Inaccurate Representation or Misrepresentation?

By popular demand I have decided to delve deeper into the concept of appraisal fraud. In previous posts I have addressed several aspects of appraisal fraud, including its definition and various aspects to try to help the reader to understand that an appraiser can be inept or inexperienced without being a crook .

What I cannot stress enough, is that fraud is a legal term. It is a term that only applies at the time of conviction. A conviction only occurs through the legal process and until such time, we are all considered innocent until proven guilty. Therefore, reviewers, auditors and investigators should be wary of suggesting that a misstatement of fact or an unsupported opinion is “fraud” or “misrepresentation” . By inflaming the language of review we increase our risk in two ways. First, the inflammatory language can be construed as slanderous. Even though the US has a constitutional freedom of speech, if comments that are place in a review document or audit affect the livelihood of an appraiser, there is ground for a lawsuit and frankly, the appraiser has a good case to win.

Secondly, this industry is a relatively small one, therefore if injurious statements are made about an appraiser, they could be forced away from legitimate clients and into the hands of lenders who want appraisers with moral flexibility.

When we come across appraisals that have an appearance of having been inflated or written in a manner that could be construed as misrepresentation, we have an opportunity to make contact with the appraiser to seek clarification. During the process of review, we have the opportunity to support the appraiser and to guide the process towards integrity. It is like raising a child, if we are constantly accusing and critical, this child will only learn to hide better. But if we are honest and encourage integrity then the appraiser “grows up” to be better at their job and better serve the overall community.

Let us all strive to be better at our jobs and to deal honestly with one another. This can only result in an improvement within the lending community itself.

See you around the water cooler!

2011 – Mortgage Fraud Update

It has been seven years since the FBI targeted mortgage fraud as one of the nation’s leading problems of crime. California and several other states have created a Mortgage Fraud Task Force and yet according to several news sources, the instances of mortgage fraud are on the rise. “How can this be?”, after all the money, time and resources the government has spent on tracking, analyzing, and prosecuting mortgage fraud, “How is it possible that crooks don’t just stop trying?!”. Of course, I am being a bit sarcastic. I believe the real problem has yet to be unearthed. This type of white-collar theft takes a very long time to detect. Unlike the passé bank robberies of the late 1800’s and early 1900’s, thieves are no longer required to just use tommy guns and wheel-men. With a good acrobat adobe and a lack of a moral center, people are able to abscond literally millions of dollars, and if they are smart, they leave the country to someplace without extradition.

The problem is not as simple as finding better appraisers, or educating loan officers or mortgage underwriters, or having a risk analyst look at the loan prior to funding. Although all of these steps are good ones, the resources should be set in place to enable a potential lender to check a loan file through a federal database that is driven through the analytic machine of FNMA, the FBI and the IRS. These three leaders in fraud detection and prosecution have the data for the majority of the players and schemes that are being perpetrated. If there was a central base of intelligence for mortgage fraud and all loan profiles were run through this system, much like a background check, then looking at the major players, routing numbers for transfer etc., the fraudsters would have to work a lot harder to steal “the banks” money.

This of course is just the personal ranting of a tired real estate appraiser/fraud investigator. But I continue to live in the hope that sense, like courtesy, will some day become common once again.

See you around the water cooler!

Mortgage Fraud

The unfortunate reality of mortgage fraud is that there has become levels of acceptability within the industry that frankly never should have been allowed. For instance, if the borrower misrepresents his income or his occupancy, as long as the loan does not go into default, the lender did not worry about the misrepresentation, even though the borrower may have lied with the intent of obtaining a loan. The problem is of course that the rules and regulations that were put into place were intended to safeguard the process to preëmpt certain individuals from being able to obtain a loan (if the income was not high enough to support the loan) or to signal the lender that the loan was for a non-owner occupant loan which has a higher risk and thus should have been priced differently. The “lender”, however, is a nebulous term because as Kevin S. Gouveia, CPC, states the Holder in Due Course changes as the paper (Discussions (1) see discussion Prevent Mortgage Fraud) is flipped, escalating the eventual investor risk as the paper is loaded down with additional fees and the risk is not properly rated. Therefore the party that is damaged by the process of fraud is the eventual investor who purchased the paper on the capital market.

How do we prevent this? Well this is the trillion-dollar (and growing) question. The original intent of the laws that governed this process was sufficient; however, the lack of due diligence in training and impressing upon each person that was involved in the lending process led to this melt down. For instance, some real estate appraisers were professional, reliable and providing adequate service to the lending community, but as the demand for jobs increased beyond the point of reasonableness, the knee-jerk reaction for many shops was to grow. The growth of these shops was to obtain appraisal trainees who may or may not have had proper supervision thus putting the original appraiser in a position of providing appraisal reports that became less professional and much less reliable. The same is true in each part of the lending process: processing, underwriting, and sales. The loan mechanism broke down from overuse. What needed to happen was that growth needed to be limited for each part of the lending process to have time to respond to the demand and each component to take on the proper responsibility for the corresponding product or service that was provided.

What has happened is that the majority of poorly trained individuals have already left the scene and the rest of us are looking around to “mop up”, as it were. Mop up from the tidal wave of greed that has drowned so many in the aftermath of this “comedy of errors.”

Under Valued Appraisers

It is ironic that the one group of people who could have held the line, kept buyers from paying too much and lenders from being over extended, was the one group that nobody wanted to listen to. Appraisers that told the truth found their work limited to forensic review or REO. All others were re-educated to enable them to “understand their part in the process”. The title wave of incompetence has brought us to this point of demise. It is an old story, but one that requires reliving, until everyone understands the significance of this debacle.

There were multiple levels of bad decisions, break downs of safe guard, and self-perpetuating myths that caused the virtual ruination of the appraisal profession.

