Bogus Appraisals Stress Housing Markets

Bogus inflated appraisals?

SHOCKED! SHOCKED! SHOCKED!

Many Americans no longer can trust appraisals to accurately reflect their home’s value.

An independent and unbiased appraisal — once considered the bedrock of any home sale or loan — today is often built on shifting sands, according to concerned appraisers in Kansas and Missouri as well as nationwide.

Their concerns were underscored Thursday when Belton real estate investor Brent Barber pleaded guilty to orchestrating the Midwest’s biggest mortgage fraud to date, one that relied on inflated appraisals and sham documents to fabricate 300 fraudulent loans worth almost $20 million.

The federal case focused on Kansas City area lenders and investors who lost nearly $12 million through schemes that falsely depicted hundreds of run-down urban homes as renovated properties primed to reap thousands of dollars in annual rents. Similar fraud investigations are under way in other cities.

The FBI estimates that last year loan fraud bilked lenders and consumers of more than $1 billion — twice the loss reported in 2004.

Concerned appraisers who talked with The Kansas City Star, however, say that the problem goes far deeper than that. They contend that thousands of homeowners across the country, from the urban core to the suburbs, are unwittingly victimized by an epidemic of inflated appraisals.

Consequences for consumers can be costly. A false appraisal influences the fair market price when you buy or sell your home. It also determines how much money you can borrow against your home to remodel a kitchen or pay off debts.

“I’ve seen appraisals where descriptions and prices were totally fabricated — it can have a disastrous effect on consumers,” said appraiser Jack Shelton.

“There’s no question it’s a problem,” added Shelton, a former Kansas appraisal board chairman and a past director of the Association of Appraisal Regulatory Officials.

Though regulators disagree on how big the inflated appraisal problem really is, mainly because definitive numbers are hard to come by, they acknowledge it has grown. “It has become more common,” said Kevin Glendening, Kansas deputy banking commissioner. Dozens of civil lawsuits, reflecting millions of dollars in damages, have been filed nationwide against mortgage brokers, bankers, investors and, increasingly, appraisers. Many of them are in Missouri, which investigators rank as one of the top 10 states for mortgage and appraisal fraud.

Housing bubble?

A go-go real estate market is partly responsible for the inflated appraisal epidemic that gives consumers a false sense of their home’s worth. One disastrous result: mortgages and refinanced loans that exceed the value of a home and create crushing debts that can take years to pay off or lead to foreclosures.

Annie Lewis knows what that feels like.

“It’s a very sick feeling,” said the Lee’s Summit woman, who fears losing the recently built condo she bought in 2003 for $94,000.

In 2004, she responded to an Ameriquest TV ad to consolidate her debts by refinancing her home. She was delighted when an appraiser sent by the company valued her condo for $129,000 — a 37 percent leap in value in little more than a year. She paid off bills and settled for a 7.7 percent adjustable rate mortgage.

But it was too good to be true. This past year, six lenders rejected her efforts to get a new, fixed-rate loan to keep her interest rate from rising. All said her condo was overvalued and is only worth $108,000.

Now, because of all the debts she consolidated, Lewis owes more than her home is worth — what’s called being “upside down.” What’s more, her adjusted interest rate is set to jump to about 10 percent.

“I’m running the risk of losing my home that I worked so hard for,” Lewis said.

In January, Ameriquest Mortgage Co., one of the largest home refinancers, paid $325 million to settle complaints by 49 states — including Kansas and Missouri — that it misled thousands of consumers into high-cost loans involving fudged appraisals. Hundreds of consumers defaulted on their loans.

Ameriquest did not admit any wrongdoing in the settlement and blamed problems on rogue employees. The company declined, for privacy reasons, to comment on Lewis’ situation.

Besides victimizing homeowners, overstated appraisals can lead to higher property taxes in a neighborhood, or losses to banks that relied on bogus appraisals to lend money. If home prices suddenly plunge — the much feared bursting of the “housing bubble” — many loans could default.

Wildly inflated values were partly to blame for the savings and loan debacle of the 1980s, which cost financial institutions and taxpayers billions and created a drag on the economy for years.

Appraisers pressured

Appraisers said the problem began to grow with the housing boom and low-interest rates that spurred aggressive loan brokers to encourage consumers to refinance their loans. The carrot dangled in front of consumers — in thousands of direct-mail campaigns, TV commercials and Internet ads — is freed-up cash to consolidate debts.

