Tuesday , 27 October 2020

Staying Out of Hot Water, an Interview with Michael Stolworthy

We’re all humans and make mistakes, but do you know any appraisers who deliberately inflate appraisals? This devious action could get them in a lot of trouble nowadays. Why would they risk their license, home and, savings? Perhaps they don’t know just how serious the government is when prosecuting such fraud. Today we speak with former Deputy Special Agent, Michael Stolworthy, on his time investigating housing fraud, and so much more.

Buzz: Michael, thank you so much for joining us, to get things started can you tell us how you became to be Deputy Special Agent in Charge with HUD OIG?

Stolworthy: Well, it was a long career, so this will be a bit of a long answer. I worked for the federal government for more than thirty years before retiring from law enforcement last November.

I started as an auditor with the IRS in 1984, and became a special agent in 1994. I moved over to the Inspector General’s Office at HUD in 1999, and spent eight years working criminal investigations of mortgage frauds and low income housing frauds in New York. I transferred to Washington DC in 2007, where I served as the Special Agent in Charge of the headquarters Criminal Investigation Division, and was then promoted to the Director of Fraud Prevention.

As the Director, I helped lead the Mortgage Fraud Working Group of the President’s Financial Fraud Enforcement Task Force, directed HUD-OIG’s mortgage fraud initiative nationwide, and acted as the key HUD-OIG special agent liaison to the mortgage industry. In 2013, I was detailed for two years to the Recovery Accountability and Transparency Board, a small independent agency, to assist in oversight of federal disaster recovery spending related to Hurricane Sandy.

At the beginning of 2015, I was asked to take the position of Deputy Special Agent in Charge of the HUD-OIG Joint Civil Fraud Division (JCFD), a civil investigations group initiated by former HUD-OIG inspector General Kenneth Donohue. The JCFD is a group of the best HUD-OIG special agents from around the country, who conduct civil investigations.

Buzz: Have you noticed any change in the number of fraudulent cases? Are there any trends involving these cases?

Stolworthy: The biggest, most recent trend was the resurgence of the FHA market after the economic crash in 2008. Before then, the FHA had been steadily losing market share to conventional lenders offering mortgages with little or no down payments to borrowers with little or no credit – traditionally borrowers who used to finance through the FHA. After 2008, lenders closed down alternative lending and flocked back to the protection of the FHA. Unfortunately, at that time, the fraudsters also flocked back to the FHA.

For years after the crash, we saw and continue to see a lot of foreclosure rescue and loan modifications scams. These scams involve perpetrators purporting to assist homeowners who are delinquent in their mortgage payments by offering to renegotiate the terms of the homeowners’ loan with the lender. The scammers typically demand large fees up front and often don’t actually negotiate at all. Often times, the fraudsters will direct homeowners to stop making mortgage payments or to make the mortgage payments directly to the fraudsters. Unfortunately, the homeowner victims often lose their homes.

In other foreclosure rescue frauds, perpetrators mislead homeowners into believing they can save their homes by transferring the deed into the name of an investor. The perpetrators then use a fraudulent appraisal to create equity, sell the property to a straw borrower, and steal the proceeds.

Today, we are starting to see that what is old is new again. False statements on loan applications (as to income or down payments or credit) and illegal property flipping have made comebacks. False appraisals are, of course, used to fraudulently inflate property values for property flips or to build in down payments.

Buzz: Is there anything you’ve seen that could be considered cautionary tales for appraisers?

Stolworthy: The most important thing for appraisers to understand these days is that HUD-OIG has new investigative and prosecution tools at its disposal. The Joint Civil Fraud Division is expanding – targeting not only the large lenders, but also smaller lenders, underwriters, loan officers and appraisers as well.

This should be of particular note to appraisers. In the past, law enforcement has prosecuted appraisers only when we could prove that the appraisers made deliberate false statements on appraisals. For example, in a recent case, an appraiser was prosecuted for entering false transfer dates and prices on appraisals in order to fraudulently increase the appraised values of properties. In other cases, appraisers have been prosecuted for using pictures that were not the property being appraised. In one case, fraudsters repaired just the front of a burned out house. The house literally had no back wall. The appraiser used actual pictures of the front of the house, but for the rear, sides and interior, the appraiser used pictures of another house. Those cases are fairly easy to prosecute.

What is more typical though, in inflated appraisals, is when an appraiser cherry picks comps, or exaggerates or minimizes adjustments to arrive at desired values. In these cases, it is hard to prosecute appraisers criminally without actual false statements.

That being said, the Joint Civil Fraud Division is now targeting appraisers for civil prosecutions. Civil cases require a much lower burden of proof, and the government can pursue cases against individuals based on pattern and practice, and against participants who knew or even those who should have known.

