We all know that inflated appraisals are at the heart of the melt down in the sub prime market but just how did we get to this point? The four largest trade groups representing appraisers say yes -- and they are asking federal financial regulators to crack down on lenders and loan officers who pressure appraisers to raise valuations to allow overpriced deals to go through.
The 22,000 member Appraisal Insitute (creme de la creme in the Appraisal world) is pressuring regulators to closely inspect how the current debacle happened. They listed these instances:
They bought loans with zero or minimal down payments without taking hard looks at the qualifications and track records of the appraisers supplying the numbers. Yet in softening housing markets, accuracy on property valuations is essential whenever down payments are tiny and borrowers' credit histories are shaky. A zero-down mortgage made to unqualified buyers on a house worth thousands less than the appraisal in a depreciating market is a financial cluster bomb waiting to explode.
They failed to require "firewalls" separating loan officers working on commission from the appraisers hired to value the properties to be financed. Some of you may recall that I've spoken freely here about my husband's appraisal business and how much he was pressured by a local bank to "hit the number." When he declined the loan representative's requests repeatedly, he was told he would no longer get any business from the bank. And guess what? He hasn't!
Gary Crabtree, president of Affiliated Appraisers in Bakersfield, Calif., documented the practice recently for the FBI and state financial and real estate regulators. The basic scenario, said Crabtree, involves realty agents who've listed houses that aren't selling. To move the properties, they entice buyers -- or friends -- to "submit an offer (for the home) that is $30,000 to $100,000 above the current list price," with the promise that they'll get substantial cash at closing.
The realty agents then amend the Multiple Listing Service asking price upward to the artificially inflated offer price. A house that had been sitting for months with no takers at $450,000, for example, might be relisted by the agent at $525,000.
Then, working with a cooperative appraiser who has promised to "hit the number," and an unscrupulous mortgage broker who simply wants the commission, they "change the (loan) documentation to reflect the (artificially inflated) sales price." The loans typically are for 100 percent of the price of the house. The seller nets the price he or she had originally listed -- $450,000 in this example -- and the buyer gets a portion or all of the $75,000 inflated differential as cash at closing.
The wholesale lender purchasing the loan from the broker doesn't look hard at the appraisal, and funds the excessive loan amount none the wiser. Public records do not reflect the $75,000 slush in the transaction. The realty agents and loan brokers pocket their commissions; the buyer pockets the cash from the closing proceeds, makes loan payments for a while and then stops. Within months, the property is headed to foreclosure.
"It's total fraud, of course," said Crabtree, who is documenting 32 cases of alleged appraisal hanky-panky for state regulators and the FBI. "You can throw a dart at just about any large subprime lender, and something like this (scheme) is going to stick."
Yet some lenders are in denial that they've accepted grossly inflated appraisals. Crabtree said he contacted one major East Coast lender with the documented details of a "cash back at closing" scam that he submitted to state regulators. So far, the lender has not even returned phone calls, according to Crabtree.
The interesting part of this whole debacle is how credible some of these practices would have seemed to us as Realtors. When we trust a particular mortgage rep, we believe them. Personally, I don't know how some of the low price home builders are going to get their deals through as lenders tighten up and adjust their lending practices. The horizon is changing and we need to be vigilant in protecting ourselves as well as our clients.
For anyone interested in taking a look back at one of South Carolina's most historical little towns, Bluffton is an interesting community. It offers a look at old South Carolina including a view of antebellum homes and many unique artsy and innovatinve shops. Located just across the bridge from Hilton Head, Bluffton is now one of the fastest growing areas in the entire United States.
Polo in Bluffton, South Carolina? Definitely! The bi-annual Polo Match is held at Rose Hill Plantation and this year's event will take place on April 29th in Bluffton. The spring theme will be "Bluffton's Biggest Picnic" and celebrates the art of the picnic. Some of the fun events include tailgate parties, gourmet box lunches, awards for best picnic displays and live jazz music.
The recently passed House Bill 4449 that was passed by the South Carolina State Legislature contained two pieces of helpful news for owner occupied homes in the state.