Underwriting and Appraisal Fraud

sentry · Joined: 12 Aug 2007 Posts: 7

New home sells for 700K, in 9/2006. It is a 3BR on slab. This will be a Construction Perm Loan. Approx 5200sf.

Bank Appraises it at 800K only later I find out they counted the BR in this house as 5. The comps he uses are all o/s subd, even though a 4BR in the same subdivision and directly across the street from the subject, sold 6 months earlier for 654K. Appraiser states all comps were within 1 mile of Subject. I find 2 of the comps were actually 2+ miles away.

Bank gives Loan for 640K, 80% of value.

It would appear the U/W never underwrote the Appraisal and certainly never a review Appraisal.

Thsi is either sloppy U/W or Fraud.

Any comments?

m2c · Joined: 03 Aug 2005 Posts: 937

5200 SF, 3 BR on a slab – that’s one unusual puppy. At least around here it would be.

Figuring LTV off appraised value rather than sales price – that’s one unusual bank also!

OK I can almost forgive the UW for the mileage – hard to judge exact scale from the maps but ….

Appraisals are probably the most tricky part of loan applications these days. Thin market and all that. Results on the Internet value estimators (Zillow, Cyberhouse and the like) are “ify” but they are very good at showing nearby sales. Many times you end up speaking with the appraiser. Sometimes the explanation is OK; sometimes not. It’s always possible there was some reason for a “fire sale” on the one comp. MAYBE … but it does happen. At a minimum I think a call to the state appraisal regulator is in order. I’ve done this only once but was amazed how eager they are to obtain information.

I also think someone up the food chain might want to go over the UW's work on this file.

sentry · Joined: 12 Aug 2007 Posts: 7

I should add the Appraiser stated the Borrower was paying the CP Interest and this property was "one of the first to be built"

Research shows this was a 34 lot subd and 11 homes were already built and listed on FMLS. Two were sold, the 654 one and a private sale where no sale price was disclosed.

This should have had a review appraisal after coming in at exactly 100K over SP.

I think the Loan Officer told the Appraiser what value she needed to make the deal work.

Loan Officer is no longer with the organization and is completely out of the Mortgage Business.

Red Flags????

Haplo · Joined: 20 Jan 2005 Posts: 2422 Location: Springfield, IL

Quote: I think the Loan Officer told the Appraiser what value she needed to make the deal work.

This happens frequently.

Just out of curiosity, so we can kind of get a better idea of your perspective, which party are you involved in the loan?

sentry · Joined: 12 Aug 2007 Posts: 7

I am the spouse of the Borrower.

If you were the U/W would you have ordered a review appraisal.

m2c · Joined: 03 Aug 2005 Posts: 937

Depending on state law even the sales price on a “private sale” is disclosed via the transfer tax. If this applies to your state, it is public record and hopefully your county recorded has an Internet site where the information is readily accessible. If the $654 deal was a construction-perm, only the lot price will show. The actual sales price is not public record and the appraiser could not have determined in September of 2006.

Similarly the “already built” homes would likely show with lot sale prices and would not provide much guidance to the appraiser – listing price doesn’t count. Might explain why appraiser went “far a field” to get comps. The $654K is still a mystery if and only if the sale occurred AFTER construction. I did come across a builder/developer in a semi-rural location (i.e., a distance from any subdivisions) who had the bright idea to sell the first home in the development “at cost” in order to “get things moving”. His “desperation” to get the first family “moved in” plagued him for about a year since that one comp kept coming up.

Definitely it’s industry practice to use the lower of appraised value or sales price as “value” for loan purposes. Can’t explain this.

5,200 sf is large for a 3 BR. If a “den” has a closet, it can be classified as a bedroom even it is not your intent to use as such. I was going to add “ditto” for a similar room in walk out basement but forgot this was a slab. Rarely I’ve found “walk through” bedrooms. Usually this occurs where someone finds “extra space” and puts in another room with only entry through another bedroom. We don’t count this unusual layout as a bedroom.

