The model concluded that roughly one-third of the loans were for amounts that were 105 percent or more of the underlying property’s value. Roughly 5.5 percent of the loans in the pools had appraisals that were lower than they should have been.

In one pool with 3,543 loans, for example, the CoreLogic model had enough information to evaluate 2,097 loans. Of those, it determined that 1,114 mortgages — or more than half — had loan-to-value ratios of 105 percent or more. The valuations on those properties exceeded their true market value by $65 million,


  • Investors’ are proving the case for appraisal fraud, aligning themselves with borrowers. They are doing the borrower’s work. Get yourself copies of these complaints, discovery etc., send them to me and use them in your own case.
  • The little guy is starting to get attention. The court’s are getting the point that these loans were fraudulent. In my surveys I have found that appraisal fraud accounts for nearly all the loans 2003-2008, and that the amount of the fraud was a s much as 150% in some cases with an average of around 35%. The moment you closed, whatever down payment you made was lost and you were underwater.
  • The obligation to present a proper appraisal is on the lender not the borrower.
  • Just like the investors, borrowers were deprived of vital information about their loan that would have prevented any reasonable person from closing. Thus whether the Court’s like it or not, rescission, is a proper remedy, if not under TILA then under fraud statues and common law doctrines of fraud. Combine that with damages available, and the prospect of getting loan reduction and adjustment of loan terms comes into clearer view.
June 18, 2010

The Inflatable Loan Pool


AMID the legal battles between investors who lost money in mortgage securities and the investment banks that sold the stuff, one thing seems clear: the investment banks appear to be winning a good many of the early skirmishes.

But some cases are faring better for individual plaintiffs, with judges allowing them to proceed even as banks ask that they be dismissed. Still, these matters are hard to litigate because investors must persuade the judges overseeing them that their losses were not simply a result of a market crash. Investors must argue, convincingly, that the banks misrepresented the quality of the loans in the pools and made material misstatements about them in prospectuses provided to buyers.

Recent filings by two Federal Home Loan Banks — in San Francisco and Seattle — offer an intriguing way to clear this high hurdle. Lawyers representing the banks, which bought mortgage securities, combed through the loan pools looking for discrepancies between actual loan characteristics and how they were pitched to investors.

You may not be shocked to learn that the analysis found significant differences between what the Home Loan Banks were told about these securities and what they were sold.

The rate of discrepancies in these pools is surprising. The lawsuits contend that half the loans were inaccurately described in disclosure materials filed with the Securities and Exchange Commission.

These findings are compelling because they involve some 525,000 mortgage loans in 156 pools sold by 10 investment banks from 2005 through 2007. And because the research was conducted using a valuation model devised by CoreLogic, an information analytics company that is a trusted source for mortgage loan data, the conclusions are even more credible.

The analysis used CoreLogic’s valuation model, called VP4, which is used by many in the mortgage industry to verify accuracy of property appraisals. It homed in on loan-to-value ratios, a crucial measure in predicting defaults.

An overwhelming majority of the loan-to-value ratios stated in the securities’ prospectuses used appraisals, court documents say. Investors rely on the ratios because it is well known that the higher the loan relative to an underlying property’s appraised value, the more likely the borrower will walk away when financial troubles arise.

By back-testing the loans using the CoreLogic model from the time the mortgage securities were originated, the analysis compared those values with the loans’ appraised values as stated in prospectuses. Then the analysts reassessed the weighted average loan-to-value ratios of the pools’ mortgages.

The model concluded that roughly one-third of the loans were for amounts that were 105 percent or more of the underlying property’s value. Roughly 5.5 percent of the loans in the pools had appraisals that were lower than they should have been.

That means inflated appraisals were involved in six times as many loans as were understated appraisals.

David J. Grais, a lawyer at Grais & Ellsworth in New York, represents the Home Loan Banks in the lawsuits. “The information in these complaints shows that the disclosure documents for these securities did not describe the collateral accurately,” Mr. Grais said last week. “Courts have shown great interest in loan-by-loan and trust-by-trust information in cases like these. We think these complaints will satisfy that interest.”

The banks are requesting that the firms that sold the securities repurchase them. The San Francisco Home Loan Bank paid $19 billion for the mortgage securities covered by the lawsuit, and the Seattle Home Loan Bank paid $4 billion. It is unclear how much the banks would get if they won their suits.

Among the 10 defendants in the cases are Deutsche Bank, Credit Suisse, Merrill Lynch, Countrywide and UBS. None of these banks would comment.

As outlined in the San Francisco Bank’s amended complaint, it did not receive detailed data about the loans in the securities it purchased. Instead, the complaint says, the banks used the loan data to compile statistics about the loans, which were then presented to potential investors. These disclosures were misleading, the San Francisco Bank contends.

