Wells Fargo Workers Went on Appraisal-Fraud Bender
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It feels like Ground Hog Day all over again. Who can forget the Wells Fargo banker who, stressed from opening fraudulent accounts in the name of hapless depositors, had begun guzzling hand sanitizer? That was in 2016. New revelations from the nation’s second-largest mortgage lender will make the U.S. taxpayer want to take a good long pull on the nearest bottle of hand wash.
Dozens of loan officers at Wells Fargo altered values in the bank’s database, so loans would qualify for so-called appraisal waivers, according to recent reporting from Business Insider. In some cases, Wells Fargo employees slashed $1 million or more off home values, reported the publication. The mortgages, based on the chicanery, were then sold to Fannie Mae and Freddie Mac, both of which are in federal conservatorship.
Business Insider’s reporting indicates loan officers at the bank changed values, since waivers were available only to properties valued below $1 million. Reducing the value of a home in their system below that threshold triggered a waiver. In some high-cost areas where Wells Fargo does considerable business, like the San Francisco Bay Area, databased values – some questionable to begin with – may have been reduced from, say, $2 million to below $1 million.
The American Enterprise Institute warned of potential manipulation of appraisal waivers months earlier. Researchers Edward Pinto and Tobias Peter believed loan officers would rely on Zillow and Redfin and then play Freddie and Fannie against one another. This warning turned out to be prescient.
Some Wells Fargo loan officers – an unknown number of whom have since been terminated – protested the allegations, telling reporters that some of the occurrences dated back to the early days of the pandemic and that guidance from senior managers at the time was ambiguous. Less ambiguous were the commissions they received after altering the data. Fannie has since stepped up efforts to force loan buybacks on lenders who peddled these shaky loans and others to the mortgage giant.
Fraud and abuse appear to be part of the dog-eat-dog culture at Wells Fargo.
Astute observers recall the case of Angie Payden, the Wells Fargo banker in Hudson, Wisconsin, who recounted in 2016 how she’d been pressured by managers to defraud customers in various ways, among them informing them there’d been fraud on their accounts in order to keep closing and opening accounts to pocket bonuses for herself and her bosses. But the stress became too great.
“One morning, before meeting with a customer, in which I knew I was going to have to sell unneeded services, I had a severe panic attack,” Payden told the New York Times. “I went to the bathroom and took a drink of some hand sanitizer. From that point, I began drinking the hand sanitizer all over the bank.” The viscous substance, which she drank between 2011 and 2014, gave her the strength to continue ripping off hapless depositors.
During the fake-accounts era at Wells, managers actively trained branch personnel in how to defraud account holders at scale, pressuring employees like Payden to open redundant accounts and cross-sell products at all costs. The bank later said it had fired 5,300 employees it found responsible. The average was 377 fake accounts per fired employee.
The benefit to the lender of an appraisal waiver is that it bypasses the need for an appraisal of the collateral used to secure the loan. Instead, lenders use data generated by an automated valuation model – similar to a Zillow “Zestimate” – to determine the home’s value.
Five months after the Federal Housing Finance Agency required Freddie and Fannie to show more flexibility in purchasing mortgages based on the waivers, more than a third of total mortgage originations relied on one. In January 2021, 47.4% of all Freddie Mac loans and 44.5% of all Fannie Mae loans received a waiver.
As predicted by Pinto and Peter of the American Enterprise Institute, loan officers appear to have altered values using websites like Redfin or Zillow when they found it advantageous.
The duo identified another potential downside of waivers for purchase loans: When human appraisals conclude a value that is below contract price, they provide a consumer benefit by alerting the would-be buyer that he is overpaying. With a waiver, this benefit is erased.
Freddie and Fannie began accepting another variant – the so-called “hybrid appraisal” – as of March 19, 2022, reported the think tank. These are valuations in which the appraiser does not view the property collateralized in the loan, instead relying on photos and measurements that are provided by third parties. Pinto and Tobias have requested clarification as to how the hybrid valuations will be reported.
To appraisers, the situation on the ground has caused alarm.
“In two counties I cover, there are now 1,590 homes under contract within the prior two weeks,” said Fort Worth-based residential appraiser George Heredia in late September. “These are newly contracted homes. They need appraisals. Where are the appraisals? We are doing two to four per week.
“[We looked] at Tarrant and Denton counties, and there are many homes (last 30 days) under contract, yet few appraisal orders. A wider problem is that Fannie’s automated valuation model is based on prior months’ data. We are seeing some areas showing stable pricing and some price declines and longer days on market.”
Heredia believes that without new appraisals to scrub Fannie and Freddie’s data, the mortgage giants’ valuation model will become unreliable within the next three to six months.
“Banks got used to appraisal waivers,” said North Carolina appraiser Eric Kennedy. “After all, home prices were going up by double-digits every quarter in some regions. As values are now falling, common sense tells me that bankers wouldn’t want to rely on these waivers as they once did. Of course, that assumes the absence of fraud and that banks are acting responsibly.”
Kennedy wondered aloud where the original values were coming from in these cases of alleged fraud.
“The whole [appraisal waiver] thing is a mess, since it allows commissioned salespeople to game the value of collateral used to secure taxpayer-backed loans in mortgage transactions [from which] they personally benefit. That’s a recipe for disaster.”
Two loan officers with knowledge of the purported appraisal fraud told Business Insider that two mortgage retail sales senior managers in the San Francisco Bay area, Jim Lew and Jarod Johnson, had fired approximately five loan officers in their area. Another estimate suggests that 12 to 15 people were fired across that region.
The departed Wells Fargo employees, schooled in mortgage fraud and industrial-scale larceny, will showcase their talents elsewhere. No doubt, there are still more than a few sociopaths still at Wells, swilling hand sanitizer. As every midnight drinker knows, defrauding the public can be stressful.
Wells Fargo received a $25 billion federal bailout in 2008. That sum was eclipsed by the nearly $200 billion bailout Freddie and Fannie received the same year.