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Posts Tagged ‘Appraisal Process’

Mortgage Fraud: Hiding True Occupant Of Apartment From Lender [part 6 of a series]

September 22, 2005 | 8:03 pm |

Today our firm got a call from a major national lender and was asked to change the occupant noted on the appraisal from tenant to owner. It wouldn’t fit the loan package they had arranged for. This particular national lender makes requests like this all the time.

The people making the request are usually clerical and have no idea what they are really asking from us. We get the impression that appraisers usually comply with these sort of requests in hopes of maintaining the relationship.

The client pressed hard for us (politely) to change the occupant information, even when we clearly explained why we couldn’t and that what we were being asked to do was fraudulent.

For this assignment, the tenant’s lease expired in 2 months. We gave the lender 2 options:

1: We change nothing in the report
2: We make the effective date for two months from now when the lease expires, disclosing that we inspected it two months prior and that the unit was occupied by a tenant with the terms of the lease disclosed, that the condition was unchanged between the effective date and the inspection date, all as a extraordinary assumption. (phew!)

They called back an hour later and chose selection 2.

Just another day…

Hello out there…where are the bank regulators?

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Data Dance

September 20, 2005 | 10:02 pm |

In most cases, when we are retained by a lender to do an appraisal we have no idea who the property contact is. We are given a name and a phone humber, but we don’t know if that person is the owner, broker, buyer or seller of the property. Knowing who we are calling would undoubtedly make the process quicker and smoother.

Recently I was given the retail tenant as the property contact for a mixed-use building. Took about a week to find this out, since he had no real interest in returning calls. We were finally able to pin him down for a site visit, only to find out when we got there that he was the tenant, had no idea why we were given his name, and had absolutely no knowledge of upper floor leases and operating history. Not terribly pleasant to deal with either.

Trying to get the property data (i.e. leases, expenses, floor plans, construction costs, etc.) needed for an assignment has become one of its biggest challenges. (This week we were referred to four different people in an attempt to get construction costs for a new development project.) While we do the property data dance, the clock is ticking away.

How’s this for an idea? When the appraiser is engaged for the assignment, the lender makes the data request and the “clock starts ticking” once it’s received by the appraiser. The borrower should be advised by the lender that the closing may be delayed if they are not responsive. This would also alleviate the impression that many borrowers get that the bank’s right hand doesn’t know what the left hand is doing.

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Centralized Underwriting: Locational Disconnect

September 16, 2005 | 8:27 pm |

For years, national lenders have been moving towards centralizing the review and underwriting function. This has also brought in appraisal management companies, whose sales pitch is primarily convenience and cost savings. I have always maintained that these centralized operations cause the lender to lose touch with their local markets. Every market has certain housing characteristics and quirks.

Angelo R. Mozilo, the Chairman and Chief Executive Officer of Countrywide Financial Corporation who was interviewed on 06/03/2005 by the NYSE made specific references to the practice of centralized underwriting.

Our competitors have decided that the most efficient way to operate is to centralize. So if you buy a co-op in Manhattan that loan may be processed in Des Moines, Iowa. If you deal with Countrywide that loan is processed pretty close to where your co-op is in Manhattan. We believe that our operation should be local even though we have national power and national strength. All of our operations, they’re very localized. Because each of the communities in The United States, whether it be Manhattan, New York or Manhattan, Kansas are very, very different in their needs. And house values are very different. Cultures are very different. And we want to make sure that our operations matches the needs of the community.

[Soapbox] The beginning of the end, or how this mess got started.
[Soapbox] Outsourcing Codeword: AMC

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Real Estate Day Traders

September 16, 2005 | 8:07 am |

I am now at the age where the doctors and lawyers that I meet seem awfully young, however, some of the recent real estate developers I have encountered seem even younger.

Many of today’s future-Donalds are first time developers, often barely out of college and armed with some seed money from friends and family, or from a couple of good years on Wall Street. Like the day-traders of the 1990’s, this real estate boom makes everyone, including these noveau-developers, seem brilliant, since all they have to do is convert an existing building into condominiums, and they walk off with a profit and seed money for the next project.

What scares me is how so few of these people entering the development market today have an understanding of basic real estate fundamentals because they were still in elementary school during the last down-cycle. Valuation and analysis of these properties take a back seat to verve and bravado.

There is a limited collective memory of what can happen when things don’t go well. Does anyone know how many day-traders from the late 90’s are still trading?

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In South Korea, Appraisers Are More Corporate In Seoul

September 15, 2005 | 12:46 pm |

In South Korea, there are 2,200 professional appraisers (as of April 2005), the vast majority of whom work in large appraisal corporations (with a minimum of 60 appraisers). Unlike the US, where the profession tends to be made up of small appraisal practices, the South Korean appraisal firms need to be large in order to be credible and to qualify for government work.

The South Korean government is one of the largest buyer of appraisal services in the country, particularly for property asessments. The fees are set by the government based on the value of the property and are, for the most part, generous by current US standards. (The fee for a $10 million property would be about $7,700.) However, the South Korean appraisers have to take the good with the bad, and are often called on to appraise properties at a loss. The fee for a $500,000 property, about $550.

