APPRAISAL FRAUD IN DETAIL

Posted on May 11, 2010 by Neil Garfield

APPRAISAL FRAUD IS THE ACT OF GIVING A RATING OR VALUE TO A HOME THAT IS WRONG — AND THE APPRAISER KNOWS IT IS WRONG. This can’t be performed in a vacuum because there are so many players who are involved. They ALL must be complicit in the deceit leading to the homeowner signing on the the bottom line and advancing his home as collateral on a loan which at the very beginning is theft of most of the value of the home. It’s like those credit cards they send to people who are financially challenged. $300 credit, no questions asked. And then you get a bill for $297 including fees and insurance. So you end up not with a credit line of $300, but a liability of $300 just for signing your name. It’s a game to the “lenders” because they are not using their own money.

And remember, the legal responsibility for the appraisal is directly with the appraiser, the appraisal company (which usually has errors and omissions insurance) and the named lender in your closing documents. The named “lender” is, according to Federal Law, required to verify the value of the property.

How many of them , if they were using their own money, would blithely accept a $300,000 appraisal on a home that was worth $200,000 last month and will be worth $200,000 next month? You are entitled to rely on the appraisal and the “verification” by the “lender” (see Truth in Lending Act and Reg Z). The whole reason the law is structured that way is because THEY know and YOU don’t. THEY have access to the information and YOU don’t. This is a complex transaction that THEY understand and YOU don’t.

A false appraisal steals money from you because you rely on it to make the deal for refinancing or for the purchase. You think the home is worth $300,000 and so you agree to buy a loan product that puts you in debt for $290,000. But the house is worth $200,000. You just lost $90,000 plus closing costs and a variety of other expenses, especially if you are moving into anew home that requires all kinds of additions like window treatments etc. But the “lender” who is really just a front for the Wall Street and the investor pool that funded the loan, made out like bandits. Yield spread premiums, extra fees, profits, rebates, kickbacks to the developer, the appraiser, the mortgage broker, the title agency, the closing agent, the real estate broker, trustee(s) the investment banking entities that were used in the securitization of your loan, amount in some cases to MORE THAN YOUR LOAN. No wonder they are so anxious to get your signature.

“Comparable” means reference to time, nearby geography, and physical attributes of the home and lot. Here are SOME of the more obvious indicators of appraisal fraud:

  1. Your home is worth 40% of the appraisal amount.
  2. The appraisal used add-ons from the developer that were marked up for the home buyer but which nobody in the secondary market will pay. That kitchen you paid an extra $10,000 for “extras” is included in your appraisal but has no value to anyone else. That’s not an appraisal and it isn’t collateral or fair market value.
  3. The homes in the immediate vicinity of your home were selling for less than your home appraisal when they had the same attributes.
  4. The homes in the immediate vicinity of your home were selling for less than your home appraisal just a few weeks or months before.
  5. The value of your home was significantly less just a  few weeks or months after the closing.
  6. You are underwater: this means you owe more on your obligation than your house is worth. Current estimates are that it might take 20 years or more for home prices to reach the level of mortgages, and that is WITH inflation.
  7. Negative amortization loans usually allow the principal to rise even above the falsely inflated appraisal amount. If that happened, then they knew at the time of the loan that even if the appraisal was not inflated, it still would not be worth the amount of the principal due on the obligation. For example, if your loan is $290,000 and the interest is $25,000 per year, but you were only required to pay $1,000 per month for the first three years, then your Principal was going up by $13,000 per year compounded. So that $300,000 appraisal doesn’t cover the $39,000+ that would be added to your principal balance. The balance at the end of 3 years will be over $330,000 on property APPRAISED at $300,000. No honest appraiser, mortgage broker, or lender, would be complicit in such an arrangement unless they were paid handsomely to do it and they had no risk because they were not using their own money for the loan.