By the two inhabited dwellings I assume you mean your home and the $654K home. Not a good time to be the Lone Ranger with the current mortgage/housing market. By any chance did the bank granting the loan also finance the development loan. Might explain a few things.

I assume you paid the $700K and no more. This works out to $135/SF – somewhat on the lower end of “new construction” but this figure varies WIDELY depending on “fit and finish” and property location. There could be logical explanations for everything except not using "lower of". Actually this may have worked to your advantage by eliminating mortgage insurance assuming the price of $700K is justified.

sentry · Joined: 12 Aug 2007 Posts: 7

Home is only, per bank, 35% complete. We strongly disagree.

Construction stopped when we found out Builder never pulled a Building Permit. We gave him the opportunity to do so. He declined and said to get ourselves another Builder.

The 654K price was new construction and that was the recorded sales price.

Of the three properties occupied there was the sale of 654K made 6 month's prior to our closing. A tenant is leasing out another property, and another Builder's Son and Daughter in Law occupy the the third property. The last two transactions occured after our purchase so they would not have affected the appraisal.

m2c · Joined: 03 Aug 2005 Posts: 937

Your story continues to get more and more incredible. I starting to think this is a yank but you “sound” sincere.

Now a year or so after construction started, home is only 30% complete and you’ve discovered there’s no building permit?! It’s hard to believe any lender would file a mortgage or at a minimum issue an initial draw without proof of a building permit. Without a building permit, it’s likely no inspections have been performed. That’s REALLY scary.

It’s probably well past the time when you should consider talking with an attorney well versed in real estate matters. Your spouse has a sizable liability on a home that may never be completed. I don’t see another builder stepping in to finish the house unless you hold a gun to his/her head – quality and warranty issues as well as potential for mechanic liens.

sentry · Joined: 12 Aug 2007 Posts: 7

Now the rest of the Story.

Construction Funds were to be released, via check, to both my and Builder after Builder reached certain Benchmarks as itemized on the Construction Loan Disbursement Schedule (CDS).

When we found out the Builder did not obtain permit in March 2007 and refused to obtain it to continue we took him to Arbitration. That was April 2007.

At the hearing was SR VP of the Bank and the current Construction Loan Administrator.

We found out the Bank disbursed $28,500 on the day of closing, via wire, directly to the Builder per the Instruction of the LO.

This amount was not disclosed on the HUD 1.

The Bank's Inspector on his first Inspection certified the entire Foundation was in, as well as the Water and Septic.

The slab for the attached garage had not been poured and no water was in nor was the septic.

On the 2nd Inspection the Inspector certified all inside and outside studs were up. This 2nd inspection was about 7 days after the first.

Naturally the studs were not complete since the slab was not complete.

These first 2 draws were 50,850 and 62,150.

On the 3rd Inspection the Inspector certified that all roof framing was complete, Roof Sheathing was up and 50% of the Felt was up. This is not true since the remaining slab had not been poured.

I refused to allow the Bank to issue any further draws. That was early March. I did authorize the Bank to deposit into my wife' account 2 draws of 12,977.14 and 19,000. These amounts served as reimbursements to us for Concrete for the Slab, which the Builder never paid, Framing Lumber, cost of appliances. We had expected another bill from another supplier for additional lumbar but that has yet to materialize.

The Bank is stating that since my wife signed the checks for 50,850, and 62,150 it releases them from any liability. Further the "Inspections are made for the benefit of the Bank"

We won the arbitration hands down and the Arbitrator awarded us 98K plus in damages. That was in May of 07.

The Builder filed Bankruptcy on 4/24/07 and we were not aware of that until 4/30/07. The Builder also filed a Lien against the property for 120,444 at that time.

When we advised the Bank of the Lien they refused all further draws.

The skeleton of house has been sitting exposed to the weather since March 2007.

Anyone know any regulators who might be interested in talking to the Bank.

m2c · Joined: 03 Aug 2005 Posts: 937

WOW! You’re in a bad situation. I never seen something this bad; perhaps Haplo will come in with some comments. All the more reason to consult with an attorney.
The inspections to which I referred were the ones normally done by the county building department. The bank will also send the appraiser out at various draw time markers (foundation, framing prior to drywall, etc.) to validate completion for the draw.

