New York State joins the post-housing boom mortgage clean-up effort and tries to learn more about the ghost in the machine. The machine being the lending industry and yet the government seems to know so little about it. This is ironic because fraud appears to have been blatantly prevalent (It ain’t just subprime) for many years. And although mortgage fraud is a significant problem, the cumulative effect of “little white lies” that are engrained into the system will be the most difficult to undo, detect or prove. You know, the things that are commonly done so much that eventually no one realizes that they are illegal or unethical?

New York state Governor Eliot Spitzer announced creation of a new interagency task force with the neat acronym (an important element of government culture): HALT (Halt Abusive Lending Transactions) that:

is designed to help the public handle questionable lending practices in the subprime market, and to make it easier for low-income families to buy new homes.

A Political Fine Line
Any government agency walks a fine political line when trying to reign in subprime lending because on one hand, the government can shut low-income families from access to funds to purchase new homes by being too tough, and on the other hand, low-income families will continue to get hurt if government does nothing and the abusive tactics continue. This week, Fed Chair Bernanke addressed the subprime issue and seemed to take a laissez-fare position on fixing the subprime mess.

There was a “Debtor Nation: The Mortgage Mess” special on CNN/Paula Zahn Now show last night that included real estate editor Gerri Willis. One of the facts mentioned was the statistic reported by that 34% of loan applicants don’t know what type of mortgage product they have on their house. Amazing. No wonder the scope of the mortgage problem is so widespread. I am not downplaying the mortgage problem in any way, but at some point, people need to take some responsibility for their actions (assuming they are not misled).

The first overt action taken from this task force was announced yesterday:

Attorney General Andrew Cuomo issued a subpoena to Manhattan appraiser Mitchell, Maxwell & Jackson Inc., the company said. Manhattan Mortgage Co., a [mortgage] broker, also received a subpoena, Chief Executive Officer Melissa Cohn said.

I have known Jeff Jackson and Steve Knobel of Mitchell, Maxwell & Jackson (MMJ) professionally since they founded their firm in 1991 (my firm started in 1986). MMJ is my primary competitor. In addition, our firm has done work for mortgage broker Melissa Cohn, founder of Manhattan Mortgage on and off, but very little in recent years.

Here’s another irony:

I am pretty confident that Mitchell, Maxwell and Jackson (MMJ) as well as Manhattan Mortgage do very little, if any subprime work. Manhattan and the surrounding region have a relatively low concentration of subprime lending activity and these firms aren’t known for this type of work.

I am sure the AG’s office know these two firms are not orientated towards subprime, so this effort must be largely directed at the issue of appraisal pressure and not subprime lending.

Here’s how the MMJ responded to the media:

Y. David Scharf, an attorney at New York law firm Morrison Cohen LLP, who is representing Mitchell, Maxwell & Jackson, said his client has been told it’s not a target of the investigation.

The information that is being requested is whether or not pressure has been brought to bear on appraisers to change their appraisals,” Scharf said. The firm is “continuing to gather information” in response to the subpoena, he said.

We did not change appraisals in any circumstances,” he said.

I thought the closing quote by Jeff Jackson in the Crain’s article was particularly interesting.

Because we are a large company were not as easily pressured as a small company might be.

This phrasing seems to infer that the smaller an appraisal firm is, the more unethical it has the potential to become. I believe that size is not a proxy for insulation from pressure. Sure, a small firm can be pressured by small clients, whereas a larger firm is less likely to react to that type of pressure. I think that’s what Jeff was referring to and I agree with that example.

However, a large mortgage broker can inflict significant pressure on a large appraisal firm. Get the appraiser addicted to high volume and the potential to be influenced is just as significant. Small and large appraisal firms, like firms in any other industry, are always concerned about covering their overhead.

Every appraisal firm who does mortgage work, no matter what their size, is vulnerable to significant appraisal pressure.

The issue of appraisal pressure is why I got into blogging in the first place and started the appraiser blog Soapbox before I got the idea for Matrix. I can work up a good rant about the appraisal pressure issue with very little effort at a moment’s notice. One of my personal goals in life is to speak about appraisal pressure before Congress to explain what the problem is and how to solve it. Many of these ideas have been fleshed out in both of my blogs already. Of course, at the rate this is going, I may get my chance. I’ll keep my fingers crossed.

but I digress…

An edited down version of the Bloomberg wire story also ran in the New York Times today.

I was contacted by Bloomberg for the story to ask whether we too were issued a subpoena.

Other appraisers — Miller Samuel Inc. and the Vanderbilt Appraisal Company, competitors of Mitchell, Maxwell & Jackson — said they had not received subpoenas.

A quote of mine was left out of the New York Times version of the Bloomberg story – sort of an overview of the state of affairs in the appraisal industry:

Appraisers frequently face pressure to revise their findings, said Jonathan Miller, president of Miller Samuel.

“I would seriously doubt that there is one appraiser in the United States that has not been on more than one occasion pressured to make a number,” Miller said.

In a study conducted last year by Richfield, Ohio-based October Research Corp., 90 percent of appraisers said they felt influenced to write bogus appraisals. Four years ago, that number was 55 percent. Seventy-one percent said mortgage brokers asked them to do it.

I’d say the October Research report results were on the conservative side because I think the idea of appraisal pressure is so commonplace, its become invisible. Here’s a typical example:

Mortgage Broker XYZ hires my firm to appraise a property for a cash-out refinance. I estimate the market value but its not high enough to make the deal work. The value is reasonable but the property owner needs more. The deal dies and the mortgage broker simply never uses my firm again. This incident is a one-time situation but it exists in perpetuity because that mortgage broker learned from the experience and only selects appraisers who “play ball.”

