broker referrals for our business.

SMITH had enterred into an agreement to purchase a newly constructed luxury residence, which in those days could be purchased for ~$350,000.  We sent our regular appraiser around.  We NEVER pressured our appraiser for inflated values.  We DIDN'T NEED TO.  We were typically qualifying established borrowers for a NEW LOAN on a property that had nicely appreciated in value and for whom we were going to LOWER their interest rate and payments substantially.  We ONLY asked for an honest appraisal!

SMITH had made an earnest money deposit on the house, which I believe had been newly constructed by a small developer on a speculative basis and which had been listed and sold through a broker.  I will say that SMITH had put down $10,000 and had a sales agreement negotiated by a lawyer, which agreement contained a FINANCING CONTINEGENCY.  That is, if SMITH could NOT get financing by DATE x, he could obtain a REFUND of his earnest money deposit.

SMITH completed our application and we verified income, cash balances, debt, and credit.  SMITH was really blue chip!  A PRIME customer!

The application process was unnecessarily drawn out by the fact that completion of construction was delayed.  We sent our appraiser around the first time and the house just wasn't ready!  SMITH and the SELLER agreed to an EXTENSION ofthe contract, but the financing contingency remained in place.

The appraisal came back.  It said that the house for which SMITH had agreed to pay $350,000 was in fact only worth $315,000!  The appraiser also noted that certain landscaping work was unfinished.

I have omitted to mention that immediately AFTER SMITH signed the contract, we begin to receive calls from the BROKER who had arranged this SALE.  The BROKER demanded to know how things looked for SMITH, how his credit, employment, etc. were working out.  But the BROKER was particularly concerned about the APPRAISAL.

Our policy was to discuss a applicant's application and financial situation ONLY with the applicant.  And I ENFORCED this policy, too.  I made it plain to our employees that we believed we had a fiduciary duty ONLY to our applicants and to our mortgage investors and owed the brokers, who worked for the seller, NO DUTY AT ALL.

We would basically tell those inquiring that America was a great and growing country and that SMITH was a great guy!  We would tell them NOTHING of SMITH's application, fianances or of the appraisal.

The calls from SMITH's BROKER became more and more aggressive and when our underwriter REFUSED to answer any questions about SMITH's application, the calls were ultimately referred to ME.

The broker INSISTED that she had a provision in the sales contract which AUTHORIZED the broker to make inquiries of the lender and to obtain the buyer's financial information and even a copy of the appraisal.  I explained to the broker that EVEN IF THIS WAS TRUE that our firm was NOT a party to such a contract and that it wasn't binding upon us.  I suggested that IF SHE HAD A RIGHT to this infomration, she needed to obtain it from SMITH.  Then I called SMITH and gave him a heads up.

I also promptly REWROTE our corporate privacy policy to provide thet we would ONLY disclose information to persons designated by the applicant IN WRITING on OUR FORM disclosure authorization form.  Basically, I set out a new policy to TRUMP any boilerplate authorization which had been inserted surreptitiously into the buyers contract or another agreement to which we were NOT a party.  The disclosure agreement also explained in plain English why it was NOT in the borrower's interest to CONSENT to such disclosures.  In essence, I gave even those who had improvidently AGREED to such a disclosure an additional opportunity to PROTECT their own privacy by simply DOING NOTHING.

It is important to understand that LOAN TO VALUE RATIOS are calculated based upon the LOWER of COST or MARKET.  If the house SMITH was purchasing had appraised for MORE than the sales price, we would use the sales price.  When the appraisal came in LOWER than the agreed upon price, we had to use the appraisal.

SMITH was going to put down something like $100,000 in cash and finance $225,000 on a $350,000 purchase, giving us a 64% LTV.  When the appraisal came in low, we would have had to use the lower $315,000 number in the denominator resulting in a 71% LTV.   

Faced with the LOW appraisal, there were two ways were could have gone at this point.  Truly, SMITH had such great credit, income and resources, that we COULD HAVE APPROVED SMITH for the amount he requested, particularly at a 71% LTV.  But he would have been paying $35,000 too much for the property.  However, we also could arguably REJECT SMITH and give him a valid basis to RECOVER his earnest money deposit.