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Foreclosure Defense: Pay Attention to the Ankle Biting For Really Good Inside Information

Posted on June 17, 2008 by Neil Garfield


LITIGATORS AND LITIGANTS WHO ARE FIGHTING FORECLOSURE AND USING OFFENSIVE STRATEGIES TO RECOVER REFUNDS, REBATES AND DAMAGES FROM THE COLLECTION OF COMPANIES THAT RAN UPLINE AND DOWNLINE FROM THE LENDER SHOUDL TRACK THESE LAWSUITS AND EVERY FIILNG — THERE IS A LOT OF GOLD IN THOSE PLEADINGS AND A LOT OF WORK YOU WON’T BE REQUIRED TO DO ESPECIALLY WHEN YOU FIND A LAWSUIT AGAINST SOME OF THE SAME PARTIES YOU HAVE IN YOUR CASE. 

THE FRAUDULENT ACTS COMMITTED IN VIOLATION OF MULTIPLE STATUTES AT THE SECURITIES END OF THIS SINGLE TRANSACTION IS A MIRROR IMAGE OF THE FRAUDULENT ACTS AT THE REAL ESTATE END OF THE TRANSACTION. THE SIGNATURE IS THE SAME. INFLATED APPRAISALS AND RATINGS WERE AT THE ROOT OF COVERING UP INTENTIONAL DISREGARD AND DEGREDATION OF UNDERWRITING STANDARDS.

IN ALL CASES UP AND DOWN THE LINE, UNDER FASB ACCOUNTING STANDARDS, THE LOAN WAS NOT ON THE BALANCE SHEET OF ANY ENTITY, WHICH IS WHY WE SAY THAT THE SECURITY WAS SEPARATED FROM THE SECURITY INSTRUMENT AND THE OBLIGATION TO PAY WAS SEPARATED FROM THE NOTE. 

IN ALL CASES WHERE WE HAVE BEEN PRIVY TO THE DETAILS, WE HAVE FOUND NO ENTITY THAT CAN PROVE IT IS OR WAS THE ACTUAL LENDER IN THE REAL ESTATE TRANSACTION AND WE HAVE FOUND NO ENTITY THAT CAN PRODUCE THE ORIGINAL NOTE OR EVEN THE ASSIGNMENTS THAT TOOK PLACE SHORTLY AFTER THE REAL ESTATE TRANSACTION. THIS IS WHY WE SAY THAT THE REAL ESTATE TRANSACTION WAS IN ACTUALITY A SECURITIES TRANSACTION WHERE THE BORROWER WAS PROMISED HIGH RETURNS ON HIS PASSIVE INVESTMENT IN A HYPER-INFLATED APPRAISAL (RATING) OF REAL ESTATE.

Now that things are falling apart, the banks are suing each other, the investors are suing the investment banks, everyone is suing everyone. A lot of what has been reported here and theorized in this site is now supported by the allegations of dozens of lawsuits and changes being made in regulations, accounting standards, and licensing of professionals in securities, real estate and related areas to the Mortgage Meltdown. 

The Buffalo case reported below clearly shows the inside scoop on how the fraud occurred, how clear it is, and how the financial shake-up is not ending but rather just starting a new chapter. The fraud alleged is precisely what has been reported and predicted by this site for months. Deutsch Bank is at the center of this one, but don’t be fooled. They all did it, some more than others. 

New reports from the Financial Accounting Standards Board indicate a long overdue correction in reporting standards for off balance sheet transactions. Until now, incredibly, financial firms were allowed to conduct business “off balance sheet”, reporting the income but NOT the liability.

Firms like Lehman are now going to be required to take all those transactions back onto their balance sheet. This will reveal the 25+ ratio typically used by all investment banking firms for leverage which every investor knows is stupidly suicidal. Their plan was to report the income on the way up and get bailed out by government if everything went to hell.

We also have information on a case that proves our point beyond a reasonable doubt: Wells Fargo was selling (assigning) various aspects of its residential real estate loans as soon as the application was filled out. Which means that at NO time were they ever using their own money. The case involved property in Michigan and will shortly be filed there.

M&T sues German bank

Deutsche Bank AGaccused of impropriety

By Jonathan D. Epstein NEWS BUSINESS REPORTER
Updated: 06/17/08 7:10 AM

M&T Bank Corp. sued German banking giant Deutsche Bank AG Monday evening, accusing the global investment banking powerhouse of knowingly selling M&T unsafe mortgage investments. M&T is seeking to recover $182 million in losses and punitive damages.

