By James R. MacCrate, MAI, CRE, ASA


One wonders how the current financial crisis developed in this country. After all, we have faced  numerous financial crises dating back to the early 1800’s. The financial institutions, regulators, accounting firms, credit rating agencies, and the major Wall Street firms have not studied the history of other periods of financial duress or ignored what has been learned in the past. If you are interested in some problems and warning signs, please read the following and see if you can determine when it was written and where it was published.  This is a direct quote:

“Real Estate Lending – Potential Problems

Real estate lending abuses have been given a lot of publicity due to the problems encountered by financial institutions that have suffered substantial losses from problem real estate loans. These problems have not been confined to any particular area of the country. Many of the problems revolve around inflated appraisals, land flips (interparty transactions), fraudulent sales contracts, forged title documents, misapplication of loan proceeds, financing of nonexistent properties, loans in the name of trustees, holding companies and offshore companies to disguise the true identity of the actual borrowers and fraudulent loan applications from purchasers, including false income statements, false employment verifications, false credit reports and false financial statements. In many cases, important documentation is missing or is intentionally deficient in an attempt to conceal material facts.

Warning Signs

  1. An unusually large number of loans in the same development are exactly equal to the institution’s minimum loan-to-value (LTV) ratio for real estate mortgages.
  2. The institution has an unusually high percentage of “No Doc” loans. (A “No Doc” loan is one in which extensive documentation of income, credit history, deposits, etc., is not required because of the size of the down payment, usually 25% or more. Theoretically, the value of the collateral is to protect the lender.)
  3. Borrower has never owned a home before and does not appear to have the financial ability to support the size of the down payment made.
  4. Property securing loan has changed ownership frequently in a short period of time. Related entities may be involved.
  5. Insured value of improvements is considerably less than appraised value.
  6. Appraiser is a heavy borrower at the institution.
  7. Appraisal fee is based on a percentage of appraised value.
  8. Borrower furnishes his/her own appraisal which is a photocopy of an appraisal signed by a reputable appraiser.
  9. Use of “comparables” which are not comparable.
  10. Appraisal is based on an estimated future value.
  11. All comparables are new houses in the same development that were built by the same builder and appraised by the same appraiser.
  12. An unusual number of “purchasers” are from out of the area or out of state.
  13. Credit history, employment, etc., are not independently verified by the lender.
  14. Large number of applicants have income from sources that cannot be verified, such as self-employment.
  15. Applicant makes $90,000 per year and only wants to purchase a $90,000 home.
  16. Applicant is 45 years old but credit history only dates back five years.
  17. The institution’s normal procedure is to accept photocopies of important documents rather than to make their own copies of the originals.
  18. If copies of income tax returns are provided, columns are uneven and/or do not balance.
  19. Appraiser is from out of the area and not likely to be familiar with local property values.
  20. Close relationship exists between builder, broker, appraiser and lender.
  21. Construction draws are made without visual inspections.
  22. All “comparables” are from properties appraised by the same appraiser.
  23. Generally, housing sales are slow, but this development seems unusually active in sales.
  24. There seems to be an unusual number of foreclosures on 90% to 95% loans with Private Mortgage Insurance on homes in the same development built by the same builder. (Sometimes it is cheaper for the builder to arrange for a straw buyer to get the 95% loan and default than it is to market the home if the market is sluggish.)
  25. Applications received through the same broker have numerous similarities.
  26. Sales contracts have numerous crossed out and changed figures for sales price and down payment.
  27. Appraiser for project owns property in the project.
  28. Lending officer buys a home in a project financed by the institution.
  29. Assessed value for tax purposes is not in in line with appraised value.
  30. The project is reportedly fully occupied, but the parking lot always appears to be nearly empty.
  31. The parking lot is full, but the project appears empty. Nobody is around in the parking lot, pool, etc.
  32. After a long period of inactivity, sales suddenly become brisk.
  33. Sales contract is drawn up to fit lender’s LTV requirements. Buyer wants an $80,000 home but has no down payment. The lender only lends 80% of appraised value or selling price. Contract is drawn up to show a selling price $100,000 instead of the actual selling price of $80,000.
  34. Builder claims a large number of presold units not yet under construction while many finished units remain unsold.
  35. Employment of prospective borrower/purchaser is 100 miles from location of property while comparable housing is readily available within 10 miles of employment.
  36. Applicant’s stated income is not commensurate with his/her stated employment and/or years of experience.
  37. Applicant’s financial statement shows numerous assets that are self evaluated and cannot be readily verified through independent sources.
  38. Applicant claims to own partial interests in many assets but not 100% in any asset, making verification difficult.
  39. Appraised value of property is contingent upon the curing of some property defect such as drainage problems.
  40. Applicant’s financial statement reflects expensive jewelry and art work but no insurance coverage is carried.
  41. Applicant’s tax return shows substantial interest deductions, but financial statement shows little debt. For example, the borrower’s tax return shows substantial mortgage interest deductions, but the self-prepared financial statement shows no mortgage or a very small mortgage.
  42. Appraised value of a condominium complex is arrived at by using the asking price for one of the more desirable units and multiplying that by the total number of units.
  43. Loans are unusual considering the size of the institution and the level of expertise of its lending officers.
  44. There is a heavy concentration of loans to a single project or to individuals related to the project.
  45. There is a heavy concentration of loans to local borrowers with the same or similar real estate collateral which is located outside the institution’s trade area.
  46. There are many loans in the names of trustees, holding companies, and/or offshore companies but the names of the individuals involved are not disclosed in the institution’s files.
  47. A loan is approved contingent upon an appraised value of at least a certain amount and the appraised value is exactly that amount.
  48. Independent reviews of outside appraisals are never conducted.
  49. The institution routinely accepts mortgages or other loans through brokers but makes no attempt to determine the financial condition of the broker or to obtain any references or other background information.
  50. Borrower claims substantial income but his/her only credit experience has been with finance companies.
  51. Borrower claims to own substantial assets, reportedly has an excellent credit history and above average income, but is being charged many points and a higher than average interest rate which is indicative of high risk loans.
  52. The institution allows borrowers to assign mortgages as collateral without routinely performing the same analysis of the mortgage and mortgagor as they would perform if the institution were mortgagee.
  53. Asset Swaps – Sale of other real estate or other distressed assets to a broker at an inflated price in return for favorable terms and conditions on a new loan to a borrower introduced to the institution by the broker. The new loan is usually secured by property of questionable value and the borrower is in weak financial condition. Borrower and collateral are often outside the institution’s trade area.

