Appraisal Fraud Explained

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I was speaking with a pharmacist last night who was questioning me about my contention that appraisal fraud was the root cause and vehicle of the deception that is called securitization. By now most people understand that there was something wrong with securitization but they don’t really understand that the actual breaking up the whole into pieces that were sold to investors was never completed, and in many cases, was never started.

But it is still a sticking point to most people that one should not be able to entirely escape a valid obligation just because the wrong Chinese hexagram was placed on the back of the wrong napkin. My answer is that they are entirely correct. The only way to extinguish an obligation is to pay it. My point on that score has always been that it WAS paid, not that it shouldn’t be paid. And I have further made the point that the obligation is offset by liability of the Banks to the borrower for lying to the borrower about the transaction. I have never endorsed any theory employing magical thinking which would discharge indebtedness  without payment or offset (which is the equivalent of payment, like a credit bid at auction).

Which brings us back to the point of appraisal fraud and how to explain to even a professional person how the value of the property was artificially hiked for the purpose of inducing the borrower to sign his name to documents that ruined his life forever. My previous explanations included some undeniable facts — like that each appraiser who wanted to continue working was required to look at the contract (violation #1) and was instructed to come in with an “appraisal” at $20,000 over the contract (violation #2 as to independence and objectivity of the appraiser).

I would say things like the appraiser was either specifically licensed or otherwise in a superior position of expertise such that the borrower and the other parties could rely on them, but in the securitized loan cases, they were reduced to clerical functions of simply rubber stamping the “values” being used by the Banks to justify the the money they took from investors.

I thought that pointing out facts like that it would be self-evident that appraisal fraud lay at the center of the universe of securitization and that appraisal’s twin, the securities ratings from Moody’s et al, was a twin black hole without which the mortgage mess and the appearance of securitization could never have been achieved. I was wrong.

Like the sticking point about the obligation not being discharged by anything other than payment, there is a sticking point about appraisal fraud which is that it seems inconceivable to most people that appraisers and bankers would intentionally use false values — even after those same people understand that the Banks were making a fortune on these bogus loans and the sale of bogus mortgage bonds to investors. Decent people just can’t get their minds wrapped around the idea that the appraisals cannot be justified by any means acceptable as an industry standard for appraisals. As expressed to me last night, “the appraisals must have been close to the actual value of the property.”

No, it wasn’t. And the proof of the pudding is what we have now, which is the same prices that were prevalent ten years ago before the run up. How did the appraisers get it so wrong? They didn’t. They were just following orders, which always sends chills down my spine because that is what Nazi war criminals said.

So how do I explain it? I’m trying out a new analogy so maybe people will finally get the fact that yes, they were duped by Banks who want us to believe that they too were duped but of course they haven’t brought a single lawsuit against a single appraiser. Why? Perhaps because the appraiser WAS just following orders from the banks and they can prove it.

So here is my pharmaceutical analogy. If you are a pharmacist selling many over the counter and prescription drugs, you pay attention to the purity and safety of the drugs and other items you sell in your drug store. The usual pharmacy has a aspirin on their shelves for anyone to buy. Despite the fact that aspirin is a powerful drug with multiple benefits and side effects it has become so popular that no attempts have been made to regulate it, except for the labeling and therefore it is available without prescription. Aspirin has been around for over 2 thousand years in one form or another, so we have a long history from which we can draw conclusions, but the actual mechanism by which aspirin works was not discovered until 1971.

Back to our pharmacist. With 2,000 years of history worldwide and a couple of hundred years here in this country, the pharmacist would ordinarily tell you that he feels no anxiety about leaving such a powerful drug out on the shelves and that we do know what it does and how it does it. If someone comes in to complaint about a bottle of aspirin, it is rare, perhaps once per month, which is the way it has always been for hundreds of years.

Now, assume that the average complaint per person for the whole population of those who visit the pharmacy for the last 100 years has been 1 per month, which is mostly explained by improper dosage or use. That provides a level of comfort about how to gauge the safety of the drug Aspirin. If there was a spike in deaths and problems reported to the pharmacists from customers and authorities, the pharmacist would assume, quite correctly, that there was some toxin in a particular batch of Aspirin and he would take it off his shelves. The assumption would be that the pill was bad because it was tainted by impure substances. As soon as the pill is removed from the shelves, the number of deaths and complaints drops to normal levels. Conclusion: the pill was a bad pill.

Now assume we have a similar statistic with home values that has been created and tracked by the Case-Schiller Index going back to the 1880’s. And in the main Index, they remove inflation as a factor and compare home prices to the average income of homeowners. The chart is flat, just like the experience with aspirin which showed a flat  chart with little variation until the bad pill came along. The flat chart is proof positive that comparing housing prices to median income is the proper way to judge market trends and for projections to have any meat to them.

