Appraiser Bias Allegations Unmask Debt Traps

Jeremy Bagott

Appraiser Bias Allegations Unmask Nonbank Lenders Debt Traps. 

Claims of tainted appraisal unmask something else… the renewed “churning” of mortgages by nonbank lenders.

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.

Image credit flickr - michael_swan
Jeremy Bagott

Jeremy Bagott

Jeremy Bagott is a real estate appraiser and former newspaperman. His most recent book, “The Ichthyologist’s Guide to the Subprime Meltdown,” is a concise almanac that distills the cataclysmic financial crisis of 2007-2008 to its essence. This pithy guide to the upheaval includes essays, chronologies, roundups and key lists, weaving together the stories of the politics-infused Freddie and Fannie; the doomed Wall Street investment banks Lehman and Bear Stearns; the dereliction of duty by the Big Three credit-rating services; the mayhem caused by the shadowy nonbank lenders; and the massive government bailouts. It provides a rapid-fire succession of “ah-hah” moments as it lays out the meltdown, convulsion by convulsion.

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10 Responses

  1. Avatar Pat Turner says:

    Ruh Roh
    Here we go again, Just a different wolf in the same sheep’s clothing??

    6
  2. Baggins Baggins says:

    Bagott for president! Treating your home like an atm machine is risky business. Although the immediate lower amount paid monthly seems appealing, when one draws out debt on a 30 year amortization period, the actual cash equivalent repayment amount is much higher than with shorter term payments. This is an example of poisonous protectionism, courtesy of GSE programs, government insurance, & QE programs. Absent such a monolithic institution set driven by politics, people would be wiser and often restricted to simply borrowing against their home with a separate lending instrument. And if they failed to repay, a lien would result.

    Prevalent financial ignorance results in illusionary wealth gain, all a refinance to wipe debt away accomplishes is to place the borrower in to a diminished state with less equity. There are two ways to get ahead in real estate for most people. 1. Track down your principal amount as fast as possible to attain true and complete home ownership, kick the bank out of your life and never touch the equity. 2. Buy and hold, then sell and realize your gains without any lending instruments attached to your profits. If the taxpayer was not backing the lending institutions and the money was solid currency gold silver, very few would be willing to let people leverage this much equity this often. Too big to fail is bucking up again right now. If people walk from millions of mortgages, market corrections will be severe and misplaced improperly associated accusations in all directions will abound. If only it was as simple or easy as blaming one person, wouldn’t that be something.

    As the market slides and ‘adjusts’, people are still able to sell out and enjoy margins of gain. At least for most. The time is coming soon that if enough downward price movement happens, there will be no margin left and we’ll see waves of actual foreclosures again. Treasurer notices are jumping nationwide. Agents in their ignorance are price slashing after mere days. As the plunge protection team seeks to deflate the bubble incrementally, hoping to avoid a free fall full pop event. The populace base whom does not understand the dangers of central planning, seeking a brave new world of equality and justice just don’t get it. In their ignorance they blame the people measuring the market rather than the engineers and managers of these markets whom perpetuate a failed model. The problem is from the very top, the fact the government is involved with our money supply, managing our lending and insurance policies in the first place. You ain’t seen nothing yet, just wait.

    5
  3. Great article which I plan t share with the powers that be on this whole Racist Story…..Bottom line is this..The higher appraisal in these racism cases that everyone ASSUMES to be the correct one, is the one that is likely suspect and should be called out in much the same fashion if not more so (due to the people that they hurt by over valuation) as they call out the other Appraisers that came in at the lower value and likely the more accurate value from the findings of the various cases so far.

    Talk about short term memory on where we are headed. The racist story has clouded the brains of those that are making the laws right now and they fail to see that the very people they are supposedly trying to help…Minorities… are the ones who will suffer the most….and by whom? The Non Lenders and the Appraisers who gave the non lenders the HIGH value number so their deals could close and by doing so they taint the entire lot of us good Appraisers out there trying to do the right thing, do our jobs as we are trained to do and could care less about the racial make up of the homeowners in our process to provide opinions of value.

    The saga continues…

    5
  4. Avatar Scott Fields says:

    Well, that’s what you get when the originators and underwriters have little skin in the game. The risk is all to the GSE’s, that’s to say taxpayers.

    1
  5. Avatar C. Bond says:

    Spot on!! Good article and good research! This is very reminiscent of my early secretarial and apprenticeship years back in the late 1990’s when the firm I worked for appraised the same houses, over and over like clockwork for shady mortgage officers that would call to “schmooze” us in person about the order they were about to send over. The LO’s were sleazy creeps most of the time, orders came over with “value needed” on them that seemed to correlate with a figure that spelled out: current mortgage pay-off, plus borrower’s car loan and credit cards, plus some fees and points to the lender plus commission and bonus to the LO equals value of the house.

