CLASS ACTION COMPLAINT FOR APPRAISAL FRAUD FILED AGAINST GIANTS KB HOME AND COUNTRYWIDE
By Kent Berk on December 5th, 2009 in BLOG, REAL ESTATE LAW
A class action complaint has been filed against home builder giant KB Home and major lender Countrywide, among others, for appraisal fraud. In the complaint filed in the United States District Court of Florida on October 30, 2009, the class action representative has brought numerous claims. Primarily, the claims surround two “schemes” related to appraisals.
THE FIRST SCHEME: For the first scheme, it is alleged that the Defendants conspired to improperly inflate appraisal valuations in order to sell more homes and make more loans, all at inflated amounts. “Defendants KB Home, Countrywide and LandSafe [a wholly owned subsidiary of Countrywide], along with their network of staff and fee appraisers, formed and operated a criminal enterprise . . . which through the ‘Inflated Appraisal Scheme’ inflated the sale amounts of KB Home properties and loan amounts of Countrywide loans by corrupting the appraisals of KB Home properties such that the appraisals would always indicate a value at or above the contracted sales price for the properties or were otherwise inflated,” according to Paragraph 1 of the Complaint.
The Complaint correctly notes that “an appraisal is a critical part of the home buying and financing process. If an appraisal is inaccurate, a homeowner may purchase a house for more than its [sic] worth, and the results can lead to an inability to refinance and foreclosure, in addition to excessive mortgage payments and taxes.” According to the Complaint, the Defendants manipulated the home buying and financing process through a tight network and scheme as follows: When a customer desired to purchase a home, they were referred by KB Home to obtain a loan from Countrywide. The loan brokers at Coutrywide, in turn, would hire its related company, LandSafe, to perform the appraisal. Because the loan could not be approved and, in turn, the home sale would not go through unless the property appraised for at least the purchase price, obtaining an appraisal was the key. Thus, LandSafe representatives assigned the task of appraising the properties to specific appraisers who agreed to “play ball” and meet the target desired value. As a result, the home sales were completed (and KB Home profited) and the loans were made (and Countryide profited). The appraisals were false and misleading, according to the Complaint, by including dissimilar and distant properties as comparables, false information concerning general market trends and using pending (incomplete) sales as comparables.
“The impact of this Scheme is staggering as Plaintiff and thousands of homeowners overpaid for thier homes and in many cases were immediately’ ‘under water’ (i.e., the actual value was less than the amount they had borrowed). In KB Homes’ ‘Southeast Segment,’ which includes Florida, KB Home built over 19,633 homes between 2006 and 2008, at an average price of approximately $225,000. Conservatively assuming an average inflated appraisal of $30,000 per home, that amounts to almost $600 million in inflated contract prices,” according to the Complaint.
THE SECOND SCHEME: For the second scheme, the Complaint alleges that Countrywide required borrowers to use its subsidiary, LandSafe, to obtain appraisals for their purchase and loans. In turn, LandSafe hired appraisers who would agree to specific fees for performing the actual appraisal and providing the appraisal report. On the closing statement, LandSafe would charge the homeowner an “appraisal fee” substantially greater than the actual fee paid to the appraiser (and sometimes twice the amount), but the “markup” was not disclosed to the borrower, according to the Complaint.
As it relates to both schemes, according to the Complaint, if the appraisers did not meet the target values or agree to perform the appraisals for the set fee, the appraisers were “blacklisted.” Interestingly, it appears that the Complaint does not include as Defendants the actual appraisers who did participate in the alleged schemes.