I have been involved in researching and writing about real estate frauds, mortgage frauds and appraisal frauds since about 1982. My Masters Thesis for a degree in Real Estate Appraisal was on Real Estate Frauds, Mortgage Frauds and Appraisal Frauds.
I have written about Predatory Lending and Client Pressures in an effort to help appraisers understand that they have been played as pawns in a game where millions in bonuses were being made.
Not every transaction recorded is a valid sale, some are created between related parties. There are many kinds of fraudulent transactions. They increase when markets cool, and start to decline.
My first experience with this came after we were 2-years into a recession, about 1982.
It first came to light in a neighborhood in Westlake Village, CA, where there was a lot sales subdivision. Local contractors or owners bought lots and built homes, some were spec builds, others custom for owners. This market boomed until October 6, 1979 when the Federal Reserve Chairman raised the Discount Rate to stop Inflation. And it did.
Interest rates skyrocketed to 15% for a 30-year fixed rate loan. Sales came to a standstill. I was a member of the Beverly Hills/Malibu/Westside MLS. They did not print a 4th quarter Comp Book, because there were not enough orders to justify the print cost.
Builders had inventory that they could not sell, people could not qualify. They started selling them to each other at artificial prices. The data base was seeded with fraudulent sales.
Appraisers were completely unaware. Most did not have access to the MLS prior to appraisal licensing.
When I checked the Zip Code where I lived, I spotted 99 sales in 1-year that were as much as double their previously listed Asking Price, in a Declining market.
Appraisers who had been trained to Bracket the Sales Price could be easily fooled with as few as 2-sales in a given neighborhood.
The market recovered and boomed until 1989 when FIRREA came out, making some loans be classified as high risk. And, also requiring licensing of appraisers.
The Lenders had stood before Congressional Committees and told them that all their bad loans were because of inflated and misleading appraisals, that they {Congress} should do something about it. Licensing was the, then, answer.
A mini recession followed in 1990-92 and then the markets took off again, slowly at first, but gaining speed at double digit prices.
The new century brought an myriad of new loan types, along with predatory lending {which is a whole other story}. No Qualifier Loans, aka Liar Loans fueled sales, prices escalated until the bubble burst in 2006.
All the while, appraisers bracketing the Sales Price with "Comps" were able to deliver reports that helped more and more loans get funded. They became the enablers to mortgage frauds.This was the residential appraiser as opposed to the commercial appraiser upon whom the S&L Crisis was blamed.
The GSE's said they knew what the problem was, lenders had been pressuring appraiser to inflate values. The answer was HVCC, and voila, the advent of the AMC's came into play.
Next came the UAD which allowed the GSE's and others to data mine the comparables and subject of every appraisal. In the background, they were working with big data and analytics programs with the intent of eliminating the Sales Price Hitting Appraisers.
Most recently the Bifurcated Appraisal product was introduced, which will eliminate the need for tens of thousands of appraisers.
That might not be a bad thing, since many had simply been able to fake their way with a Template, List of Adjustments and Bracketing of the Sales Price for their entire career. As opposed to being real appraisers embracing and employing the principals and processes of appraisal.
For those in the latter category, there is little that can be done at this juncture unless one is willing to finally take meaningful courses, advanced courses to learn appraisal processes and procedures and be able to do more than form reports for lenders.
We are at a Catch 22 situation. Those that have not taken advanced course work and developed higher skills will soon be out of business in large numbers, tens of thousands.
Out of work appraisers cannot afford to pay for the advanced education necessary to get of the bottom rung of the fee ladder in the world of appraisal.
The housing market has been slowing down for over a year. Artificially low interest rates have kept it alive, except for the $1m+ market.
As markets slow down, there will be an increase of real estate frauds of all kinds, which will work their way into the databases. Appraisers who rely on published data at face value will be readily fooled.
There is very little evidence of appraisers being active participants in real estate frauds or mortgage frauds in particular. That is, few have demanded a bribe, or kickback.
It has been more like the appraiser was the enabler to the frauds, not an active participant.
I have had District Attorneys come and speak at Real Estate Fraud seminars I have given. One in particular said this "a licensed appraiser cannot be willfully blind or willfully ignorant to things that normal due diligence would have revealed".
He went on to say that those who do not investigate their sales, verify their validity, find out what drove the price, whether it was fraud, or a new car included in the sales price, any kind of concession given by the seller to enable the transaction; can be easily fooled and end up as a defendant in a mortgage case.
Appraisers working fast and cheap, have no time for due diligence, and are the most likely to get in trouble as the market continues to cool and ultimately begin to decline.
E&O insurance does not cover fraudulent appraisals. What is a fraudulent appraisal, according to FIRREA, it is an inflated value or misleading report. Gulp.
I write this, which has taken some time and thought, with the hope that some may heed and make changes, start exercising due diligence, embrace and employ all of the 5-Steps to the Market Approach.
The rub is, one cannot charge for doing this in the beginning, but must create samples to show they know how to do it, reports that reflect that they have done it.
How many have never Verified a sale with a party to the transaction or their authorized agent?
In the current market there are homes being advertised openly and notoriously and being sold with a new Tesla car included in the Sales Price. How far off would the adjusted value be if the appraiser did not know and did not adjust?
How many other kinds of Concessions or Sweeteners are being offered and included in the Sales Price to keep the prices up?
To me, the FNMA report IF an appraiser exercises due diligence and embraces and employs all 5-Steps of the Market Approach; the fee should be more than double.
The only way for an individual to get there is to start doing the real work, for free, creating examples of higher quality, more credible, believable, verifiable work.
Personally, I started doing this by doing one report a week where I dug in. It was when I began verifying the Transactional aspects of what drove the sales prices; that I began to actually learn what the market was doing. I could then write about my market data with authority, and document my downward adjustments for Concessions/Sweeteners, etc.
Only after doing the hard work, could I raise my prices.
It is my hope that this writing might awaken at least one licensee to the need for employing the due diligence part of being an appraiser. If so inspired, give a shout out.
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