Housing Fraud is Back – Real Estate Industry Intentionally Inflating Home Appraisals

Tyler Durden's picture

Submitted by Mike Krieger via Liberty Blitzkrieg blog,

Almost 40% of appraisers surveyed from Sept. 15 through Nov. 7 reported experiencing pressure to inflate values, according to Allterra Group LLC, a for-profit appraiser-advocacy firm based in Salisbury, Md. That figure was 37% in the survey for the previous year.

 

“If you thought what was happening before was an embarrassment, wait until the second time around,” said Joan Trice, Allterra’s chief executive and founder of the Collateral Risk Network, which represents appraisers employed by lenders and other companies and has been meeting with regulators to discuss concerns about appraisers being pressured into inflating values.

 

– From the Wall Street Journal article: Dodgy Home Appraisals Make a Comeback

When in doubt, just make shit up.

That seems to be the mantra of the U.S. real estate industry. A place where home values must always rise no matter what. After all, there’s nothing better for an economy than pricing out average citizens from their means of shelter.

As the WSJ reports, inflated home appraisals have become such a concern that the Office of the Comptroller of the Currency is looking into it. Which means precisely nothing will be done to stop it. After all, it is official government policy to encourage risky loans to keep housing bubble 2.0 inflated. Recall: Mel Watt, Federal Housing Finance Agency Head, is Pushing Banks to Make Extremely Risky Home Loans.

The WSJ reports:

Home appraisers are inflating the values of some properties they assess, often at the behest of loan officers and real-estate agents, in what industry executives say is a return to practices seen before the financial crisis.

 

An estimated one in seven appraisals conducted from 2011 through early 2014 inflated home values by 20% or more, according to data provided to The Wall Street Journal by Digital Risk Analytics, a subsidiary of Digital Risk LLC. The mortgage-analysis and consulting firm based in Maitland, Fla., was hired by some of the 20 largest lenders to review their loan files.

 

The firm reviewed more than 200,000 mortgages, parsing the homes’ appraised values and other information, including the properties’ sizes and similar homes sold in the areas at the times. The review was conducted using the firm’s software and staff appraisers.

 

Bankers, appraisers and federal officials in interviews said inflated appraisals are becoming more widespread as the recovery in the housing market cools. While home prices are increasing generally, their appreciation is slowing, and sales have been weak despite low interest rates. The dollar amount of new mortgages issued this year is expected to be down 39% from last year, at about $1.12 trillion, according to the Mortgage Bankers Association.

 

That has put increasing pressure on loan officers, who depend on originating new mortgages for their income, as well as real-estate agents, who live on sales commissions. That in turn is raising the heat on appraisers, whose valuations can make or break a sale. Banks generally won’t agree to a mortgage if the purchase price or the refinancing amount is higher than the appraised value.

 

Almost 40% of appraisers surveyed from Sept. 15 through Nov. 7 reported experiencing pressure to inflate values, according to Allterra Group LLC, a for-profit appraiser-advocacy firm based in Salisbury, Md. That figure was 37% in the survey for the previous year.

 

“If you thought what was happening before was an embarrassment, wait until the second time around,” said Joan Trice, Allterra’s chief executive and founder of the Collateral Risk Network, which represents appraisers employed by lenders and other companies and has been meeting with regulators to discuss concerns about appraisers being pressured into inflating values.

 

Digital Risk found that some appraised values were off the mark based on discrepancies that appeared unintentional, though, “at other times, the appraiser’s selection of [comparable properties]…is very hard to justify,” said Thomas Showalter, chief analytics officer at Digital Risk. The firm saw cases where values for decades-old homes were determined based on sales prices for newly constructed ones, and homes blocks from shorelines were compared with waterfront properties, he said.

 

Brandon Boudreau, chief operating officer at Metro-West Appraisal Co. LLC, a national firm based in Detroit, says he and his appraisers often feel pressured by aggressive real-estate agents.

Much of the pressure, appraisers say, is being applied by companies hired by banks to assign appraisal work, known as appraisal-management companies, or AMCs. A much larger share of appraisals have been filtered through these companies since the introduction of new financial rules and other requirements that seek to prohibit appraiser coercion.

