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Recent PostsBlogrollHow Appraisers are Using the 1004MCBy AppraiserLoft Team | June 24, 2009 After almost three months of working with the 1004MC market conditions addendum, how are appraisers adjusting their workflow? Valuation Review spoke to several appraisers in the trenches to see what effect the form has had on turnaround times and fees, and what problems they have encountered when using the 1004MC. On April 1, the 1004MC market conditions form was introduced by Fannie Mae. The form is required for all mortgage loans delivered to the GSE with appraisals of one- to four-unit properties. Valuation Review spoke to several appraisers across the country to get their perspective on the form, and how they have incorporated it into their workflow. Frank Gregoire, owner of Gregoire and Gregoire Inc. and writer of the Appraiser Active blog (www.appraiseractive.blogspot.com), doesn’t think the form is a big deal. “I had discussions with a number of appraisers about this. Those of us who have been doing high quality work for years couldn’t understand why Fannie Mae even bothered with the form,” he said. For Gregoire, the form is just duplicating the work that he was already doing. “We were including an explanation of the market in narrative comments and supporting our adjustments with a neighborhood analysis,” he added. He called the form a “poor substitute” for a well-done analysis, but conceded it is at least a step in the right direction for some appraisers. According to Gregoire, the form’s problem is that it adds another layer of bureaucracy. “Fannie and Freddie have a habit of reducing everything to a form and a checkbox. It seems to me they prefer to have people look at checkboxes and find square pegs for the square holes, making their decision on that basis, rather than reading more analysis and more descriptions,” he said. Mark Ryan is the branch manager for the Las Vegas office of Forsythe Appraisals. He believes the form is effective in helping the appraiser organize data to properly analyze market trends. He said, however, that these markets need to have sufficient sales activity. Like Gregoire, he doesn’t see the form adding much to his workload. “We have been providing this type of information to our clients for a long time. Properly analyzing market conditions is critical, especially in the Las Vegas market where market conditions can change rapidly,” he said, “The new form asks the same basic questions that we have always provided answers to.” A lack of data One of the main criticisms of the form, though, is that it is one-size-fits-all. Describing market trends and conditions in a suburban setting is one thing; in a rural market, it can be frustrating. As Gregoire said, “I’m the most spoiled appraiser because I work in the most densely populated county in Florida. We’ve got a lot of sales, a lot of property, a lot of data. I don’t understand how they do it in rural markets. My hat is off to any appraisers working in rural areas who don’t have the data.” Brent Martin, owner of On Call Appraisal Co., in Sidney, Maine, appraises in urban, suburban and rural markets and said the form is not useful. “You can’t standardize the information in the form when you have too many parts of the country that have rural and suburban markets,” he said. “The information is unreliable. I’ve had to cater my disclosures because my markets are very diverse.” Martin gives an example of one town that had just six sales in the past year, ranging from $32,000 to $280,000. On the other side of the country is Dave Towne, owner of Towne Appraisals in the northwest of Washington. As sales in his area can also be extremely limited, he agrees that the form doesn’t provide much use. “The few sales (zero to five in any three-month period) reported and used on the 1004MC form really don’t help loan underwriters understand the market,” he said. Despite appraising in more densely populated area, Gregoire agrees that a lack of data can be troublesome when completing a 1004MC. “An analysis of the market may show a clear trend with a crisis in value decreasing at a rate of a percent or two percent a month but because of the inadequate number of sales that meet your search criteria, the form doesn’t appear to produce the same results,” he said. This point is echoed by Ryan. “The lack of data can result in misleading value trends. The form defines the market in a very specific way. The answers do not always paint an accurate picture if the sample size is too small,” he said. Neighborhoods versus markets Another criticism of the form concerns the Neighborhood section and the difference between neighborhood and competitive market area. Bradford Charnas, owner of Charnas Appraisal in Rocky River, Ohio, doesn’t think the form is clear in this regard. “They’ve blurred the two,” he said, “It just adds to the confusion.” Towne points out that not all neighborhoods contain comparable properties, and warns against appraisers confusing neighborhood with comparable properties. He calls it an “apples to oranges” problem. “[Fannie Mae] believes that a heterogeneous neighborhood will automatically reveal trend data for a specific homogeneous property within that neighborhood. But in many cases the overall neighborhood of different properties has no real connection to the appraised property,” he added. Guidelines from Fannie Mae caution against expanding your neighborhood to encompass your comparable sales. But in some markets, especially rural ones, this can be unavoidable, and especially if the subject property is unique. Charnas gives an example. “Let’s say the buyer wants to buy a horse property with 20 acres, a barn, and a couple of pastures,” he said. “In that case, the location isn’t going to be the primary concern of the buyers, it’s going to be the features of the property. The competitive market area for that particular type of property could be across several counties.” Knowing your prospective buyers At the top of the 1004MC, the instructions include the following: Sales and listings must be properties that compete with the subject property, determined by applying the criteria that would be used by a prospective buyer of the subject property. The question of who the “prospective buyer” is, though, can be problematic. Martin gives an example of a subject property that was a three-car garage with living space over the top. The prospective buyer could be someone who