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Mortgage Lending: 7.5.1 Overview

Property flipping scams involve speculators who buy dilapidated or just older residential properties at low prices and resell them to unsophisticated first time home buyers at huge markups.538 Sometimes these scams involve new construction, with a home builder selling first-time homebuyers overpriced, poorly constructed homes or undeveloped lots in a subdivision.539 Buyers are persuaded to enter into purchase agreements only after the seller has promised to make necessary or agreed upon repa

Mortgage Lending: 7.5.2 Role of FHA Insurance in Property Flipping

While many property flipping schemes rely on steering borrowers to high-cost lenders,552 other schemes depend on the availability of government insurance.553 (And some property flippers do both—steering good credit prospects to Federal Housing Administration (FHA) loans and bad credit prospects to subprime loans).

Mortgage Lending: 7.5.3.1 Overview

A variety of parties may be involved in property flipping schemes. Generally, it is a good idea to cast a wide net in naming defendants in a property flipping complaint. Including as many scam participants as possible may facilitate discovery from all parties, add deep pockets to the case, provide more parties to contribute to a settlement, and help present the complex and unfair scheme in the proper light to the judge or jury.

Mortgage Lending: 7.5.3.2 Lenders

While sellers are obvious defendants in property flipping schemes,563 a lender willing to participate in the fraud564 or one with sloppy underwriting565 is vital to all forms of property flipping.

Mortgage Lending: 7.5.3.4 Title Companies and Closing Agents

Title companies, closing agents, and attorneys have also been implicated in flipping scams.578 As one court found, property flipping “requires the assistance of an attorney who is aware of the fraud, chooses to look the other way, or who fails to supervise non-lawyer assistants engaging in the unauthorized practice of law.”579 Almost always, closing agents are acting as the lender’s agents, pursuant to the closing instructions prepared for them by the lender.

Mortgage Lending: 7.5.4 Possible Claims in Property Flipping Cases

Aggressive litigation and advocacy can usually preserve homeownership, or alternatively, force a discharge of the debt and payment of sufficient damages to allow the homeowner to move on. Practitioners should always explore what the homeowner wants (whether to keep the home or to move), the actual condition of the house, and the cost of repairs.

Mortgage Lending: 7.5.5 Damages in Property Flipping Cases

Actual damages in property flipping cases can be significant, even without punitive damages.598 When recoverable, a claim for emotional distress damages should be developed.599 Borrowers are not necessarily limited to rescission; courts have allowed rescission and the return of interest paid and other foreseeable costs associated with the fraud.600 These schemes will often support the award of punitive damages against one or more parties.

Mortgage Lending: 7.5.6 FHA Anti-Flipping Regulation

In an attempt to curb the use of FHA insurance in property flipping schemes, the FHA adopted guidelines designed to identify and exclude flipping transactions. Among other restrictions, the guidelines seek to hold lenders accountable for the quality of appraisals on properties secured by FHA-insured mortgages.607

Mortgage Lending: 7.6.2.2 Broker Price Opinions

A broker price opinion (BPO) is a determination of property value typically based on a drive-by exterior examination, public data sources, and recent comparable sales. Broker price opinions can be produced by real estate brokers, sales agents, or sales persons who are not qualified appraisers. They typically cost less than an appraisal and are used to determine the probable selling price of a property, often in the context of a defaulted mortgage or in the context of loan servicing and modifications.629

Mortgage Lending: 7.6.2.3 Automated Valuation Models

Automated valuation models (AVM) are computer programs that analyze data including comparable property and sales data to assign a value or range of values to a property.634 AVMs have been used as a backup to check the values shown in traditional appraisals and to conduct prequalification screening, loan underwriting, portfolio review, and loss-mitigation reviews. But they are increasingly being used as substitutes for appraisals where an appraisal is not strictly required.

Mortgage Lending: 7.6.2.4 Evaluations

In contrast to an appraisal, the person conducting an evaluation need not be licensed or have any formal training,643 although states may impose some requirements.644 An evaluation need not comply with the USPAP standards for appraisers and no particular format is mandated.

Mortgage Lending: 7.6.3.2 Appraisal Discrimination

It is not much of an exaggeration to say that racial discrimination is the original sin of the real estate appraisal industry. The Home Owners Loan Corporation’s color coded maps—marking communities of color in red and grading them “hazardous”—remain the most visible evidence.681 But racial bias permeated the appraisal practices of the day and continued to do so until after the 1968 Fair Housing Act. Valuation treatises and professional materials emphasized that appraisers should consider race when analyzing properties.