 

Tom Allen, who says he has been an appraiser for 44 years, recalled appraising a house in April for about $450,000 for a loan application with J.P. Morgan Chase & Co. About a week later, Mr. Allen, 68 years old, says he received a request from the appraisal-management company to use two different properties as comparables that had recently sold for around $525,000 and $540,000. Mr. Allen says he refused because the homes were larger, in a more expensive neighborhood and built about 10 years after the property in question. Since then, Mr. Allen says he mostly accepts appraisal requests for homes that have several similar nearby sales.

 

A J.P. Morgan spokesman declined to comment.

Of course they did.

Freddie Mac has found cases of appraisers submitting a suspiciously high number of reports in one day, as well as reports for properties in places where they aren’t certified or licensed to operate, according to a spokesman. It has also received tips from employees at lenders and other insiders warning of inflated valuations, he said.

Is there any price in this economy that isn’t completely rigged?

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orangegeek's picture

philly housing index just hit an eight year high

 

http://bullandbearmash.com/chart/philly-housing-monthly-finds-year-high-...

 

central banks are buying up this sector too - yep, we're all convinced - after six years, the recovery is still on

Pladizow's picture

What?!? You mean self interest and human nature dont change - shocking!

quintago's picture

I just discovered yesterday a mortgage put out by BOFA that will allow somebody to borrow 500k for a payment of 700 per month for the next 10 years (in theory assuming rates stay stagnant).

Loan good for up to 2M. That should explain house values.

CH1's picture

Is there any price in this economy that isn’t completely rigged?

On the national, governmental, fascist level? No. Reality has been expelled there. (And it will be an angry bitch when it comes back.)

On the local, small business, black market level? Sure.

zerozulu's picture

well, debt jubilee is the way out.

imaginalis's picture

With loans like that being pushed it makes me think deflation is about to unfold.

Pool Shark's picture

 

 

So, after 10-years of making monthly interest payments, your principal balance is higher.

Great, they're bringing back 'negative amortization' loans.

Idiots...

 

I am more equal than others's picture

 

 

I know this industry well.  I would say that is low - 40%.  I would also say commercial lending is worse.  I would say 70% of the reports have overvalued the property. 

All - and I mean every single one of them - national commercial appraisal firms are corrupt to the core and only care about how fast they can turn their error prone reports in to collect the fee.  Analytical abilities are nonexistent.  There data source is 50% accurate at best.  They know if they keep their client happy they will keeping working for them.  The coming correction will be horrific and made worse by greed and gross incompetence. 

The Proletariat's picture

I don't entirely disagree with the article....however, Joan Trice is a fucking lying cunt that prostitutes herself to "regulators' and "too big to fail banks" whilst throwing "real" appraisers under the bus.

And, in essense, everything is overvalued whne you have a currency that is consistently devalued...

PT's picture

In the old days it was called a "second gear valuation" because the valuer slowed down to second gear as he drove past the house...

booboo's picture

shhhh, I'm selling my home, keep this on the down low. Don't worry, I'm buying gold and a Urban Evacuation Vehicle with the proceeds.

LawsofPhysics's picture

Oh give me a fucking break, "mark to fantasy" accounting is everywhere on Wall Street, D.C. and in corporate America.

Coke and Hookers's picture

"Real Estate Industry"?? There are few things I hate more than this term applied to buying and selling shit.

NuckingFuts's picture

The only thing worse is the 'gaming industry'.  Casinos are no industry

Coke and Hookers's picture

Don't forget the "financial industry".

Coke and Hookers's picture

Ohh I forgot "political science". Any fucking bullshit is science these days. Everything's being pimped up.

Rap "music".

A Nanny Moose's picture

Throw Economics/Economist on that pile as well.

booboo's picture

Yes, even road side fruit vendors are in on the action.

A Nanny Moose's picture

At least the shoe shine boys aren't. Unless you count Jim Cramer.

SheepDog-One's picture

The appraiser gig is a scam, it's pretty much always been like this....you work for the bank, you do your comps, and you better fluff it by %5 or the bank won't be happy.

One Day Only's picture

Not entirely true.  Many FIs use an AMC for their appraisals, which then contract an appraiser to do the job.  My wife is an appraiser, and she's not pumping values, and she's got more requests for work coming in than she can take.  Yeah, we've seen several appraisals that were ridiculous in the amount of shoddy work done, but not every appraiser is pumping up values.  Then again, it says right there on the report "Opinion of Value".  It's one appraiser's opinion, where another appraiser, looking at the same house, may come up with a completely different value.  My wife can back up any value she comes up with by showing her research.  She's not just pulling values from thin air. 