[Soapbox] From Rubble to Rubles

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Real Estate Taxes: The Size Of Homes Expand And Contract

September 15, 2005 | 7:54 am |

This article, Measurements Amiss: Size matters–on your property tax bill struck a particular chord with me, both as an appraiser and a homeowner.

The square footage of properties found in assessor records may be well off the mark. Appraisers should use caution when pulling comps from town hall. Public records are not always accurate. After driving by the comp, if something doesn’t seem right, call the broker who sold the property (you should be doing this anyway).

Square footage is an important consideration for homeowners as well because it affects your tax bill. One of the easiest things to look at is the size of your home versus the size recorded with your town hall. Its a tangible amenity and much easier to make a case for getting your tax bill reduced. With the explosion of home additions, there is ample opportunity for errors in the tax records.

Although this pertains to a commercial building, there’s that old Manhattan joke that the “Empire State Building is more than twice as large as originally constructed.”

Concern over square footage doesn’t just apply to single family houses. Condos also see significant inconsistencies. The developer may include varying parts of the exterior space, such as a terrace, in the total square footage of the apartment, depending on the municipality. While such an amenity provides additional value, there is not an apparent standardization of how much, if any, of these sort of amenities. A small portion or all of this additional area may be included. We have seen condos that must have must have common area included in their gross living calculations. (Its a stretch, but I suspect that was intended to make the price per square foot value appear lower than competing properties.)

There are one family standard measurement techniques set by ANSI and a condo standard required by Fannie Mae which relies in the interior perimeter.

A below grade basement and attic space is usually excluded from square footage. However, there are exceptions. A prior home that I had owned was a Cape Cod style house that had been expanded several times that was lovingly called a “bastardized cape” in that particular market. At least 40 years prior, the attic had been converted to 2 additional bedrooms and a full bath as were most of the other capes in the neighborhood. A portion of this living area should have been considered as part of the square footage which seemed to keep our taxes low as compared to neighboring homes.

[Matrix] Length x Width Is Negotiable

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Feeling The Need For Speed And The Double Standard

September 14, 2005 | 7:32 am |

Our firm just did a desk review for a national lender on a one family property in our market area. This is the same lender that gave me a hard time last month for being too slow and suggested that if we didn’t get the reports in faster, we would be removed from the panel because we are 2 days slower than everyone else.

Yesterday, I reviewed a report done by another firm who is much faster than us. Our firm was actually in several of the comps used and the square footages were grossly understated. The comps were taken from other locations that were vastly superior. The property had significant functional and external obsolescence issues which were not noted in report. The name of this firm is well known in the market for this type of work product, but boy are they fast!

Incidentally the property was over appraised by more than $1.5M for a cash-out refinance. mmmm…48 hours faster….$1.5M over appraised….thats…$31,250 per hour in additional exposure for the lender.

We run across these discrepancies of this size nearly every week. Of course, no one remembers how fast the appraisals were done when the loan goes sour.

The problem is on both sides of the transaction. Large lenders can readily track turn times but have not figured out quality. Not surprisingly, there are many individuals (not deserved of the title “appraiser”) who can meet this need for speed.

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Mortgage Fraud: Customized Time Adjustments To Fit Every Mortgage [part 4 of a series]

September 14, 2005 | 7:09 am |

Yesterday (and nearly every day) our appraisal firm received a fax from a mortgage broker with a checklist. This checklist included all aspects of the loan package that the bank felt needed to be corrected by the mortgage broker. There was only one item pertaining to the appraisal and it was the cryptic:

Appraiser is to remove time adjustments

It never ceases to amaze me how cavalier this type of request is. The underwriter generally has no concept of what they are requesting. Essentially they are asking us to misrepresent the market so that the mortgage can meet their own portfolio criteria by reducing the perceived risk associated with the collateral. Isn’t this fraud?

The sad thing is that many appraisers, in order to keep their relationship going, will simply comply. We see this frequently when we do appraisal reviews. The same appraiser will tell Bank A that the market is flat while Bank B gets a report on another property in the area that the market is rising. The adjustments are made up under other amenities so the value is the same and everyone is happy. Isn’t this fraud?

A few years ago, a local lender issued a policy forbiding time adjustments. I sent them a letter explaining that this was unethical and that this was an underwriting policy, not an appraisal matter and we were sorry but we would be forced to resign from their appraisal panel. Since we were their primary and most trusted appraiser, they exempted only us from the policy. Of course, other members on the appraiser panel complied so they could continue to receive work.

Just imagine if all appraisers withstood this systematic pressure? Of course its important to remember that it is unfair, unethical and probably illegal that we are put in this position in the first place.

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Fee For Service Armageddon: How Low Can You Go?

September 13, 2005 | 8:56 pm |

From the Movie Armageddon – actor Steve Buscemi says, as they are sitting in the Space Shuttle on the launch pad:

You know we’re sitting on four million pounds of fuel, one nuclear weapon and a thing that has 270,000 moving parts built by the lowest bidder. Makes you feel good, doesn’t it?