Suggested Action

Review all real estate files and request any missing documents. Review appraisals to attempt to determine whether any land flips have been involved. Compare appraised value to other stated values such as assessed value or insured value. Attempt to identify any pattern or practice which appears to be suspicious such as a large number of borrowers having the same employer, a large number of properties appraised by the same appraiser, a large number of loans presented by the same broker, a large number of out-of-territory borrowers, etc. If possible, visit construction sites to see activity is as represented.”

Conclusion and Answer

Believe it or not, this was written and published by Federal Deposit Insurance Corporation in January 1990 in the DOS Manual of Examination Policies as Bank Fraud and Insider Abuse (1-90).  It was faxed to me at Price Waterhouse LP on February 19, 1991 at 3:51 PM EST by the FDIC Library while my group was reviewing loan portfolios at five lending institutions from Tampa to Buffalo.  Amazing, isn’t it?  Probably, the folks who understood these issues and directives are retired or forced into retirment or fired during the period from 2004 through 2008.

Special Thanks to Maureen McGoldrick, MDM Appraisals, LLC for her contributions.


About Jim MacCrate

Real estate appraiser and valuation consultant for more than 30 years specializing in reviewing real estate appraisals, risk management and quality control.
This entry was posted in Appraisal Reviews, Ethics, Real Estate Litigation Support, Residential Properties and tagged , , , , , , , , , . Bookmark the permalink.


  1. From Roger Grabowski, ASA

    (Reuters) – Standard & Poor’s has been sued by Illinois’ attorney general, who accused it of fueling the nation’s housing and financial crises by assigning inflated credit ratings to risky mortgage-backed securities. http://www.reuters.com/article/2012/01/25/us-mcgrawhill-sandp-lawsuit-idUSTRE80O21Y20120125

  2. Brh says:

    Great post thank you. We need to stand strong as a profession and take it back from those who entice malpractice thru unresaonable deadlines, pressure for no future work and low fees. I think we all know we have a professional obligation to consider all of these pieces of data and market research. It’s a great profession and one that should be recognized as a great source of knowledgable for what ails us and our economy.

  3. Wow, but not surprising. By 1999 I had discovered residential Flipping going on in my region and after asking three dozen other appraisers if they were seeing it too; realized that our industry is blind to the problem.

    I was in a Masters program at the time and was researching Professional Liability as a class project. Within the first week, I realized that Criminal Liability was the new problem, not Professional.

    Between 1999-2000 I wrote three different seminars that were offered in three different venues including the AI, on Real Estate Frauds {including Mortgage Frauds of all kinds} and the Appraisers Role, including Appraisal Frauds required to enable transactions.

    I tried to talk to the FDIC, who had no interest in residential issues. By 2003 I stopped delivering the seminar as I began to realize that many appraisers knew what they were doing and were doing it to keep their fees coming in the front door..

    Appraisers became the enablers to the frauds and predatory lending that created the bubble. We {us, our industry} still have not paid the price for our past actions.

    Fortunately for me, I decided to get completely away from lender work before the bubble took hold.

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