Forensic Appraisal Review

Written By: Bonnie Wilt-Hild
Senior DE Underwriter & NAMP Instructor

Last week I touched upon some of the stuff that an underwriter might look for when trying to determine if a file contained fraudulent documentation. On the same note, I though I would touch upon the appraisal as well, only more for the purpose of forensic loan audits and overall appraisal review.

As we are aware, the discipline of forensic loan review it quite new and is basically comprised of an overall review of a closed loan file in order to determine if violations exist in the file where RESPA, Regulation Z, predatory lending or constructive fraud is concerned. These reviews are generally manual with use of certain computer based tools to determine APR violations or potential section 32 violations where HOEPA is concerned.

As the forensic auditors review the loan file documentation, they must also review the property appraisal. This is extremely important as it might ultimately determine if a particular case could be deemed to contain documentation, such as the appraisal, which allowed a lender or broker to charge additional or excessive fees which stripped the borrower of certain equity or much worse allowing a loan application to become approved which may have not otherwise been approved due to excessive LTV.

Consider this: A borrower is contacted by a mortgage broker via telephone solicitation and the mortgage broker or lender informs the borrower that they can assist them with a refinance transaction and provide them with additional cash out for home improvement. The borrower agrees and the loan process begins. The broker soon finds out that the property is not worth the $250,000 that is needed in order to pay off the existing first mortgage, roll in closing costs including 3% of broker fees as well as give the borrower the cash promised.

Additionally, the maximum LTV allowed for the particular loan program that the broker or lender wants to place the borrower in is 80% so if the property does not appraise for at least $250,000 the loan will be rejected or the loan amount will have to be cut, which will prohibit the cash out and the broker will not be able to make their 3% broker fee.

The broker or lender, after being told the fair market value is only $200,000 contacts the appraiser and explains that they need a value of $250,000. The appraiser proceeds to find comparable sales which are not located in the subject’s market area but are within a reasonable distance, say 2 miles which are significantly larger then the subject in a neighborhood where properties traditionally sell for more due to its location. He or she proceeds to adjust the comparables for appraisal purposes doing minimal downward adjustments for size, no adjustments for location, and further increases the value of the comparable sales but doing an upward adjustment for condition which offsets the downward adjustment for size and ultimately creates an inflated value for the subject property.

The appraisal does not suggest that certain comps were readily available in the subject’s market area because with this the appraiser would have had to use the more comparable properties which would have resulted in a lower value. The end result is an appraisal that suggests a fair market value $50,000 greater then the actual fair market value. Under these circumstances the broker or lender has made their fee and the loan application gets approved when it would not have otherwise been approved by the underwriter and the borrower is in a negative equity position once the loan disburses.

This is a clear case of constructive fraud. The loan broker or lender with the help of the appraiser purposely inflated the value of the subject property to deceive not only the underwriter but to also benefit financially from the increased fee they were now able to charge by demonstrating an increased equity position which in reality did not exist. Worse still is the fact that most appraisers Errors and Omissions insurance does not cover fraud so the borrower and servicing lender really do not have much recourse short of trying to demonstrate that it was not fraud but omissions of relevant facts where the property appraisal is concerned that contributed to the inflated value.

When reviewing the appraisal of the files which are being audited look carefully at the comparable sales used by the appraisers. These are usually the first indicators as to if the property value has been stretched. If the comparables are greater then 1 mile from the subject property, have closed more then 6 months prior to the effective date of the appraiser and are much larger then the subject property with downward adjustments for size then you may have a stretched value.

Also look for other indicators such as room size and sq footage errors. This information can usually be check on your state departments of real estate taxation. Any such errors in this area could also indicate fraud. Finally, if you think you will be doing a lot of appraisal audits it might not be a bad idea to brush up on overall appraisal standards for conforming and government lending so you know what you are looking for, remember knowledge is power.

About the Writer. As an NAMP staff writer, Bonnie serves as a senior instructor for FHA Online University as well maintains a full-time job as Senior DE Underwriter for a major banking institution. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.

SOURCE: Published by NAMP Publishing Group, a division of the National Association of Mortgage Processors (http://www.MortgageProcessor.org)