But to make such high-dollar loans pass muster with underwriters, unscrupulous loan brokers chasing big commissions pressure appraisers to meet predetermined values. In other words, artificially inflate the value of the homes to justify the costlier loans.

Thousands of these loans are pooled and sold on the secondary market to other banks and financial institutions, including Freddie Mac and Fannie Mae. If the loans later fail, they might not be discovered before they hurt other institutions that unwittingly purchased them down the financial food chain.

“We are seeing a bigger rise in mortgage fraud, and inflated appraisals have always been a part of that,” said Jenny Brawley, lead mortgage fraud investigator for Freddie Mac.

In many cases, Freddie Mac has forced loan brokers to buy back bad loans. Ironically, some brokers have turned around and sued the appraisers.

Appraisers nationally, including those in Missouri and Kansas, agree that doctoring an appraisal to hit a predetermined number violates long-held industry standards. But they say many appraisers have succumbed to pressure from brokers and some real estate agents to stay in business, if not to grease their own greed.

“If you don’t hit the right number, it can kill a deal,” said Steven Smith of Lexington, Mo., one of six appraisers in Kansas and Missouri who spoke candidly with The Star about appraisal fraud. “I’ve had mortgage brokers flat out say, ‘Can you bring in this house at this or another number?’ If you say no, they’ll call someone else.

“They’ll just keep calling until they get someone who will give them that number,” added Smith, who said his business is down two-thirds because he has refused to exaggerate appraisals.

Mortgage brokers say they have sought tougher enforcement of industry standards. But they insist brokers aren’t the only ones to blame.

“Are appraisers feeling pressure? Probably, but do they have to give in to it? No,” said Chris Sander, past president of the Missouri Association of Mortgage Brokers, who has lobbied for tougher laws. “If all the appraisers said they are not going to be coerced by this, then you wouldn’t have a problem.”

Appraisers, however, say that is easier said than done. They point out that some appraisers can’t afford to turn down jobs. And they criticize an influx of newer, less experienced appraisers who are more susceptible to pressure.

Appraisers willing to be flexible get the business. If you don’t play ball, you don’t get called, some appraisers contend.

The Appraisal Institute, a trade group that certifies appraisers, urged the U.S. House Committee on Financial Services just this month to pass a bill that would prohibit coercion of appraisers. Among other things, the trade group claimed that “appraiser exclusionary lists” are circulating nationally to discriminate against honest appraisers.

“We don’t get selected because we do a great job,” said Warrensburg appraiser Vernon R. Elsberry, who said lenders have rejected his appraisals for coming in too low. “We get selected because we do what they want. We’re the only profession where you are begged to be dishonest.”

Fraud too easy

Appraisal fraud is relatively easy to hide because most consumers have no idea how an appraisal works. Many consumers never see an appraisal — though they pay for them — unless they ask for one at closing. But while they may appear subjective, honest appraisals are supposed to adhere to well-defined principles.

A good appraisal compares a subject property with three comparable ones that have sold recently. Comparable properties should closely resemble a subject property in size, style, age, square footage and condition.

The subject home also should be compared with homes in the same subdivision and in only rare instances to homes more than a mile away. A ranch-style house in Raytown, for instance, shouldn’t be compared to a huge mansion in Hallbrook without raising a red flag.

But appraisers told The Sta r that less scrupulous colleagues can inflate home values in subtle ways, too. They adjust the square footage, misrepresent the condition of the home, or bloat the value of the house with thousands of dollars in loan fees and seller concessions, including in one case patio furniture. For example:

■ In one appraisal provided to The Star, an appraiser boosted by as much as $50,000 the prices of three Excelsior Springs homes used as comparables to justify the value of a home the appraiser said was worth $197,355.

■ In the appraisal of a home on Indiana Street in Kansas City, an appraiser cited prices of three homes nearly two miles to the west, in newer subdivisions where homes sell for higher prices. The appraisal said the Indiana Street home was worth $82,000 — or about $40,000 more than any of its neighboring homes.

Unfortunately, many consumers don’t learn that the true value of their home is inflated until it’s too late.

Lewis, the Lee’s Summit woman, had no idea why her condo’s value soared so significantly. But the answer lies in her appraisal. Lewis’ condo was built on a slab with no basement. Values in 2004 for similar condos without basements in her development ranged from $91,000 to $109,950, according to the Heartland Multiple Listing Service.

