Matrix Blog

Law, Ethics & Fraud

eBay: Bid On Your Real Estate Appraiser Apprenticeship Anywhere in USA

August 8, 2005 | 11:30 am |

The following eBay post for an appraiser apprentice position [Note: PDF] was found on Ann O’Rourke’s Appraisal Today‘s email blast.

Can the standards of the appraisal profession drop any lower? The inference here is that you become a form-filler with minimal effort. Amazing!

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Mortgage fraud huge in Florida, FBI report says

August 8, 2005 | 10:41 am |

Florida’s red-hot real estate market may have a serious downside.

“Research shows that one-third to one-half of appraisals are overpriced, and the problem is endemic in Florida,” says John Taylor, president and chief executive of the Washington, D.C. based National Community Reinvestment Coalition.

“It’s like a time bomb,” says Alan Hummel, government relations chairman for the Appraisal Institute and an appraiser in Des Moines, Iowa. “There is so much out there, but we don’t find out about it until down the road when property owners start having problems.”

Lack of structure and accountability in the valuation process promotes fraud.

When you have a lending system where the appraisal process is not treated as a “sacred activity,” where the results are respected, believed and followed, then money talks and lenders find appraisers who will play the game.

It’s just that simple.

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Liability of Appraisers Who Help Understate Tax Liability

August 2, 2005 | 8:24 am | |

On the Tax and Legal update section on ERC’s web site, there is reference to an IRS memorandum that discusses applying penalties to appraisers who knowingly manipulate appraisals to help an individual pay less tax. Examples of appraisals done for tax purposes include estate tax, gift tax, facade easements and charitable contributions.

the IRS Office of Chief Counsel [note: pdf] discussed the possible application of section 6701 of the Internal Revenue Code to appraisers. Section 6701 imposes a penalty on anyone who aids or participates in the preparation of any return or document and has reason to believe it will result in the understatement of someone else’s tax liability.

What’s wrong with being held accountable for the value estimate? Nothing, except…

…and here’s the caveat, the person requesting the appraisal should be on the hook as well. The tax attorney or accountant is often the person trying to influence the appraiser. My problem with this IRS memo, is that the appraiser is left twisting in the wind.

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Appraiser Identity Theft

July 29, 2005 | 11:15 pm |

The Illinois Coalition of Appraisal Professionals commissioned a study on identity theft and resulting article that has been widely posted on the internet on appraisal sites. Here is a copy [note: pdf]. The letter written by Brian Weaver, a practicing appraiser for over 25 years and worked as an investigator for the Office of Banks and Real Estate in Illinois. He is referring to a problem that is manifested by the state agencies that publish the license numbers of appraisers on the Internet and the appearance of license numbers on all appraisal reports.

This is an excerpt of a letter written by Chip Wagner, IFA, SCRP, ERC’s 2005 Appraisal Foundation Advisory Council Representative to the Worldwide Employee Relocation Council to bring attention to the RAC membership an issue that is affecting the Appraisal Community.

There is an alarming trend of the fraudulent use of appraiser’s license numbers and unscrupulous individuals stealing the name and license or certification number to use on fraudulent appraisal reports. As you can see from the [Brian Weaver] article, over $40 Million in forgery has been uncovered in Illinois, and it is expected that this might be only the tip of the iceberg.

Online appraisal directories, Department of State Web Sites, Appraisal Reports and printed appraiser directories all publish our license numbers. There is no need to disseminate this to the public. Posting categories would replace the need to post numbers since [honest] users of these directories only look to see the license number and often don’t know the classification.

  • Certified General
  • Certified Residential
  • Licensed
  • Trainee

When Chip brought this matter to my attention, my first reaction was “well the Department of State publishes our numbers online for all to see, and most states do the same thing.”

Chip’s response was:

Let me advise you, this is all changing based on the publicity that what is happening in my state is taking place. My state has access to this information password protected now. When I first saw this article on appraiser identity theft, I told my state appraisal board the same thing “this is available on the Appraisal SubCommittee’s website.”

I have been told by my state appraisal director and appraisers on the board that this will be changing because of what is happening in my state.

After thinking about this further, I realized this is a natural extension of identity theft from stolen credit cards and social security numbers. Today, the proliferation of Appraisal Management Companies have virtually eliminated the one on one relationships lenders had with their approved appraisers, in fact 10 years ago, a lender could tell when your signature was forged. Now its a non-issue, they have no idea what your signature looks like.


The first thing to do is remove your license numbers from your own web sites…

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Interagency Statements on Independent Appraisal and Evaluation Functions

July 29, 2005 | 9:51 pm |

The Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC), the Office of Thrift Supervision (OTS), and the National Credit Union Administration (NCUA) were concerned enough on several appraisal issues that they released a joint statements in 2003 and 2005.

