Mortgage Fraud - The Appraiser's Role

Practicing real estate law in California can be a fun and diverse body of work.  The downside is seeing the surge in mortgage fraud and how it especially preys on elders.

As real estate values have risen, so too has the wealth of elders who have owned their homes for many years.  Additionally, as they have retired from the work force and have more time -- they are more likely to answer telephone cold calls or read their "junk mail" advertising mortgage schemes. 

Often, elders are receptive to the thought of converting the equity in their home into an income stream and think the "reverse mortgage" sounds right for them.

Not surprisingly, most of the time the "reverse mortgage" solicitication is an outright scam, where the fraudster takes title to the home, either in his or her name or LLC or through a straw buyer with good credit.  The elder is fed a volume of confusing information and at close of escrow believes he or she is going to receive payments from this "reverse mortgage loan" or that somehow the home will be deeded back to them.

This is where the appraiser fraud can come in.  With the straw buyer, the fraudsters are treating it as a new purchase, and in an effort to "double dip" will often try to get a credit back in the sales proceeds.  In some cases, we've seen as much as $50k back in a credit to the buyer.  How is that possible? Well, an inflated appraisal and sales price is usually the way to ensure that the property will appraise to value so that the lender's underwriting loan-to-value guidelines are met.  Even without the context of financial abuse of an elder, this is a common loan fraud scheme to squeeze money from the lender.  The new buyer will lose it in foreclosure if they can't afford to service the payments. 

After the Savings & Crisis, the bailout included strict legislation to deter appraisers from defrauding banks-FIRREA.   If appraisers are implicated, they will face stiff civil and criminal penalties.

After the S&L Crisis, the Appraisal Foundation was created.  They promulgated USPAP, the standards that are the generally accepted standards for professional appraisal practice in North America.

For single family residential real estate, the cost of an appraisal is generally less than $500.  For a certified MAI appraisal of commercial property, the cost is usually more than ten times that--in some cases $6,000-$8,000 for the appraisal report.

If at closing, you see an excessive amount of fees going to the appraiser, that is a red flag that the appraiser may be involved in the fraud.  Some fees are paid outside the escrow so it can be difficult to tell whether the appraiser was receiving extra compensation. 

The biggest question is whether the appraiser was merely negligent or whether they intentionally made a false appraisal.  That often can fall into the category of "I know it when I see it."  A property worth $300k, appraised at $650k exceeds the acceptable range of error.  A property appraised at $850k, when all homes in the neighborhood are comped at $750k is also difficult to treat as mere negligence.  An expert appraiser can testify as to what factors can make that higher value acceptable or unacceptable.

Bottom Line for Borrowers: Beware of loan products you do not fully understand.  Work only with licensed brokers in good standing that come from a reliable referral. Most importantly, in seeking out a reverse mortgage, make sure to go first to a large reputable bank for education about how the product works. 

Bottom Line for Private Money Lenders: Be skeptical of the appraisal report.  Your underwriting standards should involve more than one number in the appraisal report for you to calculate your LTV.  Working with a reputable broker will allow you to ask the questions that make sense--borrower's ability to repay, reliability of the appraiser, etc.

Comments

[Sylvia Williams]

You said: "Not surprisingly, most of the time the "reverse mortgage" solicitication is an outright scam,....." Nothing could be farther from the truth. That is totally false. I have been in the reverse mortgage industry for 3 years and not once have I encountered a "scam". Sure, it can happen, but with the mandatory HUD counseling, the strict regulations, etc., it is VERY rare. Please don't scare seniors away from reverse mortgages. I have over 200 clients and each and every one of them would tell you that the reverse mortgage changed their life and that it was a "God-send".

[Julia M. Wei]

Sylvia - have you been sorting through my mail? If so, you would see that many of the solicitations I receive that actually use the term "reverse mortgage" are not accurate and are actually a very large loan. I don't offer judgment on the actual reverse mortgage loan product--but many people do not meet the criteria, ie, no debt against the home in order to qualify and yet are solicited despite the fraudster knowing there is an existing deed of trust against the home.

[John]

Hi, nice blog. Pretty informative. But,before you start signing papers with a broker, it is important to discuss fees. Brokers work on a commission basis and often receive lender fees. The broker is usually paid by the buyer or lender. You can pay the broker with cash, rebates, or proceeds from your loan. The fees are added to your total amount.

thanks, john http://www.thejohnbeck.tv

[Cochise]

For single family residential real estate, the cost of an appraisal is generally less than $500. For a certified MAI appraisal of commercial property, the cost is usually more than ten times that--in some cases $6,000-$8,000 for the appraisal report.

THERE IS NO SUCH THING AS A CERTIFIED MAI APPRAISAL!

If you want more information on mai appraisers please visit http://www.hwforums.com/2191/

[Julia M. Wei]

Cochise - technically you are correct, it is not the report itself that is certified. The appraiser has earned an MAI designation - see
http://www.appraisalinstitute.org/about/designations.asp

[peggy]

American Mrtgage has called me reccommmending reverse mortgage. I have 1st and 2nd mortgage and my house will be paid for in ten years, however not having a house payment is tempting, tho I do not qualify for cash or very little. How do I know if this is the rigth and reputable thing to do......

[Cochise]

Hi wei,
I see you have not visited /2191. You say "earned" I was once part of the orginazation and believe me it is more like "purchased" than earned.

[Cochise]

Peggy is exactly right. The Appraisal Institute is a Scam and a Fraud. I believe two their appraisers in Cali went to JAIL this summer. I am still trying to locate their names. Maybe wei knows!

[Anthony Blackburn]

Nice article. Contrary to some comments, reverse mortgages are the perfect vehicle for elder fraud and abuse. it has happened in my family. On another note, many lenders utilize appraisers to review and do QC work on other appraisers appraisals. This protects the lender from overvaluations and fraud. If a family member suspects fraud, they can contact an appraiser that specializes in Appraisal review and contract them to look at the appraisal. Most times, however, this will be after the loan is closed. Cochise is right. MAI's are actually, in my experience, MORE likely to provide a lower quality residential appraisal, as they tend to be focused on commercial appraisals.

[David Kessler]

Great article profiling how vulnerable our senior citizens are to these schemes.

My name is David Kessler and I am a national trainer/consultant on exploitation of the elderly.

Please visit my web site at:

www.ProtectingTheElderly.com

If I can ever assist in any manner on these crimes please contact me.

Thank you,

Dave

[Cochise]

I am still on the fence about this RM thing. What are the Tax Implications?

[Cochise]

More on the Appraisal Institute and TAX FRAUD.

Exempt Purposes - Internal Revenue Code Section 501(c)(3)

The exempt purposes set forth in section 501(c)(3) are charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals. The term charitable is used in its generally accepted legal sense and includes relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; erecting or maintaining public buildings, monuments, or works; lessening the burdens of government; lessening neighborhood tensions; eliminating prejudice and discrimination; defending human and civil rights secured by law; and combating community deterioration and juvenile delinquency.

The Appraisal Institute is being ably
represented in these ongoing talks by J. Richard Donahue, III, MAI, Walter Carpenter, Jr., MAI, Alan
Hummel, SRA, Oscar E. “Bud” Kunkel, SRA and Matthew Smith, MAI, SRA." (Hampton Roads Chapter of the Appraisal Institute
Residential Associates’ Newsletter, Summer 2007)

[san diego real estate]

Pretty informative post. But,before you start signing papers with a broker, it is important to discuss fees. Brokers work on a commission basis and often receive lender fees. The broker is usually paid by the buyer or lender.