From MY perspective, I thought that IF SMITH could obtain a better price that we had an even BETTER security interest in the property, because SMITH would ask for a slightly LOWER LOAN AMOUNT and have MORE MONEY IN THE BANK AFTER CLOSING.  AND SMITH would have a really good impression about doing business with us and would feel GOOD about repaying his loan, as well as recommending us to others and using us again!

Because we had PRESERVED our duty to our applicant and respected his privacy, the BROKER had NO WAY OF KNOWING the true circumstances.

I resolved this problem by CALLING SMITH and explaining what our appraiser had found.  I furnished SMITH with a COPY of the appraisal (which had also been DEMANDED by the pushy BROKER).  I told SMITH to let us KNOW whether he desired to be APPROVED or REJECTED.  SMITH asked for a letter of REJECTION citing the low appraisal, which we provided.

SMITH, being an asutue businessman and a good negotiator went back to the SELLER and BROKER and declared that he was going to be REJECTED for the loan because the house had APPRAISED LOW.  He asked for a PRICE CONCESSION.  Enough time had elapsed with the property OFF THE MARKET that the calendar had slipped PAST prime selling season.  The seller did NOT want to take a chance and the SELLER and SMITH agreed to a $25,000 price reduction.  The SELLER also agreed to the escrow of an additional $10,000 pending completion of the landscaping which was then deferred until Spring because of the lateness of the season.

We then APPROVED SMITH at the new $325,000 negotiated sales price.

Here, you have a real world, actual example of the outcome when the Lender just does the RIGHT THING.  Some folks have told me that it was DISHONEST to furnish SMITH with a REJECTION letter.  I DISAGREE, because I was perfectly WILLING to REJECT the loan and LOSE our profit opportunity to SPARE SMITH from overpaying for the house by $35,000.

Whether this is a great outcome depends upon whether you are the buyer or the seller.  As the LENDER, I thought it was a pretty good outcome.  SMITH borrowered the same $225,000 and we had the SAME 71% LTV we would have otherwise had.  But SMITH had $25,000 more in post settlement cash to act as a buffer in case of financial adversity.  And we held back the additional $10,000 to assure the completion of the contracted landscaping.

But here is a rather vexing economic problem:  HOW DOES AN HONEST LENDER COMPETE IN THE MARKETPLACE WITH DISHONEST LENDERS. 

Here we have one small example of how one might develop a niche business by BEING HONEST and treating the Applicant/Borrower WELL.  But numerous studies show that most pre-internet mortgage business was obtained through broker-referrals.  Needless to say that we did NOT get any referral business from the the pushy BROKER.

My employees did NOT get their share of the broker supplied cocaine going around back then.  We kept our noses CLEAN.  The people RUNNING the mortgage business today are mostly the folks that DIDN'T.  In a rough cyclical business, the SURVIVORS were often those who had no second thoughts about BEING DISHONEST if they could make a buck!  And here we are amidst a TRILLION DOLLAR mortgage meltdown!    
Quote 0 0
Blossom
Dee,
As a Realtor, I can tell you what my practice is to inform buyers.  When they are about to make an offer on a property, I provide them with recent comparable sales to subject property along with recent neighborhood sales data.  I also give them current assessor's field card on subject property.  In the process we also review existing deed and property survey.
It is vital to run comparison of recorded docs and assessment data against info provided by listing agent.  I've often performed CMA - current market analysis on subject property for buyer's use in determining what their offer will be.  I know that not all in my profession do this but experience shows it is a best effort to keep buyers educated as to current market conditions and values.

Joe B.,
Re:   Has anyone ever heard of someone using an appraiser to get a lower price in order to negotiate with the seller?
I have never seen this happen intentionally. I have seen appraisals come back below purchase price, simultaneously too low to support financing contingency.  In that one case, yes, selling price was appropriately adjusted.  My experience has been that lenders and mortgage brokers choose which appraiser to use, not the Realtors.  Overall, it is best for all parties that appraisers tell it like it is and yes, I know we don't live in a perfect world.  I recently heard of a situation in which mortgage broker asked a listing agent to fudge rent roll and this was for an FHA loan with some units leased to Section 8 tenants. They were a little surprised when the Realtor told them 'nut's to that!"    

Quote 0 0
Well, if they waffle one way for the money they would probably waffle the other way for money.

A borrower would be a one time shot for the most part so the attraction
would be towards lenders that can send them a thousand cases a year.

