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Before the water boils, the pot gets hot: Appraisal fraud at IndyMac

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  • Before the water boils, the pot gets hot: Appraisal fraud at IndyMac

    LONG, but interesting pre-housing-bust insider testimony. It really paints the picture of the underlying shadiness that is just one piece of the mess we find ourselves in today. A culture of greed precipitates disaster. Just one of many, many, many loans being made on phony real estate asset inflation. Bogus equity figures justifying issuing unsustainable credit on a massive scale.

    I’ve shared some tidbits with you in the last month about my experience at IndyMac as their chief commercial appraiser from October 2001 to the end of March 2002. Now that IndyMac has been seized by FDIC and their legal staff presumably unemployed, I will tell the rest of the story. Some people tell me that it must have been hell for me, but I look back on it as an adventure, like sailing into the “Perfect Storm”, a perfect storm of corruption and incompetence, and living to tell about it. I first became acquainted with IndyMac through OTS appraisal examiner Darryl Washington, MAI. Darryl used to examine my appraisal department each year when at Home Savings of America, which was acquired by WAMU in 1998. During the summer of 2001, I had a chance encounter with him at a jazz concert. I asked him what he had been up to, and he told me that he had just completed the first examination of IndyMac Bank, which had just received its savings and loan charter only a year before. He said, “Vern, they could use a guy like you.”

    Several weeks later I saw the chief commercial appraiser position for IndyMac Bank posted on Monster.com. I responded with a cover letter that started with “Darryl Washington of the OTS suggested that I contact you….” Apparently, that was the right way to start the letter. IMB’s chief credit officer called me soon, asking “do you know Darryl Washington?’ I said “Yes, he examined my department annually at Home Savings.” His next question was “Do you know how to deal with him?” I assured the chief credit officer that I was used to dealing with the OTS and Darryl and that I could get IMB into compliance with OTS appraisal regulations.

    After 3 interviews, IMB wanted me to start right away, because the OTS was returning in November. I started on 10/15/01 and had a month to familiarize myself with their commercial lending practices until the OTS showed up.

    At the end of my first week, there was an urgent need to field review an appraisal of a subdivision in the Sacramento area. I went up there on the weekend, but also took along some other recent appraisal reports from the Sacramento area. One of the other appraisal reports concerned me. A residential subdivision had been appraised as “80% complete”, but when I visited it, it had only been rough-graded, probably no more than 15% complete. When I returned to the office on Monday I asked who the construction inspector was for that region. I was told that there were two inspectors for the Sacramento area; one was CEO Mike Perry’s father and the other one was Mike Perry’s father-in-law. The loan officer on the deal was Mike Perry’s younger brother, Roger, who had recently been hired. His previous experience had been as a cop. Thereafter I heard of favoritism towards relatives of Mike Perry and “FOMs”, and the chief credit officer advised me to take special care of Mike Perry’s brother. (“FOM” was IndyMac jargon for “Friend of Mike”.)

    I reported my Sacramento findings in a private memo to the chief credit officer, who then distributed it to the senior managers at the construction lending subsidiary known as the Construction Lending Corporation of America (CLCA). The senior credit officer from CLCA, the manager who most resembled Tony Soprano, was the one to call me. He asked “Are you sure you saw what you said you saw?” in a rather chilling manner. He said he had been on site with Roger Perry and had seen things differently. After that call, I asked the chief credit officer why CLCA’s senior credit officer would want me to recant my report. He told me that the senior credit officer received sales commissions for every loan made, which seemed to me like a blatant conflict of interest.

    All appraisals were ordered by the loan officers from a list of approved appraisers maintained by LandAmerica. I was not allowed to order appraisals, but I recognized many names on the LandAmerica list as well known, reputable appraisers. What I began to observe, however, was that loan officers were learning which appraisers were more “flexible” than others. My areas of concern were extraordinary assumptions, lack of feasibility analysis, and false information given to appraisers.

    As an example, I read an appraisal of a vacant, former Costco warehouse which had been purchased for $2 million several months before, but was appraised for $17 million based on a fabricated rent roll composed of tenants that had never signed a lease or a letter of intent. Only one tenant actually moved in. I told the loan officer that I could not accept the appraisal report, as it was hypothetical. He wanted me to approve it, any way, with the understanding that no funds would be disbursed until the prospective tenants could be verified. I told him that I wasn’t going to approve a hypothetical appraisal. The loan was funded, any way.

    My only substantive encounter with CEO Mike Perry was in November 2001. I was summoned late to an impromptu meeting of senior executives in the board room. When I arrived, the meeting was already underway. The tone of the meeting was very different than senior executive meetings at other companies I had worked for. Mr. Perry, a man in his thirties, was spinning ideas and executives who were 10 or 20 years his senior were behaving like “yes men”, competing to agree with his ideas. There were lots of raised hands and enthusiastic participation. He seemed to be enjoying this, in an immature, megalomaniacal way.

    Then he turned to me with an idea. He asked me if I, as the chief commercial appraiser, had the regulatory authority to change the discounted cash flow models in each subdivision appraisal, which might have the effect of changing appraised values. I said that I could possibly do it, but why? He smiled and said "Don't housing prices always go up?" (Was he really too young to remember the early 1990s?)

    I told him that it wasn’t a good idea, because we were already hiring competent appraisers who had more local knowledge than I had. Unless I could show that their analysis was flawed, it would be inappropriate for me to change the appraisals. That answer seemed to anger him. At the end of the meeting, the chief credit officer tried to introduce me to him, but he turned his back on me.

