Potential Tsunami of Mortgage Fraud

Potential Tsunami of Mortgage Fraud - Deferring Appraisals for 120 DaysHere is my take on the new ruling since I just happen to be an appraiser with 34 years of experience:

Lenders have seen their mortgage volume drop because of liquidity issues (namely job loss and uncertainty about future income). Lenders are also reluctant to issue low rate loans in this situation given concerns about liquidity and lack of processing capacity, so mortgage rates are not falling in aggregate. In essence, they are slightly higher than a month ago. There is also the likelihood of declining property values going forward, so an 80% LTV could be a 100% LTV tomorrow.

So to fix this, the Treasury, the Fed, and FDIC have opted to allow banks to skip the appraisal for 120 days despite efforts by FHFA to allow for driveby and desktop alternatives. They are not waiving the appraisal. Yet 120 days after the loan, appraisers will provide an opinion which I would assume would show a lower value. What do banks do with that?

This rule only applies to FRT (federally related transactions), which is a small number of mortgages. Still, you can bet other regulatory bodies will adopt this rule quickly to try to bolster the mortgage volume so people can take advantage of the low rates. Yet this is not the problem. These three parties have already been critical of the appraisal process, as evidenced by their recommendations to save on cost and timing without consideration of quality and reliability last year.

The thing is, the appraiser isn’t the problem. Property access has been solved temporarily by drivebys and desktops via FHFA for sales. But refinance activity has been limited because the banks don’t want to take on the risk. After all, they don’t trust the daily changes in regulations by the federal government, have real concerns about a future with falling values and significant liquidity risk. The primary problem is liquidity, and all this rule does is unleash a potential tsunami of mortgage fraud and predatory lending on the housing market when people are most vulnerable.

Perhaps this rule was made with the best intentions, but it reflects a fundamental misunderstanding of what the purpose of an appraisal is.

Let’s hope most banks avoid this recklessness that will be paid again by the taxpayer.

Jonathan Miller
Image credit flickr - Michael Dorausch
Jonathan Miller

Jonathan Miller

Jonathan Miller is President and CEO of Miller Samuel Inc., a real estate appraisal and consulting firm he co-founded in 1986. He is a state-certified real estate appraiser in New York and Connecticut, performing court testimony as an expert witness in various local, state and federal courts.

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11 Responses

  1. Trust Real Estate Appraisal on Facebook Trust Real Estate Appraisal on Facebook says:

    Drop the PC – Just call this for what it is; Predatorial Capitalism.

  2. Avatar Marion says:

    Oh Please.

    It was only 4 years ago, appraisers were being HAMMERED to do Restricted Use Reports for Res Lending, and Hybrids before there was a “pilot” program.

    Some of those borrowers, are no longer employed and while they may qualify for forbearance, those bills will come due at some point. Then, oh my! Some Lemmings are going to have defend those things, when the borrowers sue over predatory lending practices.

    Just like last time.

  3. Avatar John Smith says:

    I think you’ll have a lot more issues coming round the bend. We’ve already seen one or two litigation cases, one we are engaged on where the appraiser did an exterior only appraisal threw some Covid-19 extraordinary assumption in there and missed a whole slew of things on the property (there was a lack of analysis as well but that won’t get him dinged by the courts/state).

    Can’t believe I’m saying this, but anyone out there doing exterior only appraisals, make sure you’re at least calling the property contact, you don’t know if you’re missing things on the inside and you don’t know what the property history is.

    • Avatar don says:

      I believe a good appraiser, buyer, investor could make a case for a retirement home having to give a measurable market discount.

      who is the predator, the buyer or the seller? What is the future?

      What is; MARKET VALUE? doesn’t it come from the market, maybe the color of the wall paper, or the condition of the yard has an effect, but that doesn’t affect anything other than YOUR analyses and description.

      FREE CHOICE allows being; honest, and fair, or being crooks and miss directing.

  4. Avatar Marion says:

    And let’s not even consider how any Appraiser, today, or, 3 weeks ago, could derive a “market value” from a OPEN AND COMPETITIVE MARKET THAT WOULD HAVE RESULTED in a fair sale.

    Yup, Lots of appraisers are going to be on the hook.

  5. Avatar Derek says:

    I work in capital markets at a large institution and can tell you that this temporary easing will have no impact on appraisers. The appetite for buying mortgages right now is very low as the vast majority of investors are sitting on the sidelines to see what happens. I also can’t imagine too many portfolio lenders out there wanting to manufacture loans that they have to keep on their books for at least 120 days, hoping the borrower doesn’t default and their collateral holds its value. It’s more of a hassle to do this than just sitting it out and waiting to see where it goes. We also know a second wave will likely be coming in the fall, so everyone is strengthening their book.

    The paradox of times like this are banks and investors start to apply stricter overlays to protect from severe market shocks, but their regulators start to loosen policy in hopes that those same banks and investors take more risks in the name of liquidity. Either way, there’s more focus on getting involved in the small business loans than mortgages right now, since that debt is backed by the government.

    • Perfectly explained and this is for FRTs, so an even smaller pool. There is an absolute cognitive failure right now due to the extent of damage to the economy and nobody wants the risks.

    • Avatar lance brown says:

      second wave …. ask yourself if staying at home for 45 days weakens your immune system, better question is “how much” does it weaken it . Odds are there are going to be a mass amount of people struggling to beat the common cold in the coming weeks.

      • Avatar John Smith says:

        Lance, that is not how the immune system works. The adaptive immune response will still exist. Your innate immune system will still exist. I do not intend to come off as snarky, but the immune system does not cease to function because you stayed home. Now if you’re eating crap, drinking excessively (things that can reduce your bodies circulating lymphocytes) then yes, cortisol (stress) also affects and inhibits the immune system. That said, simply staying home, etc. will not affect your immune system.

  6. Vince Simon on Facebook Vince Simon on Facebook says:

    I don’t see why that would be the cure when a 2055 exterior or Desktop appraisal would at least have support. Seems like they are pushing back on the appraisal process because every current assignment is a full 1004 interior inspection.

  7. Vince D'Ambrosio Vince D'Ambrosio says:

    If they want an interior inspection put on a mask and fo it. If I can walk in a supermarket and shop walking into a residential property is more than a reasonable request. If they can do this for 90 days they can do it for 180 days and then 360! Then you’ll have a problem you can’t solve.


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Potential Tsunami of Mortgage Fraud

by Jonathan Miller time to read: 2 min