One legitimate way to use an appraiser is that you suspect the decline
in value of your property since you bought it.

Get an appraiser to state the value and if it is less then request the
assessors office to reduce the tax levied against your house.

There is nothing wrong with doing that.  Putting pressure on the appraiser
is what is going to get these lenders in trouble and they will take the
crooked appraiser right with them.

Dee
Quote 0 0

Another (OT) response:

 

I know little about this subject, but I’ll chime in and present my take on appraisals.  A dwelling has actually two values.  First is its replacement cost, in other words, what it would cost to build it today.  Add to that the value of the land and other improvements, and you have the “value” of the property.  It is this value that should be used to determine the insurance coverage.

 

However, it makes absolutely no difference what the “value” of the property is worth when it comes to using the home as collateral to borrower money.  Lenders want to know what they can sell it for if they need to take the home in a foreclosure.  This is why the appraisals I’ve seen have two numbers (1) replacement value and (2) comparable value.

 

The value of anything is not what it is worth or what it cost but is what someone is willing to pay for it.  This is why comparable value is so important.  Comparable value is not subjective; it is based (or should be at least) on what similar properties in the surrounding area have actually sold for in the past.  The appraisals I’ve seen ALWAYS include printouts of the comparables from MLS – the Multiple Listing Service.

 

If a house had a replacement cost of $250,000.00 in 2006, then today it is most likely worth more because of inflation.  However, today the comparable value for the same home could be as low as $187,500.00 because some areas of the country have seen a 25% reduction in home prices.  

 

Therefore, if an appraiser inflates the value of a property, do they not also have to submit fake MLS information to the broker/lender?  And if they did submit fake MLS data, wouldn’t that not leave a paper trail that could hang them on the appraisal inflation scam?

 

Someone help me out here.

Quote 0 0
Quote:
Originally Posted by Joe B:
As a follow-on question.  When you hired your appraiser for your property review, did he or she ask for the current sales price, or what you were planning on offering ahead of time?


This is ANOTHER very insightful question Joe!

And time precludes me from giving it the attention it truly deserves.

But in answer, let me preface what I will tell you by informing you that in MOST STATES the appraiser is engaged by the mortgage lender.  This is implicit from the annecdote above.

In answer to your question, it is STANDARD and I believe REQUIRED practice to give the appraiser a copy of hte sales contract.  I found this a bit fishy at first.  After all, WHY doe the appraiser need to know what you have agreed to PAY in order to appraise the property.

But there IS a reasonable and valid explanation.  The appraiser is expected to verify that there are no hidden incentives or give-backs written into the contract.  For example, knowing whether IRREGULAR personal property is INCLUDED (the garage cames with a speedboat).

At core, one would expect that appraisers ought to be able to give equally ACCURATE ex ante as ex post estimates of price.  As far as I know, this has never yet been scientifically tested.  Nobody wants to pay for an ADVANCE appraisal.  Some of the newer published private indices of home prices somewhat get at this in a different way and would presumably have afforded some basis to check the individual assessments.

This area, incidentally, was an area of focused and unpublished research on my part during my second time at Wharton.

I had actually found another rather telling CLUE of implicit appraiser DISHONESTY which directly leads to the ex ante versus ex post question.  That arose from the curious observation that appraisers were just TOO PERFECT.

During my time in the mortgage market, I persistently found that CONTRARY to the previous example, that MOST OF THE TIME, the appraised estimate came in EXACTLY at the contracted sales price!  This is actually a VERY UNUSUAL result. 

Economics professors routinely identify real estate markets as amongst the LEAST efficient public markets for a number of sound reasons that again defy the scope of this post.  In perfect markets, everthing is PROPERLY PRICED all the time.  In efficient markets, there may be small pricing errors, but there are rarely arbitrage opportunities -- opportunities for RISK FREE CERTAIN PROFIT.  In IN-EFFICIENT MARKETS, pricing errors are EXPECTED to occur and DO occur.

This leads to a rather fascinating quandry.  Even if you accepted as a given that ALL real estate appriasers were honest and even PERFECT and were able to persistently identify precisely the CORRECT price at which each transaction should occur, if BUYERS and SELLERS sometimes MISPRICED, that is if BUYERS and SELLERS sometimes paid too much or too little, one would EXPECT deviations between the sales price and the appraised value due to market pricing errors even if the appraisers ESTIMATED correctly every time.