wants to use the garages for storage, and ignore the living space. Or it could be someone in the lower end of the market looking for a home. Or it could be someone who is planning on building a much larger house that encompasses the garages. “So my prospective buyers are either going to be able to afford a $400,000 home with a three-car garage and living space or a $150,00 house,” said Martin. “How do you pick which prospective buyer to go with to define the range?” The problems of price range Charnas believes that the 1004MC’s price range section can be counter-productive. “When you limit your research to a particular price range, you’re predetermining the results,” he said. Even if the market prices drop 10 percent, if your research is limited to the price range, you’d just swap one set of comparables for another, he argued, but the median price would stay the same. Ryan agreed that the number of comparables can have a detrimental effect on market reporting. “If the property being appraised has a limited number of reasonable comparables in a year the median price trend may not accurately describe the market,” he said. Charnas uses school districts to get a better idea of a price range. “I search for all properties in the school district and compare one year’s worth to the next, looking at the average price per square foot and median price per square foot. Otherwise, you’re dealing with numbers that are so small, they can be misleading.” Reagan Trano, branch manager for Forsythe Appraisals in Dallas, suggests writing a separate analysis. “Some market segments have less activity and may require a different type of analysis to determine market trends,” he said. “In these instances, it may be necessary to complete the 1004MC with the limited data available and perform a separate analysis to determine the actual trends.” Fees and Times Completing the 1004MC has added extra time to an appraisal. Of the appraisers interviewed for this article, all of them said filling out the form added approximately an extra half-hour to their appraisal reports. This extra half-hour has had an impact on the fee the appraisers are charging for using the form. In the Feb. 2 print edition of Valuation Review, Tracy Martin, McKissock USPAP instructor, mentioned the concern that appraisers had about charging fees for the 1004MC. “The first question [I hear] is, without fail, ‘Can I charge a higher fee?’” Some appraisers have negotiated a higher fee. The upcharge in fees can range from $25 to $75, with the average fee being around $50. However, all the appraisers who were increasing their fee said the difference depended on who the client was. Some appraisers, though, have said that they have kept their fees “essentially the same.” As Gregoire said, “An extra half hour for the amount of time I put in to a typical report, I don’t need to [increase my fee]. I’ve been doing the work all along.” Technology tools So what are some of the tools that appraisers are using in completing the 1004MC? There has been a spate of spreadsheets and excel programs designed to help corral the data needed for completing the form, mostly by appraisers working with the form themselves, such as Towne. “I designed an Excel spreadsheet upon which an appraiser can enter the sales and listing data for the three columns,” he said “It then self-calculates the necessary median numbers for the form.” Some of these programs, such as Towne’s, are being offered free to other appraisers and can be found online. However, for some appraisers, the tools are still too new to be relied on. Ryan remains wary. “We feel the accuracy of these tools need to be validated before we can rely on them. When we run our own statistics along side of the results provided by the software the variance often exceeds my comfort level,” he said. Despite the problems that the 1004MC has, appraisers still welcome the introduction of the form. Gregoire said the form would help those appraisers who weren’t already including detailed analyses. “There are probably a few appraisers who might be producing a better documented and better supported value opinion by using the form,” he said. Charnas believes it is a step in the right direction. “I applaud Fannie Mae for providing a vehicle that requires appraisers to show the economic analysis that they’re doing. It’s an essential part of our job, especially in this market,” he said. However, he added, “It’s just not the form I would have designed.” Indeed, Charnas says that although he fills out the form as required, he still attaches his own research that compares the same time period with the previous year. Other appraisers also mentioned that, especially when confronted with a lack of data, they have added additional analysis to the form in order to properly determine market trends. Ryan said the form adds value to the appraisal process, but advised appraisers to think outside the box. “The key is for appraisers to recognize the form’s limitations and provide additional commentary when necessary,” he said. “The appraiser needs to be able to go beyond the questions in the form to ensure the client has the appropriate information.” Trano agreed with Ryan, saying ultimately the introduction of the 1004MC will help provide some consistency in the way that markets are analyzed. “While it will take some getting used to, I think that this will result in appraisers that are more cognizant of market trends,” he said. refer link: http://tinyurl.com/naub4o Topics: Appraisal Regulations, Appraiser's Voice | No Comments » FHA Appraisers in the Spotlight on Capitol HillBy AppraiserLoft Team | June 24, 2009 Professional industry groups recently testified on Capitol Hill about the need for increased oversight in the Federal Housing Administration. The testimonies called for FHA appraisers to be given more independence, and even for the FHA appraiser fee panel to be brought back. Among the weaknesses identified in the FHA appraisal process is the fact that the FHA appraiser roster contains almost 3,500 appraisers whose licenses have expired. In recent years, the Federal Housing Administration’s (FHA) mortgage insurance program’s role has grown in the housing industry as more and more families use it to finance a home. The FHA’s market share has grown from less than 3 percent to more than 25 percent in a short period of time. A number of professional groups recently testified on Capitol Hill before the Oversight and Investigations Subcommittee