Myth number one, if the appraiser is aware of the price that the borrower is looking for the appraiser will lose his or her objectivity. Although it is clear that there was a generation of “made as instructed” appraisals (not a reference to the highly sought after MAI designation) this does not mean that all appraisers were finding ways to make a deal work. The fact of the matter is that when the appraiser was informed up front of the clients expectations and it was clear that these expectations did not fit the market, many appraisers were enabled to let the parties down tactfully and salvage a working relationship with the lender for future work.

Myth number two, appraiser independence means that the appraiser should never speak to the client. Without client interaction the appraiser is reduced to a mere report that is supplied by a management company. This disables the client from ascertaining the level of competence of the appraisal professional who is producing this report.

Myth number three, the appraiser’s impartiality will be maintained by using appraisal management companies (AMCs) the current problem with the majority of newly formed appraisal management companies is that no significant oversight was established for the formation of or management of these companies. While individual appraisers can easily be removed for violation of State Law (i.e. USPAP has been adopted as law in most of the States), the AMC is not subject to USPAP and they are free to act as an advocate to their client base. Appraisers are finding all type of subtle and direct pressures to be more flexible in their opinions and presentations of value.

“What about the multiple levels of bad decisions?”,  you may ask. By this, I am referring to the many large lenders that created in-house appraisal companies and hundreds of staff appraisers and review appraisers to shape the lending decisions of the company. The original plan was that this department was reporting to the sales departments that generated loans, by the mid 1990’s this was changed to include an operations division which attempted to stand between sales and appraisal, but the mindset of protect the interest of the lender had already been established. The problem was simple. The appraiser’s job was never to protect the interest of anyone. The appraiser’s job was to accurately report and analyze the market and  determine how the subject fit into the market and the report this in a manner that was not misleading.

The underwriters had the job to protect the interests of the lender; however, since the appraiser was trained to think like an underwriter the underwriters were disabled because they rarely got the straight (or complete) story. Therefore lending decisions were formed based upon the desire to make loans, all possible loans, instead of all prudent loans.

“What about the safe guards that were broken down?”, good question. During the early part of the 21st century many of us were screaming that the process of out of control. Appraisals were being reported in a way that, at best were misleading, and at worse were fraudulent. Reviewers were trying to stop the flow of unreliable appraisals, but this process got out of hand quickly because the lenders created national review teams with pools of available national data to determine the adequacy of the report. And instead of slowing down and getting a local review, when the national reviewer had a question, the management would push the national review to “fix the deficiencies” of the report so a deal could be made. Once reviewers stepped here, the process was broken. The flood gates of greed had burst and the resulting damage is still being uncovered.

So, “where do we go from here?”, this is the trillion-dollar question. There has been some legislation enacted and some proposed, but I am afraid that no one has actually touched on the original problem. We have an entire generation of appraisers who were just “doing their jobs” and few even realize that they contributed to the problem. There are a handful of battle hardened veteran appraisers who have always fought the good fight and tried to stay reasonable and accurate in their analysis and reporting of the markets. These people are generally ignored by those in control of the front end appraisals, because these appraisers are not generally people who will “play ball” or “accommodate the clients concerns”. These appraisers are generally hired on the back-end to try to figure out what happened and where do we go from here.

My suggestion? My suggestion, is one that is fairly simple. Credit policies should be form in such a way that all people have a chance to buy or refinance their homes, but the lenders should never loan above a certain Loan to Value Ratio (LTV) that can be determined by greater minds than mine. Appraisers should produce reports, that require them to show the actual sales they had to consider, and a brief description of why the sales they choose were the best in demonstrating the market reaction to the subject property. All appraisals should be reviewed by local appraisers. These reviewers should be allowed access to the property just like the appraiser was allowed. If the appraisals is later found be inaccurate the origination appraiser and review appraiser should be liable to buy the home at their recommended value.  Unrealistic? probably. But I guarantee that appraisers would no longer render an opinion of value that could not be supported in the marketplace as of the date of value.

Is it possible to commit fraud unknowingly?

I have recently read several different posts and articles on the Internet stating that some appraisers have committed fraud unknowingly. Some describe instances of stating condition to be average when the property needed work, or “tweaking” the numbers to make the deal work.

First of all it is important to note, The FBI defines mortgage fraud as “any material misstatement, misrepresentation or omission relied upon by an underwriter or lender to fund, purchase or insure a loan.” By that definition, such fraud can clearly be committed by both lenders and applicants, even though the latter may not think their misrepresentations or omissions are significant enough to be a concern.

This definition has been transmitted around the Internet and has been widely used to accuse appraisers of wrong doing. It is equally important to note that in order for a charge of gross misrepresentation to become a convict-able offense of fraud the claimant must prove that the defendant intentionally committed such a grievous transgression. Fraud my intentional omission is of course as bad as fraud by wording a report to mislead, or gearing a value towards a prearranged goal.

Appraisers must always be vigilant to make sure they have not compromised their objectivity or lost their independence during the appraisal process. Equally review appraisers must stray from calling misstatement of that is uncovered during the appraisal review, “fraud”. Fraud is a term that the judge hands down with conviction. An appraiser is not guilty of committing fraud until he or she has been convicted of such an offense.

It is my considered opinion, that review appraisers who place in their reviews charges of appraisal fraud are setting themselves up for a libelous suit from the appraisers who are being labeled fraudulent appraisers by the client and as a result are losing business due to the label.

Is it possible to commit fraud unknowingly? No. The simple answer is no. The appraiser needs to have intent in order to be convicted of fraud. This is not to say an appraiser can not, or should not his or her licensed removed if he or she show a trend of producing appraisals that are materially incorrect or misleading, even if there was not intention of fraud. But this is another discussion for another day.