Practicing real estate law in California can be a fun and diverse body of work. The downside is seeing the surge in mortgage fraud and how it especially preys on elders.
As real estate values have risen, so too has the wealth of elders who have owned their homes for many years. Additionally, as they have retired from the work force and have more time — they are more likely to answer telephone cold calls or read their "junk mail" advertising mortgage schemes.
Often, elders are receptive to the thought of converting the equity in their home into an income stream and think the "reverse mortgage" sounds right for them.
Not surprisingly, most of the time the "reverse mortgage" solicitication is an outright scam, where the fraudster takes title to the home, either in his or her name or LLC or through a straw buyer with good credit. The elder is fed a volume of confusing information and at close of escrow believes he or she is going to receive payments from this "reverse mortgage loan" or that somehow the home will be deeded back to them.
This is where the appraiser fraud can come in. With the straw buyer, the fraudsters are treating it as a new purchase, and in an effort to "double dip" will often try to get a credit back in the sales proceeds. In some cases, we’ve seen as much as $50k back in a credit to the buyer. How is that possible? Well, an inflated appraisal and sales price is usually the way to ensure that the property will appraise to value so that the lender’s underwriting loan-to-value guidelines are met. Even without the context of financial abuse of an elder, this is a common loan fraud scheme to squeeze money from the lender. The new buyer will lose it in foreclosure if they can’t afford to service the payments.
After the Savings & Crisis, the bailout included strict legislation to deter appraisers from defrauding banks-FIRREA. If appraisers are implicated, they will face stiff civil and criminal penalties.
After the S&L Crisis, the Appraisal Foundation was created. They promulgated USPAP, the standards that are the generally accepted standards for professional appraisal practice in North America.
For single family residential real estate, the cost of an appraisal is generally less than $500. For a certified MAI appraisal of commercial property, the cost is usually more than ten times that–in some cases $6,000-$8,000 for the appraisal report.
If at closing, you see an excessive amount of fees going to the appraiser, that is a red flag that the appraiser may be involved in the fraud. Some fees are paid outside the escrow so it can be difficult to tell whether the appraiser was receiving extra compensation.
The biggest question is whether the appraiser was merely negligent or whether they intentionally made a false appraisal. That often can fall into the category of "I know it when I see it." A property worth $300k, appraised at $650k exceeds the acceptable range of error. A property appraised at $850k, when all homes in the neighborhood are comped at $750k is also difficult to treat as mere negligence. An expert appraiser can testify as to what factors can make that higher value acceptable or unacceptable.
Bottom Line for Borrowers: Beware of loan products you do not fully understand. Work only with licensed brokers in good standing that come from a reliable referral. Most importantly, in seeking out a reverse mortgage, make sure to go first to a large reputable bank for education about how the product works.
Bottom Line for Private Money Lenders: Be skeptical of the appraisal report. Your underwriting standards should involve more than one number in the appraisal report for you to calculate your LTV. Working with a reputable broker will allow you to ask the questions that make sense–borrower’s ability to repay, reliability of the appraiser, etc.