Home Appraisal Fraud

Joseph and Kimberli bought an unimproved lot in a subdivision and then engaged an architect and a contractor to design and build the home of their dreams on it. The lot and finished home together would cost them about $731,000. They borrowed most of the sales price from a bank, which sought and obtained an appraisal from an appraiser regularly used by the bank. Conveniently enough, the appraisal came in at about $731,000 when conducted under both a cost approach and a sales comparison approach.

After the couple had been in their new house about a year, Kimberli lost her job and the couple went back to the bank to apply for a home equity line of credit. This required another appraisal from a new appraiser. To the shock and consternation of the homeowners, the property was appraised this time at only $510,000. To use a term which has come to describe so many, Joseph and Kimberli were “under water.” Denied the home equity loan and unable to pay the mortgage, they managed to sell the property for $660,000.

When Joseph and Kimberli sued the first appraiser for intentional misrepresentation, the claim was upheld by a state supreme court, which ruled that the couple had presented enough evidence to warrant a jury trial. A plaintiff suing for intentional misrepresentation must prove that

1. The defendant made a false representation of an existing or past material fact;

2. The defendant made the representation recklessly, with knowledge that it was false or without belief that the representation was true; and

3. The plaintiff reasonably relied on the representation, causing him damage.

The gist of the suit was that the appraiser, to please everyone involved at that moment, intentionally misrepresented the value of the property when he appraised it at a dollar amount substantially higher than its true value. The defendant appraiser contended that an appraisal is in one sense an opinion, rather than a simple statement of fact. However, for purposes of a claim for fraud, an appraisal can be regarded as a representation of fact.

On the issue of recklessness, there was evidence for both sides, but the issue needed to be resolved by a jury. Favoring Joseph and Kimberli was evidence that the appraisal request from the bank was for a “Rush!” appraisal, and the appraisal value matched the sales price virtually down to the dollar. Joseph and Kimberli would get their chance in court to prove that, to their detriment, the appraiser was determined to come up with the “right” appraisal to make the deal happen, even if the truth of the property’s actual value was a casualty in the transaction.

Noncompliance with HUD

When a home loan is insured by the U.S. Department of Housing and Urban Development (HUD), regulations impose some loan servicing responsibilities on the lender, while also granting certain forms of relief for borrowers facing the prospect of foreclosure. For example, under certain conditions, the lender must initiate face-to-face contact with the borrower before starting foreclosure proceedings. Before a borrower falls behind by four full monthly installments on a mortgage, the lender must evaluate all of the loss mitigation techniques provided for in the regulations.

These regulations have an obvious bearing on the relationship between lenders on HUD-insured loans and the federal government, but it is a closer question of law as to whether a borrower can raise a lender’s failure to comply with the regulations as a defense when the borrower defaults and the lender sues to foreclose on the mortgage.

Recently, a state court agreed with a borrower who had defaulted on her HUD-insured mortgage that a foreclosure action by her mortgage company could not go forward until it was shown that the mortgage company first had complied with the servicing responsibilities imposed by HUD.

The main point of contention in the case concerned the face-to-face contact requirement. This regulation applies only if the mortgaged property is within 200 miles of the lender. The mortgage company in this case was established under the laws of a distant state that was more than 200 miles from the property, but the borrower countered that the company had an office within the 200-mile range, in a neighboring state.

The court ruled that the HUD loan servicing requirements had such importance that the failure to comply with them should be an affirmative defense for a defaulting borrower. Families who receive HUD-insured mortgages generally do not qualify for conventional mortgages. It would make no sense to create a program to aid families for whom homeownership would otherwise be impossible without promulgating mandatory regulations for HUD-approved mortgagees to ensure that the objectives of the HUD program are met. The goal of preventing foreclosure in HUD mortgages wherever possible cannot be attained if HUD’s involvement begins and ends with the purchase of the home and the receipt of a mortgage by a low-income family.