So when the contracted sales price and the appraised value are always THE SAME, this implies either that (a) BOTH appraisers are perfect and real estate markets are also perfect, or (b) the appraiser is CONFORMING his estimate to the contracted sales price.  I have a very nice academic paper about this athering dust somewhere.  A very nice little treatment of this problem, I might say.  No one was really very INTERESTED!

Perhaps the really remarkable thing is that in a $10 TRILLION mortgage market that NOBODY EVER SEEMED TO NOTICE.  Or should I say, everybody else just kind of LOOKED THE OTHER WAY.

Of course, there is a statistical approach that can be used to test and isolate this kind of problem.  This is precisely the sort of thing that the quality management folks at FNMA, FHLMC, the mortgage insurers and the ratings agencies ought to have been focusing on. 
Quote 0 0
Blossom
WTG,
The ugly truth is that when an appraiser is dealing with a lot of comparable sales, it is very easy to 'stack the deck' rendering opinion of current market value high or low as so desired.  They can pick and choose those which will put subject property in most favorable light. Most appraisals contain on average 3-6 recent comparable sales that have taken place within last 6 months.  Generally the appraiser will have only been inside the subject property with no idea of interior conditions of comparables.  Another important factor is to only utilize sales that are considered 'arm's length transactions.  A good appraiser will run every comparable against assessment info, double checking things like living area square footage, an element that is frequently incorrect in MLS listing data, but they don't all do that.
Quote 0 0
WTG:

Actually there are THREE VALUES, but the third is mostly OMITTED from appraisals EXCEPT when the property is an INCOME property.

These are:
Replacement Cost
Market Value
Income
Using the Income approach, one would ask what sort of RENTS a property fetches, together with the EXPENSES associated with the production of that income.

Admittedly, if a property had a value using the Income approach which EXCEEDED the regular market value, this would drive market value HIGHER.  THis dynamic would SHIFT uses between owner occupancy and landlord-tenant rental uses.

Similarly, REPLACEMENT COST affords some floor at a certain point.

The entire area of valuation will be rather ripe for research and analysis for the next few years!  It will be a GREAT TIME to earn tenure in an academic real estate department!
Quote 0 0

Thanks all.  What you are saying is true.  In the case of rental property, it is true that rental income is a method of determining value with respect to ROI and that surely comes into play when a rental property is mortgaged.  Although you have to admit the third value gets us even further off topic for this Forum.  Nonetheless, no lender is going to approve a loan with a monthly payment of $2,000 if the comparable rental income in the area is only $1,000.

 

I still say that the comparable values submitted with an appraisal can be a method of clearly determining if the appraisal was inflated.  The comparables are still there, and for the most part the number of bedrooms, bathrooms and square footage are the same today as they were when they were used for the appraisal.  Let’s face it, square footage is the most important factor followed by the overall quality of the improvements.  A brick house is worth a lot more then one with vinyl siding, even if all other factors are the same.

 

If I were looking for appraisal fraud today, I’d look at the comparables that were used to support the suspect appraisal and check them against the MLS data base to be sure that whiteout wasn’t used.  Then I’d check at the courthouse.  And if all of that came up clean I would physically look at the comparables and the subject property to be sure brick was brick or vinyl was vinyl.

 

My point is that it seems rather easy to prove that an appraisal was inflated.  And if a borrower, one who is not an expert when it comes to property value, wants to refinance their mortgage and/or take out some equity on their existing home, and the broker and appraiser conspire by inflating the value, then that is not the borrower’s fault.  Borrowers who find themselves in this position should have a cause of action against the conspirators.    

 

Quote 0 0
Stephen

The Truth about Real Estate Appraisal

 

By Stephen G. Bishop

 

 

    looking for an appraiser

 

       Reply to: serv-281816099@craigslist.org
       Date: 2007-02-20,
12:21PM PST


       tried of getting low balled by current people I use as of now no more!!!
        just looking for some to work with that I can call on all the time. If you are that person please

        email me info at travafu@yahoo.com

      

         -BrokersOutpost

 

 

 

 

It is time, actually has been for many years, for the general public to learn what a real estate appraisal really is.  The information provided herein is neither conjecture or opinion, nor attitude or inference.  It is factual, tangibly supported and, while incredible to ordinary professionals, nevertheless is organized crime behind a mask of regulations and licensing.  The FACTS delivered here are from an insider who has experienced the real conditions of real estate appraisal, which are only acknowledged with the wink of an eye among conspirators.

