According to Freddie Mac, in 1996 there were 44,665 cases of mortgage fraud reported by federal financial institutions. These cases led to more than $3 billion in losses.23 Mortgage fraud is a form of equity stripping, they could stop the foreclosure yet they are exploiting the owners in any how they could. According to the MBA members who report it, mortgage fraud increased from $60 billion-$70 billion between 1998-1999, a relatively good growth year. By 2000, it had grown to $90 billion, a 27% growth year. Whether it is a predatory lending scheme or flipping, mortgage fraud is definitely a growth industry. And, it requires the help, paid or unpaid, of the appraiser. The MBA members who do report their statistics do not represent all of their members. Additionally, the banks, savings and loans, and thrift figures are not included in the $90 billion. If they were to account for the other half of the activity, the total volume could be closer to $180 billion, as of 2000.
The Certified Fraud Examiners reported some $400 billion in white-collar crimes in 2000, not including mortgage frauds. Mortgage fraud, a form of robbery using real estate to accomplish it, may account for more than any other type of white-collar crime. It requires the help of an appraiser, paid or unpaid, as a willing participant or an unwitting accomplice. If the appraiser is found to have knowingly provided a misleading or inflated report, there could be culpability.
If the lenders wanted to put a stop to it, they could. But lenders can profit by funding fraud deals, in terms of the points and fees, and then sue the appraiser for negligence, using their liability insurance as if it were mortgage insurance. Claudia Gaglione, a defense attorney for Liability Administrators, stated at a luncheon this past summer in Riverside that often their best defense for an appraiser is to subpoena the loan file and tear it apart, showing the loan should have not been made, regardless of the problems with the appraisal. More than 70% of the civil suits against appraisers come down the lender pipeline.24
Many civil suits against appraisers, which could be turned in as fraud, are pursued as negligence, in order to keep the appraisers insurance in the case. This was exactly what happened in the Soderburg vs. McKinney25 case that I worked on in 1995. According to Thomas McCullough Jr., the lawyer for Soderburg, they dismissed the fraud charge without prejudice, obtained a $250,000 settlement from the loan broker and then pursued McKinney's insurance as a loss recovery vehicle. In our first Real Estate Fraud seminar in 1999, McCullough stated that he believes that "what McKinney did was fraud," but it did his client no good to pursue that issue and negate the liability insurance. Soderburg had not sent the appraisal before the loan was funded but prevailed in suing him, even though he was not the client of the appraiser.
If the residential loan production appraiser understood that they were being used by the lending industry as a free form of insurance, fees would be higher to account for the known risk and delivery times prolonged to account for a higher level of due diligence.
Additionally, if appraisers had any idea that they were being used as a mortgage insurer, there would be a lot more sobriety in the marketplace. The best appraisers operating under economic coercion find it hard to maintain market share and ethics. Like the classic conditioning we learned about in Psychology 101, as the twig is bent, so is the industry being inclined. Many lenders, or their authorized agents, are habitually pressuring appraisers. Absent any structure to withstand the coercion, the residential appraisal industry is caving in. An appraiser who caves in to client pressures and knowingly inflates appraisal values could end up facing criminal charges.
Historically, it has not been the regulated lenders who put the greatest pressure on the appraiser. Rather, it has been the commissioned loan agent or loan broker. Mortgage frauds, whether flips, packed transactions or bogus sales require inflated appraisals. Lenders now have a new insurance available. They can buy portfolio insurance against fraud and negligent misrepresentation.26 Armed with this new product in the marketplace, some civil suits against appraisers may be turned into criminal cases by the lenders, who, after finding another loss recovery vehicle in the form of insurance, seek to save face by turning appraisers in for their criminal participation in mortgage fraud schemes. Lenders have been the largest source of civil and criminal liability for appraisers, because mortgage fraud cases are the greatest source for potential crime.
At a fraud seminar in Cleveland last year, Tom Getz, a prosecutor with the USDOJ, stated, "The last thing you want as an appraiser is to be standing in a charging docket next to your loan broker client."27 He explained the Federal Sentencing Guideline, which, like USPAP and licensing, came out of the S&L Crisis. It is, to a prosecutor what USPAP is to of an appraiser. He gave the example that an appraiser who copped a plea to 10 charges from the 40 or so that they were facing in a mortgage fraud case could expect a sentence from between 43-51 months in federal prison.
USPAP is being used against appraisers in criminal cases. Appraisers are being sued in predatory lending and housing fraud cases or wire fraud, mail fraud, computer fraud, bank fraud, and/or mortgage fraud.
All real estate appraisers must comply with USPAP regulations in accordance with the Financial Institutions Reform, Recovery and Enforcement Act of 1989 [FIRREA]. State Appraiser Certification and Licensing Boards; federal, state and local agencies; appraisal services; and appraisal trade associations require compliance with USPAP.28
If the appraisal industry as a whole complied with USPAP, property flipping could be stopped. Maybe that is why USPAP was created. Maybe it had something to do with the S&L Crisis. Maybe it was mostly commercial appraisers last time and, just maybe; it is a residential phenomenon this time. That is my view after much research. Only time will tell if I am wrong.
Predatory lending will not go away. Too many are profiting from it. Stock prices of publicly traded companies can be enhanced with the huge amounts of high interest, points, and fees involved in the practice.
Probably the best thing an appraiser could do to limit exposure to excessive risks would be to avoid high liability clients, and high-risk assignments. The high loan to value transactions would be the first thing to avoid, especially if they include excessive fees or the borrower has blemished credit.
From a legislative standpoint, it is not likely that strong laws will protect the appraisers who operate in this arena. It is more likely that laws will protect the consumer and the regulated lender. The appraiser is likely to be on the wrong side of new laws that create stricter requirements, rules and penalties.
Appraisers involved exclusively in residential loan production work are at a greater risk of being caught up in a bogus transaction and more likely to have risk of involvement in a criminal transaction. Every predatory lending nd mortgage fraud transaction requires the help and services of an appraiser, or an altered appraisal.
Neil
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