Freddie Mac software to fight home appraisal fraud

[Stephen J. Vertin MAI]

NEW YORK, March 12 (Reuters) - U.S. home finance giant Freddie Mac <FRE.N> said on Tuesday it plans to launch a software program to detect inflated property valuations that may be the result of fraud or misrepresentation.

"Inflated appraisals are a key component of many abusive lending practices," said Michael Bradley, Freddie Mac's vice president of Strategic Information Services, in a statement. "The borrower who buys an overpriced home may lose money when they try to sell."

Appraisal fraud is the fastest growing fraud reported by major mortgage lenders in the country, according to a 2001 report by the Mortgage Asset Research Institute Inc. The share of mortgage appraisal frauds grew from 5 percent in 1995 to 17 percent in 2000.

Freddie Mac's Home Value Calibrator, to be available in the second quarter, will allow lenders and other mortgage professionals to analyze home appraisal data, and help weed out potential predatory loans -- loans made typically to poor and minority borrowers at exorbitant fees and interest rates, the McLean, Virginia company said.

The program automatically analyzes home valuation data and comes up with a report and a score to indicate if there are valuation inconsistencies. The report can be used to predict whether a loan is high risk, moderate risk or low risk of a faulty home value assessment, Freddie Mac said.

If a high score by the program is returned, the lender may be able to close that mortgage loan faster with greater confidence, it said.

If a low score is returned, it indicates greater likelihood that the market value of the home is much less than the appraised value, borrower's estimate or purchase price. "The lender may want to further review the loan and the valuation," the company said.

APPRAISAL FRAUDS TIED TO PROPERTY FLIPS

The Mortgage Asset Research Institute, based in Reston, Virginia, said the tripling of appraisal frauds during the late 1990s appeared to be related to the increase in property flips.

These flipping schemes often involve appraisers, loan officers, mortgage brokers and phony buyers and sellers in the quick sale and resale of a property at a huge profit. They aim to artificially inflate the value of the property so a bank or a mortgage lender believes the property is worth much more than it is and to obtain mortgage loans from lenders that exceeded the market value of the property being "flipped."

In its study, the institute said California, the country's biggest housing and mortgage market, has historically had some of highest levels of mortgage frauds. But preliminary data for 2001 pointed to a sizable decline from 2000 when it had the most reported mortgage frauds in the country.

"Real estate fraud is prevalent here as in any other states," said Tony Majewski, acting director at the California Office of Real Estate Appraisers, which licenses appraisers and regulates the state's 11,000 licensed appraisers.

Majewski's office investigates complaints from lenders on appraisers who fail to comply with standards. It may take away an appraiser's license if the complaint is valid.

18:40 03-12-02

 

[Nancy in Friday Harbor]

Steve,
Thanks for the post.

SIGH!!

I know we're supposed to be the "gate keepers" and watch out for, report and stop unethical and fraudulant real estate deals. But why is always "APPRAISER FRAUD" and not developer fraud or realtor fraud? Keeps making it sound like appraisers thought it up, developed it and carried it through to the end all by themselves! And the poor developers and agents were just swept up in the histeria of the moment, poor suckers!

I'm not typically a "conspiracy" theorist, but this almost looks like there is a concerted effort to discredit all appraisers -- isn't it interesting that it's generous, benevolent Freddie Mac who wants to save the world from all us crummy appraisers anyway?!

Nancy

 

[Caterina Platt]

Makes me wonder just what Freddie's program is written to score high or low. Old sales, single adjustments over 10%, gross over 25%, distances greater than 1-2 miles, 10% over predominant value, that describes just about 80% of my rural/suburban non-homogenous market.

I've done reviews of reports that fit ever so neatly into the 'suggested guidelines' yet were blatantly constructed to inflate the value. Unless you know the neighborhood and can apply intuitive and discriminitave thinking processes, you won't see it.

Just how will this computer accomplish this :?: Would love to know how this program will determine such fraudulent reports. I assume exceeded guidelines, but have no idea, really. Anyone out there know?

 

[Austin]