Obaminator's picture

unless your wife is curently valuing homes BELOW other homes in the neighborhood, then her value is....um....how can I say this...INFLATED.

And im gunna go wager to bet, her values at rhe very least MATCH the rest of the comps.

She may be "inflating" home values un-intentionally by the very way the system itself is set-up. I know this sounds horrible and just plain impossible, but when, noit if, this latest round of crap finally has the SHTF moment, she will look back, like so many other pelple I peronally know who were making $$$$$$$ in 2007 now look back and say "Yeah, it really was a completely BS system".

I lost quite a few friends over that breakdown...they got caught up in their own system, and lost 50% of their income when it SHFT'd, lost their houses, etc etc, Still have mine....I was "Prudent", or as they said I was "No Fun" back then. Now they are no fun 5 years into the "Recovery"

So, again, if your wife's valuations are coming in at or close to the other's, then its becuase she is using PREVIOUSLY inflated prices to VALUE the curent property.

Just because some other idiots paid too much recently for a property in now way means other properties are really "Vazlued" higher, it just means the system allows her to make the $$$ higher for a new loan, then when people stop buying and start selling, all those values she did will be...falling. Just like they did starting in 2007 when appraisers were STILL marking properties higher, whike the house down the street went foreclosed...Shhhhhhhhhhh, dont look there, LOOK HERE!

One Day Only's picture

True, but those previously inflated prices were what people paid for them, giving us the market value.  One thing that I found interesting is that appraiser has to 'bracket' values, both on the top line, or the raw sale price of the comp, meaning they have to find at least one comp that sold for less than the subject, and at least one that sold for more than the subject.  They also have to bracket the adjusted values on the bottom line.

In a crazy market like we had in early 2014, it was very difficult to find a top bracket property because market prices were up 10% in just a few months.  Appraisals were often coming in very much lower than the contract price.  I can think of a few appraisals the she did that probably threw a wrench in the deal, or at least casued the buyer to have to come to the table with more cash/equity.  

Appraisers are supposed to (and I stress supposed to) value a property at what the lender would reasonably be able to sell the house for should the borrower default.  It's the realtors that really drive the bubbles.  They're the ones that convince the buyer that their property is a MUST HAVE, all while convincing the seller that their property is falling down around them.  Lenders also play a big part by loosening underwriting standards to approve a borrower.

Are some appraisers complicit in inflating the bubble?  Sure.  But good ones do the job as a true dis-interested third party.  That was the reason for the increase in the AMC industry.  It sucks to squirrel a deal because a value can't be supported, but if you have ethics, you can't let it bother you.

As for the foreclosure/short sale issue, sometimes that's the market.  If an area is rife with 'under-market' sales, that's what a FI will have to compete with if they need to fire-sale a property.  A good appraiser will NOT ignore those types of properties because they're actually supposed to be working for the FI's risk team, not their sales team.  They're supposed to be giving the FI a realistic price should they have to foreclose or short-sale.

Obaminator's picture

I agree, and its exactly in this type of an environment where we have "Perma-Rise" in home prices where valuations keep going up.

This didnt end well in 2007, and house prices then fell for 4 years. During those 4 years, the valuation based on previous sales were actually grossly inflated because by the time the new home could sell, prices actually fell.

Thus, we have All home valuation right now inflated by the very nature of the current scenario. It works until it doesnt. Then everyone burns.

I remember back in the early 90's...the appraisers actually looked for reasons to value your house LESS so the bank could then lend less and force a bigger down payment. Thats when interest rates were 9%, and anything less than 10% down was (outside CA and NY and FLA) literally laughed at. back then and before, except in isolated hot spots, there just were not incentives to constantly have house prices increase 5, 10, 20% per year.

House prices are still, looking at a 30-year income-to-house price ratio, WAY overvalued. If interest rates ever rise, look out below...valuation made today will be as inaccurate as the ones made from 2002 thru 2007, when Everyone said they were good, even the "honest" folks. There simply is no reason for even an honest person to quesiton the system as long as that system is the source of bread, milk, water, and a few carribean cruises.

