New York Attorney General Andrew Cuomo's investigation into mortgage broker influence on property values continued to grab headlines last week when he issued a subpoena to First American Corp.'s real estate appraisal unit eAppraiseIT. The attorney general ordered an inquiry about appraisals the unit performed in the state.
The subpoena was the latest in a string of such inquiries seeking information on alleged appraisal fraud. Appraiser Mitchell, Maxwell & Jackson and broker Manhattan Mortgage Co. were also issued subpoenas by the attorney general as part of the investigation - which includes disputed appraisals and how appraisals were ordered - earlier this month.
The investigation is helping to shed light on yet another corner of the subprime lending market where brokers were lured by incentives to push loans through and by the promise of a robust housing market. "It's a huge concern," said one ABS CDO manager. "There is concern that appraisers are being coerced to be coming up with values."
Indeed. And not always in the way you'd expect.
Former New Century Financial Corp. appraiser Maggie Hardiman was quoted in the Washington Post earlier this month with tales of salesmen barging into her office with baseball bats when she rejected loan applications. Hardiman, who likened the stress of her position with the company to "selling her soul," said "You didn't want to turn away a loan because, all hell would break loose."
The woman told the newspaper about such a scene: "You cut my [expletive] deal!" she recalls one man yelling at her. "You can't do that." "Bang! The bat whacked the top of her desk," the newspaper reported.
Most of the mortgage applications she reviewed had "problems," the former employee of the now bankrupt subprime lender New Century, said. But when she did reject a loan application, another appraiser was typically found to sign off on it, she told the Post.
According to a study released last year by October Research Corp., 90% of appraisers said they felt pushed to inflate appraisals. In 2004, about 55% of respondents said they felt pressure to overstate values, and more than 40% reported pressure in 20% of transactions.
And in the realm of subprime lending, accurate appraisals are key to determining a loan's future performance. More often than not in recent years, the borrower had a high LTV to begin with - and there's a chance the value of his or her home has already declined - leaving little equity to work with.
So what's a HEL buyer to do? A number of investors were quick to point out last week that bad apple appraisers are most likely to grab headlines, but likely only make up a minority in the field. On-site due diligence, they said, was key to gaining confidence in home valuation practices.
Among common quality control techniques are: using licensed appraisers, utilizing lender-approved, not broker-approved, appraisers and employing AVMs as a secondary control measure.
And of course, if you come across a baseball bat during an office visit, you might want to rethink that loan purchase agreement.
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