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Exclusive: Banks' Appraisal Conflicts Could Continue Under New HVCC Rules

Cuomo's office: "GSE's knew they were buying loans with appraisal fraud..."

By Teri Buhl

Teri Buhl is an investigative journalist covering Wall Street who has written for the New York Post Sunday Business, HousingWire and Trader Monthly. Contact her at

Despite calls for reform, Countrywide is still showing signs of committing the same predatory lending sins under new owner Bank of America. As Congress rushes the lending reforms through the House this month, banks are still fighting to keep control of how they run the mortgage business, and keep collecting lucrative fees in every step of the lending process.

Exhibit A is a $2.8 billion class action lawsuit filed on March 7th against a BofA subsidiary called Countrywide-KB Home Loans and its wholly owned appraisal firm Landsafe, Inc. The suit accuses the two subsidiaries of an appraisal inflation scheme affecting over 14,000 borrowers, and is a product of a yearlong investigation examining home buyers in California, Arizona, and Nevada. Leading the charge were the Laborers' International Union of America (LIUNA) and Seattle-based law firm Hagen Berman. The law firm is presently litigating over three class action cases against Countrywide.

"These cases are a reminder the mortgage business is completely broken, says Ira Rheingold, president of National Association of consumer Advocates in Washington. "It is obvious the big banks are still engaging in a number of practices that violate the Real Estate Settlement Procedures Act (RESPA). Laws that were designed to create consumer choice are being ignored."

Congress passed RESPA in 1974 to prohibit certain practices such as referral fees between lenders, brokers, and appraisers that increase costs to homebuyers.

Jordan Ash, who led LIUNA's investigation for the lawsuit states that his group went door to door in KB Home developments looking for someone to show up with proof that Landsafe had inflated appraisals - LIUNA's goal is to curtail kickbacks and price inflation between builders and lenders. He found his guy in Nathaniel Johnson, a KB home buyer in Arizona.

In Johnson's case, the company inflated his appraisal by around $45,000. He had obtained a similar price comparison from his credit union, but when he presented that to a Countrywide KB Home Loan officer, the officer said he could only use their appraiser (Landsafe) if he wanted the loan and the home. When defendants like Johnson tried later to sell their homes, they found that they were now underwater, and then realized how inflated the appraisals were.

It turns out that Countrywide had been ignoring warning signs since 2006. Back then, former Countrywide-KB Home Vice President Mark Zachary began warning banking executives that Landsafe's appraisals were inflated by at least 6 percent or were using comparable home prices in other neighborhoods. Legal documents show Zachary was questioning top bank executives on why only one appraiser was being used.

In addition to homebuyers being duped, Zachary argued, investors funding these loans were also defrauded, as the actual home value could be less than the loan amount -- putting the buyers upside down immediately after the purchasing, and the investors at a net loss.

In mid 2007, Countrywide fired Zachary after being asked to name executives involved in the scheme and is now battling with BofA's legal team in Texas state courts over wrongful termination.

This isn't the first time a large bank has been sued for being in cahoots with appraisal companies. New York Attorney General Andrew Cuomo is still fighting a lawsuit started in November 2007 with California-based First American and its appraisal firm eAppraiseIT. Charges include appraisal fraud and kickbacks on loans made with Washington Mutual. Last month Cuomo defeated a yearlong battle to have the case (currently in discovery) dismissed because First American said a federal regulator needs to charge it with wrong-doing. The N.Y. Supreme court thought otherwise, and Cuomo's office says it still plans to pursue millions in monetary damages, along with not allowing the two to do business with each other.

When we asked Rheingold if he was surprised that Bank of America didn't shed Landsafe when it bought Countrywide last June, he laughed. In the 1990s, BofA owned one of the nation's first subprime lenders, Equicredit, but it later sold off following lending and foreclosure fraud lawsuits.

"Bank of America is no angel," says Rheingold. "When I was running legal assistance in Chicago, if we got a foreclosure case with Equicredit involved, I took the case right away because I knew there would be illegal behavior by the lender. BofA always called to settle after I made the case public."

Difficulty Changing the Culture

Outside industry experts on Bank of America's advisory council, speaking on the condition of anonymity, said they had hoped Countrywide's shady past would be cleaned up within a year of the new ownership. But nearly a year later, we've learned that the Charlotte-based BofA has simply assumed the same practices that branded Countrywide a financial predator.

According to sources, Barbara DeSoer -- head of BofA's combined mortgage unit -- was personally confronted about LandSafe conflict of interest practices while at a council meeting in Dallas at the end of March by a member of the advisory council. In response, she said she didn't see it as a conflict of interest.

Today, Internet forums are packed with chatter complaining about Landsafe. Last week on one such forum,the Implode-Explode Forum, people posted statements about the lack of employee morale currently at Landsafe, blaming management's "churn-and-burn" appraisal ethics. One certified appraiser using the pseudonym "exlandsafeappraiser" says, "From an appraisal standpoint, Landsafe values quantity over quality... hit the number and move on."

Another former Landsafe appraiser who left the firm last October said, "There was tremendous pressure to hit values, especially on the KB new homes. There was a lot of "can you find me another $5,000?"

Secret Blacklists and Whistleblower Traps

Sources who've worked for the firm and spoke on the condition of anonymity for fear of retribution told us about a secret database so-called "UVL" or "unapproved vendor list." The list keeps track of all appraisers who've been blackballed for not meeting the lender's price target. In fact, when employees log onto the list, a warning flashes on the screen and tells the user not to disclose the list's existence.

A person who currently works at Landsafe says "At BofA's Landsafe, when the in-house reviewer does his check-off on the appraisal, the first thing we're told is to check the UVL list. If the appraiser is on it, out goes the appraisal in the trash."