 

Having spent thousands to earn an appraiser’s license twice in eleven years in an attempt to escape the mind-numbing boredom of corporate finance, I felt the need to educate the consumer about how real estate appraisals are prepared and how appraisers are educated and trained.  This because those who buy, sell or refinance a piece of real estate are naively confident that the appraisal has been prepared by a highly educated professional with many years of experience, and that experience is synonymous with expertise.

 

The simple fact is that the field of real estate appraisal is a closed society, primarily dominated by nepotism (all in the family) and a dark underworld of misperception, deception and child-like simplicity which exists to rubber stamp values determined by real estate agents, brokers, loan officers and realtors.

 

 

Appraisal defined

 

A real estate appraisal is little more than copying data from public records into a state-recognized format with a simple comparison between recent sales of same or similar properties.  There is quite a bit of narrative included in most appraisals, but that too, is primarily copied from one appraisal to another and rarely is specific to the properties appraised. 

 

Qualifying comments are generic in nature, and some appraisers add water to their appraisals by writing lengthy “Addendums” at the end of their appraisals.  These “Addendums” add depth, breadth and volume to a highly simplistic and imprecise “Estimate of Value”, which is what an appraisal is defined as by the pipe smokers at the North Pole.

 

Many hours, persons, office spaces and utilities, paper, computers and postage have been spent in an attempt to properly define a real estate appraisal. These multitudes of resources have combined to define a snapshot of a property value.  Truly an extraordinary army of erudites burns midnight oil contemplating such terms as “Property” and “Time of Appraisal”, to mention a few.  In reality, those on the receiving end of these highly generated documents couldn’t care less about the academics.  They just want a number, and if it isn’t the number they want, the appraiser must go back and rework the appraisal, or find a new client.  The comments in the appraisal (remember all that verbiage?) must not contain any negative comments, especially things like “Holes in the roof” or “Cracked foundation” or “Rests in the ghetto” as these are sure to kill the deal and defeat the true purpose of the appraisal, which is to get a loan for some poor soul who thinks he’s in the hands of the good fairy, even though the “Good Fairy” may have a felony record, is unable to get a normal job, and has found a cash cow in a naïve society.

 

 

Appraisal Education

 

No formal public education is required to be an appraiser above a high school diploma.  While appraisal may be a course in a real estate curriculum in some colleges, 99% of specific education is only obtainable through shopping center schools for profit, who are more than happy to sell anyone an expensive series of courses without telling them that chances of becoming an appraiser are near-zero, especially if the prospective student thinks that knowing and following the rules is the road to prosperity.

 

These classes are filled to capacity, generate big bucks for the promoters and provide all one needs to know to be an appraiser in 4 or 5 pretty books less than ¾ of an inch thick, while instructors hammer ethics, ethics, ethics into the spongy student, failing to mention once that the program is designed to keep new appraisers from entering the field.

 

To summarize appraisal education, there is no shortage of expensive, water-filled courses, seminars, books and lectures to fill the aspiring appraiser with much ado about nothing!  The reason colleges do not offer degrees in Real Estate Appraisal is simple:  There isn’t enough substance to stretch over a semester or quarter.  Real Estate Appraisal is a sub-function of real estate and can be assimilated by a high school graduate in a few weeks.  This leads directly into the subject of experience.

 

 

Experience

 

The greatest façade of real estate appraisal is experience.  A common illusion is that appraisal experience is synonymous with expertise.  In reality, the opposite is more often true.  Given the depth and breadth of real estate appraisal, one reaches the limits of knowledge in a few months and twenty years of experience is 1 year 20 times.  It is the perception of other professionals and the public that experience implies constantly expanded capabilities and knowledge.  In the real world of appraisal, the most senior appraisers tend not to have a college degree, no education in Accounting, Business Administration, Economics, Marketing, Statistics or any of the other higher level skills which one would think would be inherent in a high-income, independent occupation.  It is not uncommon to find a “Senior” appraiser with the highest level license measure a property with a measuring tape, do calculations longhand using Boorum & Pease ruled pads with frequent erasures and fundamentally computer illiterate.  Yet, these people are hired by lawyers to be “Expert Witnesses” for thousands of dollars to testify in a court of law.

