Appraiser Bias Allegations Unmask Debt Traps
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Convinced racism torpedoed valuations in their home refinancings, the owners of three properties in the San Francisco Bay Area told their stories to Julian Glover, a reporter who covers the race, culture and social justice beat for ABC’s San Francisco affiliate. Similar claims of tainted appraisals have surfaced in Philadelphia, Chicago and, more recently, Maryland. A civil lawsuit was filed in one of the cases in a federal district court. A claim was dismissed Wednesday based on a flaw unrelated to the case’s core allegation – racism.
An accusation of discrimination in a housing transaction is serious business. It represents a potential violation of a federal statute, 42 U.S. Code 3605.
But the claims unmask something else. The property owners’ public comments, cross-referenced with public records, suggest the renewed “churning” of mortgages by nonbank lenders. Churning sets up debt traps for borrowers. The latter, who are sometimes the victims of so-called affinity scams, are often told by unscrupulous loan officers that every dollar they reinvest into their properties will automatically enhance the value, on a dollar-for-dollar basis.
The loan officer may have a crooked appraiser on his team who will make the upgrades equal the value required to make the next refi work. Meanwhile, the borrowers slowly become ensnared in a debt trap, as owed principal increases faster than their ability to service the ever-larger debt loads.
The shortfalls typically result in swelling credit-card balances. During times of increasing property values, a friendly mortgage broker from the office of the lender periodically contacts the borrower. In times of rising property values, a new refinancing can make the credit-card debt go away. The refinanced loan is then backstopped by, or sold to, Freddie Mac or Fannie Mae or insured by the FHA.
Historically, when values start to decline, and trapped borrowers can no longer refinance, they lose their homes to foreclosure. The revival of churning during the recent run-up again transferred risk to the U.S. taxpayer via Freddie, Fannie and the FHA.
In the words of one Lawrence Peter Berra, AKA “Yogi,” it feels like déjà vu all over again.
One of the properties in which a racially biased appraisal is alleged – the one involving the claim that was dismissed Wednesday – was a single-family home in Marin County, Calif. It was bought in 2016 in an off-market sale for $550,000 via an FHA loan through a nonbank lender for more than 98% of its purchase price. Records show the owners refinanced the next year with another FHA loan, this time for $540,490 through the same lender. The following year, they again refinanced through the same lender in an FHA loan for $679,650. The next year saw another refinance, this time for $739,239. The year after that, they refinanced yet again through the original lender for $756,500. Finally, it was refinanced yet again last year for $750,000. This concentrated, fee-generating activity looks an awful lot like churn.
An Oakland, Calif., property in which the owner believes the most recent valuation was also tainted by racial bias was bought in 2015 for $305,000 with an FHA-backed loan of $299,475 through a nonbank. Two years later, the mortgage was refinanced for $357,500. Next, $100,900 was borrowed against it in the form of a variable-rate loan. In 2021, it was refinanced yet again, this time for $547,500, also through a nonbank. Records show the same home had once been mortgaged to Argent Mortgage, the wholesale lending arm of the failed subprime purveyor Ameriquest, during the lead-up to the financial crisis. The U.S. Justice Department’s Civil Rights Division brought a case against Ameriquest for padding mortgages made to minorities, women and the elderly, and for engaging in bait-and-switch tactics.
A third California property in which appraiser racism was alleged when the property failed to appraise is on Alcatraz Avenue in Oakland. It transferred in an off-market sale in 2019 for $600,000. The next year, in December 2020, an $800,000 loan was placed on the property by a nonbank based on what was reported to have been a $900,000 appraisal. The property owners, who say they both work in real estate, told Glover the property had appraised In April 2020 for $1,154,000. No loan transaction was found connecting this appraisal to any refinancing. It later sold in September 2021 for $1,200,000.
This property, too, has a past. Records show it was once mortgaged to the now-defunct World Savings Bank, a lender once notorious for originating negatively amortizing loans via so-called “pick-a-pay” mortgages. The pick-a-pay mortgage allowed borrowers to make a minimum payment for a limited time under certain conditions. When a payment was insufficient to pay the interest owed, unpaid interest was added to the loan balance and the outstanding loan balance increased via negative amortization.
The old crop of predatory lenders is gone, but observations suggest a new golden age of serial refinancings is being facilitated by a new stable of nonbank lenders. Recently, the Greenlining Institute, an Oakland, Calif.-based nonprofit, found that the eight largest nonbank mortgage lenders in California had lent disproportionately to black and Hispanic home buyers when compared with top banks in the state. There are many open questions about this finding.
Also, thousands of workers at loanDepot, Guaranteed Rate, Fairway Independent Mortgage, Caliber Home Loans, New American Funding and United Wholesale Mortgage have been funneling millions in small-dollar donations to political action committees across the political spectrum; much of this activity was in 2019 and 2020 and much of it went to the people currently in office.
Using the Federal Election Commission’s screening tool, author-appraiser Jeremy Bagott has compiled an Excel spreadsheet with over 43,000 small-dollar donations totaling more than $11 million from individual employees of nonbank lenders. You can view and download the Excel file here. Or you can run the filters yourself at the Federal Election Commission’s website. All of the information is public and available to anyone with a browser and a little time.
Many of the donations are in uneven amounts and many repeat donations were made at irregular intervals – as if created by a random-number generator. This becomes apparent when the data is sorted by donor and date in Excel.
As swollen home prices begin to correct, there will be more “wrong” appraisals and fewer “right” ones in the eyes of panicked, straitened homeowners of all creeds and colors.