Jeff Kaller

An insidious real estate fraud known as "flipping" is victimizing both home buyers and lenders in Maryland. In the spring of 2000, HUD and the U.S. Treasury held public forums on predatory lending. By the summer of 2000 the mortgage fraud problem was so large in so many major cities, that HUD put a moratorium on lenders from foreclosing on homes in the "hot zones"; from Baltimore to Los Angeles the predatory lending in urban locations was huge to stop foreclosures. Legislation was being drafted.

Lenders are keenly aware that this is an issue. Appraisers are in the middle of the issue because lenders need the appraiser to "help make the deals work." However it plays out, the appraiser is a part of the problem.

 There are good lenders, bad lenders, and everything in between. There are regulated lenders and unregulated lenders. Separate from them is the loan broker, which may be where the larger problem lies. How the changes unfold and how they impact appraisers is unclear. Appraisers need to understand what type of client they are dealing with. There are newspaper articles in most major cities dealing with the issue of predatory lending. Yet, the appraisal community, which is actively involved in appraisals for loan production has, on the whole, been slow to take a stand. Here is an excerpt from "Buyer Beware, Predatory Mortgage Brokers Don't Give Terms Promised, Causing Some to Lose Their Homes," by Teresa Dixon Murray:

The Predatory lenders have been stalking neighborhoods throughout the country virtually unchecked for the past several years, consumer advocates and legal experts say. Within the past 1 1/2 years however, the practice has mushroomed into a crisis as largely unregulated mortgage brokers cash in on the confusion and mounds of paperwork surrounding a home loan.

"The predatory lenders who are basically seducing people and ripping them off," says Rachel Robinson, an attorney with the Ohio State Legal Services Association in Columbus. Ned Wilson says he never realized he was committing to paying out $753 a month. Only the dollar amounts change from city to city. In Los Angeles, it might be a $200,000 property that ends up with $250,000 in loans. All of these require the help and assistance of an appraiser.

With regard to the predatory lending and mortgage fraud issue, appraisers have been playing the role of co-conspirator, but there is little record of appraisers demanding bribes or taking kickbacks. The Mortgage Bankers of America (MBA) issued a press release on the subprime topic .

In 1999 the Ohio Organized Crime Commission began investigating these mortgage issues as a form of Organized Crime which they are exploiting people who are in need of stopping foreclosures of their properties. Florida has its own Communications Fraud Act, which has already been used against an appraiser. In 1997, because of dramatic increases in predatory lending and mortgage fraud between 1993 and 1996, funding for the Housing Fraud Initiative began with investigations in 50 cities. Arrests began in 1998 and the first appraisers were convicted in 1999. This joint funding effort allows cooperation between the U.S. Department of Justice (USDOJ) , HUD Inspector General (IG), FBI, and Postal Inspectors.

Neil

While affordable housing has long held an important place on the federal government's policy agenda, budget cutbacks in recent years have forced the government to turn over many housing responsibilities to the states. Housing finance agencies (HFAs) have been created by states to issue tax-exempt bonds to finance mortgages for lower-income first-time home buyers and to build multi-family housing.

States are involved in a host of initiatives throughout the broad spectrum of housing finance and development. Interim construction financing programs which can reduce the basic costs of lower-income housing projects have been initiated in a number of states, together with innovative home ownership programs and programs directed toward rehabilitation and improved energy conservation.

States are also venturing into areas which have not received as much public sector attention until recently. By encouraging non-traditional types of housing, such as accessory units, shelters, and single room occupancy housing, states are addressing important elements of the housing market.

In Colorado, the state Housing and Finance Authority (CHFA) has issued more than $2 billions of bonds and notes since its establishment in 1973, providing housing for more than 33,000 families and individuals of low and moderate income; 19,000 first-time home buyers and over 14,500 rental housing units. In recent years the state has broadened CHFA's authority to allow it to develop finance programs to assist the growth of small business, help exports with insurance on goods sold overseas, and similar projects this is to stop foreclosures.

