Thursday, May 19, 2011

The Next Fraud Trend

From the Appraiser Buzz:
Interview with Ann Fulmer, Vice President Business Relations - Interthinx


FULMER: Fraud schemes are always mutating to take advantage of opportunities presented by the economy and lenders' operational processes. Now that lenders require fully documented applications there’s been a big increase in forged and fabricated documents relating to the borrower’s income and assets. There’s also been an increase in misrepresentations relating to occupancy as investors begin to move back into the market or try to obtain refinancing. The predominant for-profit schemes are default related and center on underwater borrowers and distressed properties. That’s why the biggest pain point for lenders today is short sale "flopping."

Flopping occurs when participants in a short sale withhold material information and/or manipulate the property’s exposure to the market in order to induce the note holder to accept a below-market price. In a for-profit flop, the motive is to increase the profit margin when the property is quickly resold at actual market value with minimal or no improvements. Here’s an example: Let’s say that the amount due on a note is $100,000, that the actual market value of the property is $80,000, and that the note holder is fraudulently induced to believe that the value is only $60,000. If the short sale goes through at the manipulated price, the seller’s deficiency and the holder’s loss are both increased by $20,000. The crook walks away with that amount as his profit.

BUZZ: What is the anatomy of a short sale fraud and what do appraisers need to look for?

FULMER: Flopping occurs in two phases. The first phase (A to B) is the acquisition of the property. Appraisers are not likely to be involved at this point because collateral value is usually established with a broker price opinion. Appraisers get involved at the B to C stage when they're asked to value the property for the end buyer (C). Red flags to look for include:

• Seller is not the owner of record
• Owner of record (distressed borrower) is the seller but he/she is not actively involved with the sale or no longer occupies the property (may indicate an unrecorded sale)
• Previous owner of record (the distressed borrower) remains in the property after the short sale
• Subject transaction is set to close less than 90 days after short sale with no apparent improvements or repairs to justify the higher resale price
• Liens or judgments were filed shortly before or after the short sale but there’s no evidence of repair
• Second mortgage (satisfied during the short sale) was back-dated and filed after notice of default
• Seller is a land trust (especially where transfer into trust occurred shortly before the short sale)
• Seller is an LLC
• The transaction is non-arms length (seller is a corporate entity/LLC owned by the real estate agent or broker or another participant in the transaction; seller and real estate agent or settlement agent have an on-going undisclosed business relationship; end buyer is a friend or relative of the seller, etc.)
• The same real estate and settlement agents are involved in the short and end buyer transactions
• The purchase contract:
- predates the short sale
- shows an excessive real estate commission, or a commission that is based on an amount that is significantly less than the purchase price (may indicate that the real estate agent is uncomfortable with the stated contract price)
- shows substantial fees are to be paid to a “negotiator” or “facilitator,” or for referral or management of the property
• The short sale was never listed in MLS
• The short sale was listed but the history (pre-short sale) shows only token exposure to the market:
- No photo, or only one photo that makes property appear very unattractive
- Minimal property description
- Listing was immediately marked “pending” or “under contract”
- Listing was “office exclusive” (only agents from listing office can bring offers)
- Property was coded for a different (usually inferior) neighborhood
- Property was listed in the wrong city
- List price was significantly lower than sale and list prices for comparable properties
• Comparable sales show signs of flopping/flipping and/or involve the same parties as in the subject transaction.

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Related article in LA Times

Maybe 10 Years of "Tail Insurance" Is A Good Idea

Excerpt from the Appraiser Law Blog:

"How is it that the FDIC can be suing about appraisals delivered 5 or more years ago?

"First, when the FDIC sells off the assets of a failed lender for which it has been appointed receiver, the FDIC typically retains for itself the right to claims against parties like professionals and officers and directors whom it can blame for losses of the failed lender. The standard language included in FDIC asset sale agreements is shown to the right.