of the House Financial Services Committee. The purpose of the hearing was “Strengthening Oversight and Preventing Fraud in FHA and other HUD Programs.” The first speaker was the Inspector General of the Department of Housing and Urban Development (HUD), Kenneth Donohue. He discussed his department’s concerns with the FHA, particularly about it coping with the extra workload. “We continue to remain concerned regarding FHA’s ability and capacity to oversee the newly generated business,” Donohue said in his testimony. Donohue said fraud schemes continued to affect the FHA, including appraisal fraud. He described appraisal fraud as being “typically central to every loan origination fraud” and included fraudulent appraisals, inflated appraisals, appraiser coercion and “appraiser kickbacks.” Donohue then listed several examples of the fraud cases that HUD investigated in the FHA, including an appraiser who was involved in a $12 million loan fraud scheme. He also said the FHA appraiser roster contained “critical front-end weaknesses” including listing 3,480 appraisers with expired licenses and 199 appraisers that had been sanctioned by their states. Donohue described HUD’s appraiser review process as inadequate for consistently identifying appraisers’ deficiencies. He called for a return to an FHA Appraiser Fee Panel, which had been dismantled in 1994. “It is essential if the mortgage industry wants to overcome perceptions regarding its integrity and its role in the current economic crisis that it ensures true market values are correctly estimated,” he said. Keeping appraisers independent from outside pressure was key to ensuring the quality of appraisals, Donohue said. He cited the October Research survey which showed that 90 percent of appraisers had felt pressure to hit the numbers. Donohue said the HVCC, which was created to help ease this pressure, still had vulnerabilities. Under the code, lenders “may have the potential to manipulate appraisal management companies who do not necessarily appraise in a way that some unscrupulous lenders may desire,” Donohue said. “Although still early in the new process, we are not sure that if such paid appraisers are not “hitting the mark,” what is to stop those lenders from threatening to go elsewhere to do business?” he continued. Overall, Donohue urged the industry to remain vigilant about the impact that overinflated appraisals can have. “The downstream negative effect of overinflated appraisals is long-term and can be fundamentally corrosive to the housing market, and to even, as we know today, the world economy.” Another speaker was the Chairman of IRR-Residential, a national residential appraisal organization based in Kansas City. Kevin Nunnink urged the committee to strengthen the independence of appraisals as a safeguard for the loan transaction. “Any effort to circumvent the independence of the appraised value heightens mortgage risk,” he testified. Nunnink explained that of all the professionals involved with the mortgage origination process, the appraiser is frequently the only professional that visits the property, implicitly for purpose of providing due diligence for their lender client by inspecting the property and making sure that it has sufficient value to support the intended loan. He told the committee that appraiser separation is particularly important in today’s mortgage industry where virtually all mortgage originators sell their mortgage paper into the secondary market and thereby hold minimal long-term loan risk. “An independent appraiser makes it much more difficult to initiate mortgage fraud,” he said. “That is why we support legislation and regulations that increase the separation between contingent fee real estate mortgage professionals and the appraisal process.” While Nunnink believed that a similar version of the Home Valuation Code of Conduct should be adopted by HUD, he argued against the use of broker price opinions, saying they carry potential conflicts of interest. “More importantly,” he said, “they have not proven to be as reliable when compared to valuation products prepared by independent appraisers. We believe HUD, like Freddie Mac, should continue to disallow BPOs for mortgage origination purposes.” These thoughts were echoed by David Berenbaum, executive vice president of the National Community Reinvestment Coalition. He called for BPOs to be outlawed for REO properties in his testimony. “The real estate brokers, acting as agents of the REO owners, develop hasty and inaccurate BPOs that underestimate the values of the REOs,” he said. “Undervaluation is often destructive to local markets and depresses the value and equity of neighbors of REO properties.” Berenbaum also called for Congress to consider codifying the HVCC in statute and encouraged HUD to develop new regulations that addressed fraudulent appraisal practices. Berenbaum welcomed the separation of brokers from appraisers in the HVCC and urged HUD to take “aggressive action” in adopting this practice, “since broker participation in FHA lending has increased dramatically.” The President of the National Association of Mortgage Brokers (NAMB), Marc Savitt, also testified before the committee. In his testimony, Savitt repeated many of the concerns that his association outlined in its recent call to action, specifically with the problems the broker industry has had with the introduction of the HVCC. Savitt applauded the efforts to revitalize the FHA loan program and eliminate fraud, but warned that the HVCC would have a detrimental effect on consumers and the market. Instead, he called for greater reform of appraisal independence laws including HR 1728 and the Federal Reserve Board’s 2008 Regulation Z Amendments. NAMB’s dissatisfaction with the HVCC was echoed in the testimony of David G. Kittle, chairman of the Mortgage Bankers Association. Kittle called for changes to be made to the code in order to overcome “operational difficulties” for lenders and borrowers. In its current form, he argued, the code was too vague in certain parts to provide clear instructions. To demonstrate this problem, Kittle described the problem of appraisal portability, noting that is what acceptable in the code if a lender provides written confirmation of compliance. However, there are no industry standards for this written confirmation, making lenders reluctant to accept another lender’s appraisal. This in turn makes the borrower more likely to have to order a second appraisal, which