Another irony in these situations, is that we have had owners or top producers at mortgage firms that don’t use us regularly, recommend or use us when it impacts them personally such as for a divorce, an estate, a complex deal, a lender who requires them to use us, a friend thinking about buying a property, etc. In other words, when incentivized to obtain a reasonable estimate market value, we get the call.

A Badge of Honor
I have spent a large portion of my professional appraisal career steering clear or getting rid of clients that pressure us. Don’t get me wrong. There are clients that don’t pressure us at all. Those clients are the keepers. I have worn this effort as a badge of honor. However, that badge of honor is bad for business and has cost myself and my family in significant economic terms during my career. I could triple the size of my firm tomorrow if removed that badge.

But that’s for another rant…

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6 Responses to “Badge of Irony: HALTing Appraisal Pressure Despite Ghost In The Machine”

  1. John K says:

    I’m glad NY state is taking this necessary step.

    I don’t follow any issue unless there’s an acronym involved.

  2. Morgan Alexandra says:

    The appraisers are not the only ones being pressured to do fraud. I am a loan officer and I have been pressured (verbally and in writing)by a Realtor to do seven fraudulent loans because as he told me “everyone does it.” First with bribes which didn’t work. Then upon his threat he screamed at me of him getting me black balled by every Realtor in Reno. When I brought it to his Broker’s attention, she called my Sales Manager and threatened him she would have us as a bank black balled by every agent in her large brokerage if I wasn’t fired for trying to get real estate agents in trouble for doing what everyone does. My Sales Manager had me turn them into Corporate Fraud for a SAR to the FBI. This Realtor then went over my Sales Manager’s head to the Branch Manager where he made the same threats to her.

    Mortgage Fraud is a very dirty secret that too many know about and too few take serious. For the last three years I have felt I was tilting at windmills trying to get people here to understand the seriousness of the mortgage fraud I saw occurring around me and the lack of understanding from Realtors, their Brokers, the real estate division and mortgage division as to what mortgage fraud is, why it should be immediately nipped in the bud when brought to light, and the negative impact to our community from it. I was accused of doom and gloom. Unfortunately, it took the negative impact to our real estate market we are now going through for people to start taking me seriously. Mortgage Fraud spawned a dangerous housing bubble burst that ruined households and neighborhoods as overvalued property falsely inflated nearby home values while also raising property taxes. When the fraud was uncovered or homeowners default or both, values just as quickly plummeted leaving other owners with over-valued homes and upside down mortgages — conditions that worsen the housing bust aka adjustment to where the values would have been but for the fraud.

  3. Grunt says:

    Sure you could have tripled the size of your firm if you turned in your badge. The result would be the type of unwanted attention that these other firms are receiving. Or worse. A one way ticket to club fed.

    In the long run, you will be better off because honesty is a rare and valuable commidity that people are willing to pay a premimum for.

  4. Mike Chase says:

    Lender pressure is alive and well! I have lost 3 clients in the last 8-10 months due to failure to come up with the required number to do the deal. I was doing work with a very large national lender who went to a management company to order and place appraisal orders with contract appraisers on the lenders approved list. What happened is all appraisal orders were assigned randomly throughout the region. Orders actually incresed as the list of appraisers was culled down from “everyone” to a select few who had past good quality work product. As more and more loan officers and branch managers became exposed to some new appraisers in the mix, they lost the ability to work with their “relationship” appraisers as in the past. Seemed fair to me at the time. However, after a few months of providing accurate, fair and supportable appraisals, the pressure began to surface. The first complaint I received from a loan officer I had never worked with before was to push value on a property by $60,000. After all the loan officer said, the deal came from another lender who couldn’t do the deal, for whatever reason, and the appraisal they had done was for the higher value. And if I didnt’ change the appraisal I would be taken off the list of approved appraisers in my region. The loan officer even e-mailed me the above and copied the branch manager and regional VP. Soon after, as more of my appraisals began to make their way into the system I received more complaints from other loan officers and branch managers on “hitting values” to make the deals work. Even though the lenders own internal checks and balances forbid the loan folks from commnincating with appraisers on values, only on requesting other comps if necessary. Unfortunately, the branch managers and the regional VP did not agree with their own internal procedures and with enough pressure exerted within the institution, were able to further reduce the list of appraisers to those appraisers who had a previous “relationship” to each branch or individual loan officer. Word quickly spread on who to use for appraisals, who would “cooperate” to make the deals, those who were “flexible” to make the number. I lost a lot of business in this process. The regional VP expressed to me that if I didn’t make the deal work someone else could/would, and they could not afford to lose a deal to competing lenders. It’s a corrupt culture out there and very few realize that what they are doing on a daily basis is unethical and fraudulent. I have provided value ranges for clients, and told that if I could come up with higher value I could get the deal. Adding insult to injury some of these brokers/lenders have actually called me to do another appraisal or review on the properties I told them would not have a supportable value when another appraiser got what they wanted, and since I was an approved appraiser to where it was being brokered, would I provide a favorable review or same value on another appraisal in order to make it happen. After all I was already approved, on the list, and they would not question my work! Let’s license loan officers/brokers, and have them as accountable as we are in the chain of events. Some of my nearest competition, fairly large shops, play ball with these major players in the area and the quality and professionalisim of the work I have seen, reviewed is abominable.

  5. […] is plenty of culpability to go around – lenders, appraisers (HT: Property Grunt) Realtors and, don’t forget – the […]

  6. Paul Knag says:

    This is a can of worms and everyone knows it, it is all bad, bad, bad. No matter how you defend, no matter what is found, nothing will come of it but increased government regulation and industry scrutiny. Fraud is a serious problem, and to the extent that it has been allowed in our organizations we have only ourselves to blame.