"Second, under its interpretation of the Federal Deposit Insurance Act, the FDIC receives an extension of any state statutes of limitations -- an additional three years for tort claims (e.g., negligence) and six years for breach of contract claims, running from the date of the FDIC's appointment as receiver."

The entire article is here. (This excerpt is about halfway down the post.)

While we're on the topic, Peter Christensen has more valuable information:

The FDIC's Use of its Pre-Claim Investigation Powers

"Unlike private lenders or other private parties, even before the FDIC files or threatens a lawsuit, the FDIC has broad investigatory powers that it tries to use in some cases to essentially shake the file cabinets of a professional upside down to find something that may support claims against the professional who worked for or rendered services to one of the 350+ failed lenders that the FDIC has taken over since 2007.

With respect to appraisers specifically, the FDIC has subpoenaed appraisers to produce five or six years worth of appraisal work files for a failed bank -- so that the FDIC can comb through the appraisals and work files for potential claims."

[Ed.: In most other contexts, this would be referred to as a "fishing expedition."]

How to Determine if an Appraiser E&O Policy Excludes FDIC or Other Regulatory Agency Claims


"The best way is to read the policy including all of its relevant endorsements and, if more clarification is needed, ask the broker offering you that policy. If the appraiser is considering new insurance, it is advisable for the appraiser to ask for a complete copy of the policy and all proposed endorsements before binding coverage. Exclusion of coverage for FDIC claims is just one concern in this current liability environment, but it is a big one for appraisers who performed any appraisals for loans (mainly between 2004-2008) made by or sold to any of the 350+ failed lenders taken over by the FDIC since 2007."

Appraisers: Be Sure Your E&O Covers FDIC Complaints

"In state insurance filings, GenStar has now indicated that future E&O policies effective after 6/1/2011 for appraisers needing insurance for work before August 2008 will contain an exclusion for damages alleged by the FDIC. Most insurers are making this move because of the FDIC's hyper-aggressive litigation tactics against individual appraisers -- insurance premiums that most appraisers can afford are just not enough to cover the FDIC's view that appraisals are a form of mortgage insurance."

Thanks to Peter Christensen from the Appraiser Law Blog.

Monday, May 16, 2011

FDIC v LPS, CoreLogic

The FDIC has accused Lender Processing Services Inc. of Jacksonville, Fla., and CoreLogic Inc. of Santa Ana, Calif., of causing $283.5 million of damages to the former Washington Mutual Inc. for failing to provide oversight of appraisal.

The 118-page filing of the lawsuit states 220 appraisals performed between 2006 and 2008 contained “multiple egregious violations” of industry standards.

Less than 4% of LPS appraisals conformed with professional appraisal standards.

The FDIC filed a separate suit seeking $129 million from CoreLogic, claiming it found negligence in Corelogic’s eAppraiseIT unit after a review of 194 appraisals performed in 2006 and 2007.

CoreLogic’s defense? 85% of the loans involved “desk reviews” — no interior or exterior inspection.


Rules for Home-Office Deductions

Just in time to start thinking about next year's taxes!

Many appraisers work as sole proprietors from home-based offices, and many know that IRS guidelines allow deductions for the portion of the home that is used "exclusively and on a regular basis for work in your business." All the space you use for working from home, including storage space, can qualify for a tax deduction.

"Exclusive" use means you must use the entire area—whether a single desk, a room or an entire floor—only for business and nothing else. Any personal or family use forfeits all rights to home-office deductions

Your "principal place of business" means the place where you personally meet clients or customers (phone calls don't count) or the only fixed location where you conduct your business' key administrative or management activities. There can't be another fixed location outside of your home where you conduct such activities for that business.

Some IRS-approved examples of administrative or management activities: arranging appointments; billing clients, customers or patients; ordering supplies; maintaining records; forwarding orders; and preparing reports.

You can also qualify for deductions if your employer requires you to work from home, as long as you don’t charge your employer rent. One big catch is that you can’t deduct expenses for your home office if you choose to work at home even though your employer provides you with an office. IRS Form 8829 can be used by self-employed workers to calculate the home office deduction, which should be reported on Schedule C.