This is nothing new. I have had this capability using regression analysis for about five years. If anything is out of kilter, I can spot it in a New York minute. Just to illustrate how accurate the system can be: I consistently found four Realtors from the same office that always reported the wrong GLA. There was another Realtor that would deliberately report the wrong GLA in the MLS to screw people up. I can look at the graph of predicted prices and tell you which ones are out of line and who is doing what. I know the name of the four Realtors than can’t count GLA, I know the Realtor that deliberately lies, I catch them all the time trying to jack the price up to get 100% financing. The program predicts a price exactly equal to the contract price less down payment and closing costs. With 30 sales they stick out like a sore thumb.
I did an appraisal once and was in a hurry. I forgot to measure the darn house. I discovered this little problem when I started doing the regression. It was ten miles back out to the house. I used the trend line price estimate for the 30 sales for the subject and did iterations with different GLA counts to estimate the actual GLA so I could finish the report that day. Then the next morning, I stopped by the subject and measured it just to be sure. I had it exactly correct.
I was appraising a house once in a subdivision in which the garage had been converted into living area making it about 40% more GLA than anything in the neighborhood. The regression just would not work out right. What the program was telling me was that this house was a 2,000 square foot house with an 800 square foot garage finished into living space, and not a 2,800 square foot dwelling as the Realtor claimed. There si a big difference. The technology to do this is here folks.
It is easy to do if you want a demo. Take about ten comparable sales including one you suspect as being jacked up. Do a marketing grid making adjustments to a subject. Then graph the GLA vs the adjusted prices and calculate the trend line in Excell. If one of the sales is jacked up, you will spot it on the graph way above the trend line. If you used my sequence of adjustments, you could spot it every time anyway. I wrote an article that was published in Appraisal Buzz about three months ago on this subject.

 

[Mary E Perry]

Austin

I wrote an article that was published in Appraisal Buzz about three months ago on this subject.

From a post April 6, 2002 "Freddie Mac Software to fight home apprisal fraud"

Title of the article or some key words in title would be great for me. I would love to find it and read it. A good bit of review work comes my way and it is usually reviewing appraisal crap. In my little rural GA town the realtors rule and the unethical appraisers over-inflate the market. My reviews and appraisals are based on verifying data every and any which way I can. Yes I even go so far as to measure a comp in a review at times when I know things just don't look right and can't get data from any source. But it sure is a hastle explaining to these country folk why I want to measure their home. If any of your models can help me weed out the ones that I don't have to spend days digging up accurate info I would be much ablidged. By asking for this I am not insinuating that I will not verify sales. It would just be helpful to use a technique in which I can help sort out the comps that need extra special attention.

Any info on your regession analysis or similar models would be a pleasure to give a whirl.

Mary

 

[jtrotta]

Perhaps another view needs to be brought into play, before all the appraisers get the blame; now this is just an opinion;

if Freddie/FNMA or anyone else wants to provide anyone 100% to 125% Funding on any deal they need to first look into their own purpose for allowing these types of transaction's. it puts out an impression that no money is required to make the Largest purchase of someone's entire life and also the most detremental effect on their life/credit when it all goes bad. To me this is as bad a business decision as someone could make, but after all it's not their money so why should they care anyway, plus they get the opportunity to lay the blame off to someone else in the end.
maybe, just maybe the Borrowers information should be made available, so that it could be checked to see if they could really afford to make the purchase in the begining.

h34r:

 

[Tim Hicks (Texas)]

The bottom line: It still takes an appraiser to "play ball" with all the other crooks in the real estate world. If all appraisers had a backbone this would not be a problem. Greed will dissolve a backbone instantly. We can teach ethics all we want, but until appraisers are held accountable, the problem will never be solved.

 

[Mountain Man]

We can teach ethics all we want, but until appraisers are held accountable, the problem will never be solved.

Tim, I agree...... partially.

I would add Realtors, attorneys, AND especially the Loan Brokers to that list. Realtor ethics are poo-pooed every day, and lender pressure is unsurmountable. As for the attorneys, unless it is something really bad, they know how to limit their liability....... slick closing addendum.

 

[Pamela Crowley (Florida)]

How well can the system possibly work when the 'police' of the industry (appraisers) are hired and paid (ie: livlihood depends on) by the 'crooks' of the industry whose commission (income) is higher when the appraised value is higher.

:twisted: :twisted: :twisted:

Until Realtors and Loan Officers are held accountable for their actions and no longer have any say in the appraisal ordering process, Appraisers will be blamed.

 

[Carnivore]

Backbone is what its going to take. Backbone to start making formal complaints againts lenders and the big money sources behind them to state and federal regulatory banking agencies. We need to turn the tide. We need reporters to make a constant drum beat about large banks and the enormous pressure they apply to appraisers,title workers, termite inspectors, surveyors, etc etc. All service related operators are subject to tremendous pressure from Papa, mama and baby banks. inscrupolous LO's. Recently I heard that Credit bureas are now under the same assault, that LO's are scanning credit reports and changing them to more favorable results. So much for Fannie Maes thinking on credit driven loans.

I am really getting sick and tired of this. The root cause of all this is the BANKS, INSURANCE Co., fannie mae, freddie mac. etc. etc

FLASH, Now AMC's are feeling the pinch, as more AMC's pop up the competition for loan work increases tremendously. The biggest AMC is using selective picking now to keep the high ballers and the incompetent
appraisers working steadily. If your ethical your put to the bottome of the list. Its not just the fee, its how cooperative you are also.