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Overcoming the Housing Crisis

                                              The Home Appraisal that Defrauded a Homeowner

The housing market throughout Michigan and much of the nation continues to rebound, according to several recent reports. While such a recovery is welcome news, the housing market continues to shake out the remnants of the 2007 crash that precipitated the economic downturn the following year. Much of this drama is playing out in federal courts across the U.S., including an interesting case this month where a homeowner is alleging his mortgage lender violated the RICO statute more commonly attributed to notorious organized crime.

In Wallace v. Midwest Financial & Mortgage Services, the Sixth Circuit Court of Appeals ruled that the plaintiff homeowner could move forward on his civil RICO claim that he was defrauded by the defendant through an inflated appraisal that led the plaintiff to enter into an option adjustable rate mortgage (“ARM”). The homeowner eventually could not keep up with the payments and lost the Kentucky home.

The plaintiff, Wallace, had two mortgages on the home in 2006, when he sought a cash-out refinancing to raise the $42,500 he needed to finish his basement. He owed $380,000 on the balance of the two mortgages combined, meaning he needed to get $422,500 financed. After preliminary paperwork, Wallace was told an appraisal of his home would need to be done by a now-defunct company, Accupraise. A former Accupraise employee said Midwest Financial would fax the requested appraisal amount to Accupraise, which would then “send back a tailor-made appraisal.” This was often done without the appraiser setting foot on the property and instead simply forging the signature of an appraiser to make the appraisals appear authentic.

In this case, Accupraise said Wallace’s home was worth $500,000 – double what he had paid for it two years earlier and making him eligible for the $422,500 loan. The appraisal factored heavily into the decision to grant the new loan, and into Wallace’s decision to enter into the loan. Unbeknownst to Wallace at the time, he had entered into an ARM that began with an interest rate of 2 % but went up from there. For having gotten Wallace to enter into the loan, Midwest Financial was paid a fee in excess of $14,000 by the lender, MortgageIT.

Wallace later learned that his home was actually worth $375,000 at the time of the “appraisal.” After he lost the home and had declared bankruptcy, Wallace filed suit in May 2007, alleging he was the victim of a scheme between Midwest Financial and MortgageIT whereby he was led to enter into a loan with a higher dollar amount with MortgageIT, which then paid a larger fee for Midwest Financial. Wallace brought federal claims under RICO, the Truth in Lending Act, and the Real Estate Settlement Procedures Act along with state claims.

Here is where it gets interesting. While the federal district court dismissed Wallace’s RICO claim, the Sixth Circuit reversed and held that the claim go forward. In particular, the Sixth Circuit evaluated the question of whether “the allegedly fraudulent appraisal proximately caused his injuries.” As Wallace was basing the civil RICO claim on wire and/or mail fraud, he had to show “use of the mail in furtherance of a scheme to defraud and an injury proximately caused by that scheme.”

In this case, Wallace claimed Midwest Financial committed the fraud with Accupraise through the inflated appraisal that was sent through the mail. The inflated appraisal “gave rise to the illusion of substantial equity against which Wallace intended to borrow to fund his build-out project. Based on that illusion, (Midwest Financial) was able to convince Wallace to enter into a large option ARM, the unfavorable terms of which were never made clear to Wallace.” This created an injury to Wallace in the amount of the fees, interest costs, and other costs that resulted from the option ARM.

The Sixth Circuit held that Wallace’s RICO theory was valid and the case should move forward. “Once we accept that Wallace was an intended target of the defendants’ alleged scheme to induce borrowers to agree to loans with high interest rates and other unfavorable terms…the link between the scheme and the type of injury Wallace suffered is plain to see. Wallace’s confidence in his ability to afford a larger mortgage and confusion regarding the underlying terms might well have ‘led directly’ to his decision to enter into the option ARM at issue.”

One of Wallace’s first priorities before entering a new loan was determining what equity he had in the home, which led to Midwest Financial having an inflated appraisal done that gave the false illusion of equity. “A good-faith appraisal would have revealed at best that Wallace had no equity in his home and at worst that he was already upside-down on his existing mortgages. Without any corresponding evidence that Wallace intended to pursue the build-out project at all costs, it is certainly possible that the illusion of equity made the difference here. In other words, we are able to trace a straight line between the alleged fraud and the asserted injury.”

The case was remanded to the district court for additional proceedings. For the full opinion, click here.

The attorneys at Dalton & Tomich, PLC have extensive experience representing banks, credit unions, and individual borrowers with mortgage-related matters, as well as other areas of banking law. We will continue to follow developments in both state and federal courts that affect the rights of both banks and borrowers. For more information, or if you believe you need legal assistance in this area, please feel free to contact us.



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