The government intends to pursue cases against appraisers under the False Claims Act. This means that appraisers who falsely inflate values can be sued for three times the amount of any claims to the federal government.

I’ll give you an example. Let’s say a loan officer instructs an appraiser to come in at a certain value. Using legitimate and proper comps, the appraised value is $100,000, but the loan officer needs $150,000 to make the deal work. So the appraiser ignores good comps, close to the subject property and close to the date of the transaction, and instead selects comparable sales further away from the subject property. The loan later goes in foreclosure and the lender makes a claim to the FHA for the balance of the mortgage and all related expenses, let’s say $175,000. The FHA later sells the foreclosed property for $75,000, taking a $100,000 loss. The government can pursue false claims cases against the lender, the loan officer and the appraiser. Each or all can be sued for three times the amount of the claim, not the loss, less the amount of the recovery. In this example, the appraiser could be sued for $450,000 – for one bad loan!

The JCFD is also going after appraiser’s FHA approvals and state licenses.

Buzz: What can appraisers be on the lookout for to avoid problems and issues?

Stolworthy: Appraisers should understand that the government is not going after appraisers who make honest mistakes or legitimately use their professional discretion to arrive at values, even if those values later prove to be wrong. But for appraisers who deliberately inflate appraisals, the little bit of extra work generated by working with suspect lenders or fraudsters could cost the appraisers their license, their business, their savings, or even their homes.

Buzz: Do you have any tips for professionals working in lending or appraising on how to stay out of trouble altogether?

Stolworthy: Easy. Risking your license, your business, your house and your retirement is not worth a few extra jobs. If you wouldn’t be able to justify your appraisal to a special agent, don’t do the appraisal.

Buzz: Michael, thank you so much for joining us today with such great information! Fraud is certainly a slippery slope. With so much government action, perhaps the scandals will be put to bed for good. Behave yourselves everyone.

Have any comments or would you like to submit content of your own? Email comments@appraisalbuzz.com

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9 comments

  1. Avatar

    When appraisers complain about low pay, in part it is directly related to the now increased liability we face. How many appraisers have been sued only for the case to be thrown out? How many thousands of dollars did it take for that appraiser to defend himself? Was the appraiser out of work or under employed for the time frame to close the case? When it comes time to renew E&O insurance and there was a past issue (thrown out),will coverage be available and at what cost? Will that appraiser show up on the lenders shadow do not use list and in essence be unemployable? Listen up lenders! When it comes to complexity requests from appraisers (TRID issues), it’s not always just about the physical characteristics of the property (GLA, lot size, guest house, etc.), but much more. Liability increases when the property is an investor flip, or has a low down payment. Does the property have transfer records from the past 3 years (increase liability)? Does the property have records within the governments collateral underwriter platform that the new assignment is going to be checked against? Why have our fees not significantly increased to in part offset these increased liabilities? How much of your health care provider premiums goes towards the ever increasing liabilities they are facing? What was your premium 15 years ago as compared to now? Why have they been allowed to raise premiums 5, 10, 15, 20% per year to in part off set these higher liabilities. Why is the AMC split appraisal fee of today equal to wages from 15 to 20 years ago?

    • Avatar

      I read part of the responses from the ex-agent. Where is effort to get the appraiser’s 1st response to a simple or complex accusation or question from the report, before being suit? Ohh, has violated ‘USPAP’S – FAILED TO COMMUNICATE, ETC” now is tamed and could face ‘criminal charges and imprisonment”
      Having to much fun ? Not enough? Continue to appraise in your home state.
      FHA or any lender Knows exactly what is the ‘owner’s property value and loan amount” from the loan application. Now they know exactly is time to pay a small or larger fee – until re-paid by applicant. Why shopping around for 5 bucks lesser fee? When no info property is given – except the address -never a section- block- lot, and now You shall verify its record and assessment [ which is out or incorrect in NYC] and may discover that is not 1SFR and is a 2-3 R Units.

      I have notice that is only 3-5 appraisers on this hot ‘blog” Why – – – no one cares- thanks

      • Avatar

        In part Alex no one cares because the truth is being hidden from the public. If the lender can claim and collect $600 for an appraisal while only paying the appraiser at times $250, then its a secret that needs to get out. Why is the fee not separated on the loan form (AMC verses / appraiser)? Why can’t I include an invoice within the appraisal? Why does the borrower pay the appraisal fee while not technically being the intended user (I can’t disclose my portion of the appraisal fee)? Why does my state not allow me to disclose my portion of the collected appraisal fee within the report itself? Why must the lender select the appraiser while not technically paying for it? Can you choose your doctor, lawyer, accountant, real estate agent, broker, home inspector, contractor, etc., so why not your own appraiser?

