A group of Phoenix area homebuyers says builder KB Home and its exclusive lender Countrywide, now owned by Bank of America, developed a scheme to sell homes at peak market prices even after real-estate values began to decline.
A lawsuit filed Thursday in U.S. District Court in Phoenix contends the builder and lender engaged in systematic appraisal-rigging to inflate by thousands of dollars the value of new homes sold since 2006. The plaintiffs, seven KB Home customers in Buckeye and Surprise, say the practice has cost customers millions of dollars and contributed to the recent flood of loan defaults and foreclosures.
KB Home and BofA representatives said they had not seen the complaint as of Thursday and could not comment.
The lawsuit arrives amid widespread resentment directed at lenders for practices perceived as predatory and at home buyers for taking on more debt than they could realistically afford. It is the latest in a series of lawsuits filed in Arizona and across the country to try to assess blame in the wake of the worst housing meltdown since the Great Depression.
In exchange for its participation with KB Home, Countrywide and its appraisal-management subsidiary, LandSafe, were made the exclusive providers of real-estate settlement services for KB Home, the suit says. They earned thousands of dollars per customer in loan-origination, title-insurance, appraisal and escrow fees.
The plaintiffs are seeking class-action status to add thousands more KB Home buyers nationwide. In the Southwest alone, at least 14,000 KB Home-built houses have been sold since 2006, the complaint says.
Many critics of the lending industry say inflated appraisals contributed to the nation’s economic crisis. The industry’s shift toward selling off mortgage loans as securities to investment brokers made lenders less concerned about the accuracy of appraisals, the critics contend, just as the rise of new incentives for mortgage brokers gave them more reasons to push risky loans on buyers.
Homebuilders sold their homes for higher prices, the banks profited from making and selling loans, and the mortgage brokers benefited from earning more commissions.
Some appraisers have said that they had to choose between playing along or losing the bulk of their business.
The Phoenix-area residents’ complaint, filed by their lawyer, Robert Carey, a former Arizona assistant attorney general, says the plaintiffs cannot be held responsible for their own lack of due diligence because participants in the homebuying transactions who presented themselves as disinterested third parties actually were in on the scheme.
That includes appraisers “who were under direct instruction to value homes at their contract price and were hand-fed inappropriate – if not outright false – comparable properties to use in completing their appraisals,” the complaint says. Reports written by different appraisers who should not have been communicating with each other or with KB Home relied upon the same “unverified information and patently faulty methodology,” the complaint says.
The complaint cites three common elements to the appraisals.
The first was “improper selection of distant, dissimilar properties” when there were “numerous available neighboring, identical comparable sales that would have revealed lower value.”
In addition, the complaint says, the appraisals contained identical “false and misleading statements regarding market factors and conditions” that ignored known facts about the housing market’s downward trajectory after 2005.
The third sign of a problem, the complaint says, was the use of pending KB Home sales as a basis for appraised value, “even when no sale was actually pending because the ostensible buyer had abandoned the transaction.”
On a more fundamental level, the complaint argues that the use of pending transactions raises a red flag because such information “would only have been known to KB Home” and the appraisers were not supposed to be conferring at all with the builder.
The lawsuit is the second filed against Countrywide and LandSafe this year by Carey’s law firm, Seattle-based Hagens Berman Sobol Shapiro, which also filed a similar case in Phoenix against Wells Fargo and its appraisal-management firm, Rels Valuation, in February.
A Wells Fargo representative said at the time that the lender’s process for obtaining home-loan proposals is legitimate.
Appraisers in Idaho filed a still-pending lawsuit in October against Countrywide, claiming the lender had pressured them to manipulate appraisals. A Countrywide representative at the time said that the lawsuit was without merit.
And a recent investigation of appraisals by New York Attorney General Andrew Cuomo prompted federally sponsored lending giants Fannie Mae and Freddie Mac to adopt new standards this month for the way appraisals are conducted.
The newest lawsuit describes the financial impact of KB Home and Countrywide’s appraisal maneuvers as “staggering.”
It contends that price inflation by the builder and lender is an average of $20,000 per home, which would have cost consumers $280 million in the Southwest region alone.
Transaction process for home sales under fire
Participants in home-sales transactions at all levels have faced accusations of manipulating the process. Here’s a look at how it should work and what can go wrong.
What they do: Establish a property’s fair market value, which is used by banks as the basis for issuing a mortgage loan.
The right way: Produce an independent property-value estimate based on recent similar-sale transactions.
The wrong way: Seek out recent transactions that justify a predetermined price and ignore transactions that conflict with the desired price.
What they do: Approve or deny a mortgage loan based on a property’s assessed value and the anticipated ability of a borrower to repay the loan.
The right way: Rely on independent appraisals to determine a prudent loan amount for a given property.
The wrong way: Pressure appraisers to set the value of a property at an amount desired by the loan broker or property seller.
What they do: Sell new homes based on current market value.
The right way: Establish a sale price based on an independent appraiser’s estimated valuation.
The wrong way: Pressure the lender or appraiser to set estimated property value at a predetermined amount.
Source: The Arizona Republic