 

You see, experience is everything in appraisal because it is a semi-skilled trade, requiring little education, low barriers to entry and a limited technical knowledge base.  As a result, the primary way a senior appraiser can distinguish themselves from junior appraisers is experience.

 

 

Licensing

 

It came to pass that, after the S&L debacle in the late eighties, the federal government demanded that appraisers be licensed.  This, supposed the Fed would put an end to the corruption and fraud of real estate appraisal, and so governing documents were created, state government offices of appraisal oversight created, courses developed and a program of licensing implemented.

 

The result of all this is that the corruption and fraud worsened, rather than lessened.  The reasons for this are two-fold:  It actually lowered the bar for new entry into the field and the feeding frenzy for licensing and training fees created an abundance of new licensees with few alternatives for employment, unless devious means are used to skirt the system.  The impermeable membrane of real estate appraisal which was supposed to keep the bad eggs out, actually drew them in, because only the unprincipled will circumscribe the prescribed career path set forth by the states.  Those of strong character, disillusioned into thinking they were entering a profession of integrity simply throw the licenses away when they learn what is necessary to use them.

 

One appraiser described real estate appraisal as a combination of “Ambiguity and overkill”.  Ambiguity abounds as there are only ten highly generalized rules of appraisal, and therefore much left to interpretation, while the length of the apprenticeship, formology, and control of the appraisal process would choke a horse.

 

Take the license level “Trainee”.  After taking 5 or 6 courses and passing a state exam, an aspirant acquires a Trainee License.  This license requires that the new appraiser be under the complete control of a “Supervisor”, which is simply an appraiser with a higher level license.  As in other unskilled and semi-skilled trades, the Trainee is regarded as developmentally retarded, having no skills or other work experience and quite incapable of performing even the simplest tasks without strict guidance.  Of course, many enter this field from other professions, have infinitely more education and life skills than their so-called “Supervisor”, who regards him/herself as a genius.  Woe is he/she who comes into this field with a bachelor’s degree in business administration, accounting, math or similar disciplines and tries to employ these attributes as a Trainee in appraisal.  For one thing, most of the underlying assumptions upon which real estate appraisal is founded are erroneous and reflect a gross lack of academic source.

 

 

For a mature, educated professional to enter the appraisal field, two years of apprenticeship is sheer torture.  It is an exercise in reversion of intelligence and capability and mind-numbing boredom.

 

Though it is extremely difficult for an educated person to dumb down for two years of apprenticeship, it doesn’t really matter anyway, because no-one will hire them.  You see, the basic program is designed to fail.  Why would a veteran appraiser train his/her future competition?  The answer is, they won’t, unless they can exploit the Trainee to an infinite degree by working them to death for little or no compensation (which is against federal labor law).  Some “Supervisors” actually charge the downtrodden Trainee for their signature on their hours log.  The Trainee lives for the 2,000 hours required to advance to the next license level and independence, and this is a valuable carrot for the supervisor to extract free labor.

 

 

Appraisal Accuracy

 

Appraisers value a property by adjusting the differences between the subject and comparable sales.  They employ factors, such as dollars per square foot to adjust for differences in square footage.  These “Factors” have little to no substance as they are typically handed down from generation to generation without knowing where the number originally came from, or are picked up from the “Supervisor” who got it from hearsay, and the factors employed vary from appraiser to appraiser as much as animal species vary.  Three methods of valuing a property are employed by the appraiser and the three are supposed to be tangential and validate one another. Two of the methods, the Cost Approach and the Income Approach are not valid for developing real estate market value.  The Cost Approach  is professed to be a validator of the Comparison Approach, which it is not.  Trainees are taught that the Cost Approach MUST equal the Sales Comparison value. This is a fallacious assumption, and reflects little application of economics or common sense.  Real estate is not a cost-based product and the cost will never even approximate the Sales Comparison Approach, therefore appraisers back into the Cost Approach value to force it to match the Sales Comparison value.  Therefore the Cost Approach is meaningless.  The Income Approach assumes that the capitalized value of a property is an accurate indicator of market value.  It could be, but market rents and real estate market values are not directly correlated, therefore the Income Approach is also meaningless. Yet, these methods are pontificated by senior appraisers/Supervisors as undeniable facts, because that’s what the book says.  Therefore, only the Sales Comparison Approach would be indicative of a property value.  The margin of error in this approach, though has a wide band of interpretation, depending on the appraiser and the data employed.

