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The Denver Post, July 17,2 2006
By David Olinger, Greg Griffin and Aldo Svaldi
Denver Post Staff Writers
http://www.denverpost.com/business/ci_4058172
Pueblo - His down payment was a beat-up car that wouldn't shift into reverse.
His factory-made home had not been installed on his land, yet when he signed his first home loan, Frank Finn Jr. thought his family was getting a great deal. He borrowed $102,500, the cost of the land, home and installation. The appraisal showed his home in West Valley Estates, a community of factory-made homes, would be worth $130,000 - $55,700 above the ZIP code's median house price.
"We were so happy," he said. "I was like, 'Right on; geez, I'm really making out on this. I've already got $28,000 in equity."
Six years later, Finn is a foreclosed homeowner with ruined credit and monthly rent bills. So are his old neighbors.
Of 65 homes in West Valley Estates, 28 were foreclosed from 2002 to 2006. Nine others were deeded to lenders without a foreclosure. The appraiser of Finn's home and others in the development lost his license.
The sale price of Finn's home after his foreclosure: $57,700.
Finn and many of his former neighbors believe they were victims of appraisal fraud, a hidden crime that officials say is helping fuel Colorado's nation-leading foreclosure rate.
Reports of all mortgage fraud nationwide have tripled since 2003 to nearly 22,000 last year, the FBI said.
In the past five years, appraisal fraud has been involved in up to 40 percent of fraudulent mortgage reports, according to the Mortgage Asset Research Institute.
In Colorado, mortgage fraud is "a significant factor" in the rising number of foreclosures, and "bogus appraisals are a big, big part of it," said Colorado Attorney General John Suthers.
Suthers' office is pursuing six mortgage-fraud investigations, including cases involving inflated appraisals.
Lenders estimate "as much as 15 percent of all appraisals are overvalued" though not necessarily fraudulent, said David Berenbaum, a board member of the national Center for Responsible Appraisals and Valuations. "We're questioning a large volume of the loans today."
An inflated appraisal can lead an innocent buyer to pay too much for a home, putting the buyer at greater risk of foreclosure.
As part of a mortgage- fraud scheme, a bogus appraisal can leave lenders with foreclosed properties worth well below the value of their loans and millions of dollars of losses on their books.
Mortgage fraud hurts "the whole community - you, me, everybody else," said Ivor Hill, a Pueblo appraiser who's on a state mortgage fraud task force.
"The lender takes a hit. The buyer's credit is ruined by a foreclosure. The tax base of the local community is skewed by inflated appraisals, and future buyers of other properties may pay too much for a house."
In Pueblo, local, state and federal agencies are investigating three real estate deals - including West Valley Estates - in which criminal wrongdoing is suspected. Two of the cases involve bogus appraisals.
In one case, the FBI is examining the sale of 22 homes by a Pueblo couple to an Aurora investor at inflated prices, sources told The Denver Post. All of the homes went into foreclosure, and the appraisal for one property was riddled with errors.
State among fraud leaders
Colorado has the worst foreclosure rate in the United States.
One of every 436 Colorado homes was in foreclosure in May, 2.8 times the national average, according to RealtyTrac, which tracks foreclosures.
Loose lending and aggressive building are the main culprits. Mortgage fraud also plays a role, officials say. There, too, Colorado is distinguished.
The state ranks fourth in the nation for mortgage fraud based on dollar loss and cases under investigation, said Denver-based FBI agent Jean Andersen.
For the past three years, Colorado has ranked among the top five states for mortgage fraud, according to the Mortgage Asset Research Institute. Last year, the state's mortgage-fraud rate was 75 percent above the national average, the institute reported. The group would not release the specific numbers.
The rankings are based on lenders' reports of suspicious activities such as falsified applications and inflated appraisals.
Inflated appraisals can lead to mortgage fraud and foreclosure in several ways.
An appraiser may boost the value of a house to benefit the seller, mortgage broker and real estate agent, who all gain from the higher sales price.
The victim is buyers, who may not realize they borrowed more than the house is worth until they try to sell or refinance.
The biggest fraud losses come when brokers, real estate agents and appraisers "are gathering in a conspiracy to inflate appraisals," said Andersen of the FBI.
Appraised at double value
John Scherling, an Aurora real estate investor, bought 22 houses in Pueblo in one month of 2004 from Jose and Joan Aguilar, borrowing almost $2 million. In 2005, all 22 were foreclosed.
A copy of the appraisal report for one of those purchases was obtained by The Denver Post.
The house sits at 921 E. Seventh St., in an aging neighborhood of low-cost rental homes.
Scherling bought the house in July 2004 for $102,000 based on an appraisal of $103,000. Two years earlier, Aguilar had paid $52,000 for the house, and after Scherling lost it to foreclosure, it sold for $47,000.
The appraisal had errors that falsely boosted the home's value, including misstated square footage and use of inappropriate comparable home sales.
Distances of the comparable properties were understated, and incorrect photographs were attached to the appraisal.