The legal action represents an attempt by Buffalo-based M&T to recoup most of the damage it suffered on a trio of mortgage-backed securities in the fourth quarter of last year. That’s when mortgage delinquencies and foreclosures were soaring nationwide, causing vast losses not only for lenders but also for the holders of investments.

The fraud lawsuit, filed Monday in State Supreme Court in Erie County, concerns two investment securities M&T purchased from Deutsche Bank in February 2007. At the time, M&T had hoped to earn higher returns than it could on U. S. Treasury bills and high-grade commercial debt issued by a company like General Electric Co.

Known as “collateralized debt obligations,” the complex layered securities were ultimately backed by “subprime mortgages,” which are loans to borrowers with bad credit. But the investments were highly rated by two of the nation’s major debt-ratings agencies, Standard & Poor’s and Moody’s Corp., giving the bank some comfort.

In its lawsuit, M&T claims Deutsche Bank deceived M&T by claiming the two securities it sold were “safe, secure, and nearly risk-free” — even safer than corporate debt and nearly as safe as Treasury bills.

In fact, the suit says, Deutsche Bank knew that its underwriting standards and due diligence had deteriorated, and bank officials were already experiencing problems with subprime loans and collateral “under their control” in 2006 and early 2007.

Also, M&T claims the ratings from Moody’s and S&P were also “fraudulent and false” because Deutsche Bank allegedly withheld information from the ratings firms, including about fraud with some of the loans and the refusal by the loan originators to stand behind them.

In the end, M&T cut the value of all three investments from $132 million to just $4.4 million less than a year after buying them.

“If M&T had been aware of the true facts . . . M&T would not have purchased the notes,” the bank said in the 51-page suit.

The bank is seeking to recover the original cost of the two Deutsche Bank securities, about $82 million, plus interest and $100 million in damages. The lawsuit does not cover the third security investment, originally valued at $50 million and sold to M&T by another party.

“We think that we have an incredibly strong case on the facts,” said Robert Lane, partner and head of the litigation department for Buffalo law firm Hodgson Russ LLP, which is handling the bank’s case.

The action by M&T represents the latest effort by an investor that purchased mortgage- backed securities and related bonds to go after the lender or brokerage that sold the investments in the first place.

Several such investor lawsuits have been filed by unions, pension funds, hospitals and municipalities such as Springfield, Mass., alleging they were sold inappropriate investments.

All of those suits are still in the early stages of litigation, with no sign of immediate resolution. But Lane said M&T was confident because its case is based on “very basic, accepted legal theories of fraud and negligent misrepresentation.”

The lawsuit also shines a light into the inner workings of “securitizations,” in which a multitude of loans are packaged by an investment bank into a legal trust, whose cash flow from the loans is then broken into pieces and sold to investors. Ratings agencies bestow their blessings in the form of evaluations such as “AAA,” which Wall Street then touts to sell the securities.

The two securities M&T purchased were “collateralized debt obligations,” which are pieces of debt that in turn are backed by other debt, such as mortgage-backed securities. Cash flow from one is used to repay the debt from the next higher level. And investors can buy into different levels of risk, accepting a bigger chance of default for higher returns. Many CDOs also have used derivatives known as “credit default swaps” to supplement loans.

M&T historically stuck to conservative investments, but opted to buy CDOs for the first time in February 2007. Relying on Deutsche Bank’s marketing, it chose two bonds from the Gemstone VII trust, which Deutsche Bank put together, sold, and administered, with Texas-based HBK Investments LP as collateral manager, the lawsuit said.

The first security, for $42 million, was rated AAA by S&P, while the second, for $40 million, was AA. The Gemstone marketing materials touted HBK’s experience and record, and the historically stable performance of similar investments, while a Deutsche Bank salesman repeatedly reassured M&T.

But within months after the purchase, the loans deteriorated, defaults soared, the bonds behind the CDOs were downgraded, and Gemstone itself was up for downgrade. M&T also learned for the first time that HBK had had claims against one of its biggest lenders, and was fighting with five over loans in default since 2006.

By October, half the bonds in Gemstone were downgraded, and one-fourth were in default. Gemstone itself was next.

Ultimately, M&T cut the Gemstone bonds to just under $2 million. They’re now $1 million.

jepstein@buffnews.com


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