 Colorado has done more than simply help its citizens find housing: the programs have resulted in construction employment of more than 20,000 jobs, with wages estimated at almost $20 million in new local real estate taxes and an indirect gain of $1.6 billion for the state.Wisconsin, Maine and New York each have 20 programs including special ones for women and minorities, for disabled persons, and for environmental hazard removal.

Maryland operates 25 programs, including those to help people with closing costs and settlement expenses. It also has special funds available for the elderly and is developing an emergency mortgage fund to help people who have fallen behind in their payments aiding them to stop future foreclosures. Non-profit developers can also tap the state for money to build low-cost rental units.

Among Michigan's 29 programs and Minnesota's 25 are several for neighborhood revitalization. Minnesota also offers programs targeting the needs of urban Indians and migrant farm workers. Alaska, Oregon and Vermont offer financing for tenant acquisition of mobile home parks.

Funds are also available for persons who take steps to make their homes more energy efficient, for home owners and landlords who remove lead paint from dwelling units, for houses without plumbing or those with plumbing that is dysfunctional, for handicapped persons, and to help landlords defray the costs of bringing low-income housing into compliance with state and local housing codes. There are also funds for non-profit organizations to acquire or renovate existing houses and apartments for use as group homes for special needs such as mentally retarded.

In many states, elderly home owners can look to the HFA to obtain financing and/or support services they need to remain in their homes and avoid institutionalization. Some of the states have more than one agency dedicated to housing and we have attempted to list them all here. Also, many cities and counties have quasi-federal/quasi-local "housing authorities" with additional programs. Check your local government listings for these.

Neil

Here's what might actually work……..

Let's have the government do something to fix the housing market. Ideas are flying around Washington. They include tax credits and cheaper mortgages for home buyers as well as leaning on lenders to rewrite mortgage terms for struggling borrowers. But maybe we should ask what, exactly, fixing the housing market means--and prepares ourselves for the limits of what these policies can actually accomplish.

Congress passed a bill last July to help the housing market; in an effort to churn demand and stabilize home prices, the bill created a $7,500 tax break for first-time home buyers. It also created a program to stop foreclosures. Bottom line: only 25 loans have been rewritten.  In December, houses sold for 15% less than they did a year earlier. Says Wellesley College economist Karl Case: "Let's not delude ourselves into thinking we're driving a speedboat when we're driving a tanker."

 Most proposals on the table are designed to boost demand without distorting the market and at the same time restrain supply by keeping people in their homes. The core issue is that there aren't enough people buying houses. Usually when price goes down, demand rises, but in the housing market, falling values make potential buyers fearful, sending them to the sidelines as they wait to see how much cheaper homes will get. If we could restore buyers to the market, the thinking goes, prices would stabilize, delinquent borrowers could sell instead of falling into foreclosure which is undeniably hard to stop, and the value of the mortgage-related securities contaminating our financial system would stop being such a mystery.

 Ideas aimed at kick-starting this process include giving everyone who buys a house a tax credit worth 10% of the purchase price and driving down mortgage rates--perhaps to as low as 4%. Nearly one-fifth of all borrowers owe more than their house is worth. At the same time, some houses are still overvalued. Economists disagree by how much, and the answer changes from region to region. Houses in Cleveland are undoubtedly cheap. They could use some new home buyers there. In some ways, proposals to stimulate the housing market aren't really aimed at bringing in new buyers. Extending tax credits to people selling one home to buy another and letting homeowners use cheap mortgages to refinance won't get rid of excess housing inventory. These policies are meant to do something else: stimulate the economy by delivering money to homeowners. The other core issue is that too many people can no longer afford their mortgage. Maybe they took out an adjustable-rate loan that has reset higher, or they lost a job in the slowing economy. If we could stop the cycle of defaults and foreclosures, the thinking goes, we could prevent deeply discounted, bank-sold homes from flooding the market, keep losses from further impairing mortgage-backed securities and preserve property values. That's how we wind up with ideas like paying mortgage servicers to make loans more affordable and changing the bankruptcy code to allow judges to reduce the amount borrowers owe their mortgage company.

