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The New York Attorney General’s office is suing First American for their alleged role in residential appraisal fraud for loans done for Washington Mutual. The charges allege that eAppraiseIT, a division of First American, knowingly and willingly inflated the value on properties associated with loans for Washington Mutual in order to maintain a ‘preferred’ status for appraisal orders and future business.
Apparently, the AG’s office has some pretty damning emails to prove it’s case.
From Market Watch:
New York Attorney General Andrew Cuomo said on Thursday that he’s suing First American Corp. to inflate the appraisal value of homes. eAppraiseIT, a unit of First American, succumbed to pressure from WaMu to use a list of preferred “Proven Appraisers” who provided inflated appraisals on homes. E-mails also show that executives at eAppraiseIT knew their behavior was illegal, but intentionally broke the law to secure future business with WaMu…
We all know that inflated appraisals are at the crux of the collateral problem we’re having right now. In fact, it would be interesting to try and guess as to what percentage of the housing correction is really just the air being taken out of inflated appraisals for refinance and cash-back purchase schemes. Appraisers are in a terrible position; do their job correctly and honestly and they get black listed for being ‘difficult’ and ‘not a team player,’ play along and they are committing fraud and are liable. So if you are honest your family doesn’t eat; and if you try to please the lenders you don’t sleep waiting for federal agents to call you about some property that is in foreclosure for $150,000 less than you appraised it for. Sweet way to earn a living. Not really.
Here’s a good example right from my neighborhood. My neighbors just refinanced their home and the appraisal came in at $670,000, sweet for them. The only problem is the home literally RIGHT ACROSS the greenbelt from them is for sale at $565,000. Now you tell me what’s wrong with that picture? Their deal is done, they’re obviously upside down, but they don’t care; they don’t plan on moving. But the lender is in a very tenuous situation to say the least. They are probably at least $100,000 upside down because, guess what, that house across the way ain’t moving at $565,000.
There’s a lot more to say on the appraisal issue, but we’ll save that for another time. Let’s just say that there is a major flaw in the appraisal system that needs to be addressed amidst all of this broker-bashing legislative chest-pounding in order to restore confidence in house values.
Hat tip to reader Don for the story. I consider this just a coming out party for the big state-led lawsuits against all aspects of the industry looking for some redress for their citizens taking it in a big way right now…
Sorry for the lack of updates today; I’ve been up in LA at a digital media conference which was fun, but left me with out my computer to blog.
What if Ben Bernanke is using dollar devaluation in a game of chicken with China to force them to abandon the currency peg? Exhibit A:
“The authority sold HK$7.828 billion ($1 billion) to defend the currency yesterday, twice as much as two previous interventions since Oct. 23.”
I think the Fed knows everything we know, and then some but when they speak it’s to a world audience so they’re tight lipped. To us, it appears they’re trying to destroy the currency. I think they’re doing something analogous to seeing how far they can pull the cooling rods out of a nuclear reactor without reaching critical mass. Except the reactor is the global economy and the fuel is China.
Congress, the cabinet, and the state department can’t seem to get China to let the Yuan (RMB) float. But maybe that rogue branch, the Federal Reserve, can force their hand. And can they restore the currency’s former value afterward without sending us into a huge recession?
Very interesting Morgan..it is funny one reader on your blog once said to me, “Name a mortgage broker or company that has been put in jail? Well watch what you ask for…I have seen more stories across the country of people in the mortgage/real estate industry(not just brokers, but appraisers, realtors, title companies, processors etc..) getting into more legal tangles. Check out this blog: http://www.mortgagefraudblog.com/
I think there is going to be a even bigger legal tangle for major corporations who are trying to hide their write downs from the stockholders…many executives(Merrill CEO example) are going to find themselves in hot water next….what is happening in NY is going to be repeated all across the country…
Ann, I think you are referring to my previous entry a while back when you were bashing brokers. I was stating that the large mortgage banks were the ones who had been caught and spent hundreds of millions of dollars due to predatory lending. However, I am 100% certain that there are some mortgage brokers that should be put in jail. I just don’t think for one minute that brokers should get more than their share of blame.
Here again we have a large bank involved in abusive lending practices.
Clearly small mortgage brokers simply don’t have the clout the push appraisers around like this.
Its very upsetting that the same big banks are taking their ill gotten profits to lobby congress to eliminate the broker community. All I can say is if the big banks get their way, the consumers are going to get screwed even more.