Now imagine a huge spike in prices that lasts 6 years. Remember we are comparing the average housing price to the average income of the average family. So increases in population, or migration (a popular myth advanced by realtors to explain the sudden change in price volatility of homes) or other external factors that normally cause markets to rise and fall are not present. Without being an “expert” would you trust a change in the ratio of median income to housing prices? How could anyone pay for it if the median income per family was declining, which it was, and housing prices were going up, which they were? ANSWER: They couldn’t and they didn’t.

With inflation low, and migratory patterns being entirely insufficient to explain these huge monthly price increases, imagine yourself explaining to your adult child whether they should trust these prices. Knowing what we have explained just in this article, it is obvious what you would tell your child to do — rent, don’t buy, this can’t be sustained. The ratio is meteorically out of line with the only good measure we have of variation in housing prices — the ratio between income and price. You didn’t give that advice because you didn’t know that such indexes were available. But the appraiser did know and so did the Bank and the realtor. In fact, everyone at that closing table knew this deal was going to crash except the borrower who was relying on the Bank and the appraiser to justify the the deal.

Not only did they not tell the borrower that this was a bad deal based upon a value that could never be sustained unless median income went up over 100%, they sealed the deal with assurances that the purchase of a house was an “investment” and used the false increases in prices (caused by the influx of money and payment plans that would work for 6 months), because real estate always goes up and never goes down — a blatant lie known to be a lie by the appraiser, the realtor, the mortgage broker and the bank or mortgage originator — but not known to the average borrower.

In 2005, 8,000 honest appraisers signed a petition to Congress asking them to protect them because they were being forced to either lie on the appraisals or get out of the business because they wouldn’t get any business without lying like the Banks told them to. Of course nothing happened and the incident is long forgotten except by people like me who keep reminding you that it DID happen.

Does this help?

17 Responses

  1. @ EVOL
    Challenge? so must take apart a market—examine the slope of appreciation of comps—–then go focus upon the spikes at points where the curve turns up at a faster pace than the average slope

    then go see who appraised or if was a machine spit out—-and if there were any air loans or related party loans that went south quickly–ie within a year or so

    then what—we already know the brokers were pushing predatory loans–no mystery there–but people seem to ignore that–but the two go hand in hand—-add fake appraisal to predatory loan to predatory securitization and there are three events that statistically establish little liklihood all three are coincidences–especially as part of a broader pattern–but this is more than appraiser fraud

  2. I can’t think of a single property I bought where the appraisal was not based on actual comp sales – and good ones, all within a mile or so and current. If anything, I often had to provide lazy appraisers with comps that supported the value, as they generally just went with the first three the computer spit out and didn’t bother to look to see if there were others that supported the value I had determined from my knowledge of the area I worked.

    I can see how SOMEWHERE there was improper tweaking going on to get the values up, but how can you apply that (or at least prove it ultimately influenced) appraisals based on actual, good and recent comp sales?

  3. Yeah and what about the refi’s and the soliciting from the mortgage companies.

  4. http://www.appraiserspetition.com/sig10401-10800.htm – This is the last page of the petition with 10,401 signatures.

  5. @ RJ Koenig

    During the period at least 2004-2008, the originators were [supposedly] doing data base searches to determine value via controlled entities: Imagine if you will a desktop platform dashboard and subroutines windows that allow data access/ and application of algorithms to, among other things, attempt to predict value–largely based on comparables in its own registry system. MERS is a great data base, others have also reportedly assembled similar access to databases –my guess would be based on MERS–then filling in holes. One might guess that XXXX co was also testing reported loan data from servicer/trust lists—to find addresses that had for one reason or another not previously become enrolled on the data-base. Presumably an owner constructed[?] or locally warehoused construction period regional lender—but could include non-existant properties created in order to establish a history. I would think the data source re addresses would start with MERS. MERS or otherwise to support a desktop dashboard existence for a property address. Maybe empty lots–would be interesting if the lists had been tested against Could be a 5th floor unit of a 4-floor condo.

    Did they do any drivebys? Apparently not. Oddities about access would have been identified by an appraiser that simply looked at a platmap.

    A completely ficticious property could exist on such data bases. These could have been introduced into the MERS system by fraudulent realtor/loan broker schemes–at the periphery of the typical pumping of prices. A few were surely flipped, churned between related parties to up the apparent price. But in this netherworld of “see no evil” there could easily exist fake houses and condos.
    These could exist as MERS recorded mortgage-loans with excerpts from notes [balances] incorporated in searchable format. These airloans would be the easiest way to quickly “prime” the upward price pump–to generate those first few automated “comparables”. These were needed to fill out undertakings by the originator product marketing operations to provide targeted numbers of loans to securitizers, thereby generating fees and skimming even the entirely false loans on non-existant properties.