significantly increases their costs. Kittle also cited concerns with lenders turning to AMCs for appraisals. He said that some AMCs employ appraisers unfamiliar with the neighborhood trends of a subject property, and give work to preferred appraisers, to the exclusion of independent appraisers. Overall, Kittle, like the other representatives testifying before the committee, noted the urgency of the situation as FHA takes on a growing role in the housing industry. “Currently, FHA is experiencing a rebirth,” Kittle said, “If we don’t take this opportunity to be proactive and get FHA the resources it needs, the recent reemergence of FHA won’t last long. We have a chance to prevent future problems at FHA, but that effort must start today.” Refer link: http://tinyurl.com/lg5fpk Topics: Appraiser's Voice | No Comments » Nevada Enacts Law to Clarify the Use of Broker Price OpinionsBy AppraiserLoft Team | June 18, 2009 Nevada Senate Bill 184, signed into law May 29 by Gov. Jim Gibbons, specifically prohibits the performance and use of a broker price opinion “in lieu of an appraisal for the purpose of determining whether to approve a mortgage loan.” It clarifies that BPOs may continue to be used for the listing or purchase of real property or for an existing or potential lien holder or a third party making a decision about the listing or sale of real property (i.e., short sales, foreclosures, REO properties, etc.). The bill also enacts requirements that a BPO contain certain notifications to the intended user, and that a broker is fully responsible for all of the activities of a licensee who is associated with the broker that performs a BPO. Up to this point guidance from the Nevada Real Estate Division has indicated that BPOs may only be performed for the purposes of establishing a selling, or offering, price for real property. However, in practice, evidence suggests that BPOs are being performed for a number of other transactions (including mortgage finance transactions) in violation of the current guidance. The existing licensing law has not been effectively enforced by the Real Estate Commission, but it has resulted in disciplinary actions being taken by the Appraisal Commission for the illegal performance of appraisals without an appraiser’s license or certification. S.B. 184 was supported by the Nevada chapters of the Appraisal Institute and the Coalition of Appraisers in Nevada as a way to bring statutory clarification to the BPO issue. The legislation was the culmination of over a year’s work that started with the formation of a Task Force in 2008 to study the proliferation in the use of BPOs in the state. Representatives of the Appraisal Institute and CAN said they believe that the language of S.B. 184 prohibits the use of BPOs for all mortgage finance transactions, including originations, refinances, loan modifications, workouts, etc. The Nevada appraiser community will be working for further clarification of this issue through the regulatory process. Further, the Nevada appraisal community will be working for the adoption of standards and guidelines for the performance of BPOs. Trackback and refer: http://www.appraisalinstitute.org/ano/current.aspx?volume=10&numbr=11/12#7576 Topics: Legal Updates | No Comments » Vermont Backs Appraisal IndependenceBy AppraiserLoft Team | June 12, 2009 Vermont is the latest state to pass a law ensuring the independence of appraisals. Read on for the details. is the latest state to support appraisal independence by passing a law that reforms the mortgage process. HB 171 was signed into law by Governor Jim Douglas on May 21, 2009. It is known as the Act Relating to Home Mortgage Protection for Vermonters. Section 2241, (11), prohibits the improper or outside influence of appraisals, using the same wording as many of the other states that have passed similar legislation: Make any payment, threat, or promise, directly or indirectly, to any person for the purposes of influencing the independent judgment of the person in connection with a residential mortgage loan, or make any payment, threat, or promise, directly or indirectly, to any appraiser of a property, for the purposes of influencing the independent judgment of the appraiser with respect to the value of the property; The legislation called for mortgage originators who violated the act to be reported to the Nationwide Mortgage Licensing System and Registry (NMLS). The act will take effect on July 1, 2009.
Topics: Uncategorized | No Comments » USPAP is updated for 2010-2011By AppraiserLoft Team | June 12, 2009 The Appraisal Foundation has released an update of the 2010-2011 edition of USPAP. Among the changes are a rewriting of Standard 3, an improvement in the clarity of the Ethics Rule and the Competency Rule, and a new disclosure requirement. Find out more here. The Appraisal Foundation has released the update for the 2010-2011 edition of USPAP. The new edition was revised by the Appraisal Standards Board (ASB) after a public meeting in New Orleans, where a number of comments regarding the confusion that surrounds certain parts of USPAP were received. There are two significant changes in the new edition. The first is an addition to the Conduct section of the Ethics Rule. Appraisers will now be required to disclose to a client and in the report any services they may have performed on the subject property within the three years prior to receipt of the assignment. These services are not necessarily a previous appraisal: they can include property management, leasing, brokerage, auction, investment advisory services, or others. The addition is intended to allow the client to determine if there would be any potential conflicts of interest. “The ASB believes the client has a right to know about an appraiser’s involvement and make the decision whether or not to engage the appraiser in that particular assignment,” said Sandra Guilfoil, chair of the ASB. The ASB believed this new requirement was necessary for increasing transparency in the appraisal process. “We did not believe that USPAP was adequately serving public trust by allowing an appraiser to complete an assignment without initially notifying the client of any recent involvement with the property,” said Guilfoil. The second significant revision is the removal of an appraiser’s obligation to allow a client access to their workfile when providing a Restricted Use Appraisal Report. The rationale behind this was that appraisal reports provided