The commercial appraisal industry has evolved from a group of professionals providing critical input for underwriting or other decision making to a pure commodity. In retaining the services of an appraiser, the basic theme is “the low fee takes it.”

These buyers of appraisal services either cannot distinguish a good report from bad, or simply don’t care. Therefore, most lenders – notice that I didn’t say all – will make their selection based on that person that is willing to sell his services for cheapest fee.

Can you imagine selecting your cardiologist or divorce lawyer using the same criteria?

With the advent of on-line bidding systems, lenders can now solicit bids from a dozen or more firms, which inevitably places even more downward pressure on fees.

The irony is that the same groups that make an entirely fee-based decision are the ones lamenting the dreadful quality of appraisal reports that are the norm today.

HmmmI wonder if there’s any relationship there?

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Bill Getting Eaten By Predatory Lending Concerns

September 8, 2005 | 11:07 pm |

Officials from 4 states today came out agains the pending Ney-Kanjorski bill would weaken laws against predatory lending.

“The Ney-Kanjorski bill pending in Congress and supported by much of the lending industry would gut the strong laws in these states. Another bill, sponsored by Rep. Miller of North Carolina and supported by consumers and civil rights groups, would let states keep strong laws and protect their consumers.”

I do find it odd that the lending industry is nearly unanimously in favor of more restrictions (this bill) since subprime lending has been very profitable for many. The appraiser component of the bill, is more of an empty but magnanimous gesture. In a prior post, I felt that the bill has language intended to protect appraisers from pressure, but the reality is that there are no real preventative measures included. In other words, nada.

See: [The Responsible Lending Act (HR 1295)]

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Neutral Is A Place I’d Rather Be

September 7, 2005 | 11:12 pm |

Its late, I’m tired, and I’m thinking, what type of appraisal work do I enjoy most?

A neutral appraisal in a divorce case. Really?

In divorce matters, appraisers have the opportunity to build a business that is less dependent on interest rates.

Thats my mantra – focus on business opportunities that will keep the volatility down and most importantly, find a client base that appreciates your expertise.

Mortgage related business is generally very easy to get. However, the margins are low, turn times are fast and the client generally wants a form filled out.

In the New York , the courts refer to an appraiser who is court appointed as a “neutral.” I do a lot of this type of work. I appreciate it because I am paid fairly for my services, I get paid in advance, I usually have several weeks to complete the assignment, and I generally find that attorneys are easy and professional to deal with.

What is a neutral appraiser? Here are some thoughts and guidelines.

  • An appraiser who is hired by both parties, usually ordered by the court, to appraise a property.
  • Neutral means that no bias in any way can be shown to either party, whether actual or perceived. All communication should be with both attorneys only and on a conference call or by email with every cc’d.
  • Neutral means the property should be inspected with either both parties in attendance or neither party in attendance.
  • Do not accept phone calls from a specific party.
  • The fee should be paid in advance so no leverage can be placed over you.
  • The reports should be delivered to both parties simultaneously.
  • The results should only be discussed with both parties at the same time.
  • Remember the goal is to be fair and go right down the middle in every aspect of the case you are involved in.
  • Don’t be afraid to testify, although its rare in neutral matters. I love to. You don’t want the attorneys to be stuck with an expert that won’t go to court. If you have reservations about it, give it a chance. Its not that bad.

How do you develop this business?

Over the years, I have always recommended it to the lawyers or individuals that call me to represent them. Its a compelling argument because it saves each party from hiring their own appraiser. I’d estimate that 90% of the time I make the suggestions, I am proposed as an expert to the other side.

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Mortgage Fraud: Time Adjustments Can Underwrite Reality [part 2 of a series]

September 5, 2005 | 10:22 am |

Freddie Mac’s Weekly Primary Mortgage Market Survey for September 1st shows fixed rate mortgages dropping for the 3rd consecutive week. shows that this trend has continued since the first week of August and mortgage rates took a steep drop after Hurricane Katrina hit. The federal government OFHEO released 2nd quarter housing stats that showed a 13.4% increase in prices over the past year. Granted I have some issues with OFHEO stats, but they do show an important trend.

Then why do most appraisals we review show no time adjustments?

The answer is usually, “the underwriter wouldn’t accept the report with the adjustments included.” However, the sales price or refi estimated value was reached in the final report anyway. How? Other amenities were over or under adjusted to make the number, thats how.

A form of appraisal fraud and appraisal pressure

This a form of appraisal pressure or fraud that occurs so frequently that many underwriters and appraisers don’t even realize that this violates lending and licensing regulations. According to USPAP, the appraiser is not supposed to present a report that is “misleading” to the reader. Characterizing a rapidly rising real estate market as “flat” fills the definition of misleading.

Our firm receives this sort of pressure nearly every day.

The solution: do not remove your time adjustments if they are clearly supported by the market. Time adjustments are an underwriting issue, not a valuation issue. The appraiser is reporting an existing market condition. If the appraiser chooses to comply, then the appraisal must be made subject to a “hypothetical condition” per USPAP.

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