As far as future lawsuits goes, I doubt that lawyers will be attacking too many brokers. The main reason for this is that brokers simply don’t have deep pockets. The attorney generals have been quite successful at going after big bank’s abusive lending. Thats where they are going to make a name for themselves. THey will get little press going after a small broker shop.
Been a broker/LO since 1997. I can really relate to the line in the story of an appraiser being honest and not getting work.
I just went through this last week. My friend and neighbor asked me to do a rate/term refi for him. After looking over his situation and having a conversation with my appraiser it is obvious we are not getting this loan done because we are 60k short of the appraised value we need. Well. the friend calls 8 or so other brokers and 7 say the same thing as me, number 8 sends his appraiser out who magically gets the value and they charge him an arm and a leg for their service.
The real rub is my neighbor said “I guess there are still some good brokers out there who can get the job done.”
Morgan, thanks for the kudo. It’s appreciated. I’ll keep my eyes and ears open.
Brian, that is so typical. The good news is that 7 brokers said the same thing as yourself. That’s actually good news to me.
If your neighbor wants to be stupid, there’s no law against that, but don’t come back to we, the taxpayers, to come bail you out for being an idiot.
That is really a good example of what is going on here.
Ann, you’re right, it’s just not brokers. Add escrow to your list to. I think if they would first enforce the laws on the books and show a good number of people going to jail for a long time, a lot of this fraud would stop.
But the system needs more auditors. Where ARE all the auditors?
Brian, Good Job. Eventually the lender and the appraiser will regret their deeds. The bad lo and appraiser have no respect for the industry they work in. I would think that eventually the appraiser will be blacklisted and unable to do many more appraisals.
However, Brian you sound like the driveby media. The word Broker has come to represent all loan officers. This way the public thinks they are punishing the mortgage industry when new laws go into place. However what they are actually doing is stifling competition.
This story isnt much different though than the way realtors treat loan officers. If a loan officer wont get it done they will find another who will. Has anyone looked at the influence that have thrown around? I doubt that will ever happen.
I don’t see what needs to be “fixed” in the appraisal industry. If lenders don’t want accurate appraisals (which is the bizarre state of affairs we’ve had in recent years), then no rule or regulation is going to prevent the lender from ignoring reality, and getting what they want (i.e. ficticious valuations).
This whole problem will be solved when lenders start to be concerned about the viability of repayment, and collateral, of the money they give out. Fortunately, this process is well under way, and lenders have been dramatically tightening their criteria for issuing loans. I am sure we will see the standards become MUCH tighter still before this downturn is over.
In short, the system will automatically correct itself as each lender gets severely burnt by their terrible lending practices of the housing boom. In fact, this growing change in lending behaviour will undoubdtedly last for generations, as this current downturn grows into a full-on housing depression. Sure, lending standards might become loose again in another 2 or 3 generations, but we will be fine until then.
Mike you seem to think that I am “bashing” brokers..I am not. They are in the limelight right now as far as being placed for alot of the blame of the mortage industry undoing. However, I think the root of the blame should be placed on the organizations, such as the MBA,NAR, and others who cared more about collecting membership dues that worrying about a industry they were suppose to be protecting. I also stated in my comment that there is plenty of room for blame all the way up the entire channel. Each player contributed to the mess that we are in today…
As far as lawsuits go they are happening against brokers. Lawyers will take any case so long as the fees can be paid or there is a chance of winning. With today’s media placing blame on brokers, it would not be too hard to find a sympathetic jury..(here is recent one:Michael Sheneman and his son, Jeremie Sheneman(2 brokers), were sued by Jack Stilp, James Aters, Kris Hinton and James Turnbo III for mortgage fraud. Each of the Plaintiffs were looking for investment income to supplement their pensions and therefore purchased rental properties with the advice and assistance of the Shenemans.
According to media reports, after purchasing the South Bend, Indiana area investment properties, the plaintiffs learned that the price of the real estate was artificially inflated, that the properties were in need of repair- more so than had been disclosed) …
Now, I am not saying that their lawsuit has any validity…however timing it everything and right now all the media can work in favor of these buyers…It is sad to this happening…it all goes back to greed(lots of it) and responsibility(very little of it).