 

Homeowners often ask, “Can’t I do that myself?”.  The sad fact is that one can simply pick up a newspaper and value their property with more accuracy than a seasoned real estate appraiser.  This is because the compounded effects of fallacious assumptions, lack of standard factors and disagreement among appraisers as to values employed actually renders a formal real estate appraisal more harmful than beneficial.  Combine this with the utter absence of ethics in the appraisal industry and one quickly realizes that real estate appraisals could be eliminated from the real estate transactional process, reduce the cost of the transaction, and protect both parties from harm.

 

 

Ethics

 

HAWTGUY

2656 Posts

Posted - 01/22/2007 :  08:05:00 AM


Someone emailed me and wanted to know if I was okay? Here was my response...

NO, I am not okay. I'm tired of doing everything the "right" way. I've had two orders this month only. I can't tell you how many times lenders have called wanting to know what the property is worth prior to me appraising it. What is even worst, is that lenders are now telling the public to ask for the same thing. I'm tired of trying to educate stupid LO's. Sorry but that is how I feel. They ask the same questions over and over again. Then when an appraiser answers the question we get bombarded with people wanting to know why appraisers are on the BROKERS OUTPOST. If they don't want an appraiser to answer a question, why ask? You don't want to know the right answer, you want the answer that will make you feel good screwing the appraiser up one side and down the other. I don't like the USPAP rules/laws any more than the LO's do. But I have to follow them. Maybe other appraisers don't and that really pisses me off too. Again, I do things the right way and starve while others cheat and make millions. I'm just fed up! I'm tired of being so educated and knowing right from wrong. I wish I could be an ass like all the other appraisers out there. I've had it up to here
(if you could see me my hand is just above my eyebrows). I'm just
frustrated and flustered.

 

 

While ethics are shouted from the pulpit in appraisal courses, they cease to exist upon graduation.  This is primarily due to the fact that appraisers are employed by the most unethical workers in any industry….Brokers, Agents, Realtors and loan consultants.  The real estate industry is one of total anarchy, dominated by the most unscrupulous, easy money seekers on the planet.  Real estate “Professionals” as they refer to themselves, will do anything to make a deal, have no oversight except a token agency at the state level which looks the other way as long as it gets its fees, and earn obscene commissions for a few hours’ work.  This includes hiring their own appraisers, selected according to their flexibility in rendering a value opinion.  Guess what?  The appraiser who hits the number the most, gets the most work.  A successful real estate “Professional” will always have a “Damned Good Appraiser” in his/her hip pocket, usually in a long-term relationship, who makes every appraisal value equal the number needed to make the deal work.

 

Ethics is both inherent in the character of human beings and defined for them in terms of the working world later in life. It is difficult for the average humanoid to be unethical in the course of ordinary life.  A genetic malformation occurs when one has substandard capabilities and a lust for extraordinary income.  Although real estate “Professionals” have ethics hammered into them, many are frequently found to have criminal records and/or no other employable skills.  One can obtain a real estate license as easily as one can acquire a new car.  Background checks are frequently not conducted.  The agencies in control subsist on licensing fees, not on background checks and enforcement of the rules.  One only need read the lists of those in the field (real estate and appraisal) sanctioned, punished or whose licenses have been revoked to validate this assertion.

 

A simple test of the level of enforcement of rules and ethics is to file a complaint against another “Professional” in the field for blatant fraud and wait for the response.  And wait, and wait, and wait.  You see, the Department of Real Estate and the Office of Real Estate Appraisers protect the bad guys, and whistleblowers, or those who believe their competition should follow the rules are ignored, stifled or forced out.

 

Much more regarding the ruse of real estate appraisal can be presented, space permitting.  The simple fact is that the industry is actually the opposite of what it purports to be.  The FBI labels the real estate industry, which includes appraisal as “The New Mafia” and “Organized Crime”.  Truly, a conspiratorial relationship between real estate professionals and the lenders who accept their bogus loan applications (because they just sell them anyway) in an absence of risk management create a  truly incredible industry of scofflaws not unlike a swarm of locusts who decimate the countryside and fly off with full bellies while the land is left barren and infertile.