The October 28, 2003 statement addressed concerns over the independence of appraisers. [note: pdf].

Highlights…

The agencies’ appraisal regulations address appraiser independence and require that an institution, or its agent, directly engage the appraiser. The only exception to this requirement is that an institution may use an appraisal prepared for another financial services institution, provided that the institution determines that the appraisal conforms to the agencies’ appraisal regulations and is otherwise acceptable. Independence is compromised when an institution uses an appraiser who is recommended by the borrower or allows the borrower to select the appraiser from the institution’s list of approved appraisers.

The March 22, 2005 statement addressed concerns over the transferring re-assigning appraisals [note: pdf].

Highlights (Q & A Format)…

  1. May an appraisal be routed from one lender to a regulated institution via the >borrower?

Answer: A regulated institution cannot accept an appraisal from the borrower unless the regulated institution can confirm that the appraisal was in fact ordered by another regulated institution or financial services institution. In accepting the appraisal, the regulated institution must also confirm that the appraiser is independent of the transaction and that the appraisal conforms to the agencies’ >appraisal regulations and is otherwise acceptable.

  1. Can a borrower pay the appraiser directly for an appraisal that is ordered by the lender?

Answer: Since the regulated institution has engaged the appraiser for its services, the regulated institution should be the party to remit payment to the appraiser. The regulated institution may seek reimbursement from the borrower for the cost of the appraisal. However, the borrower may not recommend an appraiser to the institution or select the appraiser.

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OFHEO Finalizes Regulation on Mortgage Fraud

July 29, 2005 | 1:47 pm |

From their press release: “The Office of Federal Housing Enterprise Oversight (OFHEO) has finalized for publication in the Federal Register a regulation requiring Fannie Mae and Freddie Mac (the “Enterprises”) to report mortgage fraud or possible mortgage fraud in a timely fashion.” OFHEO is the regulatory oversight agency for GSE’s (Government Sponsored Enterprises) like Fannie Mae and Freddie Mac.

Complete text of the final regulation can be found here. [note: pdf]

Appraisal fraud is now considered within the definition of mortgage fraud. This rightfully defines those who pressure appraisers to reach a specific value or they won’t receive future business as committing a fraudulent act.

Excerpt… § 1731.2 Definitions.

(c) Mortgage fraud means a material misstatement, misrepresentation, or omission relied upon by an Enterprise to fund or purchase — or >not to fund or purchase — a mortgage, including a mortgage associated with a mortgage-backed security or similar financial instrument >issued or guaranteed by an Enterprise. Such mortgage fraud includes, but is not limited to, a material misstatement, misrepresentation, >or omission in identification and employment documents, mortgagee or mortgagor identity, and appraisals that are fraudulent.

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The Responsible Lending Act (HR 1295)

July 27, 2005 | 10:12 pm |

The Responsible Lending act introduced in the house this spring addressed the issue of appraisal pressure. The section of the bill to refer to TITLE IV–APPRAISAL ACTIVITIES primarily addresses predatory lending in the sub prime market.

The appraisal portion of the bill has been covered in the media and here and here and here and here.

You get the point.

This was probably in response to a rash of appraisal fraud that has been happening in then the relaxed lending guideline environment, proliferation of sub prime lending, increased wholesale mortgage origination, specifically in markets like the Poconos, which was highly publicized.

The bill provides terminology that specifically equates appraiser pressure to a criminal act. Its a giant step in the right direction but at the end of the day, we believe nothing will change to prevent overall fraud in the industry within the bill’s current format.

With 72,000+ licensed appraisers nationwide, state enforcement is limited at best. The average enforcement department for each state is something in the order of a few staff members and limited funds.

The government is currently analyzing the appraisal industry and will produce a detailed analysis. Hopefully, it will show that the lack of separation between the sales function and the underwriting function promotes fraud. In other words, those individuals paid on commission, should not decide which appraisers get the assignment.

One of the best descriptions of the current problem can be found from the think tank DEMOS.

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Testimony Before the Subcommittee on Oversight

July 26, 2005 | 8:45 am | |

Committee on Ways & Means :: U.S. House of Representatives : Testimony

Someone from the research staff of the House Ways & Means committee actually called me on this issue as well and I volunteered to testify. I wanted to discuss the problem of the lack of independence of the appraiser but they wanted me to name names. They completely missed the point. Its not specific individuals, its the way the industry is set up. I got the distinct impression from my conversation that the committee already knew what they wanted to hear. They went wih an appraiser from Virginia, David Lennhoff, who didn’t name names either, but basically said that the 10% rule – of – thumb adjustment is not valid.

Most appraisers who do facade easement valuations are using 10% to 15% adjustments as a guideline which originates from the now infamous original Primoli Letter [pdf] , since replaced by a revised version from the IRS [pdf] that omits the 10% to 15% verbage. Since it could be interpreted that the IRS seems to be re-writing history, I suspect that is the motivation for the National Architectural Trust to document the changes in policy by the IRS on this matter [NAT].

