In the wake of recent studies that mortgage fraud in the United States continues to rise, the Appraisal Institute has encouraged lenders and consumers to work with valuation professionals who hold competence and ethics in the highest regard. Of course, fraud often involves multiple individuals, and no one segment of industry professionals alone can combat such activity. Appraisers, home builders, real estate agents, title agents, loan originators and others involved in the mortgage and home buying process all need to make a concerted effort to identify fraud, to refrain from participating in such activity, and to report any wrongdoing to the proper authorities.
The Financial Crimes Enforcement Network’s (FinCEN) Mortgage Loan Fraud Update released in April includes its full year 2011 update of mortgage loan fraud suspicious activity reports (SARs). It shows that financial institutions submitted 92,028 such reports last year, a 31 percent increase over the 70,472 submitted in 2010. FinCEN is a bureau of the U.S. Department of the Treasury whose mission is to enhance the integrity of financial systems by facilitating the detection and deterrence of financial crime.
The FinCEN report states that financial institutions submitted 17,050 mortgage loan fraud SARs in the fourth quarter of 2011, a nine percent decrease in filings over 2010 when financial institutions filed 18,759 such reports. The fourth quarter of 2011 was the first time Q4 of 2010 when filings fell from the previous year.
The FinCEN report also notes that there are indications of extensive improvement in mortgage lending due diligence since the peak of the housing bubble. Specifically, the report notes that 40 percent of mortgage loan fraud suspicious activity reports’ narratives, where filers share details of the reasons an activity seems suspicious, indicated that the filing entity rejected the loan application, short sale request or debt elimination attempt due to the suspected fraud noted in the report. FinCEN cited the example of income fraud-related suspicious activity reports in which filers noticed a misrepresentation prior to funding a loan request based on record verifications during the underwriting process, and ultimately rejecting the application.
While these are positive occurrences, there is still far too much fraudulent activity taking place in the housing market, and it is incumbent upon industry professionals and consumers to work together to minimize these situations. The cost of fraud clearly includes a financial loss; however, there is also a definite impact on the reputation of the participants in our profession. Sometimes, we are blamed by consumers, legislators and regulators for the current housing situation, and other times we point the finger at each other. The reality is that most of us are “doing it right,” and guiding consumers with integrity, competence and ethics. Anything that we can do to help weed out the few that are poorly reflecting on the many is a clear step in the right direction.
One of the noteworthy findings in the FinCEN report is that it shows that the top five states ranked per capita and by suspicious activity report subject in 2011 were California, Hawaii, Florida, Nevada and the District of Columbia, which FinCEN counted as a state for the purpose of their report. The report indicated that fraud is taking place around the country, but is most prevalent in those states.
These ongoing reports of fraud in the housing industry reinforce the need for consumers and real estate professionals to rely on individuals with not only the right experience, but the reputation and ethics to help guide them through today’s uncertain marketplace. A great first step would be to continue emphasizing the value of collaborating with members of professional associations. Most of us are held to the highest ethical standards in our respective practice areas, and it makes good sense to rely on each other during such crucial transactions.
The Appraisal Institute’s nearly 23,000 members in almost 60 countries throughout the world are strongly opposed to fraud, and they use the organization’s Code of Ethics and education courses as a way to constantly reinforce the dangers of such activity, and to learn how to avoid becoming involved.
According to the Appraisal Institute’s book, Fraud Prevention for Commercial Real Estate Valuation, by Vernon Martin, the appraisal profession in the United States originally emerged to correct the financial abuses leading to the bank failures and Great Depression of the 1930s. Since its origins, it has been implicitly understood that the appraisal profession exists to protect the public, much like the accounting profession. More recently, the Uniform Standards of Professional Appraisal Practice (USPAP) were created to codify this purpose. Thus it can be argued that our profession’s perceived duty to the public should make us care about fraud prevention.
According to the book, in cases in which appraisers have been implicated in fraud, those appraisers failed to meet USPAP’s requirements regarding scope of work, intended use, intended users and the use of hypothetical conditions and extraordinary assumptions. The purpose of USPAP is to maintain public trust in professional appraisal practice. One method of obtaining this trust is to prevent misleading appraisal reports. If an appraiser knowingly or unknowingly bases an appraisal on information that can be demonstrated to be false, there may be risk of a civil action for fraud or negligence or, worse yet, a criminal action.
The book states that, in performing appraisals for lenders, appraisers need to be alert to possible conflicts of interest that might compromise their appraisals. The independent appraiser who has never worked at a financial institution may be confused as to who is in charge, and might change the appraisal report at the request of an executive perceived as having a higher rank.
While some housing industry professionals unfortunately engage in fraudulent activities, borrowers have also been found guilty of participating in such situations.
Fannie Mae reported in its May 2012 Mortgage Fraud Monthly Statistics Update that in cases of misrepresentations related to loan originations:
►45 percent included misrepresented borrower liabilities;
►16 percent found that the borrower’s intent to occupy the subject property was materially misrepresented;
►15 percent included inflated or fabricated borrower income/employment information;
►11 percent contained a specific material fact about the property and/or the comparable sales that was misrepresented;
►Six percent included a significant discrepancy in the Social Security Number(s) used to qualify the borrower(s);
►Three percent contained inflated property values and non-property-related misrepresentation in the loan transaction;
►Two percent contained inflated or fabricated borrower asset information; and
►Two percent included misrepresented borrower credit history.
According to the Fannie Mae data, the highest distribution of loans with significant representation during 2011 and 2012 are in the states of California, Texas, Illinois, New York and Colorado.
The Appraisal Institute’s own research, based on an analysis of data found in the Appraisal Subcommittee National Appraiser Registry, reported on U.S. appraiser disciplinary actions from the year 2000 through year-end 2011. Individual states initiate disciplinary actions and report them to the Appraisal Subcommittee. The Appraisal Subcommittee of the Federal Financial Institutions Examination Council, created by Congress in 1989, oversees the real estate appraisal process as it relates to federally related transactions.
►For the most recent five-year period (2007-2011), there were 1,766 disciplinary actions.
►There were 2.6 times more disciplinary actions in 2007-2011 than there were in 2002-2006.
►For 2011, the overall number of disciplinary actions decreased 6.8 percent from the prior year.
In 2000-2011, 7.9 times more non-member appraisers than Appraisal Institute members received a disciplinary action. Based on the most recent five-year averages, the Appraisal Institute represents 26 percent of the entire U.S. appraiser population, but only 12.1 percent of all disciplinary actions.
While the housing market certainly should, and likely will, begin to improve at some point, that step forward can be significantly enhanced by minimizing fraud in real estate transactions. Most of us who earn a living in this industry play by the rules, do right by consumers, and take seriously the guidance and ethical requirements of our respective professional associations. It is virtually impossible to eliminate fraud, but with the ongoing efforts of the “good guys” to identify, reduce and not engage in fraudulent activity, steady progress should be achievable.
Sara W. Stephens, MAI, is the 2012 president of the Appraisal Institute. She serves as chair of the Appraisal Institute’s Executive Committee and chairs its policy-making Board of Directors. Stephens has been active at the Appraisal Institute’s chapter, regional and national levels for more than 20 years. She is the owner and principal of Richard A. Stephens and Associates in Little Rock, Ark. Along with her business partner and husband, Richard A. Stephens, MAI, SRA, she maintains a practice offering a broad scope of services, specializing in eminent domain, litigation support and real estate tax appeal. For more information, call (800) 756-4624.