I may be being a bit cynical here, im just pointing out that using inflated prices to justify the "value" of a house, is a bit like comparing test results of students who cheated :-). The "Value" of a house is quite literally WHATEVER ANOTHER HUMAN BEING IS WILLING AND CAPABLE OF PAYING...NOW. Once there is no longer a person willing or capable of paying NOW and thus demands a lower price, the "value" has just magically fell, and will continue to fall as long as buyers either say no, or simply cannot afford.

This current environment can go on for years, but it will end, with another bang. In the meantime, enjoy the ride :-)

One Day Only's picture

I can't disagree with anything you said.

The word NOW is the important one in your response.  The appraisal is a snapshot based on current market conditions.  Yes, the appraisal will essentially be meaningless when the bubble eventually pops and values tank.  The same could be said for a rising market as well.  If another buyer is willing to pay $50,000 more for the same house in 6 months, today's appraisal is equally worthless.  

My wife works really hard, probably harder than she needs to based on some of the appraisals I've seen that have been accepted, trying to get a good value, but she can sleep at night knowing she's researched her property thoroughly, and can document the basis for her opinion of value.  There's nothing that irritates her more than when the homeowner comes back to the AMC and screams "But the house two doors down sold for a bazillion dollars!  Why didn't you use THAT house as a comp?!".  I've told her a couple times to respond by asking the homeowner to provide their Certified Appraisers License.  She hasn't done it yet, but she's come close...

Basically, appraisals become worthless the second the transaction closes.  

The industry is different than it was 15 years ago when I got into banking*.  The AMC piece of the equation has made things more arms-length, but there are still some FIs that engage their appraisers directly, and those are the ones that should be scrutinized.  

 

*Don't worry, I saw the error of my ways and left the dark side, and now work for a credit union, where we actually try to help the member rather than the shareholder.

Augustus's picture

Good for the wife.

Many people just don't understand that it is not the appraisr's job to decide if the whole market is nuts and prices are too high in an area.  The appraiser can only refer to recent area sales and make some adjustments for size and finish.

 

A broader case example is Manhattan real estate.  What appraiser can justify $1,000,000 for a 900 sft apartment with no place to park the car when elsewhere in the US that cash would buy 4,000 sft on 5 ac.

 

Appraisers have to somewhat ignore decisions of nutty buyers and accept it as the "market" in action.

One Day Only's picture

Bingo.  

A significant percentage of the population is fiscally ignorant and are subject to the 'gotta have it' mentality in order to let them keep up with the Joneses.  All things being equal, the real estate market is truly a market, with a willing buyer and willing seller agreeing on a price.  The realtors are the ones guiding the market, based on their knowledge of which way the wind is blowing on the macro sense.

Obaminator's picture

well to be somewhat fair, a Lot of "valuations" are driven by computer algorythms now...wasnt so up until around 2002+ before then, there was a lot of elbow grease involved.

Even if an appraiser does the hard work today, that cmputer still spits out a magic number.

My house went up in "value" by 75% since 2010. Really, thats what the comps say. Its not that the house changed, or that anyone is making 75% more now than in 2010, the interest rates are even a tad higher. So what changed? What made my house go UP by 75% in 4 measly years:

1) Banks resuming to offering 3% down loans to almost anyone.

2) Banks being able to borrow for 0.25% and drop interest rates by 0.5% (billions of $$ this adds up)

3) Relaxation of Banks underwriting, a 680 score is now OK, used to be a 720, change the rules, more people "Qualify"

4) More people able to Qualify because of 1, 2, 3 above = MORE BUYERS.

5) PERCEPTION of those buyers - as more people were allowed to take on loans, other people took note and said "Hey, I can do that too"

6) Due to 1 thru 5 above, people will now spend 75% to 100% more now on the exact same home as they did in 2010 when banks were VERY strict on loans and were not qualifying people.

Any questions?

When this current cycle ends, it will get Ugly. I mean really...how many people are paying 75% more for cars 4 years later :-)

One Day Only's picture

It kills me that more FIs are going to the AVMs (Automated Value Model) approach.  You may as well look up the value on Zillow and go with that.  The first bank I worked for started using AVMs for some home equity products and we bankers all hated it because it was only marginally more accurate than throwing a dart at a wall covered with random numbers.

