As fallout from the subprime mortgage crisis continues, Manhattan appraisal firms that were contacted by the state attorney general’s office last month now say they do not believe they are the targets of an investigation. Rather, the requests and subpoenas are seen as part of a broadening inquiry that began with a look into the contributing factors behind the record number of subprime foreclosures, both in the state and nationwide.
A survey of the national appraisal industry released earlier this year found that 90 percent of appraisers reported that mortgage brokers, realty agents, lenders and consumers have pressured them to increase property valuations so deals could go through, a practice known as “hitting the number.” The percentage is up sharply from 2003, when 55 percent of appraisers reported such attempts, according to a survey by October Research Corp., a Richfield, Ohio-based firm.
Jonathan Miller, president of appraisal firm Miller Samuel, said that the inquiries from Attorney General Andrew Cuomo’s office would more likely soon be targeting mortgage brokers and lenders. Miller said he believes the subpoenas will be targeting the hit-the-number practice — a fancy version of price-fixing.
Miller said the AG’s office might ask for communications records, such as e-mails and faxes that could be smoking guns — demands from lenders that the appraiser deliver a specific number, “or not bother making this appraisal,” he said.
Wider investigation
The current wave of subpoenas issued to local appraisers stems from an announcement by Cuomo in March that he was investigating subprime mortgages, where homeowners with bad credit histories pay higher rates.
The number of subprime borrowers unable to make mortgage payments as their rates have adjusted skyward and are now facing foreclosure has spiked, and hyper-valuation of properties might be a factor in the current foreclosure wave, though the focus of the investigation may be changing.
“I think that they were initially looking to see if appraisers were the root cause of the subprime thing,” Steven Knobel, co-founding partner of appraisal firm Mitchell, Maxwell & Jackson, which received a subpoena, told Bloomberg News. “It is evolving into a different investigation.”
Miller, who says he was not subpoenaed, has for a long time been publicly outspoken on his blog “Soapbox” about being pressured to deliver appraisals that fit mortgage brokers’ needs.
He said that he was asked by the AG’s office to sign a statement that he was pressured by mortgage brokers, and said he altered the language to say he did not submit to the pressure.
“My business could be three times bigger if we had been more morally flexible,” said Miller, who is best known for the widely followed Manhattan residential market report he puts out on a quarterly basis for brokerage Prudential Douglas Elliman.
Miller also said that his firm had been forced to redirect their corporate strategy into alternative markets, such as appraisals for lawsuits and estates.
Miller Samuel conducted 4,000 appraisals on properties worth a total of $5 billion in 2006, all of them in Manhattan; 50 percent of them were for residential mortgages and half for legal purposes, Miller said.
Subpoenaed firms
Mitchell, Maxwell & Jackson, which performed 9,000 appraisals worth $7.5 billion in 2006, is ranked the largest appraisal firm in New York. Knobel said he had been asked to sign a statement by Cuomo’s office that said he was inappropriately pressured into providing specific price quotes to mortgage lenders and brokers that in some cases were inflated.
Knobel said he made some alterations to the wording of the document before sending it back to the AG’s office soon after receiving it.
First American Corp.’s eAppraiseIT and the broker Manhattan Mortgage Co. were also subpoenaed by Cuomo’s office. Days later, Vanderbilt Appraisers received a subpoena, confirmed their spokesperson Richard Rubenstein, but he said he did not think the firm had received a “pressure” statement request.
Appraisal standards are set by the Uniform Standards of Professional Appraisal Practice, or USPAP, which are then adopted into law by most states, said John Brenan, director of research at the Appraisal Foundation. The Ethics Rule clearly states that “an appraiser must not accept an assignment that includes the reporting of predetermined opinions and conclusions.”
New York State law is very clear that mortgage brokers can’t engage in any deceptive practices, said Jackie MacCormack, press secretary for the New York State Division of Banking, which regulates mortgage brokers.
“I think appraisers in virtually every area of the country have experienced pressure or intimidation to one degree or another,” said Brenan. “It has become more and more, ‘If you are not going to make the number, we are going to find someone else to deal with,'” he noted.
If any mortgage brokers are found to have initiated such deals, it could be considered criminal, said MacCormack. If appraisers accepted such deals, and it was suspected to be criminal, their cases would be referred to the Attorney General’s office, said Eamon Moynihan, the Department of State’s deputy press secretary.
While Cuomo’s investigation may have been generated by increasing foreclosure rates, New York City hasn’t been as hard hit as many areas of the nation and it’s been spared the worst of the subprime fallout so far.
In the first quarter of 2007, Queens posted a 91 percent jump in foreclosures over the fourth quarter of 2006, but that still only amounted to 319 new foreclosures in a borough of more than 365,000 owner-occupied homes. Queens had the highest foreclosure total of the five boroughs, according to real estate data provider PropertyShark.com.