The conventional local wisdom blames the Bend real estate bubble and bust on greedy people (mostly from California) buying homes they couldn’t afford and borrowing against their equity to buy boats and Hummers and fancy vacations.
But according to real estate fraud expert Richard Hagar, there was a different culprit: Crooks. Specifically, corrupt mortgage brokers and appraisers who conspired to inflate the paper value of homes far beyond their real worth.
In an eye-popping piece in The Atlantic headlined “Robust Oregon Real Estate Market Poisoned by Fraud,” correspondent Christina Davidson writes that according to Hagar, the fraud was far worse, and more widespread, than anybody wanted to admit.
“So much discussion about the real estate boom and bust focuses on irresponsible buyers, who overextended themselves in purchasing homes they couldn’t actually afford, often with dreams of re-selling and making fortune off ever-increasing market values,” Davidson writes. “But during a seminar Richard Hagar gave in Bend [one recent] evening, he pointed his expert finger at one insidious culprit: fraud.
“Hagar expounded on this theme for me in a two-hour phone interview last night, after which I hung up somewhat disillusioned that most of the crooks who created the housing bubble would likely escape punishment, while their victims will struggle for years to regain footing after foreclosure, bankruptcy, and complete emotional and financial destitution.”
(Footnote: Although Bend’s Only Daily Newspaper listed Hagar’s Sept. 30 seminar in its business calendar, it has carried no follow-up story about it or his allegations.)
I was utterly shocked – shocked! – at the mere suggestion that anyone here in our little Paradise on the Deschutes could have been dishonest, but Hagar seems to know what he’s talking about.
What happened, he said, is that mortgage brokers pressured appraisers to approve grossly overinflated valuations. “According to Hagar, in the early 2000s he first started hearing from his law enforcement contacts about this kind of problem popping up with increasing frequency in Bend. The corruption seemed to grow a little more pervasive with each passing year, until 2004 when it accelerated rapidly.”
If one appraiser wouldn’t go along with the fraud, Hagar said, it was easy for the broker to find another one who would. The appraiser would “have an order coming in with a ‘minimum value needed,’ and if you couldn’t make the value, the mortgage broker would just go down the street. He wouldn’t hire you again, or wouldn’t pay you,” Hagar said.
Buyers who got mortgages based on these phony appraisals were underwater on their homes before they even moved in – their mortgage was far bigger than anything they could realistically expect to get if they sold the house. Even if they didn’t take out any home equity loans, they were screwed.
“At this stage,” writes Davidson, “it’s difficult to estimate what percentage of Bend’s real estate bubble would be more appropriately described [as] an illusion created by false valuation of properties. In an environment plagued by an inflation deliberately orchestrated by a loose conspiracy of those profiting from higher prices, the term fair market value becomes almost meaningless.”
Starting in 2005, at the request of state law enforcement officials Hagar began giving quarterly seminars in Bend warning about mortgage fraud and how to avoid it. That didn’t make him popular with the local real estate crowd.
“One time in late 2006 or early 2007,” reports Davidson, “a Bend real estate agent reached him on his cell phone, launching into a full-throated tirade as soon as he answered. ‘She yelled, “There’s no fraud in Bend. You can’t say that. We’re not scammers. We wouldn’t do that. You’ll destroy our real estate market,'” Hagar recounts, adding his own response: ‘Hmmm, actually, you’re destroying your market.'”
Although Hagar says mortgage brokers and appraisers bear the brunt of the blame, banks also were complicit for not being more vigilant about handing out loans.
How many local brokers and appraisers were involved in this massive scam?
“Off the top of his head, Hagar can think of at least 30 Bend residents who would deserve to be indicted, tried, and convicted for their role in the fraudulent activities that artificially inflated the local community’s housing bubble,” Davidson writes. “However, he says, ‘The reality is only about 5% will ever be caught.'”
This article appears in Oct 1-7, 2009.
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“If one appraiser wouldn't go along with the fraud, Hagar said, it was easy for the broker to find another who would. The appraiser would “have an order coming in with a 'minimum value needed,' and if you couldn’t make the value, the mortgage broker would just go down the street. He wouldn’t hire you again, or wouldn’t pay you,” Hagar said.”
–That’s exactly what happened when we refinanced our home in 2006. The first appraiser came through, warned us he only did real, accurate valuations in his appraisals, and said our home might not appraise out at what we were wanting to refinance. We figured that’s the way the cookie crumbles and prepared to deal with not getting our house refinanced after all.
The day the appraiser submitted his appraisal to our mortgage broker, however, the broker called us and said that appraiser was no good and he was hiring another one to come through. She showed up the next day and barely looked around the place. Lo and behold, her appraisal was slightly higher than what we wanted to refinance.
Like dopes, we signed on the dotted line. Today we’ve just come through a bankruptcy that wouldn’t have happened had we never refinanced this place. We ended up with a payment we couldn’t afford from Day One.
