Professor Wray on Appraisal Fraud and Mortgage Fraud

Anecdotes of Mortgage Fraud

| 9 March 2012 15:00

By L. Randall Wray

In the last couple of weeks I’ve been pushing foreclosure fraud. Well, not pushing the fraud but rather arguing that foreclosure is fraud. It has to be. If a mortgage was registered at MERS, then the chain of title was broken. Broken chains mean the bank cannot foreclose. But that was MERS’s business model, and so most mortgages are “infected”. Still, there’s a lot more to it than that.

I’ve been arguing since early on in the crisis that the entire real estate food chain is like Shrek’s onion—as you peel back every layer you find fraud. From the appraiser to the broker, from the lender to the securitizer, from the recording of the mortgage sales to the securitization’s trustees, from the accounting firms that signed off on everything to the ratings agencies that rated everything AAA, from the investment banks that created CDOs to the hedge fund managers who bet against the synthetics Goldman sold to its own customers, and from the bank lawyers to the judges that help banks steal homes. The whole damned onion is fraud.

And most of it, today, is to cover up the chain of fraud that dates back to the early 2000s. It has been all fraud, all the time, since 2000.

As is widely noted, the FBI warned of an epidemic of fraud in 2004. The Fed’s FOMC discussed rising fraud even before that. While anecdotal evidence, alone, should not be enough to convince one, there is certainly plenty of it. Today I want to talk briefly about a couple more examples of the fraud that led up to the crisis.

Back in the year 2000, property appraisers began to complain that mortgage lenders were forcing them to over-value property. They actually put together a petition in 2000 and began to circulate it. They continued to add names until 2009! Here were their main complaints:

We, the undersigned, represent a large number of licensed and certified real estate appraisers in the United States, who seek your assistance in solving a problem facing us on a daily basis. Lenders (meaning any and all of the following: banks, savings and loans, mortgage brokers, credit unions and loan officers in general; not to mention real estate agents) have individuals within their ranks, who, as a normal course of business, apply pressure on appraisers to hit or exceed a predetermined value.

This pressure comes in many forms and includes the following:

  • the withholding of business if we refuse to inflate values,
  • the withholding of business if we refuse to guarantee a predetermined value,
  • the withholding of business if we refuse to ignore deficiencies in the property,
  • refusing to pay for an appraisal that does not give them what they want,
  • black listing honest appraisers in order to use “rubber stamp” appraisers, etc.

They collected 11,000 signatures! I don’t know how many appraisers there are in the country, but this had to be a big chunk—11,000 warnings of massive, pervasive, fraud. And that was the very first step of the food chain, the first layer of Shrek’s onion.

You can see the petition and signatures here: The petition was widely circulated—I saw it well before the crisis hit. It was addressed to the Federal Financial Institutions Examination Council, and I am sure many in Congress and at the Fed saw it. They ignored it.

Go ahead and read through the signatures as the signers were allowed to make comments. Go back to the very first page of signatures; read it and weep. Then come back here. We’ll wait.

They warned:

*This is not good for the public at large! *Not only do we get subtle overtures to make value, we will be the first to get blame when loans go south. *It’s time to clean up this crap! Regulate and institute the lending institutions. *22 years as an appraiser this practice worsens every year. *L.O.’s (loan officers) have no standards or ethics, that I can tell. *This is an unfair practice and puts far to much pressure on the appraiser, since his/her livelyhood is involved. *I remember the late 80′s to early 90′s when I was appraising properties for the FDIC during the bank take-overs. It’s coming. *Appraisers are like pawns in some mortgage brokers game. If they don’t get what they want, they blacklist you. *This list will become a ‘blacklist’.

Folks, this was 2000. Go ahead and scroll through the rest of the 11,000 signatures. Gee, do you think that if appraisers were already warning that property was being over-valued in 2000 that maybe that fraud might help to generate a speculative bubble? A bubble that continued for 6 more years?

Yet I can recall as late as 2007 that the Fed was sending out “professional” economists (one could use a much more derogatory word to describe such “professionals”) with “rigorous” papers demonstrating that housing prices were driven by “fundamentals”. There was no bubble, according to official and public Fed pronouncements right up to the crash. In fact, it was all bubble. As early as 2000. And then it just bubbled more, fueled by fraud.

The poor appraiser was only the first layer of fraud, and you’ve got to have a bit of sympathy. They raised a red flag, knowing that just by signing the petition warning of fraud, they could be blacklisted by the mortgage brokers. To be clear, that does not absolve them of responsibility. The petition makes clear that many of them bought the devil’s bargain. To save their own families, they lied—which has cost millions upon millions of families their homes. They played the fraud game with the mortgage brokers, and they’ve got to live with their guilt.

Now, of course, the individual mortgage brokers were only reacting to the demands of the mortgage lenders—who wanted high appraisals so they could make bigger loans to those less able to afford them. And the lenders, in turn, were responding to the demands of investment banks that wanted toxic mortgages to securitize. The raters had to give triple A to the trash—or like the appraisers, they’d get blacklisted. In the bulls-eye center of the fraud was the investment bank—the blood-sucking vampire squid of Wall Street—that drove the whole criminal enterprise. I’ll come back to this below, but the junk mortgage was the food that fed the investment bank beast. All the rest of the fraudsters were mere appendages. Yes, it ALWAYS comes back to Goldman Sachs. Just read John Kenneth Galbraith’s The Great Crash, which devotes a whole chapter to the Squid. This global financial crash will devote 9 chapters to the Squid.