enough information for an intended user to be able to understand the report properly. Other revisions in the new edition were to improve the clarity, understanding and enforceability of the Ethics Rule, the Competency Rule and Standard 3: Appraisal Review, Development and Reporting. The Ethics Rule was largely rewritten. One of the changes was to separate “misleading or fraudulent” acts, in order to differentiate between ethical violations (fraudulent) and errors of performance (misleading). Other changes were to the introductory section, the conduct section, management section, the confidentiality section, and the record keeping section. The Competency Rule was divided into three sections to distinguish an appraiser’s competency obligations in an assignment. It also now clearly states the alternative actions an appraiser can take when they are not competent to complete the assignment. Other changes in the Competency Rule concerned the Jurisdictional Exception Rule. Standard 3 was largely overhauled to create a more “logical and comprehensive structure” and to bring it in line with the other standards, following the format of general requirements followed by specific requirements. To read about the changes in Standard 3, and the other rules, the Appraisal Foundation released a Summary of Actions, which explained the changes in full as well as the rationale behind the ASB’s thinking. The new edition of USPAP will be valid for two years, effective January 1, 2010 through December 31, 2011. It is scheduled to be available by October 1, 2009. The ASB will issue guidance, including advisory opinions and FAQs, which Valuation Review will report on as they are released.
Topics: Appraisal Regulations | No Comments » Parent Company of AMC Faces Financial ChallengesBy AppraiserLoft Team | June 10, 2009 While many AMCs today are enjoying the benefits of increased volume under the Home Valuation Code of Conduct (HVCC), one is yet to turn profitable for its parent company, who in turn is facing financial difficulties, according to company filings. NovaStar Financial Inc., the Maryland-based subprime lender, continues to face financial challenges, according to its 10-K, filed with the Securities and Exchanges Commission (S.E.C.) on May 27, 2009. NovaStar acquired a majority interest in the appraisal management company PipeFire LLC in August 2008, renaming the company StreetLinks National Appraisal Services and installing former head of NovaStar’s retail lending division, Steve Haslam, as the CEO. StreetLinks is headquartered in Indianapolis. NovaStar is in Kansas City. NovaStar ran into problems with the onset of the subprime mortgage lending crisis, despite taking early steps to protect its assets by shutting down its operating business, and halting all lending since late 2007. According to the 10-K filed with the S.E.C., questions remain about NovaStar’s future. “We face substantial liquidity risk and uncertainty, near-term and otherwise, which threatens our ability to continue as a going concern and avoid bankruptcy,” it stated. If NovaStar did file for bankruptcy, StreetLinks would be forced to find another owner with enough capital to help sustain its rapid growth. The emergence of StreetLinks was originally viewed with suspicion by some appraisers due to its association with NovaStar. According to an article in BusinessWeek, when NovaStar was operating as a subprime lender, it was disciplined by three states for infractions including employing unlicensed brokers and charging unlawful fees. For the full story, click here.
Topics: General | No Comments » Countrywide Exec Charged with Fraud and Insider TradingBy AppraiserLoft Team | June 10, 2009 The former CEO from Countrywide has been charged with fraud and insider trading by the SEC. Angelo Mozilo, together with two former executives, is alleged to have deliberately mislead investors about the significant credit risks involved in building the company’s market share. In emails seized by the SEC, Mozilo called subprime loans “toxic” and “dangerous”. (6/9/2009) The U.S. Securities and Exchange Commission alleges the former Countrywide executives deliberately mislead investors about the significant credit risks being taken in efforts to build and maintain the company’s market share. Mozilo was additionally charged with insider trading for selling his Countrywide stock based on non-public information for nearly $140 million in profits. The SEC alleges that Mozilo along with former chief operating officer and President David Sambol and former Chief Financial Officer Eric Sieracki misled the market by falsely assuring investors that Countrywide was primarily a prime quality mortgage lender that had avoided the excesses of its competitors. In a statement, Mozilo’s lawyer, David Siegel, an attorney for Mozilo at Irell & Manella LLP in Los Angeles, called the SEC’s allegations “baseless.” “Mr. Mozilo acted properly and lawfully at all times as the CEO of Countrywide,” he said in a statement. “The SEC’s allegations that Mr. Mozilo supposedly knew about some undisclosed risk to certain loans made by Countrywide also is demonstrably false. The complaint does not tell the whole story of either internal communications or the public disclosures.” The SEC’s enforcement action alleges that from 2005 through 2007, Countrywide engaged in an unprecedented expansion of its underwriting guidelines and was writing riskier and riskier loans, which these senior executives were warned might ultimately curtail the company’s ability to sell them. Countrywide was required to disclose these important trends to its investors in the Management Discussion and Analysis portion of its SEC filings, but failed to do so. “This is the tale of two companies,” said Robert Khuzami, director of the SEC’s Division of Enforcement. “Countrywide portrayed itself as underwriting mainly prime quality mortgages using high underwriting standards. But concealed from shareholders was the true Countrywide, an increasingly reckless lender assuming greater and greater risk. Angelo Mozilo privately described one Countrywide product as ‘toxic,’ and said another’s performance was so uncertain that Countrywide was ‘flying blind.’” Rosalind Tyson, director of the SEC’s Los Angeles Regional Office, said Mozilo had access to detailed and alarming information about Countrywide’s operations. “He knew that Countrywide was gambling with increasingly risky mortgages and he kept those details from investors