In one pool with 3,543 loans, for example, the CoreLogic model had enough information to evaluate 2,097 loans. Of those, it determined that 1,114 mortgages — or more than half — had loan-to-value ratios of 105 percent or more. The valuations on those properties exceeded their true market value by $65 million, the complaint contends.

The selling document for that pool said that all of the mortgages had loan-to-value ratios of 100 percent or less, the complaint said. But the CoreLogic analysis identified 169 loans with ratios over 100 percent. The pool prospectus also stated that the weighted average loan-to-value ratio of mortgages in the portion of the security purchased by Home Loan Bank was 69.5 percent. But the loans the CoreLogic model valued had an average ratio of almost 77 percent.

IT is unclear, of course, how these court cases will turn out. But it certainly is true that the more investors dig, the more they learn how freewheeling the Wall Street mortgage machine was back in the day. Each bit of evidence clearly points to the same lesson: investors must have access to loan details, and the time to analyze them, before they are likely to want to invest in these kinds of securities again.

24 Responses

  1. The housing market will continue as it has been, continuance of inflated appraisals. In fact, I believe there will be another round of inflated appraisals due to the Multiple Listing System (MLS) in allowing Realtors/Brokers to opine square footage of homes. I have seen homes listed with much more square footage( than what is on record with our tax assessors office (via City/Town online property record search).

    Lets face it, homes with more square footage will bring in more money. So why not attempt deception by inflating the sf when marketing homes? The temptation is there for a higher commission. I repeat, this will create another round of inflated appraisals because of these homes, as comparables, sold with deceptive square footage advertised.

    This also makes these homes, advertised and sold (naive buyers thinking the deceptive sf does exist) for more than they are actually worth, unreliable comparables for those who seek to honestly sell in the future.

    If the opined sf of realtors/brokers, as listed on these homes does really exist, then the City/Towns where the homes are located have missed out on tax revenue due to renovations not being reported / by deceptive owners not obtaining required permits to do the renovations.

    Sellers are also guilty in allowing their contracted realtors/brokers to advertise with deception, just to get the house sold at a higher price (greed?). We are all suffering in the housing market, some have taken a loss when selling, but some join in the deceptive advertising anyways.

    IF this kind practice continues on the MLS, I repeat, we will see inflated appraisals once again. Its no wonder why the MLS has a lengthy disclaimer to avoid liability of this kind of deception.

    Help stop this kind of practice and get the housing market stable. Stopping this practice will also help in stabilizing the US economy also! I have no doubt this kind of practice on the MLS was the biggest contribution to inflated appraisals we just experienced.

    I pointed this out to one real estate “professional” who has a home listed for sale, which is a comparable to mine. His reply was basically “stop causing trouble”. I have that email history saved. I was amazed he would put such comment (among others) in writing and actually hit the “send” icon.

    Are realtors and brokers qualified to opine square footage of homes? Isn’t that in the job description of licensed appraisers?

    Realtors/Brokers are aware they do not have to physically go to tax assessor offices (most cities and towns property records can be viewed online these days) to obtain “field cards” or “property cards” so why are these homes being listed with more square footage?

    Why, if the listed sf actually exists, are realtors/brokers not required to report to the tax assessor offices?

    And why doesn’t the MLS require Realtors/Brokers to list if taxes are discounted due to homeowners age, disability or veteran status. this would save buyers from experiencing “budget shock” when they get their bill for more taxes than the prevous owners.

    Heck, it was a grandma that reported her findings in the robo signing practice.

    It was because of reading about grandma that made me investigate the california notary who’s stamp was on my release of mortgage. Yup, Release of mortgage was robo signed and I recieved a letter from her (alledgely she is employed with Wells Fargo although when I called her she does not announce the company after her name) that the line entry of my Release, in her notary journal (required in Califormia with thumbprint of person being acknowledged), does not exist. The signature on my Release compared to the signature on her letter to me are totally different.

    I guess our government relies on us citizens to report what they should have caught and investigated.