    The absence of filings of loan schedules as represented in the REMIC SEC 10K–offered great opportunity to fudge the numbers and insert non-existent properties that exist only on MERS database.

    These “created properties” reside out there in some groups of properties/loans “in process”. In inner cities they complain of rundown foreclosed properties–they will be happy to find that it was an empty lot or airloan so they dont have a problem.

    But these things still exist in these databases if they were once set up. Complete with the ability to -re-estimate its value—-for a new sale for a new loan. It is vital that there be a real appraiser with a real platmap and property description that matches to review all of the MERS list and delete these time bombs. As soon as the current heat is off and people are off-topic—these things will be resurrected to trigger more fraud. its a large effort–one-by-one– something about suffering by weavers of tangled webs. This should be assessed to MERS.

  6. I researched the 2005 Appraisers Petition back to 2001.

    http://www.ired.com/news/2001/0102/appraiser.htm

    It seems to me that hiring an appraiser is a little bit like hiring a guy to read an altimeter for you in a rocket which is only half-fueled. Here is what the altimeter reader reports to you:

    5,000 feet – all systems go
    10,000 feet – all systems go
    20,000 – all systems go
    50,000 – all systems go
    75,000 feet – all sys . . . . oops.

  7. Does anyone know in California how long an appraiser is required to keep the report? I tried getting from my broker with no successm She said she didn’t have it anymore. How long are title insurers or escrow companies required to hold the files in CA? Do I have a right to a copy of everything in that file a few years later?

    Thanks!

  8. That article appeared in the Miami Herald, here’s a link
    http://www.miamiherald.com/static/multimedia/news/mortgage/sink.html

  9. @ IAN

    What is original source on that—where did the data come from—is there a link?

  10. “Florida Regulator Resigns after allowing 10,000 bank robbers and convicted felons to receive mortgage broker license” July 22 2008.
    Here on Livinglies.

  11. chris- Neil should have mentioned, unless he forgot, that the 8000 broker petition is, or was,at least, here on this site. I thought it was 11,000 signatures. I don’t know what it is titled.
    Also, and I think it is here on this site, in 2008 or 2009, the head of Florida’s mortgage broker licensing department resigned, when it was found that over 10,000, yep, ten thousand licensed mortgage brokers had criminal records.
    Say, does anyone here know what the name of that subdivision was in Florida, where, of 600 mortgages written by Option One, only 1 (one) person ever made the first payment? There were no payments ever made on the other 599 mortgages.
    Faith in government just keeps growing with stories like this.

  12. You know there’s a major problem when a real estate broker cannot give you a clean appraisal, instead hands over a brokers’ opinion.
    How is that for covering your ass?
    A whole county without ONE other property that be used as a current
    comparative!

  13. Look into vicarious liability,

    The appraisers were hired by and worked for the banksters (servicers), therefore it is still the originators, servcicers and brokers that perpetrated appraisal fraud which seldom if EVER included the requisite “absent undue market influence” into account during their appraisals.

  14. “In 2005, 8,000 honest appraisers signed a petition to Congress asking them to protect them because they were being forced to either lie on the appraisals or get out of the business because they wouldn’t get any business without lying like the Banks told them to. Of course nothing happened and the incident is long forgotten except by people like me who keep reminding you that it DID happen”

    I think this very statement in the host’s argument indicates that there is a “sort of” set of unseen hands behind the appraisers.
    The realtors and inde loan brokers who received substantially more than the appraisers. Dont blame the debacle on the appraisers–they sort of did what they could as pointed out–some anyway. But even by late 2004 the originator was doing in house appraisals driven off sales stats. The realtors were able to pump prices two ways at least, by asserting they could hook up the buyer with a broker who could swing the deal in the buyer’s budget with unrealistic ARMs and teasers, plus realtos that ginned up fake transactions between related parties or parties under common control. Who pumped the prices? Go look at the houses and cars of the realtor and broker that put you in that house for that loan. The appaiser litterally might be a computer–the real pumpers live in your community- who else would better know how and why prices were run-up? Maybe they dont still live there— more likely live in a tax haven or on their corner of a tropical island.

  15. You don’t need to use the case schiller, take a look at this chart from the Federal Reserve showing “Securitized Total Consumer Loans” in a chart format …

    dtc-systems.net/2012/01/securitized-total-consumer-loans-chart-st-louis-federal-reserve/

    -Dan

  16. Right on the Money Neil….

  17. My question is: can we access this petition? How?

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