 

While supply and demand may play a role in real estate market prices, one needs to consider what creates extraordinary demand when no other factors change significantly.  A dramatic run-up in prices, when incomes are flat, supply is sufficient, consumer credit is overextended, the cost of living rises constantly and prosperity lies in the hands of the elite, can only be attributed to one primary cause:  inflated appraisals.  If an appraiser doesn’t hit the number, they don’t work.  The fundamental relationship between an appraiser and those who employ them guarantee it.

 

My first potential client, a broker, invited me to lunch prior to giving me an appraisal order.  We went to a cheap greasy spoon where he opened the conversation with, “Our job is to help people.  We get them the loans they need to get out of financial trouble.  This means we must make the loans acceptable to the bank, no matter what”.  I replied, “That’s fraud”.  The broker smiles and says “That’s what real estate is.  It’s good for the economy”.  I paid for lunch.  My first appraisal order from him dictated clearly that a value of $340,000 was needed to make the loan work.  The comparables of the cookie-cutter tract home were identical and sold recently for $300,000.  I appraised it as such and the broker threw a tantrum.  After he cooled down, which took a few days, he came to me and demanded the pictures used in the appraisal.  I didn’t give them to him because I knew he was going to forge his own appraisal.  And he did.  The loan was approved.

 

 

 

 

Conspiracy Theory

 

A system that so easily adapts to the real estate mortgage lending process could not have been developed by accident.  The conflict of interest built into the appraisal program appears, to this systems analyst, to have been deliberately and strategically designed.  After the first S&L crisis, a system of appraiser licensing was put into place which gave the impression that the industry became instantly ethical.  However, the same appraisers who were responsible for the crisis were passively grandfathered.  Hence, no problems were solved, but perpetuated and inflamed by lower standards for entry into the field. 

 

The governing state agencies which oversee the real estate appraisal industry are woefully inadequate to both license and enforce.  This, too, I believe is by design.  The OREA in California is funded entirely by licensing fees, which of course, places the bulk of the emphasis of effort on selling licenses, and very little on enforcement of appraisal rules.  Enforcement is a negative cash flow, while licensing is a cash cow.  One need only look at the number of enforcement actions as a percentage of all licenses issued since 1992 to validate the above statement.

 

Further investigation reveals that the real estate industry has a heavy presence among the appraisal advisory functions. This relationship must cease.  Having implemented numerous automation projects in my career, real estate appraisal is a perfect candidate for automation.  To remove the fraud, bias, and lack of control of the current methods, the real estate appraisal industry must be dismantled, the property valuation methods automated without human manipulation, and the public educated to what a real estate property valuation is and is not.

 

________________

 

 

Testimonials

“I received an interesting article from Stephen G. Bishop, a former appraiser.  I realized that appraisals were works of fiction long ago, but Stephen’s article took me by surprise– I didn’t think the industry was as sleazy as he described.  I sent his article on to a realtor for a second opinion.  He assured me that, in his experience, Stephen’s The Truth About Real Estate  was accurate.”   -HousingDoom. Sept. 1, 2006

 

“good friend of mine is an appraiser < Carefull_wthat_Axe > 10/30 06:06:50

and based on what he told me - this article hits the nail on the head.” – Craigslist (Housing)

 


Your article is dead on accurate <honestnyrealtor> 2006-10-30
07:09:06

No realtor with half a brain would ever lose a

deal because a property does not appraise.

Somehow, it always ends up appraising.

It must be a friggin miracle !!

 

“I am appalled.  Why is this allowed to happen?”   R. Gallitt, Tampa, Fla.

 

 

“This explains the boom and bust.  It’s a good case for automation” – Rachel Dollar Dollar Law Firm 2006

 

 

 

About the Author

 

Steve Bishop retired from Sony of America as a Division Controller.  He has 35 years experience in the high-tech, engineering and aerospace industries as a Cost Accountant, Financial Analyst, Program Analyst, Program Financial Manager, Principal estimator, and consultant in Advanced Cost Management systems.  He holds a bachelor’s degree in Finance, and attended University of Nebraska MBA in Economics program.

 

 

 

 

 

 

 

 

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Kudos, Stephen!!  Well Said!

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