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.

Mortgage Fraud: Should the Lender be Sued by the Borrower?

A mortgage broker submits a fraudulent loan file to a lender, which promptly funds the loan. The borrower – whose identity has been stolen by the mortgage broker – doesn’t even know that he is now the proud owner of an overpriced white elephant, which promptly goes into default.

Sounds familiar? The mortgage broker/realtor/closing agent used the stolen identity of the “buyer” to defraud the lender, and is now being sued by the man whose identity he had stolen. But should the buyer add the lender as a defendant?

The plaintiff’s attorney thought of the lender as a fellow-victim, and was about to suggest to the bank to join the suit as a co-plaintiff, but something which caught his eye made him change his mind: the appraisal.

The appraisal, forged by the mortgage broker, raised more questions that it answered. The comps were all inappropriate and any trained underwriter would have recognized it immediately as a work of fiction. Instead, the lender (one of the largest savings banks in the U.S.), accepted it as is without reviewing it.

The lender’s carelessness helped the mortgage broker pull off the scam. After careful review, the plaintiff’s attorney decided to add the lender to the lawsuit – not as a co-plaintiff, but as a defendant.

Option ARM Truth-in-Lending (TIL) Litigation

For sample TIL disclosure, click here

The sample TIL disclosure above is quite familiar to us at Forster Realty Advisors. We have seen quite a few of its kind, some generated by America’s top wholesale lenders.

The TIL shows an Option ARM loan that apparently is not due for a reset for 12 years. In reality, horrified homebuyers discovered that the loan documents allowed for an interest-rate reset after 2-4 years. How? the lenders continued to use TIL forms which allowed 125% of negative amortization to be added to the loan balance, while the loan documents showed an allowable maximum of 110-115%.

Truth in Lending: The Lawyers’ 2008 Full Employment Act?

The American Bar Association bookstore is now selling it members a DVD presentation dealing with all aspects of the Truth in Lending mortgage disclosure, how to recognize a bad TIL disclosure and how to turn it into a profitable lawsuit against the lender. The reason: many lenders have been careless in disclosing pertinent information about their Option ARM loans; in particular, when the interest rate was projected to reset. In a typical TIL disclosure, the lender would show the reset as happening many years into the loan, perhaps the 8th or the 9th year, when in reality the fuse was quite a bit shorter, sometimes 4-5 years ealier than projected.

The courts have taken a dim view of such disclosures, and in California we have seen dozens of TIL lawsuits being filed daily.

Eric Forster

“I Was Duped by My Mortgage Broker!”

Q:

I am very concerned that we unknowingly were put into a subprime mortgage. We are not in danger of losing our house, but we are attempting to refinance after our interest rate jumped to 10.2%. We even had to wait for a prepayment penalty period to end which we were not even aware of until we attempted the first refi in August 2007. I know for certain that we asked about a prepayment penalty and were told by the broker that there was no penalty. Now we are having a hard time trying to find a lender. We live in a modest home that was appraised at $271,000 in August of 2007. We then did $30,000 in renovations that included major kitchen remodel. Our current appraisal is $280,000. Two mortgage companies state our house is overvalued and comparable homes aren’t selling for that amount. We live in a very rural area and no two houses are alike.

I am feeling duped and embarrassed as we refinanced unknowingly with a subprime loan because we needed cash to pay for our son’s medical problems. To our fault,we were not careful enough. I have nothing to support the original broker’s assurance that this was not a subprime with a prepayment penalty,and yes it is written in the fine print. I would appreciate any ideas to investigate on how to get out of this mess. The subprime lender is not interested in lowering the rate as we have asked them.

A:

The story you are telling is quite common, and hundreds of thousands of families are experiencing it around the country.

The only chance for redress is through litigation, and only if you (and your attorney) feel that you have been defrauded by either your mortgage broker, lender or both. This is not a simple process, and it requires that an expert go over the disclosures you have received from them and analyze them for any fraudulent information.

Say Goodbye to “Stated Income” Sub-Prime Loans

On December 18 the Fed endorsed new rules that would give people taking out home mortgages new protections against shady lending practices.

The proposed rules, approved in a 5-0 vote by the board, are geared to providing safeguards to the riskiest “subprime” borrowers, already painfully stung by the housing and credit debacles.

The proposal is expected to apply to new loans made by all types of lenders, including banks and brokers. The plan could be finalized next year.

The Fed, which has regulatory powers over the nation’s banking system, is proposing:

• Restricting lenders from penalizing certain subprime borrowers — those with tarnished credit or low incomes — who pay off their loans early. The restriction would apply to loans that meet certain conditions, including that the penalty expire at least 60 days before any possible payment increase.
• Forcing lenders to make sure that subprime borrowers set aside money to pay for taxes and insurance.
• Barring lenders from making loans when they don’t have proof of a borrower’s income.
• Prohibiting lenders from engaging in a pattern or practice of lending without considering a borrower’s ability to repay a home loan from sources other than the home’s value.

“Unfair and deceptive acts and practices hurt not just borrowers and their families, but entire communities, and indeed, the economy as a whole,” said Fed Chairman Ben Bernanke in prepared remarks. “They have no place in our mortgage system,” he added.

Fed policymakers also are considering requiring financial disclosures to borrowers early enough to use while shopping for a mortgage. Lenders could not charge fees — except for a fee to obtain a credit report — until after the consumer receives the disclosures. The Fed also will consider prohibiting certain types of misleading or deceptive advertising for certain loans. It also would require that all applicable rates or payments be disclosed in ads with equal prominence as advertised introductory “teaser rate.”

