Bad Appraisal By Lender

Question:

In 2007, I applied for a 2nd mortgage for debt consolidation through Capital One Mortgage over the phone and was immediately approved over the phone. When I inquired as to when they would be doing an inspection on my studio (condo), I was advised by the mortgage broker they pulled my value off the internet and didn’t need to do an appraisal.  

My 1st mortgage balance was $82,000 and the broker said I could take out an additional $45,000 because the value of my condo was within reason based on his report.  I subsequently closed on the loan and 30 days later my 2nd mortgage was sold to Countrywide Home Loans.  

I’ve been paying my loan timely ever since and decided to have my own appraisal this past July to see where I stood in current market conditions here in Chicago.  I was agast when the appraisal came in at $90,000!  This bothered me so much I requested and obtained a copy of the valuation report used for my 2nd mortgage and was agast again when I found out the broker used Realquest.com.  The report I have does not list the square footage of my condo or anything, just a fair market value.  When I reviewed the comps used by the report, they are all 1 and 2 bedroom condos so obviously I’m seriously upside down in my mortgage and was compared to units that don’t even match what I have.  I have a studio and these are 1 and 2 bedroom condo’s.  Big difference!  

Is there anything I can do?  Is this considered fraud on Countrywide’s part who now owns the loan?  Can I pursue this further?  I have documentation of all the homes used for comps that were incorrect.

Answer:

Capital One used an evaluation model, rather than an appraisal, to determine the value of your condo. This has been a common practice used by many lenders even to this date. The model – basically a software program which uses sales in your area to estimate the value – gives a ballpark figure; unfortunately, many times it is way off the mark.

A claim could be made that Capital One fraudulently induced you to enter into a bad transaction, based on a bad valuation of the property. Quite a few lawsuits have been filed around the country based on similar claims, and that option is open to you.

Minorities, Whites and Defaults

Question:

As I understand it, the federal regulatory agencies made mortage loan requirements considerably less stringent, primarily to enable minorities to buy houses. As a result, people who got mortgages they couldn’t afford eventually faced foreclosure aand the mortgage companies were in big trouble. (Most of these people wer not, I imagine, minority, but the law was, of course, applicable to everyone and the mortgage companies made bad sub-prime loans to many, many non-minority people who couldn’t pay back the mortgages.)

My question: were these sub-prime loans PERMITTED by the new law or REQUIRED?

Also: is there an estimate of the percentage of bad sub-prime loans that were made to minorities?

Answer

Congress indeed pressured Fannie Mae, Freddie Mac and FHA to relax their guidelines beginning about 6 years ago, and thus contributed in part to the mess we are facing today. However, those government-insured loans were not sub-prime loans; they were prime loans.

The term ’sub-prime’ applies to loans made to borrowers with low credit scores, usually below 620. Sub-prime lenders are lightly regulated, if at all.

Lenders, both prime and sub-prime, began offering loans to unqualified borrowers who are now defaulting en masse on their loans. I believe that all ethnic groups are proportionately represented among the defaulting homeowners.

Bailout: Crime, But No Punishment

The biggest heist in history was pulled off last week by Henry Paulson, the Treasury Secretary. In a matter of few days he managed to convince more than one-half of the members of the House that the Great Depression II was around the corner, waiting to pounce on whatever was left of the American economy, and that only he could rescue us. The cost of his rescue plan, $700 billion, works out to approximately $12,000 per American household, but, hey – who is counting?

The banks that were greedy and incompetent enough to have toxic loans on their balance sheets will no longer have to worry about them. The magic bailout act will remove the loans from the banks’ books, allowing them to plan their next adventure in the turbulent waters of the mortgage industry.

The bailout act is not very clear whether any punishment will be meted out to the banks and their managers. Will bonuses and previously exercised stock options be rescinded? I doubt it. Not when one of the boys, Henry Paulson, is at the helm.

Tooting My Horn

Marlys Harris, she of Money Magazine, has interviewed me for my views on the proposed changes to RESPA. Be sure to read her article in the December issue of Money. This comes on the heels of my interview with NPR’s Marketplace.