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.
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