James Esters of Parker, a licensed appraiser
Tom Ruble and his wife, Loretta, stayed in Pueblo's West Valley Estates even as neighbor after neighbor left. (Post / John Leyba)
since 2004, confirmed that he prepared that report. He did not deny that errors may have been made but said they were honest mistakes.
"Wow," he said of the incorrect photograph of 1339 Carteret Ave. "It's so easy to verify if it's wrong. Why would anybody do that? It had to be unintentional."
That report "was back when I first started" as an appraiser, he said. "I didn't know the ins and outs of the business."
Last month, Esters was disciplined by the state for allegedly misstating square footage and omitting information in two unrelated appraisals. He agreed to a $1,000 fine and other sanctions but retained his license.
Englewood-based Pulte Mortgage hired Esters for the East Seventh Street appraisal and was the lender on seven of the Scherling properties. Spokeswoman Melanie Hearsch said Pulte relies "on the credibility of licensed independent appraisers."
"When a licensed independent appraiser presents home sales as 'comparable' that are in fact misleading, it can be difficult to detect," Hearsch said.
Mortgage lenders concerned with risky loans increasingly use databases to track brokers and properties, but the system isn't foolproof. Industry insiders said brokers shop fraudulent loans until they find willing lenders.
Scherling and Aguilar did not respond to numerous phone calls or a reporter's visit to each of their homes. Scherling filed for Chapter 7 bankruptcy protection after his properties - including others in the Denver area - went into foreclosure.
The FBI is investigating Aguilar's sales to Scherling and to other sellers that resulted in foreclosures, according to sources familiar with the case.
Experts say a bulk sale at dramatically high prices, followed quickly by foreclosure, can be a strong indicator of fraud.
For example, a buyer and seller might have a secret agreement to split the seller's profit and let the property go into foreclosure.
"We do find a good correlation between early payment default and mortgage fraud," said Nick Larson, an assistant vice president with Mortgage Asset Research Institute. "If you find a loan where the first payment is missed, that is a very high likelihood of fraud."
Nationally, appraisers are feeling so much pressure to justify questionable home loans that nearly 10,000 have signed a petition calling on Congress to protect their independence.
In a recent poll, they were asked how often they felt their peers succumbed to pressure. The leading response: 41 percent to 50 percent of the time.
Some appraisers say corrupt mortgage brokers and loan officers have compromised the appraisal industry, which has long been considered the primary check against fraud.
"I am battling against appraisers who are on steroids - guys who are saying, 'What number do you want?"' said Matt George, a Littleton appraiser
The Denver Post, July 17,2 2006
By David Olinger, Greg Griffin and Aldo Svaldi
Denver Post Staff Writers
http://www.denverpost.com/business/ci_4058172
Pueblo - His down payment was a beat-up car that wouldn't shift into reverse.
His factory-made home had not been installed on his land, yet when he signed his first home loan, Frank Finn Jr. thought his family was getting a great deal. He borrowed $102,500, the cost of the land, home and installation. The appraisal showed his home in West Valley Estates, a community of factory-made homes, would be worth $130,000 - $55,700 above the ZIP code's median house price.
"We were so happy," he said. "I was like, 'Right on; geez, I'm really making out on this. I've already got $28,000 in equity."
Six years later, Finn is a foreclosed homeowner with ruined credit and monthly rent bills. So are his old neighbors.
Of 65 homes in West Valley Estates, 28 were foreclosed from 2002 to 2006. Nine others were deeded to lenders without a foreclosure. The appraiser of Finn's home and others in the development lost his license.
The sale price of Finn's home after his foreclosure: $57,700.
Finn and many of his former neighbors believe they were victims of appraisal fraud, a hidden crime that officials say is helping fuel Colorado's nation-leading foreclosure rate.
Reports of all mortgage fraud nationwide have tripled since 2003 to nearly 22,000 last year, the FBI said.
In the past five years, appraisal fraud has been involved in up to 40 percent of fraudulent mortgage reports, according to the Mortgage Asset Research Institute.
In Colorado, mortgage fraud is "a significant factor" in the rising number of foreclosures, and "bogus appraisals are a big, big part of it," said Colorado Attorney General John Suthers.
Suthers' office is pursuing six mortgage-fraud investigations, including cases involving inflated appraisals.
Lenders estimate "as much as 15 percent of all appraisals are overvalued" though not necessarily fraudulent, said David Berenbaum, a board member of the national Center for Responsible Appraisals and Valuations. "We're questioning a large volume of the loans today."
An inflated appraisal can lead an innocent buyer to pay too much for a home, putting the buyer at greater risk of foreclosure.
As part of a mortgage- fraud scheme, a bogus appraisal can leave lenders with foreclosed properties worth well below the value of their loans and millions of dollars of losses on their books.
Mortgage fraud hurts "the whole community - you, me, everybody else," said Ivor Hill, a Pueblo appraiser who's on a state mortgage fraud task force.
"The lender takes a hit. The buyer's credit is ruined by a foreclosure. The tax base of the local community is skewed by inflated appraisals, and future buyers of other properties may pay too much for a house."
