Do banks commit fraud? Do they steer appraisals? They do.
There is so much talk about how borrowers have defrauded the system and manipulated appraisals. Which I have no doubt they have but I represent several distressed borrowers trying to work out short sales and the lack of integrity on the part of some banks (not all of them) is astounding.
A Utah bank forecloses on a property and has an internal appraisal thirty days prior to the foreclosure for $275,000. The borrower owes $276,000. The bank buys the property back at the foreclosure auction for $245,000 and sues the borrower for $31,000 plus legal fees. When this property was purchased the borrower put 30% down and had made payments for three years on a 20 year amortized loan.
The Deficiency Lawsuit
In the lawsuit the bank hires an expert witness, an appraiser, to testify to value. This appraiser supplies an appraisal for $255,000. In this second appraisal he utilizes comparable properties over 5 years old. To be fair, it is a unique property but he specifically excludes comparable properties that would increase the value.
In the appraisers deposition he was asked why he has omitted these comparable properties. He begins to speak and then halts, stating he can't recall. Upon asking how the appraisal was ordered he replies, "the bank representative ordered it." In the appraisal submitted from the "expert", the foreclosure value was disclosed at the time he ordered it and it is likely he was steered toward a value. This is extremely common with local banks.
Fortunately the client had a great attorney, Celeste Canning PLLC, and myself, real estate broker Brandi Hammon, from Mountain Real Estate Companies to research the appraisal. Celeste caught the previous appraisal done 30 days prior by the same appraiser on file with the bank. Once the banks lawyer sent it over it was substantially higher and oddly enough included a comparable he omitted on the second one. It is likely high enough to dismiss the deficiency and pursue the bank for legal fees.
Why are appraisers potentially biased toward banks?
One appraiser I tried to hire for a client with a pending foreclosure from a local bank stated he could not appraise the property due to a potential conflict with the bank. The conflict? They give him a lot of business. Appraisers evaluate the bank's foreclosed properties. They are required to do this periodically by the FDIC in order to substantiate the value the bank has allocated to the property. If the property is valued lower than what is on the balance sheet, they are forced to write the value down to match the appraisal. So if a bank is hiring an appraiser to value the property once for the foreclosure sale and then again between two and four times per year by FDIC regulations they have a very valuable client. The bonus is that there is very little exposure to litigation in these situations versus when a buyer purchases a home and it is foreclosed upon and the home sells for substantially less than the appraised value. In which case, the bank can potentially pursue the appraiser.
Appraisers are usually highly professional. The fact that banks can hire them directly for deficiencies and foreclosures is unfortunate. Beware and if in litigation request ALL appraisals on hand or ordered by the bank for the life of the loan.
Knowledge is power.
President, Broker Mountain Real Estate Companies NRBA, CDPE
Mountain Real Estate Companies offers specialized services for both banks and borrowers with distressed properties. Bridging the gap in understanding both sides of the default our experience creates mutually beneficial solutions to better protect borrowers and home values in our communities. If you have questions, email or call, it is our intent to help as many people as possible. Offices currently in Ogden, Eden and Park City Utah. 801.745.8400