Bill Black: Mortgage Appraisal Fraud is Baaack…Because Bank Execs Profit From It

[marmar]

By Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Originally published at New Economic Perspectives

The Financial Crisis Inquiry Commission (FCIC) report described one of three epidemics of accounting control fraud that drove the financial crisis in these terms.

“Some real estate appraisers had also been expressing concerns for years. From 2000 to 2007, a coalition of appraisal organizations circulated and ultimately delivered to Washington officials a public petition; signed by 11,000 appraisers and including the name and address of each, it charged that lenders were pressuring appraisers to place artificially high prices on properties. According to the petition, lenders were ‘blacklisting honest appraisers’ and instead assigning business only to appraisers who would hit the desired price targets” (FCIC 2011: 18).

The FCIC Report then documents scale of this epidemic of loan origination fraud.

One 2003 survey found that 55% of the appraisers had felt pressed to inflate the value of homes; by 2006, this had climbed to 90%. The pressure came most frequently from the mortgage brokers, but appraisers reported it from real estate agents, lenders, and in many cases borrowers themselves. Most often, refusal to raise the appraisal meant losing the client. (FCIC 2011: 91).

A clarification is in order. The “client” was rarely the buyer because, for obvious reasons, we do not allow the borrower to select the appraiser. Even moderately-sized lenders have vastly greater power to successfully extort appraisers than does any residential borrower. It may be true that “many” borrowers tried to “pressure” appraisers to increase the appraisal, but the overwhelming source of such pressure was from lenders and their agents and virtually all of the successful pressure came from lenders and their agents. .................(more)

The complete piece is at: http://www.nakedcapitalism.com/2014/12/bill-black-mortgage-appraisal-fraud-baack-bank-execs-profit.html

[geek tragedy]

1. In Brooklyn, this is not happening, to the contrary

the appraisers have been low-balling compared to market value.

And we're talking about a market driven by cash buyers.

[1StrongBlackMan]

2. I read the article and have a question ...

These three findings allow us to understand a great deal about the mortgage appraisal fraud epidemic.
•Appraisal fraud was endemic
•Appraisal fraud was led by the controlling officers of lenders and their agents
•No honest lender would ever coerce, or permit, the inflation of the appraised value because the home’s true value provides a critical protection to the lender
•The lenders’ controlling officers were deliberately creating a “Gresham’s” dynamic in which bad ethics drives good ethics out of the appraisal profession
•Honest lenders’ controlling officers could easily block such a Gresham’s dynamic by creating desirable financial incentives and internal controls that will block inflated appraisals
•Appraisal fraud optimizes accounting control fraud by lenders (and loan purchasers)

How does Black define "controlling officers of lenders"/"lender's controlling officers"?

I have no doubt that banks and other lenders are/have been pressuring appraiser to come in with the highest valuation number possible (even, impossible) ... but here, Black seems to be implying that top management knows, or even, should know of the pressuring. To make that assertion/leave that impression is sloppy journalism/lawyering.

I suspect the most that can be proved is top management sets revenue goals and/or ties the unit line manager's bonus structure (or continued employment) to meeting these revenue goals. While this might (and likely does) encourage line managers to do wrongful stuff; it cannot be tied to a directive from, or even knowledge of, top management.

I know many (including Black) want to see top bank executives go to jail; the Beckett/Henry the VIII argument won't get them there ... only the "lowly" line manager would be tied to the fraud.

[Wellstone ruled]

3. Here is a comment that I recieved from a

Mortgage Loan Officer,can't you push this another ten to fifteen.what do you need. No way,not going to jail just so you can hit your numbers. In 2007 this was a daily thing. Walked away from the Industry when this crap became the norm and not the rare event. Lots of money flying around during that time frame. Many folks whom we knew in the business have lost their license or paid huge fines and a few are making license plates for the next three to five years. And non of the Bankers have been taken down.

[hughee99]

4. This is why my brother got out of the business around 2007.

Banks pushed appraisers for higher values, much higher than could reasonably be justified, and would only do business with those appraisal companies that would "play ball". After the market dropped, the banks then turned on the appraisers and started suing them for appraising the houses for too much.

[truedelphi]

5. Thanks for this thread. K & R. n/t

[Octafish]

6. Control Fraud

What a country.