In addition, the Fed is expected to propose barring lenders from paying mortgage brokers a fee that exceeds the amount the would-be borrower had agreed to in advance that the broker would receive.

And, the Fed would ban certain practices, such as failing to credit a mortgage payment to a borrower’s account when the company servicing the mortgage receives it. The Fed also would prohibit a broker or other company from coercing or encouraging an appraiser to misrepresent the value of a home.

Before taking effect, the rules must be voted on again following a period of public comment and possible revisions.

The Fed’s response has taken on heightened importance given the meltdown in the housing and credit markets that has led to record numbers of home foreclosures. The crisis has raised the odds that the economy might fall into a recession, roiled Wall Street and given Democrats and Republicans much fodder to blame each other.

The plan, if ultimately adopted, offers Bernanke, who took over the helm in February 2006, an important opportunity to put his imprint on the Fed’s regulatory powers. Some critics have complained that Bernanke’s predecessor — Alan Greenspan, who ran the Fed for 18½ years — failed to act as a forceful regulator especially during the 2001-2005 housing boom, when easy credit spurred lots of subprime home loans and many exotic types of mortgages.

Subprime Bankruptcies: Fertile Ground for Lawsuits

Legal issues have become a growing concern for many involved in the subprime industry. Claims from distressed borrowers against loan originators have begun to increase, as have actions pitting business partners against each other and claims against purchasers of subprime mortgage-backed securities that did not honor an agreement in some way, according to participants in a recent conference on subprime law sponsored by the American Bar Association.

The most common types of lawsuit emerging in the wake of the sunprime implosion are borrowers filing individual and class claims against mortgage lenders. Claims include allegations of federal disclosure law violations, unfair and deceptive trade practices, breach of duties or breach of contract, misrepresentation, usury, and unlawful collection practices.

Assignee liability is also a major focus for business lawyers as lender and Wall Street cunduits try to protect their assets from future lawsuits. (Inside B&C Lending)

Ex-NFL Star Indicted for Mortgage Fraud

FIVE INDICTED IN MORTGAGE FRAUD SCHEME

[HOUSTON, TX] – A licensed Texas attorney and real estate developer, a sports agent, two bank loan officers, and a real estate appraiser have been indicted in a multimillion dollar mortgage fraud scheme, United States Attorney Don DeGabrielle, interim Special Agent in Charge Alex J. Turner of the FBI Houston Division, and Special Agent in Charge Daniel P. Salas of the U. S. Department of Housing and Urban Development announced today.

Jerome Karam, 44, of Friendswood, TX, a real estate developer and licensed Texas lawyer; Dwight Sean Jones, 44, of Beverly Hills, CA, a former NFL player and sports agent; Tommy Jay Trammel, 44, and David Ranostaj, 40, both of Houston and former loan officers with Southwest Bank of Texas, Bank of Houston and Whitney National Bank, and Jay Westrick, 44, of Houston, a real estate appraiser, have been charged in a 12-count indictment for their alleged involvement in a mortgage fraud scheme that allegedly reached every aspect of a real estate loan: seller, buyer/borrower, loan officer, appraiser, escrow officer, and title company. For the full article...

Did You ‘State’ Your Income On Your ‘Stated Income’ Loan?

Well, for those of you who live in Arizona, we hope you did not inflate your income on your loan application. House Bill 2040 – about to be signed by the Governor – makes that a felony in your state. Arizona is among the top 10 states in the number of foreclosures filed this year.

Eric Forster

Metropolitan Mortgage & Securities Collapse

Provided by The Associated Press

A federal jury convicted a former Metropolitan Mortgage & Securities executive of three felonies Friday stemming from a shady real-estate deal that helped hasten the Spokane company’s collapse.

Thomas Turner, 56, is scheduled to be sentenced Oct. 12 before U.S. District Judge John Coughenour.

Turner, former president of Metropolitan’s sister company Summit Securities, was convicted of two counts of making false and misleading statements to accountants of a publicly traded company and one count of material omissions to accountants.

Turner’s is the only criminal prosecution related to the collapse and bankruptcy of Metropolitan, but Joseph Capone, a prosecutor with the U.S. Department of Justice’s fraud section, said Friday that the FBI investigation of Metropolitan is ongoing.

About 16,000 investors lost more than $450 million in Spokane’s largest corporate failure when Metropolitan and Summit sought Chapter 11 bankruptcy protection in February 2004.

Turner testified this week that he warned former Met owner C. Paul Sandifur Jr. and accountants that a proposed 2002 joint venture and real-estate deal with a Bellingham development company was bad.

Prosecutors alleged Turner lied to auditors about the deal to brighten the company’s 2002 financial results, enabling Metropolitan to post immediate gains and report to brokers and investors that the company was profitable when it actually was losing money and may have been insolvent.

Turner’s lawyers attempted to pin the blame for faulty audits on outside accounting giant Ernst & Young. Ernst & Young partner Jack Behrens testified that Turner lied and withheld crucial information about the $24 million transaction.

Investors, the Washington state Office of the Insurance Commissioner and a special bankruptcy trust set up to recover money for investors have sued Ernst & Young for professional negligence.

A call to the firm’s New York office was not answered after normal business hours Friday.

Metropolitan Mortgage & Securities was once a $2.7 billion conglomerate of insurance companies and investment services. Most investors who lost money in its collapse purchased unsecured debenture bonds and have been repaid 6 cents to 9 cents on the dollar.