But rather than compare her condo to similar ones sold without basements in her development — there were 28 in 2004 — the appraiser, sent by Ameriquest, chose to compare it to costlier condos nearby that had full basements — one had a walk-out and two were partially finished — which sold for $124,500 and up.

Lewis said she was told by an Ameriquest loan specialist he could get her a value “to cover the loan I needed.” She said she also was told Ameriquest would refinance her home in a year for a fixed-rate mortgage. But Lewis, unfortunately, didn’t get that promise in writing. And she said Ameriquest won’t refinance her loan again.

An Ameriquest spokesman said he could not comment specifically on Lewis’ situation for privacy reasons. But he noted: “We take these types of issues very seriously. Accurate appraisals are critical to the lending process. That’s why we’re doing more than any other lender to enhance appraisal procedures.”

The spokesman added that federal officials treated Ameriquest as one of several big, national lenders defrauded by Barber and the unscrupulous brokers and appraisers who assisted in his schemes.

Still, Lewis’ experience is similar to those of thousands of consumers who refinanced through Ameriquest. According to investigators, inexperienced sales specialists at Ameriquest branch offices were given daily quotas to call consumers culled from marketing lists to get them to refinance their loans.

“They would justify a $150,000 value for a house that might only be worth $80,000,” said Casey Chandler, who said he worked for Ameriquest but left.

Chandler said sales agents didn’t have the training to understand the risks involved in what they sold consumers.

“They had no clue at all,” added Chandler, who has since started a Web site, MortgageRefiAdvice.com, to help consumers avoid similar problems.

Ameriquest officials declined to respond specifically to Chandler’s statements. But they steadfastly maintain that any actions in branch offices that harmed consumers were done without its knowledge by employees acting on their own.

Company officials said they have taken steps to centralize operations, offer new training for loan specialists and keep better control of the appraisal process.

Tougher enforcement

Honest brokers and appraisers say the inflated appraisal epidemic will only be wiped out by acknowledging the financial threat it poses to homeowners and the nation’s economy.

But some lenders simply want to do away with the entire system. They’re promoting what’s called the automated valuation model, which uses computer analytics and sales data to estimate the value of a home without even having an appraiser inspect a property. The Kansas Legislature is considering the idea.

As might be expected, appraisers oppose it. They maintain that only trained appraisers can detect differences that computers can’t, such as whether a house sits next to a power plant or a landfill. Instead, they want professional appraisal boards to respond more quickly and more diligently to complaints. They also insist that Missouri needs stricter licensing laws, which now exempt hundreds of loan originators and brokers from state regulation. Kansas tightened its licensing laws several years ago.

Appraisers also urge stronger enforcement at the state and federal levels if there is any hope of restoring independent appraisals as a trustworthy cornerstone for America’s homes.

“It’s frustrating,” said Clinton, Mo., appraiser Wanda Batschelett, who thinks state regulators take too long to act on complaints. “We want our industry cleaned up.”

How appraisals are inflated

■■Pumping up the price: Inflating the market value of a house by comparing it to different subdivisions where home values and sales prices are consistently higher.

■ Performing a face-lift: Upgrading a home’s condition — saying it has been rehabbed when it hasn’t — or downgrading the condition of costlier or newer homes used as comparables.

■ Padding the bill: Inflating the appraisal to cover thousands of dollars in loan fees and undisclosed seller concessions, which might include repairs or lawn furniture.

■ Pushing fuzzy math: Increasing the square footage of a home to inflate its value or reducing the square footage of more expensive homes to make them seem comparable in size.

■ Persisting in comparing apples to oranges: Ignoring style differences by comparing a ranch-style to a two-story colonial or a one-car garage to a two-car garage.

Source: Appraisers in Missouri and Kansas

Investments in urban-core houses turn sour

 Jim Turner, of Liberty, said he first learned in 2004 something might be amiss with his investments in 17 urban-core houses in Kansas City when he got a call from a Freddie Mac investigator.

 Turner said the investigator questioned some of the values placed on the homes. “Red flags went up,” Turner said.

 He has since learned many of the homes were bought out of foreclosure for amounts of $25,000 or less and then turned around and offered for sale at prices of $85,000 and up.