Letting the structure waste away to the elements is doing no one any good. Some of the actions by the bank I understand but others are “interesting”. Banks typically (say 99 to 100% of the time) get lien releases prior to issuing the draw. $120K in mechanic liens come for the roof?

Various channels are potentially open to you – Channel whatever “Action News”; state attorney general; bank regulatory authority. Many of these are “feel good” actions. Your most effective action is to talk with an attorney.

sentry · Joined: 12 Aug 2007 Posts: 7

So far 2K for Attorney in fight against Builder.

5K for another Attorney in fight against Bank.

It was the Builder himself that put the Lien on the property and according to Bank the title co offers no protection.

If only the U/W underwrote the Appraisal not of this would have got past U/W.

Are you U/W's

Haplo · Joined: 20 Jan 2005 Posts: 2422 Location: Springfield, IL

I'm certainly not, and to the best of my knowledge m2c hasn't been either. What we are is guys who have a good amount of experience in the industry, with a solid ethical standard.

I haven't spoken up much because new construction is my weak point. That being said, if this were a renovation type of deal, what m2c mentioned is very true. The bank normally does receive a lien waiver prior to draw that says that they won't put a lien on the property for the items listed in the inspection (that they are then being paid for.)

It sounds like everyone is throwing up their hands saying "not our fault!" and the one to suffer is of course the borrower.

The unfortunate thing is of course with the builder filing bankruptcy, who do you get to finish the job? Even without the lien that presents a difficult issue.

The attorney is really the only option that *I* see at this point, and that's not overly helpful of course, because you're already doing that. I would probably try and get ahold of the bank and asked them why they underwrote the appraisal in such a manner, just so that you have as much information as possible. (No sense paying an attorney to go after someone if they did something that was perfectly reasonable and legal.)

m2c · Joined: 03 Aug 2005 Posts: 937

Sorry Hap, but I used to be one of those nasty types doing underwriting – mostly conventional but FHA DE also.

Still pop into underwriting for “sticky” cases which are growing in frequency of late. Appraisals are the real bear right now with the thin market – comps are getting older and occasionally it takes a leap of faith to understand the “comparability”. With increasing frequency we are asking for additional comps, written explanations, and usage of Internet sources – even looking at MLS listing – to get a feel for properties in question when they are beyond easy driving range.

New construction just adds another layer of complexity to the appraisal but there’s just a feel of “strangeness” to what sentry has said. One can construct reasonable explanations for 1 versus 2 miles and lack of usage of the $465K sale. Number of bedrooms is a bit different but the bulk of “adjustments” with comp is going to be the square footage and $135/SF wouldn’t automatically raise eyebrows. Still it shouldn’t cost anything to send the appraisal complaint to the state agency that regulates appraisers.

Not sure where the ROI is going to be on attorney fees going after the builder. BK has killed a lot of potential but the $120K mechanic lien may have just been pulled out of the air.

Some of the bank practices are unusual and there may be some hope there. Meant to be mention this earlier but the initial draw payment after closing does have some precedent. For some reason Countrywide does this, at least on the retail side. It confuses builders new to the CW procedure – “why did I get this check? I haven’t done anything.”

My guess is that your attorney has advised you this will be a L O N G messy procedure. If you can get out of the liability early for minimal cost, it could be the way to go.

Out of curiosity, does this property happen to be in Florida?

sentry · Joined: 12 Aug 2007 Posts: 7

Georgia

CLA prohibted draw until permits submitted.

And of, course it was not even shown on HUD 1.

Also found the original Disbursement Authorization. It was signed and withnessed by the Builder and his Realtor on 9/6/07.

Signed by my wife on 9/6/07.

My wife's signature witnessed by the Loan Officer on 9/7/07, DAY AFTER SHE SIGNED IT.

My wife never even met the Loan Officer.

I think the Bank found some of this out and that's why they terminated the original Disbursement person and the Loan Officer resigned.

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