Mortgage fraud is generally understood as borrowers overstating income or misrepresenting their intent to occupy the subject property. Although studies have found approximately 80% of mortgage fraud involves an industry insider, mortgage bankers have an affinity for passing the buck, so to speak. From the inside, mortgage fraud constitutes everything from brokers creating income documents and 1003 misrepresentations, to loan officer and banking insider or notary collusion. With the advances in technology and the ability of lenders to verify information provided by borrowers, it takes a higher degree of sophistication to coordinate substantial fraud. The mortgage fraud rings today often become expansive webs crossing many borders.
Given the complexities of these scenarios, law enforcement resources allocated to mitigating this crime are stretched incredibly thin. In fact, an FBI statement released in early 2010 reported they are scaling back resources dedicated to investigating mortgage fraud cases. District Attorney’s from Miami, Los Angeles and New York tell us it can take years to bring an indictment against individuals committing mortgage fraud because of the voluminous paperwork involved. Where does that leave the industry today?
Insiders concerned with quality point to short sale fraud as a current industry hot button. What this means in layman’s terms is a reverse-flip transaction. Realtors and professionals involved in the pricing and negotiation of short sales have formed rings with non-arms’s-length parties, often times the ‘get rich off of real estate’ investors, to have the appraised values of the homes artificially driven down. This allows non-arm’s length parties and investors, the new wave of “we buy ugly houses”, to pick up marketable homes for substantially less than the actual market value. What is the impact of this fraud on the housing market? While many try to convince themselves these frauds are victimless even in the shadow of the current crisis, short sale flips drive down the values of otherwise stable neighborhoods. The far reaching impact of this crime is the loss of tax revenue to municipalities already suffering from the loss of public services and educational tax revenues.
What’s the industry to do? It sure seems to many that no one is listening. The place to begin is in your own shop. Knowing the appraisal fraud red flags and implementing some basic quality control initiatives goes a long way toward mitigating avoidable risk. These simple strategies can even be undertaken by the distressed homeowner wanting to effect a viable short sale transaction or ensure the validity of a future purchase. Know your values and the tools at your disposal to prevent appraisal fraud.
Often overlooked and misunderstood, the appraisal has always been a primary component in any mortgage loan. Along with a borrower’s ability to repay, no other factor is more important than the value and condition of the underlying collateral being secured by tens, if not hundreds of thousands of dollars. Here are a few pointers which can be adopted by the novice and professional alike, that will help you ensure the value given to your home is fraud-free:
1. Appraisers are governed by the Uniform Standards of Professional Appraisal Practice, or USPAP. These standards can be found on line, or by calling the association. A good, licensed appraiser will be very knowledgeable and forthcoming about what to look for on your appraisal report.
2. Verify licensing of the appraiser completing your report and the company they work for. License verification can be found online at https://ent.hud.gov/idappp/html/apprlook.cfm. Each state requires a license and this information can be found easily on line through your state department of licensing.
3. Investigate complaints and disciplinary action. When searing on line to verify the active license of the appraiser you choose, you can investigate any disciplinary action or sanctions taken against the appraiser through the same sites. If you do not have access to the internet, call your State Department of Consumer Affairs and they can assist you.
4. Review comparables on line. There are several on-line websites that provide sales comparables for your property. When looking at the data, you want to concentrate on the following: 1) Homes should be similar in square footage, room count and age; 2) Home sales should have occurred within the previous six months; 3) Sales history for the comparables should not include a completed foreclosure or multiple transfers during that period; 4) Comparables should have like amenities, such as water front, pool, etc., 5) Transfers should be between individuals and not corporations or banks, whenever possible.
For the consumer, when determining an estimated value for your property it is always best to work with a real estate professional, Realtor or Attorney, you trust. For professionals and consumers alike, educating yourself through training courses and professional associations, you can stay current with the fraud related issues and implement due diligence procedures to protect your customers and your bottom line.
One last appraisal fraud issue to be concerned with is the rapidly growing “appraisal management company” industry. These firms are contracted, often by the big banks, to appraise volumes of properties for loan modifications and new financing. Requirements from licensing to criminal histories governing these companies vary from state to state. Find out what your state licensing requirements are before entering into business with these firms. Many states only require a valid corporation and appraisers who have lost their licensing or have criminal backgrounds start up appraisal management companies, charge unreasonably high fees, and do not meet the minimum qualifications, in many cases, that the appraisers themselves must meet to be licensed.
Furthermore, many of the big banks and services entering into contracts with these firms allow them to have a monopoly on determining their values. National litigation is growing in the areas of valuation. A few examples are sited below. As with any important business or personal transaction of this nature, arming yourself with education yourself is your best defense in fraud prevention.
Current valuation fraud cases
A lawsuit filed in Ariziona, Gomez v. Wells Fargo, DBA Rels Valuation, a wholly owned subsidiary of Wells Fargo Bank, N.A., cites violations of the federal Racketeering Influenced and Corrupt Practices Act (RICO), the Real Estate Settlement Procedures Act (RESPA) and state law, claiming that Wells Fargo required homeowners to use Rels Valuation for appraisals. In return, Rels Valuation gives Wells Fargo visibility into and control over the appraisal process. The suit goes on to site Rels Valuation subcontracted appraisal work to independent appraisers, demanding large price concessions then charges homeowners more than double the actual cost of the appraisal. A monopoly of the property valuation process without external oversight calls into question the validity of values calculated by Wells Fargo Bank used to establish loan to value, LTVs, and allowable loan amounts. Furthermore, these practices raise red flags with regulators and are being called into question whereas lenders with a monopoly of their valuation process were ‘setting the market’ through unsubstantiated high appraised values in order to raise the loan amounts, thereby increasing their fees on each loan transaction, by utilizing unsupported, high appraised values.
For training or appraisal fraud investigations contact [email protected]
Cindi Dixon, President
Mela Capital Group, LLC