Most employees are unable to satisfy the requirement that they maintain the at-home office for the convenience of their employer—"convenience" meaning that otherwise their jobs disappear. Employees can't maintain the office for their own convenience—for instance, to complete reports at night or on weekends. Dubious IRS examiners will want to see a confirming letter that says, essentially, "No home office, no job."

The amount you deduct for your home office depends on the percentage of your home used for business. (The percentage is derived by dividing the square footage of your home office by the total square footage of your home.) Simply apply that percentage to different home expenses, such as mortgage interest, real estate taxes, utilities, home repairs and maintenance and homeowner insurance premiums. These deductions are itemized on your federal tax return, thus lowering your taxable income and reducing the tax amount you owe

Another catch: You can only deduct expenses if your business generates income. Expense deductions are limited if they exceed your gross business income.

You can factor depreciation of you home into your calculations (see IRS Publication 946), but you might want to think twice before taking depreciation on your home office is that it reduces the capital gains deduction you can get when you sell a home. That could mean you’ll owe taxes when you sell, especially if you’ve lived in your home for a while.

Remember to save invoices and cancelled checks to prove what you spent in case of an IRS audit. Keep after this housekeeping regularly, so it does not spin out of control. The last thing you want is a phone call from the IRS, followed by the sickening realization that you've been jamming all of your receipts into a large "keep box" for the last 5 years.

This post is based on this article.

Sunday, May 15, 2011

An Absolute Truth

"[Appraisal] quality standards during the mortgage boom years were set by the lenders and their regulators -- lenders got the quality they ordered under the supervision of their regulators, including the OTS and FDIC.

"Yet, now, these same lenders and the FDIC are looking at those appraisals as a way to recoup their losses resulting from bad lending and falling real estate prices."

Quoted from: Appraiser Law Blog

3 Major Suits Against AMCs

FDIC v. CoreLogic, eAppraiseIT
U.S. District Court, C.D. Cal., May 9, 2011.

FDIC v. Lender Processing Services, LSI Appraisal
U.S. District Court, C.D. Cal., May 9, 2011.

FDIC v. General Star National Insurance Company
U.S. District Court, C.D. Cal., April 29, 2011.

More information from the Appraiser Law Blog here, which includes links to the complaints.

(via Richard Hagar, SRA)

Friday, May 6, 2011

ACOW President's Report

First, I want to state how honored I am to be the 2011 ACOW President. As many may know, San Sidor, MAI had to step down unexpectedly in late 2010 and I was fortunate enough to be considered to try and follow enormous footprints; in both Jim Irish, SRA and Stan! ACOW has been an official organization now since 1996; ACOW is one of the oldest state appraiser coalitions in the country. The foundation that has been put in place by all of those who have served ACOW is various capacities over the years bodes well for all of us today.

Over the past six months, I have had the privilege to travel across the state and speak to several groups of appraisers about ACOW and legislative issues impacting Washington State appraisal professionals; the back and forth in-a-day trips to Eastern Washington have yet to get old. I was surprised recently when I went to speak of a group of appraisers and one individual, a long-time ACOW supporter, handed me a $500 check as a donation to keep ACOW viable. It was after a long day and the second of two presentations and to have people hand you money showing that they support and believe in what you are trying to do is truly a very humbling experience; I was practically speechless!

Secondly, all Washington State appraisers need to know that there are a lot of your fellow appraisers throughout the state that are volunteering countless hours and resources to make sure that our voice continues to be heard in Olympia. From the membership phone calls, to the hosting of education offerings and fundraisers with proceeds to going to benefit ACOW; there are so many people besides the six ACOW board members that are making a difference for appraisers in our state.