Here’s the coda to the story on the appraisers. They’re getting blamed and sued—just as that poor lonely appraiser warned back in 2000: “we will be the first to get blame when loans go south”. Yep, and they are losing the lawsuits. Take a look here: Appraisers are damned if they do, damned if they don’t. Some are suing the banksters: appraisers are pursuing class action suits against the banksters, asserting they were blacklisted if they refused to engage in fraudulent appraisals. The problem is that if they win, they are then subject to suit by homeowners (who are losing their homes) since they overpaid, and got mortgage loans that were far too high relative to “fundamentals”. I do not need to remind readers that these mortgage debtors are now massively underwater—thanks to the banksters that forced appraisers to jack up values far beyond what the homes were worth.

So, the wrong people are going to lose. Homeowners and property appraisers. Again, appraisers should have “just said no”. It is an easy thing to say in retrospect. But prosecutors should be going after the real criminals—all of whom still work at the “dirty dozen” top twelve banks. But that will not happen. President Obama has made that abundantly clear. No top fraudster will ever be investigated for fraud. That is national policy. Wall Street will be protected at all costs.

Here’s anecdote number two. I admit, this is nothing more than an anecdote but it is from someone I trust. This is about the brokers doctoring documents and about their lending banks continually insisting on lower underwriting standards. And I’ve heard many similar stories. Finally, it fits. It helps us to understand why all the layers of the onion were fraudulent. Here’s the story (it is long but worth the read):

“I can tell you from first-hand knowledge that mortgage broker supervisors were instructing their associates to add 10′s of Thousands of Dollars stated income to the applications (AFTER the borrowers had signed the applications). The banks knew it and encouraged (even instructed) the mortgage brokers to do this!!! Indeed, my own son, went to work with a mortgage broker; and during the mere two weeks he worked there, my son discovered that this was common practice (even “the plan”). During his very first mortgage application intake, he called both his father (a criminal and civil lawyer) and me (a foreclosure defense lawyer) — he was totally “freaked out” at what he was being “instructed” to do (namely: to add $40K to stated income of the applicant — without the applicant even knowing!). We, both, told our son to immediately clean-up his desk and walk out of the office without a word. And, yes, he also reported this to the state attorney’s office — but, alas, NO FOLLOW THROUGH. All in all, banksters were in a “feeding frenzy” to create as many securitized pools as quickly as possible. The financial industry (as a whole) was feeding “phony baloney” statistics and information to business journalists and the general media touting an unstoppable real estate boom. And all of this was intentionally done to facilitate “great impact for the buck” and to “Feed their Greed”.”

The Points: Mortgage brokers and the banks/lenders/REMICs “conspired” to “encourage” borrowers/real estate investors (those exactly like “the Ritters” in Fort Washington, Maryland — and other types of borrowers) to make as many such loans as possible. Moreover, banksters fraudulently induced borrowers by inflating the appraisals, presenting phony statistics and future predictions (on which borrowers relied to their detriment) – and “to hell” with legitimate underwriting!”

“The CONSPIRED PLAN: To create “attractive” securitized trust ”investments” to sell on Wall Street to “unsuspecting securitized trust investors.” NOTE: Many “Investors” being Pension Plans for blue collar workers, which were instructed by the Pension Plans to invest only in verifiable “LOW RISK” investment vehicles. And let’s not forget other types of employee Pension Plans, SUCH AS FOR LEGISLATORS AND JUDGES!!!! That’s a whole other “can of worms” resulting in “bank bias” in our judicial system and more (a discussion for another time).”

“ However, when the “world came tumbling down” precisely because of these illegal actions — the banksters REFUSED TO CORRECT THE ATTROCITIES by, at least, granting fixed interest rate refinance (upon borrower request and before a default); OR granting loan modifications (after “instructing“ borrowers to actually default — “so that they could be placed in the loan mod process”), OR granting short sales (with releases of deficiencies); OR granting deeds-in-lieu (with releases of deficiencies) — AND COMPLETELY FORGET ABOUT PRINCIPAL REDUCTIONS OF THESE ARTIFICIALLY AND INTENTIALLY INFLATED PROPERTY VALUES!!”

“So, yes, face the reality, it all comes back to “Those Miserable Banksters” and their greed to create securitized trusts — who intentionally encouraged (often even sought-out) “questionable” borrowers and real estate investors such as the Ritters example; who intentionally encouraged (often sought-out) unsophisticated first-time borrowers; who intentionally (often sought-out) current homeowners offering them, sometimes to the point of harassment, refinanced and/or line of credit loans…and other examples that could go non-and-on.”

“Yet what all the banks, mortgage brokers, REMICs, and trustees had to do from the very beginning was to act ethically and legally; They DID NOT, and, so, when the banksters have to reap the repercussions of having to “deal with the “Questionables-of-the-World,” don’t expect any deep empathy or sympathy from this foreclosure attorney who represents good, decent, and responsible homeowners and their families who are facing foreclosure because they experienced decreased income or even lost their jobs “at the hands of the banksters.”

Wow. There you have it. In the next blog I’ll try to make sense of this. Why was the whole damned thing based on fraud—something approximating a pyramid-Ponzi-Madoff scheme? That is really the question.


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