There are times I get angry, thinking the broker never should have approved us for such a ridiculous amount of money, but we didn’t have to go through with the refinance. That’s squarely on our shoulders. Tough lesson, but we’ll never borrow more than we can afford again.
The funniest part of the whole thing was this: When the market tanked and bank financing dried up, our mortgage broker jumped into the loan modification game and aggressively marketed that service to us.
We’re all paying for this crap, and in my case, I’m getting the lumps I deserve. But that ex-broker appears to have a booming business, preying on folks who likely have no idea he’s one of the guys who got all of us into this mess in the first place.
It is very sad what happened to so many borrowers, but it’s sad also that it didn’t take outright fraud to make this mess. All it took was honestly (but foolishly) optimistic realtors hooking up with honestly (but foolishly) optimistic appraisers … basically “the bubble will never end” types.
When you are on commission your optimism doesn’t really have a downside, either. Without that downside, you might not stop to think about it.
On the other hand, if they were “this is a bubble but I’ll get my money and run” types, that was fraud. And certainly it was fraud if anyone outright lied on paperwork or about sales prices.
“All it took was honestly (but foolishly) optimistic realtors hooking up with honestly (but foolishly) optimistic appraisers”
Come on, these people — particularly appraisers — supposedly are experts at determining the value of properties. It’s their PROFESSION, fer crap’s sake! Sorry, I just can’t buy the “honest optimist” line.
And the appraisal is supposed to be based on what the house is worth AT THE TIME, not some speculative price that it might reach in the future.
FYI, Christina Davidson has a follow-up piece today telling the tragicomic story of “The Shire.” She’s doing a “Recession Road Trip” and Bend was one of the stops on her long itinerary.
You see Bruce, I tend to think all home prices have a lot of emotion in them. Even if you are a hard-as-nails appraiser, using only recent actual sales prices, those recent actual sales represent someone else’s emotion.
It’s not so easy, when a property sells for $100K, then $200K, then $300K to know here reasonable value left off.
It could be “speculative” to even think you’d get as much as the last sale – but of course dishonest optimism makes it all worse.
(BTW Bruce, I might be in Bend in a few days, email me if you want to compare notes.)
You gotta be kidding me….. once again someone blows smoke up your your %^&*
and now you are telling us it is the dishonest appraisers that are responsible for the decisions of greedy people trying to get rich quick. Actually it was people playing
“Monopoly Real Estate” only this time the game was real 🙂
jazzman: Without the mortgage brokers insisting on inflated appraisals, the appraisers going along, and the banks looking the other way the bubble couldn’t have been inflated because people couldn’t have gotten loans for several times what the houses they were buying were worth. But if I have to explain this to you it’s probably a waste of time to explain it to you.
Bruce, Several times the houses were worth…… not true nor accurate. If someone bought a house for 375,000 in 2007 are you suggesting that that house is only worth
125,000 today and the buyer who paid 375,000 was duped by the dishonesty of the appraiser and the banks. I still find your logic very hard to believe. Do the math and you will see that it is impossible even in this market.
“If someone bought a house for 375,000 in 2007 are you suggesting that that house is only worth 125,000 today”
Okay, “several times” was an exaggeration — but not a huge one. The median home selling price in Bend at the peak of the bubble in May 2007 was $396,000; as of July 2009 the median was down to $215,000, and there’s no reason to assume we’ve hit bottom yet. The drop in other Central Oregon communities has been even more dramatic.
I don’t understand why you find it so hard to believe that many fraudulent appraisals were done here when it happened virtually everywhere else in the country. Is this another variation of the “Doctrine of Bend Exceptionalism”?
Here’s a site where you can look at average sale prices: http://realestate.aol.com/Bend-OR-real-estate. The difference between the peak prices and recent prices is even more dramatic — from $498,361 in September 2007 down to $284,599 in August 2009. In December 2004 the average sales price was $237,562. In other words the price more than doubled in 33 months.
Re. Exceptionalism, if you want to take the global view, there is an argument that this was global, and related to globalization:
http://economistsview.typepad.com/economistsview/2009/10/global-imbalances-and-the-financial-crisis-products-of-common-causes.html
In the book “Irrational Exuberance” Shiller called the RE bubble early, around 2000. He cited then the concurrent rise in home prices in what he called “jet set cities.” Predominantly they were cities with an international airport, or a lot of travelers who in a sense brought their price notions with them. Million dollar homes appeared in Finland as well as in California.
Sadly, I’m one of those (like the article above) who think there is a globalization problem that will take some time to resolve. The world has a lot more educated and skilled workers than it used to have. Without American and European shoppers buying on credit, will there be enough market to pay them all high rates? Or is El Erian’s new normal prevail?
http://www.bloomberg.com/apps/news?pid=20601103&sid=ay34U_TMCKzc
I think fraud, where it happened, exacerbated a trend.
I had a great time reading around your post as I read it extensively. I am looking forward to hearing more from you.
Regards,
Gold