Despite various efforts to turn the housing market around, 10.8 million homeowners remain underwater (meaning they owe more on their mortgages than their homes are worth), which represents 22% of all mortgages in the country. While policy makers continue to butt heads on how to respond to this huge drag on the economy, homeowners continue to suffer. Lower interest rates have not had the desired impact as underwater homeowners are generally unable to refinance at recent low rates.
Putting aside for a moment the question of a political remedy, how did millions of American homeowners find themselves underwater? Yes, economic forces and a decrease in housing prices can explain part of it (but even these forces were driven by over-lending, many might say predatory lending, that was so prevalent over the last decade). However, many regions, especially those that were already economically depressed, including locally (at least until very recent times), did not see the large run-up and subsequent collapse of housing prices. Yet, under water mortgages are still prevalent.
This is particularly troublesome in West Virginia where lenders are prohibited from making mortgage loans in excess of a home's fair market value. See, W Va. Code § 31-17-8(m)(8); § 46A-4-109(5)(F). Accordingly, if housing prices have not declined and lenders are prohibited from extending loans over fair market value, why are thousands of West Virginians under water? The answer is often found when the homeowner's mortgage loan is closely examined.
Our litigation experience has shown that national lenders cultivated relationships with local appraisers through the allure of repeat business. In exchange for making a lenders preferred provider list, appraisers were subject to considerable influence to return appraisals with high enough values to close or even increase loans to homeowners.
This influence was often in-artfully accomplished through providing target values to the appraisers directly on the appraisal order form. In Brown v. Quicken Loans, a case tried by Bordas & Bordas, the Ohio County Circuit Court determined that such a practice is contrary to the common law and consumer protection statutes of West Virginia and found "[n]o legitimate purpose is served by providing an appraiser with an estimated value of a property. The only purpose could be to inflate the true value of the property."
This finding is hardly surprising and undoubtedly correct. While this practice was common in years past, it was never appropriate. As early as 2005, federal regulators jointly issued an "Interagency Statement" condemning this conduct,
"...the information provided [to the appraiser] should not unduly influence the appraiser or in any way suggest the property's value.
Because of widespread non-compliance with the Interagency Statement and litigation by the New York Attorney General, the industry in 2009 implemented the Home Valuation Code of Conduct, which prohibited lenders and their appraisal management companies from "providing to an appraiser an anticipated, estimated, encouraged, or desired value for a subject property or a proposed or target amount to be loaned to the borrower."
But after the near collapse of our financial markets, the industry could not be trusted to regulate itself. The United States Congress then stepped in to put a stop to various nefarious lending practices, including influencing appraisers. The culmination of these efforts was the Dodd-Frank Wall Street Reform and Consumer Protection Act signed into law by President Obama on July 21, 2010. Pursuant to 15 U.S.C. § 1639e(b)(3), Congress expressly prohibited financial institutions from "seeking to influence an appraiser or otherwise to encourage a targeted value in order to facilitate the making or pricing of the transaction." See also, 75 Fed. Reg. at 77457.
Unfortunately, this federal law only applies prospectively and does nothing to remedy the past indiscretions of lenders and appraisers. However, West Virginia was a head of the curve and has long prohibited this conduct. In fact, when a state licensed lender willfully makes a mortgage loan in excess of a residential property's fair market value in West Virginia, the price when caught is steep -
The court may cancel the loan, meaning it does not need to be repaid and all prior loan payments may need to be returned to the homeowner. Homeowners are further entitled to have their attorney fees paid by the lender.
So is your home underwater? Should you explore your legal rights? It is difficult for the average homeowner to accurately value their home, particularly when it was purchased many years ago. Often, the only valuation we come into contact with is from our mortgage lender. However, these appraisals or valuations, especially those obtained prior to 2010, cannot be trusted. Nor can we trust our own preconceived ideas. As homeowners, we tend by nature to believe that our home is worth more than its true economic value. After all, for years we poured our own blood, sweat and tears into improving our home, so it has to be worth way more than we paid for it and besides housing prices tend to rise. This logic often leads to a significant misconception of value.
Fortunately for our West Virginia clients, we are able to obtain a retrospective appraisal from credible appraisers to accurately re-value your home at the time of your loan. If this appraisal reveals that your home was significantly underwater at the time of the loan, we may be able to obtain substantial relief and damages for you. Feel free to contact us should you have any questions or would like a free evaluation of your own mortgage situation.