  2. WFHM sent me a 3 page appraisal from First American (I believe its subsidary or ficticious name for RELS) and I questioned them why the appraisal they sent stated (180,000-$202,000, much of home descriptons missing and use of much larger homes than mine with one being a 2 family) when the broker’s came in at $170,000 (never received a copy and WFHM said they don’t have a copy of it….blame the broker? LOL) and after not agreeing with the broker’s my appriasal came in at $165,000.00. WFHM, in writing stated that their appraisal (3 page one) was for “lending purposes” but as you will read on, I found that statement to be a dishonest one (I never believed it was for lending purposes. Guess I’m going to have to send this information (documentation in writing!) to the proper authorities. WHERE DO I SEND MY EVIDENCE????? I’m in CT

    I found the Trust (filed with SEC) that included my loan. In one document entitled “CITIGROUP MORTGAGE LOAN TRUST 2006-WFHE3 Prospectus Supplement dated October 4, 2006 (For use with Prospectus dated June 29, 2006)” under “Mortgage Underwriting” it states:
    Wells Fargo Bank’s underwriting of every mortgage loan submitted consists of not only a credit review, but also a separate appraisal conducted by (i) a third-party appraiser, (ii) an appraiser approved by Valuation Information Technology, LLC (doing business as RELS Valuation) (“RELS”), an entity jointly owned by an affiliate of Wells Fargo Bank and an unaffiliated third party, or (iii) RELS itself. Appraisals generally conform to current Fannie Mae and Freddie Mac secondary market requirements for residential property appraisals. All appraisals are subject to an internal appraisal review by the loan underwriter irrespective of the loan-to-value ratio, the mortgage loan amount or the identity of the appraiser. Certain loans require a third party review in the form of either a desk review or field review. At the discretion of Wells Fargo Bank, any mortgage loan is subject to further review in the form of a desk review, field review or additional full appraisal.

  3. I give thanks to the attorney general beacuse in june of 06 i refinanced my home with ameriquest along with deutsche bank and they appraised it for $113,000.00 they said they had done a drive by appraisal .Months later i had it appraised by my local bank and they said it appraised for $87,000 dolllars.GO GET THEM FED!!!!

  4. Hello,

    My wife and I fell victim to what we think was mortgage fraud in 2006. We started out with an 80/20 split on our loan. We FOOLISHLY refinanced the 20 for one for one of those 125% LTV mortgages. I am not certain the appraisal was inflated, but I would imagine so. Since then, the second mortgage holder has modified the terms, but the payment is VERY high. Unfortunately, our income is pretty high and they say we “can afford” our current total monthly payment. The difference between being able to truly “afford” the payment and paying it is significant. We are paying it, but is is really a financial disaster for us. Is there anything we can do to get this thing legally modified more? Please advise.

  5. Property tax day in Georgia 10/15/2010
    I called today to tell the tax Official’s that I would pay the tax only to keep it current (3750.00 plus 15% increase) that is now 4421.92 divide by 365/day’s =12.60 per day and 1%/month interest rate, WOW what a deal, I think she was blown away, and I did not reveal who I was. What are the banks going to do? They are planning on buying/purchasing
    tax lien’s as the last ditch way to put some teeth in to a parcel of property. This is so infected………..Oh ya appraisals

  6. Hello Storm , your idea is o.k. but my 3 Server will not
    answer anymore : BNC,Option One, American Home
    Mortgage .Now it looks like CHASE has my prom. note.
    I filed already a complaint with the State Attorney
    against CHASE / CORELOGIC because I can not proof
    how the was working together . My Home Numbers
    are : incl HELOC $ 270,000.00 (My price Idea ) CHASE tells me $ 313,000.00 (WoW).Dont know, where the got that number .
    I had two Deads in the Family and had to go to Europe , what burn my pocket . Then I was kicket out !! from the CHASE office : comments , no modification you are Underwater. Just Home, I was Checking CORELOGIC link on CHASE web , and it show my home : $ 126,000.00 w/o any Bath and without my new added Florida room .(absolute untrue )
    I live for 18 years in my home, have 352 ticket from Home Depot for $ 28,000.00 , what a deal for CHASE.
    I pray for AG NY Cuomo , that he winn the case.
    I will not walk away .
    So now I will work any overtime to pay my Lawyer.

  7. Check this out! Fannie is going to file suits against borrowers that strategically default because they owe way more than the house is worth. They are going to pursue deficiency judgments.,0,2953782.story

  8. Las vegas:

    Call your servicer, they have to give it to you!

  9. In our case Home Loan Center/Countrywide stated “market value” of our house was $240,000. Other houses “sold” for $285,000. Our loan was for $183,000. They have since tacked on fee’s etc.. so amount owed is $210,000. The assessor sent us our statement and taxable value of the house is now $70,000.

    We asked for the appraisal before closing, and after. Never have seen it

  10. Hi BSE:

    Feel free to call me at your leisure.

  11. Storm

    Good points…I would like to discuss appraisal fraud further. Any we can exchange a point of contact to exchange information ?

    Thank you for your assistance.

  12. Yes, storm, that is correct. The 10(b)5 allegations from the investors are all relating to the over-appraisals (misrepresentation) of the collateral (real estate underlying the loan). These claims are being brought by several large institutional investors.