while he was actively taking his own chips off the table,” she said. The SEC obtained a chain of e-mails Mozilo had sent to Sambol and other former Countrywide executives warning of the dire consequences subprime loans could bring the company. Mozilo became concerned about the loans in the first quarter of 2006, when HSBC, a purchaser of Countrywide’s 80/20 loans, began to contractually force Countrywide to “buy back” certain of these loans that HSBC contended were defective. He then directed Sambol and Sieracki to implement a series of corrective measures to “avoid the errors of both judgment and protocol that have led to the issues that we face today caused by the buybacks mandated by HSBC.” “The 100 percent loan-to-value subprime product is the most dangerous product in existence and there can be nothing more toxic and therefore requires that no deviation from guidelines be permitted irrespective of the circumstances,” Mozilo said in an e-mail to Sambol and Sieracki on March 28, 2006. According to an April 17, 2006 e-mail, Mozilo once again reiterated to Sambol that “in all my years in the business, I have never seen a more toxic” product than the 80/20 subprime loans Countrywide was originating. Mozilo said the FICO scores associated with these loans were below 600 and 500, with some below 400. “With real estate values coming down … the product will become increasingly worse,” he said. “There has [sic] to be major changes in this program, including substantial increases in the minimum FICO. Whether you consider the business milk or not, I am prepared to go without milk irrespective of the consequences to our production.” According to the SEC, both Mozilo and Sambol were aware as early as June 2006 that a significant percentage of borrowers who were taking out stated income loans were engaged in mortgage fraud. On June 1, 2006, Mozilo advised Sambol in an e-mail that he had become aware that the pay-option ARM portfolio was largely underwritten on a reduced documentation basis and that there was evidence that borrowers were lying about their income in the application process. On June 2, 2006, Sambol received an email reporting on the results of a quality control audit at Countrywide Bank that showed that 50 percent of the stated income loans audited by the bank showed a variance in income from the borrowers’ IRS filings of greater than 10 percent. Of those, 69 percent had an income variance of greater than 50 percent. These material facts were never disclosed to investors. On Sept. 26, 2006, following up on a meeting with Sambol regarding Countrywide’s pay-option ARM loan, Mozilo wrote to Sambol in an e-mail stating “we have no way, with any reasonable certainty, to assess the real risk of holding these loans on our balance sheet. The only history we can look to is that of World Savings however their portfolio was fundamentally different than ours in that their focus was equity and our focus is FICO. In my judgement [sic], as a long time lender, I would always trade off FICO for equity. The bottom line is that we are flying blind on how these loans will perform in a stressed environment of higher unemployment, reduced values and slowing home sales.” In the same e-mail, Mozilo warned that pay-options were mispriced in the secondary market and that spread could disappear quickly if another lender got into trouble with the produce or if investors soured on the product. He continued by saying the time was right to sell all newly originated pay-options and begin rolling the loans off the bank’s balance sheet. Mozilo is the most prominent executive targeted by U.S. regulators examining the subprime mortgage crisis. In April, the SEC reached a $2.45 million settlement with Michael Strauss, the former CEO of American Home Mortgage Investment Corp., over claims he understated loss reserves before the Melville, New York-based lender’s bankruptcy. The agency also sued former Bear Stearns Cos. hedge-fund managers Ralph Cioffi and Matthew Tannin last year for allegedly misleading clients about pending losses and redemptions. They have pleaded not guilty to criminal charges. Topics: Lawsuits | No Comments » Press Release : Wells Fargo AppraisersBy AppraiserLoft Team | June 4, 2009 Class Action Says Wells Fargo, Rels Illegally Strong-arm Appraisers April 14, 2009 SEATTLE – Today two real-estate appraisers filed a proposed class-action lawsuit against Wells Fargo (NYSE: WFC) and Rels Valuation, an appraisal management service, claiming the two organizations pressured and intimidated appraisers to deliver artificially inflated home appraisal values to help close loans and increase profits. The suit, filed in U.S. District Court in San Francisco under the Racketeering Influenced and Corrupt Practices Act (RICO), claims that beginning in 2004 Wells Fargo and Rels colluded to punish appraisers who refused to inflate appraisals by denying them future appraisal work. Rels is one of the largest appraisal management companies in the country, acting as an intermediary between banks and appraisers. Appraisers, by law, are intended to be independent and autonomous from the influences of others, but according to the complaint are compelled to do the bidding of Rels, and through them Wells Fargo. “We plan to show Rels effectively tells the appraisers what they want to see in the valuation, and if they don’t deliver, they are locked out of future work,” said Steve Berman, the attorney representing the plaintiffs and managing partner of Hagens Berman Sobol Shapiro. According to Berman, Rels provides the appraiser with a predetermined figure called the ‘Borrower Estimated Value’ and expects the appraisers to deliver reports with values exceeding the Rels-supplied figures. “We heard from appraisers who say that after providing bona-fide appraisals that come in below what Rels wants, the company contacts them and strongly suggests they reevaluate the property,” Berman noted. “If an appraiser refuses, we contend Rels simply refuses to use them again.” Don Pearsall and Timothy Savage both claim Wells Fargo tried to strong-arm each of them into inflating appraisal values, violating the laws and regulations of the Uniform Standards of Professional Appraisal Practice (USPAP). The USPAP rules clearly state an appraiser must not accept an assignment that includes the reporting of predetermined opinions and conclusions – something the lawsuit claims Rels does on a regular basis. According to the compliant, Rels and Wells