    I crammed hard to get my hours and classes in, passed my tests and got license in hand as quickly as possible back then, and ran as fast as I could into opening my own firm. My motto and tagline on my business cards was “When integrity matters” and I built my profession around that mission statement. Successfully so, as I am now 25 years into surviving this wild rollercoaster ride and looking to hopefully retire soon. The firm I started in would up suffering bankruptcy the year after I left when their client base stiffed them in over $60,000 in unpaid invoices, and then went out of business entirely when a state complaint was filed on the owner’s license.

    Shortly thereafter, we all watched as the house of cards came tumbling down in 2007-2009. It is pretty bizarro world to me to read this article and hear that the same equity stripping, or churning is going on again. Even more interesting that one of the outfits mentioned is one in the very same that was doing it back then and stiffed my old boss by tens of thousands – Fairway Mortgage. Not sure if they are the same people, or just the same name by coincidence. But wow!! History repeats! Spine chilling read for me, actually.

    5
  6. Of course that’s what it is. It’s an attack on appraiser independence. Anyone else yells, “My value is too low!” and they’re violating appraiser independence unless they can support a USPAP violation. If someone of color, or a minority yells, “My value is too low!”, HUD appoints someone who stands up before AARO and states, “Appraisers are robbing value from people of color by appraising their homes lower than non-colored people and FORCING them to sell their homes below the value of their homes.” When Melanie Taylor was asked why 1. None of the people in their neighborhoods ever pay cash for their homes, and 2. in a housing shortage, why no one was purchasing up these cheap houses that were exactly the same in the colored neighborhoods as the non-colored ones since they were “exactly the same” she responded by saying, “You don’t understand!” and someone from our Appraisal Foundation at a racism and bias conference had the audacity to call me “crazy” for asking these questions. (Also, the Marin County, CA lawsuit was accusing the appraiser of using comparable sales from within the subdivision, and stating this was redlining but the homeowners had purchased their vacant parcel THERE in 2016 and built their new house there. I guess it wasn’t a problem for them when they purchased the parcel in 2016 and made a decision to build, but when they wanted to refinance they decided they wanted the value to reflect a different area than where they had determined they would be building their forever home. This is significantly different than living in the area for 50 years and feeling “slighted.”

    It’s called The Principle of Substitution, Melanie. Real estate appraisers don’t CREATE value, they just report it based on the facts. The foxes, however, they have a history of redlining, racial discrimination, bias, and taking advantage of people, regardless of their race, sex, color, handicap, etc., all for the purpose of making loans and lining their pockets. Appraisers have zero motivation, none. Are there racist appraisers? I am sure there are, just like there are racist people everywhere, in every profession, and in every corner of the globe. Is it an acceptable practice? Absolutely not, but there has never been shown any proof of system racism, never. So why did it make headlines? So the FOXES COULD GET INSIDE THE HEN HOUSE and get to the money easier! So Fannie Mae and Freddie Mac could bifurcate and chop up the appraisal process and diminish the trust of the appraiser in the eyes of the public, and more bad loans could be made faster and cheaper, and who could get richer faster? The US government, lenders, banks… not the appraiser. Appraiser Independence and the American Economy under siege…again.

    4
    • Avatar don says:

      Did the Principal of Substitution get confused, by the Principals of Politics?

      Beg my pardon did anyone else lose their face-book membership due to their participation with this blurb? I believe my comment about William of Orange decapitating an “Elisabeth” and starting a thousand-year war between the oranges and the greens of Ireland and having a shot of scotch afterward was at fault for this war with the colored.

      William of Orange was also Known as Billy the Viking before he took over Holland et.al. he was really a bad guy.

      0
    • Baggins Baggins says:

      Yeah but you’ve got to hand it to them, the approach is clever and somewhat inspired. Pass the blame for two centuries of runaway corrupt lending, and all the blame is laid at the feet of individual 1099 workers. Among the last set whom have not capitulated to the lending institutions btw, checks and balances and all. Lenders hope to get rid of these pesky hindrances to their bottom line.

      And the premise is flawed from the start anyways. So what if a person was racist, it does not make them incompetent. I deal with racist people all the time, they’re still competent for the most part. We’re constantly discriminated against. But we still get our services as requested. Appraisal valuation theory and approach are written down and codified into guidelines with legal prescient already set. They can shout racism till they’re blue, it will never change the fundamentals of the principals of substitution.

      2
    • Avatar Pat Turner says:

      Well done Julie!

      1

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Appraiser Bias Allegations Unmask Debt Traps

by Jeremy Bagott time to read: 4 min
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