Sniglet, there needs to be a correction all the way up the food chain..including the appraisal industry..They, even today, make the magic number appear when all logical sense says it should not be. A home is appraised at $600K when all the homes that are “true” comps are listed for $550? One sold for $525K? Today, we have commuities of $500K homes built next to communities of $700K homes. It isn’t that hard to take the comps you want and disgard the comps you don’t to make the numbers what the “lender”, “mortgage broker”,”buyer” and “realtor” need.
I personally think page 16 of the complaint is the most intriguing……
In response, eAppraiseIT’s President wrote: “Bingo!” and explained that since the federal government enforced appraiser independence rules variably in different regions of the United States, and that “it boils down to who has juice with whom at the regulatory level.”
Mike,
I beg to differ about the appraiser and loan officer eventually regretting their deeds. If any of these banks, brokers, etc. really wanted the true market value of the “collateral” all they would have to do is employ / contract some real “review” appraisers.
The fact is that I was personally stricken off First Franklin’s and other review appraiser lists because I killed too many phony deals. Many of the appraisals I looked at were absolute jokes, i.e. dense population tract homes with 10 sales within the tract within the last 6 months and “appraisers” going 1.7 miles away for the first comparable (600 sq ft bigger too) to hit the “number”. Many of these appraisals were being done / signed by “AG” (AG is highest state designation)appraisers.
The CA state oversight agency - OREA is a toothless tiger. They exist to “preserve the public trust”. How do you preserve the public trust by handing out a $2500 fine, 16 hours additional education and necesitating supervisory signatures to a “skippy mill” appraiser that has blatently overvalued a property by 100k, misled the decision maker, and violated numerous USPAP standards. California, even has a “convicted” felon as part of its appraiser panel.
As much as I hate lawyers what we really need is for some shark to get a few of these “skippy mill” appraisers’ and scumbag brokers errors and omissions insurance to pay out some bucks to damaged investors. Errors and omissions insurance does not cover fraud.
“Well, your honor, I am not claiming that Mr. Skippy here committed fraud by overvaluing this choice piece of Compton real estate by using comparables from Beverly Hills, I’m just saying it was an error on his part, and therefore his policy needs to cover my clients loss”.
If a million dollar E & O policy is not enough money, then let the state DA send a few of the “skippy mill” boys to be traded in Folsom for a pack of cigs. If you want to move the herd you only have to shoot a couple and make public dispays.
Cheers
Socalappraiser
I agree that there needs to be changes all the way up the ladder - but it’s good to see that at least someone is being held accountable for their actions.
The crux of the appraisal problem is still Greed. Greed drives the brokers to “shop” their appraisal orders. I’ve received email orders from clueless LO or processor assistants who CC (somebody explain BCC to them please) 15 different appraisers on one email then ending the email with “please give us approximate value…” Greed (and hunger apparently) also drives the appraiser who kowtows to a broker who is asking to “please bump” the appraisal by 15k so they could cover a prepayment penalty. If you don’t have reliable controls for keeping brokers and lenders from pressuring honest appraisers who are just trying to do a good job, then there will ALWAYS be a problem. There is already a history of appraiser assisted housing/mortgage turmoil. Why do you think USPAP is in place? It will keep happening again unless some sort of reliable check/balance is in place to keep the greedy broker/lender from pressuring the appraiser.
Not that I’m saying all the blame rests on the brokers/lenders. Mill appraisal companies with pseudo trainees and one licensed appraiser signing for 20 drones with no ethics training have also done their damage. Hopefully with the new California OREA guidelines due to be in place by 2008, that will change. Hopefully.
Mike this one is for you….
http://www.sfgate.com/cgi-bin/article.cgi?file=/c/a/2007/11/03/MN10T5DS5.DTL
Thanks Ann. I appreciate the read. I suppose that if you look at the whole picture brokers would get the most blame because we originate between 65-70% of the loans.
However, I think this article says it quite clear….a large bank which ordered over 260,000 appraisers is being accused of manipulating appraisal firms to inflate values for their profit. I can see how an appraiser might be intimidated by this.
However, I honestly can’t understand an appriaser being threated by a small mortgage brokerage. Sounds to me like the appriaser was willing to do whatever they could to just make the money.
Its interesting now that the —- has hit the fan the appraisers are actually saying “dont blame me they made me do it”.
Whats surprising to me is that of all of the areas in which lenders have exerted a bit of quality control in wholesale underwritting it has been in appraisal reviews. I would say that just about all appraisals go through a review of some sort. I would not even dare to try to push through a bogus appraisal. It would seem to me to be a waste of time and resources.