Mortgage Lending: 7.6.4.2 FIRREA

The first federal law regulating real estate appraisals was Title XI of the Financial Institutions, Recovery, Reform, and Enforcement Act of 1989 (FIRREA), entitled “Real Estate Appraisal Reform Amendments.”691 Title XI prohibits financial institutions692 and the GSEs (Fannie Mae and Freddie Mac) from purchasing an appraisal from anyone except a state-licensed or certified appraiser.693 (Certified appraisers have additional training.) The Act

Mortgage Lending: 7.6.4.3 Uniform Standards of Appraisal Practice (USPAP)

As explained in § 7.6.4.2, supra, Congress has designated “The Appraisal Foundation” as the official standard-setting body for appraisals in the United States. The Foundation’s Appraisal Standards Board issues those standards in a volume called the Uniform Standards of Professional Appraisal Practice (USPAP). The Board also issues advisory opinions interpreting the standards.

Mortgage Lending: 7.6.4.5 Appraisal Review, Supervision, and Independence

FIRREA has the express purposes of ensuring that:

Federal financial and public policy interests in real estate related transactions will be protected by requiring that real estate appraisals utilized in connection with federally related transactions are performed . . . by individuals whose competency has been demonstrated and whose professional conduct will be subject to effective supervision.716

Mortgage Lending: 7.6.4.6 Reconsideration of Value

When there is a problem with an appraisal that affects the valuation of the property, the one who ordered the appraisal may ask the appraiser to take a second look. This process is called requesting a “reconsideration of value” (ROV). Because the prospective lender is most often the one who orders an appraisal, homeowners or borrowers who disagree with a valuation must direct their request to the lender. Upon receiving a request for a reconsideration of value, the lender will evaluate it and decide whether to forward it to the appraiser.

Mortgage Lending: 7.6.5.1 Background

The rules for when an appraisal is required are an overlapping mix of each lender’s own policies, banking regulations, secondary market requirements, and agency guarantor rules. Nevertheless, despite repeated evidence that valuation problems pose a threat to borrowers and the financial system, the threshold for requiring an appraisal has steadily been weakened from when Title XI of FIRREA was enacted.

Mortgage Lending: 7.6.5.2 Current Standards for When an Appraisal Is Required

The current standards for when an appraisal is required vary widely depending on the value and location of the property, who regulates the lender, and who will purchase, insure, or guarantee the loan. And even then, the lender itself may require an appraisal where no other requirement would.

In 2018, Congress amended FIRREA to add an exemption for certain loans in rural areas.754 Federally regulated lenders are not required to obtain an appraisal under the following conditions:

Mortgage Lending: 7.6.6.1 What to Look For

Inflated values are typically achieved by misrepresenting the condition of the property, by using false comparables, such as sales of other flipped properties, or omitting key information about the sales transactions, such as a sale of the property within the previous year. Appraisers may overstate how many square feet are within a building, attach pictures of a different house, or provide a false or misleading floor plan. Appraisers may also falsely describe the neighborhood as one that is stable or has high home values, when in fact home values are low and falling in the neighborhood.

Mortgage Lending: 7.6.6.2 Getting the Original Appraisal

For loans with application dates after January 18, 2014, the Equal Credit Opportunity Act requires that borrowers be provided with a copy of the appraisal, at no cost.774 Borrowers are entitled to a copy of any appraisal done, even if their application for credit is ultimately withdrawn,775 so it may be worth exploring with a borrower whether there were prior applications for which an appraisal might have been done.

Mortgage Lending: 7.6.6.3 Retrospective and Review Appraisals

A retrospective appraisal is sanctioned by the USPAP and looks at comparable sales at the time the original appraisal was done.778 A retrospective appraisal should be accepted as evidence of the value of the house at the time of the transaction.779 The weak point of a retrospective appraisal is that the home’s condition may have changed.

Mortgage Lending: 7.6.7.2 Fact Versus Opinion

Generally, to state a UDAP, fraud, or negligence claim, one must show that the misrepresentation was factual and not an opinion.813 This usually requires a showing that the appraisal is wrong in the reported facts and not just in the valuation.814 For example, showing that the appraiser added 1000 square feet or more to a house, added extra rooms, or reported that the house had amenities it lacked—all factual matters that would tend to increase the home’s value—can help establish that the ap

Mortgage Lending: 7.6.7.3 Reliance

Reliance is likely to be a necessary component of a fraud or negligent misrepresentation claim,822 though not of other causes of action.823 But it may, nevertheless, help show standing.