Detection and prevention of mortgage loan fraud

RMA Journal, The, Sept, 2004 by Vernon Martin

Assumptions also relate to proposed market conditions. One of the most misused extraordinary assumptions of the 1980s was that of sufficient demand for the proposed improvements. As a result, the Texas prairies were bejeweled with empty office buildings.

From a lending viewpoint, one must be very careful with appraisal reports using the catchphrase "per client's instructions." While this could be the hallmark of a conservative lender wary of inflated pro formas, it also could be a warning of possible manipulation by self-interested parties, such as commissioned loan agents. Assumptions dictated by commissioned loan agents can have major effects on value estimates.

It's essential to carefully review the Assumptions and Limiting Conditions section of the appraisal report. The following unreasonable assumptions were presented by Office of Thrift Supervision examiner Glen Sanders in a 1989 speech to the National Association of Review Appraisers:

* Assuming the site will be rezoned.

* Assuming undeveloped land has utilities.

* Assuming there is effective demand for the proposed development.

* Assuming there will be 95% occupancy.

* Assuming the land is stable.

* Assuming the land has valuable oil assets beneath it.

* Assuming the client's statements are correct.

The last statement is a common appraiser's cop-out. The lender should instruct the appraiser to alert it to any borrower dishonesty immediately.

Another extraordinary assumption seen in appraisals of environmentally contaminated sites is the assumption that contaminated land is not contaminated. It behooves lenders to supply appraisers with relevant environmental reports for the properties being appraised.

Misrepresented or undisclosed property conditions. The most important policy for a lending institution is to have a noncommissioned representative make a field inspection of the property designated as collateral for the loan. At one bank, a field inspection by a newly hired chief appraiser found that a subdivision in the Sacramento area was represented as 80% complete by an appraiser hired by a loan salesman and corroborated by two loan salesmen; in fact, it had only been rough-graded and appeared to be only 15% complete at best.

In another instance, a loan broker did not disclose that the borrower's trailer park was an unremediated Superfund site. A bank representative can ascertain Superfund status at www.epa.gov/superfund.> The borrower cannot be expected to disclose tax liens and special assessments, and many lenders today are not sufficiently disciplined about providing preliminary title reports to appraisers. A bank recently took a $2 million loss on an incomplete subdivision in Utah for which special assessments were not disclosed to the appraiser (who was not provided a title report). The loan officer had already taken his commission and left the bank. It should be bank policy to provide a preliminary title report to the appraiser.

Some homebuilders are applying for refinancing on homes they have supposedly been completed on the outskirts of many secondary western cities, such as Albuquerque, Phoenix, Boise, Provo, and Anchorage, with appraisers instructed to appraise the houses as complete even when they are not. Considering that the builder's main goal is to sell homes, a refinance application from a builder only spells trouble in selling his or her product.