Are Appraisals the New Organized Crime?

Greedy appraisers, who put lofty valuations on properties to please lenders and line their pockets, played a large role in the housing bubble. And the fallout continues: On Jan. 29, a former Beverly Hills real estate appraiser was sentenced to three years in federal prison for her role in a multimillion-dollar scheme to profit from inflated property values. That came on the heels of the arrest of a father and son appraiser team in Laguna Beach, CA charged with altering appraisals to inflate home values by up to $40,000.

In fact, a closer look at the industry and its scandals reveals a "Godfather"-like underbelly, complete with death threats on public officials and sting operations.

The conflicts have led to the increasing use of appraisal management companies -- middlemen that are supposed to act as a firewall between lenders and appraisers. But for millions of homeowners, the issues still linger.
Just ask the owners of the quaint, but extremely moldy Denver home that apparently appraised for about $370,000, despite comps suggesting a value at least $100,000 less. The 2-bedroom home ultimately sold last summer for $237,000.

How did that happen?

Some of the cases working their way through the courts give a glimpse of the back-door dealing that went on. Landmark Equities Group, the family-owned appraisal firm being charged by the California DA, for example, brazenly had an on-site office at a mortgage broker's facility. The appraisers, James Merritt Eaton, 60, and his son Brian Chandler Eaton, 28, secretly changed data on staff appraisers' reports, allegedly to deliver the outcome the loan officers wanted.

In the case of eAppraiseIT LLC, a division of title company First American Corp., New York State Attorney General Andrew Cuomo charged that the unit gave in to demands for higher appraisals to secure more of Washington Mutual's business. In 2006 and 2007, the appraiser did 262,000 valuations for Washington Mutual over an 18-month period, and had a total $50 million in earnings, Bloomberg News reported.

Now, that's not to say all appraisers are corrupt. In fact, 11,000 of them signed a petition protesting the pressure and unethical practices. But the bad apples have given the whole profession a black eye.

Thanks in large part to Cuomo, Freddie Mac and Fannie Mae last year adopted the "Home Valuation Code of Conduct" to counter such abuse. The code says that appraisal management companies, which are paid by the lender out of the appraisal fees collected, must act as a liaison to keep appraisers and lenders from having direct contact on Fannie and Freddie-backed loans.

Needless to say, not everyone is pleased. In one extreme case, an appraiser was arrested and held on $500 million bail in December after allegedly threatening to shoot New York AG Cuomo. The man was "apparently upset over some of the actions [Cuomo's] office has taken regarding cracking down on mortgage-related fraud," the New York Post reported.

(It should be noted that some believe that Cuomo, former HUD secretary under President Clinton, was largely responsible for the subprime mortgage crisis. And in 2004, he joined the board of AMCO, a Cleveland-based appraisal management company).

Some say the appraisal management companies (AMCs) may only make things worse, after all, some of them are owned by banks. (Landsafe, an AMC, is a subsidiary of Bank of America). The well-known New York appraiser Jonathan Miller, CEO of Miller Samuel, calls it all "an accident waiting to happen."

Although the HVCC is intended to ward against improprieties, it is not fail safe. In fact, the code still allows banks to be involved in the appraisal process. For one, lenders can still use in-house appraisers, and are "responsible for selecting, retaining, and providing for payment of all compensation to appraisers." It's right in the guidelines on Freddie Mac's website, with the caveat that the loan production staff is not to have direct involvement in the selection of an appraiser or discuss valuation with the appraiser or AMC.

The biggest concern is that the use of AMCs opens the door to appraisals being conducted by far-flung appraisers unfamiliar with the local market, which in turn will cause more erratic valuations.

"The problem is that anybody with a state-issued appraisal license has the exact same level of qualification to appraise here, whether they live in New York or Buffalo or Albany or Rockland County," Jeffrey Jackson, co-founder of New York-based appraisal firm Mitchell, Maxwell & Jackson, told The Real Deal after the code was passed last spring.

"The appraiser is just the first step in the process, yet we are taking all the blame," Portland-area appraiser Burr Robson told HousingWatch. "I had the same clients for literally 15 years until HVCC. I now have to fight for appraisal work from AMCs, and my income has fallen 67%. I am worried that I'm going to have to sell my house."

And there's a new concern for some homeowners and lenders: low-ball appraisals.

Walt Molony, spokesman for The National Association of Realtors, one of the most vocal critics of the code, said out-of-area appraisers often lead to "apples to oranges" comparisons, resulting in many valuations coming in below the price agreed upon between the buyer and seller. "In an environment where prices have declined over the past three years, this is absurd," huffs Molony. "It has caused a rise in contract cancellations -- not exactly the best way to solve the problem, particularly when homes are selling for less than replacement construction costs in much of the country."

In the end, there will always be the temptation to give in to pressure to win repeat appraisal business -- even if the pressure may not come in the form of a severed horse's head under the bed sheets. It might be something as simple as the boss of a New York appraisal management company -- let's name him "Don CordeLoan" -- saying, "I'm gonna make him an offer he can't refuse." In essence, work for us, our way, or don't work at all.

Some industry watchers say appraisers should be better regulated, but setting up appraisal management companies as the intermediary has the potential of re-creating the same problem we're trying to escape. As Michael Corleone once mulled: "If history has taught us anything..."
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