In Pueblo, local, state and federal agencies are investigating three real estate deals - including West Valley Estates - in which criminal wrongdoing is suspected. Two of the cases involve bogus appraisals.
In one case, the FBI is examining the sale of 22 homes by a Pueblo couple to an Aurora investor at inflated prices, sources told The Denver Post. All of the homes went into foreclosure, and the appraisal for one property was riddled with errors.
State among fraud leaders
Colorado has the worst foreclosure rate in the United States.
One of every 436 Colorado homes was in foreclosure in May, 2.8 times the national average, according to RealtyTrac, which tracks foreclosures.
Loose lending and aggressive building are the main culprits. Mortgage fraud also plays a role, officials say. There, too, Colorado is distinguished.
The state ranks fourth in the nation for mortgage fraud based on dollar loss and cases under investigation, said Denver-based FBI agent Jean Andersen.
For the past three years, Colorado has ranked among the top five states for mortgage fraud, according to the Mortgage Asset Research Institute. Last year, the state's mortgage-fraud rate was 75 percent above the national average, the institute reported. The group would not release the specific numbers.
The rankings are based on lenders' reports of suspicious activities such as falsified applications and inflated appraisals.
Inflated appraisals can lead to mortgage fraud and foreclosure in several ways.
An appraiser may boost the value of a house to benefit the seller, mortgage broker and real estate agent, who all gain from the higher sales price.
The victim is buyers, who may not realize they borrowed more than the house is worth until they try to sell or refinance.
The biggest fraud losses come when brokers, real estate agents and appraisers "are gathering in a conspiracy to inflate appraisals," said Andersen of the FBI.
Appraised at double value
John Scherling, an Aurora real estate investor, bought 22 houses in Pueblo in one month of 2004 from Jose and Joan Aguilar, borrowing almost $2 million. In 2005, all 22 were foreclosed.
A copy of the appraisal report for one of those purchases was obtained by The Denver Post.
The house sits at 921 E. Seventh St., in an aging neighborhood of low-cost rental homes.
Scherling bought the house in July 2004 for $102,000 based on an appraisal of $103,000. Two years earlier, Aguilar had paid $52,000 for the house, and after Scherling lost it to foreclosure, it sold for $47,000.
The appraisal had errors that falsely boosted the home's value, including misstated square footage and use of inappropriate comparable home sales.
Distances of the comparable properties were understated, and incorrect photographs were attached to the appraisal.
James Esters of Parker, a licensed appraiser
Tom Ruble and his wife, Loretta, stayed in Pueblo's West Valley Estates even as neighbor after neighbor left. (Post / John Leyba)
since 2004, confirmed that he prepared that report. He did not deny that errors may have been made but said they were honest mistakes.
"Wow," he said of the incorrect photograph of 1339 Carteret Ave. "It's so easy to verify if it's wrong. Why would anybody do that? It had to be unintentional."
That report "was back when I first started" as an appraiser, he said. "I didn't know the ins and outs of the business."
Last month, Esters was disciplined by the state for allegedly misstating square footage and omitting information in two unrelated appraisals. He agreed to a $1,000 fine and other sanctions but retained his license.
Englewood-based Pulte Mortgage hired Esters for the East Seventh Street appraisal and was the lender on seven of the Scherling properties. Spokeswoman Melanie Hearsch said Pulte relies "on the credibility of licensed independent appraisers."
"When a licensed independent appraiser presents home sales as 'comparable' that are in fact misleading, it can be difficult to detect," Hearsch said.
Mortgage lenders concerned with risky loans increasingly use databases to track brokers and properties, but the system isn't foolproof. Industry insiders said brokers shop fraudulent loans until they find willing lenders.
Scherling and Aguilar did not respond to numerous phone calls or a reporter's visit to each of their homes. Scherling filed for Chapter 7 bankruptcy protection after his properties - including others in the Denver area - went into foreclosure.
The FBI is investigating Aguilar's sales to Scherling and to other sellers that resulted in foreclosures, according to sources familiar with the case.
Experts say a bulk sale at dramatically high prices, followed quickly by foreclosure, can be a strong indicator of fraud.
For example, a buyer and seller might have a secret agreement to split the seller's profit and let the property go into foreclosure.
"We do find a good correlation between early payment default and mortgage fraud," said Nick Larson, an assistant vice president with Mortgage Asset Research Institute. "If you find a loan where the first payment is missed, that is a very high likelihood of fraud."
Nationally, appraisers are feeling so much pressure to justify questionable home loans that nearly 10,000 have signed a petition calling on Congress to protect their independence.
In a recent poll, they were asked how often they felt their peers succumbed to pressure. The leading response: 41 percent to 50 percent of the time.
Some appraisers say corrupt mortgage brokers and loan officers have compromised the appraisal industry, which has long been considered the primary check against fraud.
"I am battling against appraisers who are on steroids - guys who are saying, 'What number do you want?"' said Matt George, a Littleton appraiser
posted by Ralph Marcus (Mark) Maupin | 9:22 PM
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