 Like many investors, Turner had responded to an ad that boasted: “No money down, investment property. 100 percent rehabbed & rented. Positive cash flow. Good credit inquiries only.”

 But many of the homes were not rehabbed and had no renters.

 One house he bought, in the 3000 block of East 31st Street, was appraised for $92,000 — it had last sold for $21,000 in 2003. The appraisal said the house had “undergone entire refurbishment.”

 In fact, the roof is old and worn, windows are in disrepair, siding is falling off, and old electrical wiring is hanging loose and exposed.

 In his report, the appraiser compared the house to ones as far as 1 1/2 miles away, where prices are higher. Nearly all of the comparable homes are in better shape and have such features as garages, fences, fresh paint and central air conditioning.

 Turner said he invested in the homes after being shown several that appeared in good shape.

 “You think the system has checks and balances — banks, underwriters, appraisers — that protect you,” Turner said.

 Nearly all the homes have since fallen into foreclosure. But Turner is still on the hook for up to $1.1 million if he’s forced to pay all the loans.

 Turner’s lawyer sued 31 loan brokers, underwriters, investment companies, asset managers, banks and appraisers. Defendants include Kent Krause, whose firm appraised the house on 31st Street, and Gold Bank, which held a loan covering that house and five others. The lawsuit is pending in Jackson County Circuit Court.

 Krause said he couldn’t comment on the suit, though he did say that it has been more than a year since he appraised the house and that “the condition can change between then and now.”

 Gold Bank officials did not return telephone calls or e-mail requests for comment. They have since countersued Turner in Clay County to collect what he still owes on the loan.

What’s being done

■ The Appraisal Institute is urging a bill in Congress to prohibit coercion of appraisers.

■ State regulators are scrutinizing major lenders who solicit consumers.

■ Loan brokers have sought a law in Missouri to tighten the licensing of loan originators.

■ The FBI, the IRS and HUD are investigating mortgage fraud nationally.

■ Freddie Mac is scrutinizing mortgage information to find overvalued homes.

■ Some lenders want to use computers instead of appraisers to set values.

Source: The Kansas City Star

Getting help

If you think you are a victim of mortgage fraud:

■ Contact the lender that is servicing the loan.

■ Contact the state licensing board for appraisers or loan brokers.

■ Contact your state banking commissioner.

■ Contact your local FBI office.

■ Contact a lawyer knowledgeable about loans and appraisals.

■ Contact Freddie Mac or Fannie Mae.

Avoiding a rip-off

■ Research market values in your neighborhood through a real estate agent or county land records.

■ Always review your closing statement and confirm that it lists the agreed-upon loan amount.

■ Do not sign a loan or closing papers if there are any unresolved discrepancies.

■ Make sure you get copies of all documents signed at closing.

■ Look for a closing document authorizing a copy of your appraisal and ask for it.

■ Don’t go along with anything that makes you feel uncomfortable.

■ Be wary of appraisals provided by a seller before signing a purchase contract.

■ Inspect the property before you buy it. Check to see that promised renovations were made.

■ Be wary of high-pressure loan and property sellers. Be wary of junk fees.

■ Do your own shopping for a lender or mortgage brokers.

■ Find out what the current seller paid for the property.

Source: Freddie Mac

Remodeled kitchen painted in red ink

 Barbara McElwee was pleased when her Kansas City house was appraised in November 2004 for $150,000, allowing her to afford to remodel her kitchen.

 McElwee didn’t mind the adjustable rate mortgage. After all, home values were skyrocketing — or so she thought.

 She was shocked this past December when she sought to refinance her home again to get a fixed-rate mortgage. This time, her home was appraised for only $129,000. She was rejected for a new loan.

 A comparison of the two appraisals reveals that in the first one the appraiser went outside McElwee’s subdivision and found comparables in higher-priced neighborhoods. One comparable had a lakefront lot, according to real estate listings.

 The appraisal also reduced the square footage of one higher-priced comparable, making it closer to the size of her house.

 Two independent appraisers who reviewed the appraisals for The Star said the newer, and lower, report more accurately reflected the value of homes in her subdivision. Indeed, the highest price ever paid for a home in that subdivision was $134,900, according to the Heartland Multiple Listing Service.

 Now McElwee is saddled with paying more than $140,000 in debt on a home probably worth less than $130,000.