Fargo have given appraisers predetermined comparable properties to base appraisals, further compromising the appraisers’ independence. Plaintiff Pearsall, a long-time appraiser, completed an appraisal for Wells Fargo and Rels in 2007. After submitting his report, Rels asked that he alter the report to reflect the company’s desired views on the property. After refusing, the suit claims Rels blacklisted Pearsall, stripping him of a large portion of his income. Timothy Savage, an appraiser in Vail, Colorado, also submitted two appraisals to Rels in 2009, which the company rejected, asking him to increase the appraisal values. After refusing, Savage received a letter from Rels informing him that he is no longer included on the approved panel of appraisers, the suit claims. “We’ve heard from appraisers across the country sharing similar stories – bullied into inflating prices and blacklisted when refusing,” Berman added. “Apparently the treatment that both Tim and Don experienced is the same for hundreds, if not thousands of appraisers.” The lawsuit seeks to represent all state-licensed or state-approved appraisers nationwide who’ve been removed as an approved appraiser by Wells Fargo or Rels Valuation. The suit asks for treble damages and is the first lawsuit filed on behalf of appraisers against Wells Fargo and Rels. You can learn more about this case by visiting www.hbsslaw.com/appraisers. If you’ve performed appraisals for Wells Fargo or Rels Valuation and been blacklisted, you can also contact attorneys at wfc@hbsslaw.com. About Hagens Berman Sobol Shapiro Topics: Lawsuits | No Comments » Exclusive: Banks’ Appraisal Conflicts Could Continue Under New HVCC RulesBy AppraiserLoft Team | June 4, 2009 Cuomo’s office: “GSE’s knew they were buying loans with appraisal fraud…” By Teri Buhl Teri Buhl is an investigative journalist covering Wall Street who has written for the New York Post Sunday Business, HousingWire and Trader Monthly. Contact her at teribuhl@yahoo.com. Despite calls for reform, Countrywide is still showing signs of committing the same predatory lending sins under new owner Bank of America. As Congress rushes the lending reforms through the House this month, banks are still fighting to keep control of how they run the mortgage business, and keep collecting lucrative fees in every step of the lending process. Exhibit A is a $2.8 billion class action lawsuit filed on March 7th against a BofA subsidiary called Countrywide-KB Home Loans and its wholly owned appraisal firm Landsafe, Inc. The suit accuses the two subsidiaries of an appraisal inflation scheme affecting over 14,000 borrowers, and is a product of a yearlong investigation examining home buyers in California, Arizona, and Nevada. Leading the charge were the Laborers’ International Union of America (LIUNA) and Seattle-based law firm Hagen Berman. The law firm is presently litigating over three class action cases against Countrywide.
Congress passed RESPA in 1974 to prohibit certain practices such as referral fees between lenders, brokers, and appraisers that increase costs to homebuyers. Jordan Ash, who led LIUNA’s investigation for the lawsuit states that his group went door to door in KB Home developments looking for someone to show up with proof that Landsafe had inflated appraisals – LIUNA’s goal is to curtail kickbacks and price inflation between builders and lenders. He found his guy in Nathaniel Johnson, a KB home buyer in Arizona. In Johnson’s case, the company inflated his appraisal by around $45,000. He had obtained a similar price comparison from his credit union, but when he presented that to a Countrywide KB Home Loan officer, the officer said he could only use their appraiser (Landsafe) if he wanted the loan and the home. When defendants like Johnson tried later to sell their homes, they found that they were now underwater, and then realized how inflated the appraisals were. It turns out that Countrywide had been ignoring warning signs since 2006. Back then, former Countrywide-KB Home Vice President Mark Zachary began warning banking executives that Landsafe’s appraisals were inflated by at least 6 percent or were using comparable home prices in other neighborhoods. Legal documents show Zachary was questioning top bank executives on why only one appraiser was being used. In addition to homebuyers being duped, Zachary argued, investors funding these loans were also defrauded, as the actual home value could be less than the loan amount — putting the buyers upside down immediately after the purchasing, and the investors at a net loss. In mid 2007, Countrywide fired Zachary after being asked to name executives involved in the scheme and is now battling with BofA’s legal team in Texas state courts over wrongful termination. This isn’t the first time a large bank has been sued for being in cahoots with appraisal companies. New York Attorney General Andrew Cuomo is still fighting a lawsuit started in November 2007 with California-based First American and its appraisal firm eAppraiseIT. Charges include appraisal fraud and kickbacks on loans made with Washington Mutual. Last month Cuomo defeated a yearlong battle to have the case (currently in discovery) dismissed because First American said a federal regulator needs to charge it with wrong-doing. The N.Y. Supreme court thought otherwise, and Cuomo’s office says it still plans to pursue millions in monetary damages, along with not allowing the two to do business with each other. When we asked Rheingold if he was surprised that Bank of America didn’t shed Landsafe when it bought Countrywide last June, he laughed. In the 1990s, BofA owned one of the nation’s first subprime lenders, Equicredit, but it later sold off following lending and foreclosure fraud lawsuits.