After repeated inquiries, a Bank of America spokesperson finally commented, "We do have a UVL list that is used for quality control based on professional appraisal standards and Fannie Mae guidelines. We strongly believe it doesn't violate HVCC."

Appraiser Blackball lists have recently been banned for the mortgage industry - that is, if they want to sell their loans to Freddie and Fannie. Section one, paragraph two of the Home Valuation Code of Conduct (HVCC), which took effect May 1st, clearly states that withholding or threatening to withhold future business for an appraiser, or terminating or threatening to terminate an appraiser is a full-blown violation of the new rules imposed on lenders and appraisal management companies (AMCs). But it's likely going to take a brave Landsafe employee with a guilty conscience to report violations to the new Independent Valuation Protection Institute for any actual consequences to be levied against BofA's profit stream.

In fact, in an attempt to ensure warnings are funneled first into the perpetrators nest, Landsafe's response was to set up an independent hotline of their own with a toll free number and company email for outside appraisers to send complaints.

Cuomo's "Chinese Wall"

While Congress and federal regulators have yet to write significant laws eliminating conflict of interest between appraiser and lenders, Cuomo has already up-ended the system -- for better or worse.

Last March, Cuomo agreed to stop his investigation into Freddie Mac and Fannie Mae for knowingly accepting loans packed with fraudulent appraisals. Sources close to Cuomo's office that were involved in the GSE investigation said his case was strong enough to prove the GSE's knew they were buying loans with appraisal fraud and had no choice but to bend to the NY AG's terms to get the case dropped. In return, the agencies agreed to not buy any residential loans from banks if they broke a new set of rules Cuomo created call the Home Valuation Code of Conduct (HVCC). The crux of these rules prohibited banks "owning" appraisers, and disentangled appraisers' pay from the value of the home.

Howard Glaser, mortgage industry analyst who worked with Cuomo at HUD says, "In the optimal world, the appraisal function would be run by an independent company separate from all others involved in the lending process. The bank regulators should have been inspecting these relationships. Unfortunately, Bank of America/Landsafe still doesn't have a federal regulator who has ever cared about problems in the appraisal process." Their regulator, the Office of Comptroller of the Currency (OCC), is run by a Bush appointed holdover John Dugan.

While bank lobby groups tried to sue Cuomo's HVCC effort this February, Cuomo stayed on track and got Fannie and Freddie's regulator (the FHFA) to agree to hold the agencies accountable to the rules. With Cuomo prevailing, HVCC finally took effect May 1, 2009.

The mortgage lobby won one battle though, allowing banks to keep in-house appraisal units and to own stakes in appraisal management companies (AMCs), as long as the mortgage broker and loan officers don't pick the appraiser. If this Chinese wall is broken and complaints are submitted to regulators, then government-controlled Fannie Mae and Freddie Mac is not supposed to buy their loans on the secondary market. Today these agencies buy about 85 percent of the banks residential mortgage loans - a function that is critical to banks that need to free up capital so they can make new loans.

Consumer advocates like Rheingold worry that the HVCC rules that did get implemented only half-way solve the problem. Rheingold states that Cuomo's original guidelines, demanding fully-independent appraisal management companies, would have gone a long way to prohibit abuse in the system. The rules that did get implemented, however, allow bank ownership of AMCs to continue. Thus, including full and partial, direct and indirect ownership, four big banks now control over 80 percent of the appraisal market under HVCC. Not only does BofA own Landsafe, but Wells, Citi, and JP Morgan have ownership interests in appraisal subsidiaries/joint ventures of First American and Fidelity/LSI ServiceLink. Worries are that this system may hinder attempts to truly change the culture.

As far as the GSEs, Rheingold added “If you give Fannie and Freddie and inch they take a mile. Unfortunately, the current HVCC guidelines give them a lot more than an inch.”

Glaser adds, "HVCC should help slow appraisal fraud, but a company like Landsafe really needs to change their Top to Bottom practices and their management to stop the abuse."

Notes: (i) An earlier version of this story incorrectly stated that `` in a feature story out this month in HousingWire magazine, DeSoer admitted integrating "distinct lending systems" across BofA and Countrywide is just getting underway.'' DeSoer's comment actually applied to servicing platforms. The sentence was removed.

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Tobby at 12:33 2009-05-29 said:
This article is a mash-up of old news. And the assertion that there is a "new Independent Valuation Protection Institute" is incorrect. This aspect of the HVCC has yet to be implemented. Without it the HVCC has no teeth, just the way the bankers want it.

The article seems to suggest that fully independent AMCs are the answer, when in fact we are seeing the decimation of the appraisal industry as well educated seasoned appraisers refuse to work for the very low paying AMCs, and are leaving the industry altogether. Permalink

Jennifer James at 14:00 2009-05-31 said:
I agree with Tobby but the more articles written about what is really going on can't be bad. Many good appraisers have left the business due to AMC's paying $175-$200 for a full report and only $35 for a desk review.

I'm with an AMC that is different and until they make it law that the banks and AMC's must be separated, most appraisals will not be accurate.

BOA and the others need to cut the ties before they get the kind of reputation they cannot recover from. Permalink

Kevin Garcia at 10:34 2009-07-08 said:
AMC's aside, I've been very relieved not to get on the phone with a loan officer every time the value doesn't work out. From 2000 on, the mortgage industry was completely out of control and we're all living with the consequences today (and probably the next 5-10 years). While difficult for many, this "cold turkey" separation between appraiser/lender is simply a return to sound underwriting practices. It hurts, but so does being addicted to credit for a decade. Permalink

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