And yeah, it'll be ugly for sure.  That's why we're being that 'no fun' type ourselves.  No equity ATM for us, we actually have a net worth that's in the black.

ghengis86's picture

Just leave it at "lead". That's the only way this shit is remedied

ebworthen's picture

Housing Bubble 2.0 lead balloon.

Tech Bubble 2.0 lead balloon has better graphics.

El Hosel's picture

Nobody could have seen this coming... Fuk!

Ignatius's picture

They've already created the miracle million-dollar home with no pool.  What could possibly be next?

sodbuster's picture

Good ole USSA!! Doesn't matter, they will eventually be Corzined.

JRobby's picture

How else can they get LTV to sell the bitch to Fannie????

silverer's picture

Years ago, I moved out of NJ, and as several friends of mine who did the same will tell you, NJ is "a good place to be from", I never regretted it. But now as an outsider looking in, I realize that may have been the best thing I ever did, as they are now #1 real estate taxes in the US. 6 to 18K a year tax on homes where in other states would be $800-$2,500. When you take out a mortgage, you are actually financing a loan to pay real estate taxes, (and maybe someday buy the house)? This is just insane. Retire in NJ, even if you own it outright? Not on a social security check. That won't even cover the property taxes! WTF!?! No wonder people there are sh_tting their pants to get the valuations up. No matter, you can't sell to people with no money on 30 hour a week jobs and $45K student loans. Good luck, Garden Staters!

More_sellers_than_buyers's picture

silverer... you are so right.  None of the BS used to matter.  If you were in commuting distance to manhattan your house was worth money.  Quality of life is good if you can make a good living.  Unfortunatly everone is unemployed now.  There is no wall st anymore.  No garment district.No advertising, just a bunch of rich eurotrash

Seasmoke's picture

I have been screaming about this since 1997 !!!! No one listen to me then and now SOME people are finally agreeing with me now ......but it's too late, New Jersey is dead ......killed by corruption and the public takers......lived here for 40+ years......everywhere I go just looks old and run down, even the shore is finished since Superstorm Sandy. ...... we are all just lying to each other , hoping someone comes up with a new scam.......sports betting is all they have....HaHa 

Its_the_economy_stupid's picture

Guys!

Delaware has filled up w NJ people. The styate has rezoned the entire central corridor frm NOrth to South because of NJ demand in Delaware. It is truly unbelievable. One-time 2 horse towns are blowing wide open!

zerozulu's picture

Every time while coming back from liberty international I take wrong turn and end up somewhere in Newark. What a err feeling.

ebworthen's picture

In my low tax and conservative state, tax valuations (appraisals) after the 2008 crash took 4 years to even get close to what you could sell your house for.

Just like prices at the pump trailing crude oil/barrel by months, but worse.

bulldung's picture

After the real estate crash I went in to pay my taxes.I asked the clerk if revenues were down as home values had crashed. His straight faced response as he looked up at me, " home values never go down". Alternate reality reality.

10mm's picture

Fuck Jersey. One's a victim in alot ways. Can't carry a gun, fuckin taxes, traffic, tolls, arrogant North Jersey orange people. South Jersey use to be ok. 

Mi Naem's picture

While I have no doubt that there is significant fraud in many home and other property appraisals ('cause there's money in it), sometimes the "pressure" is to come in with a valuation slightly greater than the appraiser's sloppily chosen comparables in order to meet the price on the sales contract. 

In a rising market, the appraisal guidelines are written so as to act to supress rising prices rather than to reflect property valuations in light of current market conditions.  Ironically, in a depressed market where prices are falling, it is common for "appraised values" to come in above the contract price.  That leaves the seller screaming that they are getting ripped off as if the "apparised value" is a purely objective figure. 

ThankYouSatan's picture

Spot on, but now "time" adjustments have become more prevalent, used to adjust for increasing/decreasing market conditions. Appraised value is subjective (an opinion of market value). Anyway, an appraisal doesn't matter when loans are given with only 3.5-5% down, to barely qualified borrowers. 

Moneyswirth's picture

1)  Feds "encourage" banks to lend in non-lendable areas

2)  Banks securitize crap mortgages to Wall Street creating a second market for crap mortgage bonds

3) Non-lendable, crap homeowners lose their homes, market for crap mortgage bonds crashes.

4) Feds bail out banks, tighten lending standards, DC pols claim to save the world

5) Banks adhere to tighter lending standards, economy still in the crapper

6) Go to step 1.  Repeat.