The Problem: Most appraisers are simply performing a valuation and making this discount. The problem is that the disclosure of whether the seller has taken advantage of the deduction is not available to the public, in a practical manner. The inability to use empirical data (because it doesn’t exist) provides the classic catch-22. You need empirical evidence to appraise the first property in your market, but yet the IRS says you can’t appraise without using empirical data. However, there is no definition as to what constitues empirical evidence. Using court cases, sales data, equity stock trends, what conference wins the Superbowl (well, thats a stretch) might be interpreted as appropriate since they are all empirical evidence.

Our firm grew disaffected as homeowners caught on to the process and pressured appraisers to appraise the properties on the high side to get a bigger deduction. We refused to do that so we stopped getting this type of work. We were openly complaining that there was a problem, but from their perspective, they do not have the ability to police the appraisers.

Who is going to say the value is too high? No one. There is no review function or policing of these reports done for any facade easement organization. It falls in the lap of the IRS agent during an audit.

The loss in tax revenue due to inflated appraisals has got to be staggering to the Treasury. Many appraisals are inflated because there is no oversight and like the wholesale lending process (mortgage brokers), the benefactor picks the valuation expert. And once again, appraisers, including good appraisers who don’t play this game, will be blamed.

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Form-Fillers Wanted

July 18, 2005 | 9:29 pm |

Appraisers have been relegated to form-fillers. The easiest source of new business is the mortgage broker (wholesale lending) pipeline. I don’t want to stereotype all mortgage brokers because there are a number of good ones out there. The appraisers who deal with this client base are in a catch-22. Its simply common sense that an appraiser who comes in “low” on a refinance valuation or “kills” a sale, won’t get repeat business from that mortgage broker. Afterall, the mortgage broker is paid on commission. Appraiser makes number, gets more business. I often chuckle when appraisers are described as a “good” appraiser. That usually means that you “hit the number.”

Here’s a recent letter to the editor on this subject as seen in the New York Times:

July 3, 2005

A Disservice to Clients

To the Editor:

I am writing in response to the article that appeared in the Real Estate section concerning appraisals that don’t match the sales price (“When the Numbers Don’t Match,” May 29.).

Mortgage brokers who order appraisals until they get one that works for them are doing a disservice to their client, not to mention the lender.

It would be interesting to know how many mortgage brokers engage in this practice without disclosing their actions to their clients. If the appraisal comes in low and the mortgage broker orders another appraisal that makes the number, the question has to be asked why one appraiser could make the deal and the other couldn’t.

Is it possibly because one appraiser has taken sales outside the subject’s market in a higher-priced market or may have misrepresented the size or condition of the comparables?

The appraiser’s job is to provide the lender with an opinion of value supported by the market. The appraiser gets paid whether or not he makes the deal. The mortgage broker gets paid only if he makes the deal.

The appraiser does not have any interest in killing the deal. After all, when the appraiser makes the deal, he or she doesn’t have to take irate calls from the buyer, the seller, the sales broker or the mortgage broker. Plus, he doesn’t make any enemies, stays on the mortgage broker’s list of approved appraisers and remains on good terms with the sales broker.

Scott H. Gallant

Park Slope, Brooklyn

The author is a real estate appraiser and consultant.

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The beginning of the end, or how this mess got started.

July 18, 2005 | 9:13 pm |

It amazes me how flawed the structure of the wholesale lending process is. Someday during an economic downturn or future lending crises, this will come out with the wash. Until then, its status quo.

How it began…

As banks floundered in the early 1990’s during the recession, the non-revenue departments were cut back, which included…you guessed it…appraisal departments. The order and review function, which requires administrative overhead, was shifted to mortgage brokers who would bear the staffing risk. Mortgage brokers are generally paid a commission of 1 point, or 1% of the mortgage. The appraisal fee, which generally starts at $300 to $500, is either paid in the borrower’s application fee or the absorbed by the mortgage broker.

In relatively short order, the wall between the sales function and underwriting essentially went away and so did the buffer between bank loan reps driven by a commission incentives and the appraiser, who is supposed to be assessing the collateral for the lending institution.

Large appraisal factories sprang up across the country hiring trainees who would simply fill out appraisal forms and make the deals. Without inhouse appraisal departments to review these reports, they were essentially accepted at face value. Many experienced firms either shut down or moved into other areas of valuation.

Why does this matter?

Lets count the ways.

  1. The borrower is under the assumption that the licensed or certified appraiser is independently assessing the value.
  2. Lending institutions have no idea what their collateral is really worth and the implicit risk to their portfolio.
  3. These lending institutions are government insured.
  4. Guess who pays the bill in the next banking crises?

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