As we wrap up the legislative session in 2011, ACOW has again, been successful in advocating for appraisers in Olympia. What started out as, what we thought might be a “light” session, as we are now in the midst of the Special Session, this year has shown to be quite active. And our successes are also attributed to our lobbyist! In January, I had the opportunity to offer comments at a House Committee hearing about the elimination of the Real Estate Appraiser Commission (REAC), this was the third year our commission was slated for elimination by the Governor’s office and the third year that ACOW has lobbied against the legislation. We quickly got the REAC removed from the bill, but along the way, it got renamed to the Real Estate Appraiser Advisory Committee (REAAC); something that ACOW fought for 16 years ago in changing the original advisory committee to a commission we have today. Along with this name change, the appointment process would be moving to the Director of Licensing rather than from the Governor. ACOW kept at it and with our lobbyist’s efforts, finally got a sponsor to keep the commission as is, but with the Director’s appointment, in the Special Session. I am happy to report that ACOW has been told that a revised Bill 1371 keeps the Commission as is, with only the appointments coming from DOL.

Additionally, in the midst of this year’s budget process, a 484-page document this session, our lobbyist recognized one line that was left over from the prior budget: the ability to raise appraiser license fees! From prior discussions with the Appraiser Program Director at DOL, this was something that caught us off guard. Calling the DOL frantically to find out who asked and why this was to be included in the budget, their response was “we didn’t ask for any increase!” A day later, I received a callback indicating that this was merely a mistake, left over from the prior budget language in 2009 and that the budget writer was new(er) and it was only an oversight—though a potentially costly one to appraisers, especially given that are license fees increased 30% last year. Hearing that, ACOW took a two-pronged approach: One was to talk to the policy-makers and explain the problem; the other, have our members call our respective legislators and ask them to remove this from the bill. After a week of calls and conversations from and with several appraisers across the state, I am also happy to report that this language was recognized as a mistake and it too, was removed from the bill!

Another item that has been in recent news is the rulemaking process for implementing our state’s new AMC law. As you may recall, in March 2010, Washington State became the ninth or tenth state in the country to pass an AMC law; this was several months prior to the Dodd-Frank Act and shows how successful our organization has been for appraisers. In late 2010, the REAC created a rule-making workgroup to help DOL write the rules for the AMC law; three ACOW board members were on the workgroup and the draft has been sent to DOL to work through the language. At the last REAC meeting in April, DOL indicated that there will be a public hearing process allowing all stakeholders a chance to comment on the rules that have been proposed. We haven’t heard of a specific date yet, but stay tuned and as soon as we hear, we will distribute any information we receive.

Also, be prepared to begin hearing about the annual ACOW at the Summit in August. We are scheduled for the third weekend in August and are still awaiting word if REAC will be in attendance after a hiatus. We have a committee working hard to identify some CE and information sessions that are pertinent to all appraisers throughout the state. We want to be able to keep abreast of what is happening in Olympia as well as on the National stage.

Lastly, I want to thank all of those who have, thus far, signed up and/ or have contributed to ACOW in 2011; for those that haven’t yet, there is still time and your financial support is still needed! There are approximately 2,905 licensed/ certified appraisers that live in Washington State. While our mission is to represent all appraisers in the state, regardless of affiliation or certification, our goal is to capture a large share in order to continue our efforts in Olympia! This goal takes great resources from only a few dozen volunteers and our lobbyist.

The best way to support ACOW is to sign up and pay your annual membership dues! While 2011 saw an increase in annual dues to $45, you board of directors did not take this lightly. We recognize that the economy is different now than only a few short years ago, but to be effective in Olympia, we need your support! ACOW was successful in 2010 with eliminating mandatory green education for all appraisers and for getting the Washington State AMC law passed.

Thus far in 2011, we have helped save REAC from elimination, we were successful in eliminating licensing fee increase language in the biennial budget, and ACOW has been very involved with the AMC rule‑making work group. These directly equate to value to Washington State appraisers and I hope that you consider (or continue) supporting ACOW in 2011 and beyond.