    Rule 10b-5 — Employment of Manipulative and Deceptive Devices

    It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,
    To employ any device, scheme, or artifice to defraud,

    To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

    To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,
    in connection with the purchase or sale of any security.

  13. Hi usedkarguy:

    There are other avenues as well, because it’s also a federal crime!

  14. Hi BSE:

    Actually, it’s quite easy to prove, if you know what you’re doing.

    In your case, may be there’s REALLY nothing there.

    Lastly, the banks and appraisers would like you to believe that an “appraisal is only an opinion,” or as one person suggested that they are “negligence cases.” The first comment is a lie, the other comment is lack of knowledge.

    If you went into a store and purchased a diamond ring for 10K and it turns out to be worth 5K, that’s not an “opinion” or “negligence,” that’s FRAUD!

  15. And, I’m gonna change my name to SHULTZ. Because I know nothing, too.

  16. Where’s Todd? Todd the Appraiser from Wisconsin? Yes, Todd was an appraiser from Wisconsin who mentioned filing a complaint with your state licensing agency, as all appraisers are licensed. I took the liberty of contacting the appraiser on my deal (contracted by RELS, I mean Wells, I mean, uh, same company). He was quick to assure me that he was never pressured by Wells Fargo to “hit a number…that would be illegal”. Oh, yeah! I believe him!

    Now that I have a stack of lawsuits and news articles in my hand, maybe someone will believe me. What do you think?

    Now….where’s that complaint form?

  17. Proving appraisal fraud is easy: It’s constructive, at the very least:

    1. Long-term relationship between broker/appraiser

    2. Appraisal order contains a predetermined value

    3. Adjustments inconsonant with appraiser’s other appraisals

    4. Negatives about the property excluded

    5. Appraisal not performed by the appraiser signing the appraisal (very common)

  18. I know nothing and if I think I know something, I don’t know anything. I’m not an attorney and don’t act like one.
    I read somewhere, they sign people up for mods and then cancel them telling people they weren’t qualified for them and foreclose anyway. Maybe the mod will give them the position/title/ ‘standing’ to foreclose if they don’t have it already.
    Beware of Greeks bearing gifts.

  19. Storm,

    How do you account for appraisal fraud ? I know this is difficult to prove and agree with ANONYMOUS. I even had (2) very good honest appraisers review mine…Nothing. The only thing I may have is that Wells Fargo ordered the appraiser and the same appraiser document most home sin the neighborhood. Maybe a conflict of interest…
    A comp is a market comp. The appraisal is only an opinion. This is disclosed.

  20. My servicer called me AGAIN today. This time to say that we are being reviewed for a modificiation. One day they say we do not qualify for squat and are in foreclosure, and the next day they say we are being reviewed for a modification. Hahahaha They have been supposedly reviewing us for modification since the MHA began in early 2009.

    If they can foreclose, why haven’t they already? I keep waiting for them to file a NOD but so far, nothing. Zip. Maybe they are waiting for MERS to assign to them or to Fannie. Maybe they realize that MERS cannot assign and don’t know how to proceed. Maybe they lost my note and haven’t had enough time to produce a digital note yet.

    For whatever reason, the game playing continues. I just go along with it and keep planning my Plan B, Plan C, etc.

  21. Neil – this is a really good post – as far as appraisal fraud. It is a difficult area because they will claim that the current “market”‘ demanded the prices. In certain cases, this is disputable.

    But, at the risk of sounding like a broken record, please distinguish between MBS security investors and “investors” – again, and again, they are not the same. The “investors” you refer to are the certificate holders to the SPV trust. These certificate holders include the security underwriters to the trust and any other party that the security underwriters sold certain certificate tranches to- as long as that certificate tranche was not a pass-through of receivables.(which most A rated tranches were).

    Have no idea as to why you imply that MBS security investors are the “creditor” – this is simply not so. Unless, I am misreading your posts – which may be the case – since I do not think you would make this mistake.

    MBS investors are suing for their “lost” investment – that is- they lost their investment – wrote it off. Have spoken with attorneys for MBS investors – these investors are not entitled to foreclosure recovery. If they were, they would have to disclose this as a damages recovery. They do not get foreclosure recovery – they lost – they are done – that is why they are suing.

    If you disagree – and I am missing something – please explain. As I see it, MBS investors have no right to foreclosure recovery – and can never account for same.

  22. We find appraisal fraud in four out of every five mortgage transactions we examine nationally; and in states such as Arizona, Californi., Florida & Nevada, virtually all of the time!

  23. There are several case decisions in Arizona that lead me to believe it will be open season on appraisers here. Attorney Kent Berk (a super nice guy, I’ve talked to him on several occasions) is winning these appraisal negligence cases in Arizona. Visit his blog here:

  24. state, county, court name, case number? file date, file number???

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