 "We need to recognize the goal is not to keep everyone in their houses for as long as possible," says Edward Glaeser, professor of economics at Harvard University.

 But there are also plenty of people who might be able to keep their homes with a lower interest rate or a longer loan period. "Servicers don't have the right incentives," says Christopher Mayer, professor of real estate at Columbia University's Business School. Cutting them a check in return for a modification of the loan, or trumpeting their legal authority to do so, is meant to prime the mortgage-rewriting pump, as is letting bankruptcy judges revise mortgages.  Part of what drives up the redefault rate, though, are changes that don't lower, or may even increase, a borrower's monthly payments. A targeted tool like loan modification is probably a more useful allocation of resources than a blanket policy like cheaper mortgages. Make Some Owners Renters

 Yet no policy can change the fact that both property prices and home-ownership rates went off the charts. 

Neil

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

Investors in foreclosures hold opposing views on what they deem an acceptable rate of return for the inherent risks. So if you think you can sell a property for $200,000, you'd better make sure that your bid, plus repairs and carrying costs, doesn't exceed $140,000. When a creditor files suit to reclaim a property, this becomes part of the public record. You can discover postings of pending foreclosure suits (or notices of delinquency in some states) at the local courthouse. Ward Hanigan of San Diego, who moderates a foreclosure discussion group at foreclosureforum.com, advises that you check a local legal newspaper, preferably a daily.

 The listings give the location of the property, along with the names of the defaulting party and the lender. Thomas and Tammy Plaster, foreclosure investors who own a construction business in Conroe, Tex., say it's best if you track foreclosures in an area that you know well, such as the area where you live. You'll want to visit the property to better assess its worth. ``It's a good idea to estimate worst-case scenarios of what's inside,'' such as crumbling walls and leaky plumbing, says Robert Bruss, a syndicated real estate columnist who has profited from buying and selling seized properties.

 To further vet the property, you'll have to perform or commission a title search that will show whether other mortgages or liens are due. Senior mortgages or deeds--loans taken out prior to the one in default--are your responsibility if you buy the property. Second mortgages which are Junior loans are wiped out upon foreclosure of any previously established loan. Overdue taxes always carry over.

 If you are planning not to stop the foreclosure and you should prepare on selling the property for quick profit, you'll need to calculate the carrying costs and sale expenses as well as actual property value and repair costs. You must pay title and transfer fees, and don't forget about interim property insurance. The Plasters add 5% to 10% for unexpected costs. Depending on state laws, borrowers have anywhere from 21 days to 12 months following the lender's initial legal action or notice of default to pay up and avoid losing the property in a foreclosure. Hanigan of Foreclosureforum.com prefers to bid at foreclosure  sales because he gets the property free and clear. The lender's attorney or trustee starts the bidding with the amount owed on the property, plus the legal and administrative costs associated with foreclosure. That's the only bid the lender will enter, because it isn't allowed to profit from a foreclosure sale. Top the asking price by as little as a penny, and the property is yours. If there's a bidding war, the defaulting borrower gets the amount above the lender's bid.

 As with any property, lenders will finance your purchase of a foreclosure if you can show it's a good deal, you have good credit, and can demonstrate your ability to repay the loan. If no one bids over the asking price, the property goes to the lender. Lenders also often offer favorable financing and may waive some closing costs. Most banks list foreclosures with real estate agents who post them on the Multiple Listing Service (MLS), a directory available to realtors. Fannie Mae and Freddie Mac use realtors, too, but also list properties on their Web sites.

 If the loan on a home was guaranteed by the Federal Housing Administration (FHA) or Veteran's Administration (VA), those agencies acquire and market the property after foreclosure. They usually sell it through a real estate agent ``as is,'' without warranty, whereas banks and secondary lenders usually fix up the place so they can ask a higher price.

 Neil

Neil