Justin Slack, SRA
ACOW President

Senate Republicans Stall on CFPB Director

Watch carefully, as vested interests struggle to preserve the status quo:


"A group of 44 Republican senators sent a letter to President Obama Thursday vowing not to confirm any nominee for director of the Consumer Financial Protection Bureau until structural changes are made.

"The CFPB was created under the Dodd-Frank Act and is scheduled to open July 21. It will become the main regulator for the mortgage industry and will oversee how loans are written and sold to consumers. But, nearly two months out, there is still no director. Republicans in both the House of Representatives and Senate want to restrict the bureau and establish more checks and balances before it gets underway.

"...the White House said the CFPB will be vital to catching lending abuses in the future, according to a statement sent to HousingWire Thursday.

"'For far too long, American consumers have fallen victim to fraud, misleading claims, and powerful special interests and the President believes that American families who were the hardest hit by this financial crisis deserve an independent watchdog to protect consumers and prevent predatory lending and other abuses in the future.'

"The Dodd-Frank Act requires that the CFPB to submit annual financial reports to Congress, twice each year to justify its budget from the previous year. And the director is required to testify before and report to Congress twice each year regarding the CFPB’s activities.

"The Government Accountability Office will conduct an audit each year on the bureau’s expenditures and submits a report to Congress. And the CFPB must submit its financial operating plans, forecasts and quarterly financial reports to the Office of Management and Budget.

"A separate council of federal regulators, called the Financial Oversight Stability Council, can overrule the CFPB with a vote as well, Warren has pointed out.

"...Warren took it a step further and accused lawmakers of merely trying to delay and defund the agency before it even gets started, and that they are ignoring how quickly financial threats to consumers can emerge."


[Ed. Appraisers who are irate about how their profession has been ruined by unscrupulous banks should be showering these self-interested politicians with a blizzard of protest letters, emails and phone calls.]

Government Sues Deutsche Bank Over Mortgage Fraud


"On May 3, the United States government has filed a civil mortgage fraud lawsuit against Deutsche Bank AG and its wholly owned subsidiary, MortgageIT Inc. The complaint seeks damages and civil penalties under the False Claims Act for what it alleges were repeated false certifications made to the Department of Housing and Urban Development (HUD) in connection with the residential mortgage origination and sponsorship practices of MortgageIT.

"To date, the Federal Housing Administration (FHA) has paid insurance claims on more than 3,100 mortgages, totaling $386 million, for mortgages endorsed by MortgageIT.

" 'As alleged, MortgageIT and Deutsche Bank ignored every type of red flag and breached every duty of due diligence before underwriting thousands of federally insured mortgages,' said Preet Bharara, U.S. attorney for the Southern District of New York. 'While the homes the defendants issued loans for may have been built on solid ground, the defendants’ lending practices were built on quicksand. Ultimately, prudence was trumped by profit, and good faith took a back seat to good fees.'

"Court documents state that between 1999 and 2009, MortgageIT was an approved direct endorsement lender and endorsed more than 39,000 mortgages for FHA insurance totaling more than $5 billion in underlying principal obligations. These mortgages were highly marketable for resale to investors because they were insured by the full faith and credit of the U.S. government. MortgageIT and Deutsche Bank, which acquired MortgageIT in January 2007, made substantial profits through the resale of these endorsed FHA-insured mortgages."


Thursday, May 5, 2011

ACOW - April 5 Meeting

Thursday, April 5, 2011, 6:00 p.m. – Please Plan to Begin Promptly

Lamb Hanson Lamb Office – Seattle
4025 Delridge Way SW, Suite 530
Seattle, WA 98106 (206.903.1500)

For the Lamb Hanson Lamb Office, the building elevators close at 5:30pm; for the Lamb Hanson Lamb offices at 5:30pm.

If attending and plan to arrive after this time, please call ahead of time to arrange for access. (For directions, go to:

To attend the meeting via phone conference: -dial 1.218.339.4300 -when prompted dial access code: 872158#