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          one great observation- this shows how they want the appraisers to work -stressed out, in dark – blindfolded and subdued, under fear of being taken upon disciplinary actions- appraisers are constrained , loosing another ‘client/lender’- but all talk tall, like they are Gods- until crapp fill out the pants- sorry – but that is how is said

  2. Avatar

    Believe it or not, this is happening in the Fannie Mae market in my area. There is a specific appraiser (who shall remain nameless) who always seems to come in where Fannie Mae says it should. They might want to start by policing their own government programs, because the rotten apple hasn’t fallen far from the diseased tree, in this case.

  3. Avatar

    The Feds ought to put every one of these dishonest, crooked appraisers in prison. Period.

    • Avatar

      Will, although the borrower is not my intended client, I can tell you that the independent, unbiased, and noncommissioned appraiser ultimately may be your only friend in the buying process. On a national average it takes only 70 hours to become a real estate agent, while the requirements and business model to become fully employable as an appraiser is often 12 to 15 years. Will, I have no problem disclosing issues of properties nor signing my name to a report that says the purchase contract is 20% higher than the market value. The last deal I killed Will was a 1.2 million dollar property where the agents/brokers were already spending their $60,000 in commission check (5%). Although I cleared only a few hundred dollars post business expenses in that transaction Will, the borrower was very happy that my report brought to light issues that she was unaware of even though her hired help makes 100 times more than me. Its funny that she was able to hire HER OWN agent/broker at $30,000 in fees, but the bank hired appraiser ($300) is the one that brought to light the issues. Excuse me Will while I go back to work fighting city hall on the behalf of my client who’s property taxes are twice as high as they should be.

    • Avatar

      Hello colleagues from the land of free – at least for another while- The issue remaining is the fact that there is no ‘review steps’ when a ‘problem’ arises, jump to the execution chair and turn the switch half way and only with the appraiser strapped to chair ‘democratic court’ will listen to his/hers point.
      Will please search your state website/ licensing and look fr closed disciplinary actions, after reading few you’ll find 2 categories: a-really bad dudes with intent to do that and b- when lack of clarification steps could of clear appraiser after the underwriter’ s comments were addressed by appraiser now the Defended sitting in that almost electrified chair; yes because either will go to jail( hope not) or will be tarnished with the tag of its disciplinary result and absurd fines and the law man defending the Lender, Mr or Mrs Underwriter Failed to identify a real threat to the borrower, homeowner and tarnish this appraiser for LIFE.
      Now we will be canned by AMC’s via automatic detection via new computer software tech included with the purchase of a new modern program by AMC’s.
      The lack of good – trustworthy tools appraisers have available , still huge lack of physical data provided by the local assessors offices and buildings depts’ not correlating in real time its data, forces the appraiser to be a new architect, engineer, assessor RE agent/broker [ they really provide a description of a property that can be used as published- must be verified at all times- for over 30 yrs ] . Downloading ACI Sky data is just full of incorrect reported data place in one place from sources that failed to verify if there are new construction data on [property: extension, remodeling, new building, etc
      These guys will make you finalize the wrong physical property – value opinion- now really cooked.
      Why? Just finished a “ Landmark status” property appraisal in the good old Brooklyn, NY. For years few ‘local; brokers are running the low to high sales of anything they get hands on, becomes , no not 1-2 millions but 3- 5 millions $$$ – with or min. upgrade work on property. Effective market value for RE taxation iis most liky from 20 years ago- everyone is happy or file a review with the city, resulting in no or minimal changes, no not even physical characteristics when incorrect are not corrected or a CoO will be issued, even after assessor or building inspector conducts interior inspection. Yehhhh- hard too believe. So long

  4. Avatar

    Will, although the borrower is not my intended client, I can tell you that the independent, unbiased, and noncommissioned appraiser ultimately may be your only friend in the buying process. On a national average it takes only 70 hours to become a real estate agent, while the requirements and business model to become fully employable as an appraiser is often 12 to 15 years. Will, I have no problem disclosing issues of properties nor signing my name to a report that says the purchase contract is 20% higher than the market value. The last deal I killed Will was a 1.2 million dollar property where the agents/brokers were already spending their $60,000 in commission check (5%). Although I cleared only a few hundred dollars post business expenses in that transaction Will, the borrower was very happy that my report brought to light issues that she was unaware of even though her hired help makes 100 times more than me. Its funny that she was able to hire HER OWN agent/broker at $30,000 in fees, but the bank hired appraiser ($300) is the one that brought to light the issues. Excuse me Will while I go back to work fighting city hall on the behalf of my client who’s property taxes are twice as high as they should be.

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