Difficulty Changing the Culture Outside industry experts on Bank of America’s advisory council, speaking on the condition of anonymity, said they had hoped Countrywide’s shady past would be cleaned up within a year of the new ownership. But nearly a year later, we’ve learned that the Charlotte-based BofA has simply assumed the same practices that branded Countrywide a financial predator. According to sources, Barbara DeSoer — head of BofA’s combined mortgage unit — was personally confronted about LandSafe conflict of interest practices while at a council meeting in Dallas at the end of March by a member of the advisory council. In response, she said she didn’t see it as a conflict of interest. Today, Internet forums are packed with chatter complaining about Landsafe. Last week on one such forum,the Implode-Explode Forum, people posted statements about the lack of employee morale currently at Landsafe, blaming management’s “churn-and-burn” appraisal ethics. One certified appraiser using the pseudonym “exlandsafeappraiser” says, “From an appraisal standpoint, Landsafe values quantity over quality… hit the number and move on.” Another former Landsafe appraiser who left the firm last October said, “There was tremendous pressure to hit values, especially on the KB new homes. There was a lot of “can you find me another $5,000?” Secret Blacklists and Whistleblower Traps Sources who’ve worked for the firm and spoke on the condition of anonymity for fear of retribution told us about a secret database so-called “UVL” or “unapproved vendor list.” The list keeps track of all appraisers who’ve been blackballed for not meeting the lender’s price target. In fact, when employees log onto the list, a warning flashes on the screen and tells the user not to disclose the list’s existence. A person who currently works at Landsafe says “At BofA’s Landsafe, when the in-house reviewer does his check-off on the appraisal, the first thing we’re told is to check the UVL list. If the appraiser is on it, out goes the appraisal in the trash.” After repeated inquiries, a Bank of America spokesperson finally commented, “We do have a UVL list that is used for quality control based on professional appraisal standards and Fannie Mae guidelines. We strongly believe it doesn’t violate HVCC.” Appraiser Blackball lists have recently been banned for the mortgage industry – that is, if they want to sell their loans to Freddie and Fannie. Section one, paragraph two of the Home Valuation Code of Conduct (HVCC), which took effect May 1st, clearly states that withholding or threatening to withhold future business for an appraiser, or terminating or threatening to terminate an appraiser is a full-blown violation of the new rules imposed on lenders and appraisal management companies (AMCs). But it’s likely going to take a brave Landsafe employee with a guilty conscience to report violations to the new Independent Valuation Protection Institute for any actual consequences to be levied against BofA’s profit stream. In fact, in an attempt to ensure warnings are funneled first into the perpetrators nest, Landsafe’s response was to set up an independent hotline of their own with a toll free number and company email for outside appraisers to send complaints. Cuomo’s “Chinese Wall” While Congress and federal regulators have yet to write significant laws eliminating conflict of interest between appraiser and lenders, Cuomo has already up-ended the system — for better or worse. Last March, Cuomo agreed to stop his investigation into Freddie Mac and Fannie Mae for knowingly accepting loans packed with fraudulent appraisals. Sources close to Cuomo’s office that were involved in the GSE investigation said his case was strong enough to prove the GSE’s knew they were buying loans with appraisal fraud and had no choice but to bend to the NY AG’s terms to get the case dropped. In return, the agencies agreed to not buy any residential loans from banks if they broke a new set of rules Cuomo created call the Home Valuation Code of Conduct (HVCC). The crux of these rules prohibited banks “owning” appraisers, and disentangled appraisers’ pay from the value of the home. Howard Glaser, mortgage industry analyst who worked with Cuomo at HUD says, “In the optimal world, the appraisal function would be run by an independent company separate from all others involved in the lending process. The bank regulators should have been inspecting these relationships. Unfortunately, Bank of America/Landsafe still doesn’t have a federal regulator who has ever cared about problems in the appraisal process.” Their regulator, the Office of Comptroller of the Currency (OCC), is run by a Bush appointed holdover John Dugan. While bank lobby groups tried to sue Cuomo’s HVCC effort this February, Cuomo stayed on track and got Fannie and Freddie’s regulator (the FHFA) to agree to hold the agencies accountable to the rules. With Cuomo prevailing, HVCC finally took effect May 1, 2009. The mortgage lobby won one battle though, allowing banks to keep in-house appraisal units and to own stakes in appraisal management companies (AMCs), as long as the mortgage broker and loan officers don’t pick the appraiser. If this Chinese wall is broken and complaints are submitted to regulators, then government-controlled Fannie Mae and Freddie Mac is not supposed to buy their loans on the secondary market. Today these agencies buy about 85 percent of the banks residential mortgage loans – a function that is critical to banks that need to free up capital so they can make new loans. Consumer advocates like Rheingold worry that the HVCC rules that did get implemented only half-way solve the problem. Rheingold states that Cuomo’s original guidelines, demanding fully-independent appraisal management companies, would have gone a long way to prohibit abuse in the system. The rules that did get implemented, however, allow bank ownership of AMCs to continue. Thus, including full and partial, direct and indirect ownership, four big banks now control over 80 percent of the appraisal market under HVCC. Not only does BofA own Landsafe, but Wells, Citi, and JP Morgan have ownership interests in appraisal subsidiaries/joint ventures of First American and Fidelity/LSI ServiceLink. Worries are that this system may hinder attempts to truly change the culture. As far as the GSEs, Rheingold added “If you give Fannie and Freddie and inch they take a mile. Unfortunately, the current HVCC guidelines give them a lot more than an inch.” Glaser adds, “HVCC should help slow appraisal fraud, but a company like Landsafe really needs to change their Top to Bottom practices and their management to stop the abuse.” Notes: (i) An earlier version of this story incorrectly stated that “ in a feature story out this month in HousingWire magazine, DeSoer admitted integrating “distinct lending systems” across BofA and Countrywide is just getting underway.” DeSoer’s comment actually applied to servicing platforms. The sentence was removed. Topics: Bank Appraisal Conflicts | No Comments » Survey shows most, but not all, lenders confident of meeting HVCCBy Aman Makkar | April 2, 2009
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