    I later learned that Mike Perry was hired as CEO of IndyMac at the age of 30 when it was spun off by Countrywide. He had been an accountant at Countrywide and a protégé of Countrywide founders David Loeb and Angelo Mozilo.

    When the OTS arrived mid-November, my review duties were handed over to LandAmerica. I was to spend full time responding to findings from OTS examiner Darryl Washington. In the ensuing month it became increasingly obvious that the main reason I was there was to refute OTS findings and serve as window dressing for an institution that scoffed at or was wholly ignorant of federal regulations. Many, if not most, of the senior executives had come over from Countrywide, which was an unregulated mortgage bank.

    One of the craziest violations of OTS regulations was underwriting loans based on appraised values well above purchase prices. For example, a prominent Sacramento developer purchased a piece of land for $18 million, a price most reasonably supported by the comps, but it was appraised and underwritten at a value above $30 million, the rationale being that this developer added value to the property just by buying it.This does not satisfy the USPAP and federally accepted definition of market value, however. The appraisal firm was the same one used for the supposedly 80% complete subdivision.

    I was present at several confrontational meetings between the OTS and FDIC examiners and CLCA executives. It seemed that IMB was intent on refuting every finding and using me towards that end. I was criticized for not arguing enough with the examiners.

    After the examination was over, there was an unsolicited appraisal report waiting for me on my desk. A piece of land next to an airport had recently been purchased for $24,375,000 and was almost immediately appraised for more than $65 million based on the owner’s plans to build an airport parking lot. This was three months after September 11th, 2001 and average parking lot occupancy at this airport had declined from 73% to about the low fifties. The appraisal lacked a sales comparison approach and its feasibility analysis was based on pre-September 11th data. The feasibility analysis was done by the same consultant who caused the city of Los Angeles to lose millions on the parking garage at Hollywood and Highland. The appraisal was done by an unapproved appraiser who had previously caused my previous employer, Home Savings, to set up a $17 million loan loss reserve on a hotel he appraised for $450 million and the loan defaulted within a year. The report was delivered less than a week after it was ordered by the IMB loan officer, leading me to suspect that it had already been completed for someone else, most likely the borrower. I told CLCA executives that I could not accept the report and that I considered it to be biased. I tried to get the appraiser to change the report, but he immediately called the chief lending officer, who must have then instructed him to ignore my request.

    Despite my stated objections to the appraisal report, the chief lending officer told the Loan Committee that I had ordered and approved the appraisal, and they funded a $30 million loan. Thereafter, there was sustained pressure on me to approve the report. I responded that I would have to write my own report, since the original appraiser would not make changes. This bought me time. Meanwhile, the airport, who had previously owned 80% of the parking spaces in the area, was suing the developer and erected a fence to keep people from walking from the parking lot to the terminals.

    The chief lending officer also pressured me to accept another unsolicited appraisal of a Sacramento-area subdivision. This report was based on an “extraordinary assumption” that a road led to the subject property. When I went up to Sacramento to see the property, there was no road.

    In January I went to Sparks, Nevada, to review an appraisal of the last phase of a condominium project. The first phase, with condos on the golf course, was a success, but the last phase was on the opposite side from the golf course and actually sloped below grade. The appraiser made an $8000 downward adjustment for each unit, and I questioned whether $8000 was adjusting enough. That provoked warnings from several executives, including the chief credit officer. The developer was buying the land from David Loeb, IndyMac’s Chairman of the Board (and co-founder of Countrywide), and I was warned that challenging this deal could get me fired. Soon after, the chief credit officer came to my office with a representative from human resources to announce that my initial 90-day probation would be extended for another 90 days, as CLCA executives had complained about my lack of cooperation with them. The HR rep had a look of horror on her face the whole time he delivered this message.

    I finally finished my own airport parking lot appraisal report in late March, the same week that the Bush Administration laid off most of the OTS examiners. I don’t know which event precipitated my termination. My appraisal of the airport parking lot estimated the stabilized value at $37 million in year 2003 and the value upon completion as $31 million in 2002. These appraised values were considered insufficient to support the $30 million loan.

    IMB gave me two weeks’ notice of my impending termination and offered me $25,000 severance pay if I turned over all documents and signed a non-disclosure agreement. I told them that state law required me to keep records of all of my appraisals and reviews, and that $25,000 was not enough. After a few days of seeing that I was not cooperating, I was summoned to a final meeting with the chief legal officer and “chief people officer”. A written statement indicated that I was being terminated for having a “communication problem”. I asked for examples of my communication problem, but none were presented. (I later recounted, during a deposition, that I was left alone with the chief legal officer for a few minutes of awkward silence. I then asked him, “Doesn’t it bother you that I am being fired for a communication problem without any evidence against me?” He said, “Not at all.” This cracked up my attorney.) After the meeting, I was escorted back to my office by a large security guard to collect my personal belongings, and then I was escorted out of the building, with my toothbrush in my left hand and my toothpaste in my right hand.

    During these last days I contacted OTS about the abuses going on at IMB and said I had documentary evidence. They flew in to Burbank to meet me and they debriefed me for a couple of hours. They were upfront about how the flow of information had to be one way, from me to them, and not vice versa. I had to call my friends at IMB to find out how OTS was responding. The OTS paid a special visit to IMB and called for an internal audit to investigate my allegations. The first audit was considered a whitewash, and the OTS called for a re-audit. Interestingly enough, there was even a document produced that supposedly indicated my approval of the appraisal of the “80% complete subdivision”.

    The second audit corroborated most of my allegations and the OTS called for certain personnel changes. The president and senior credit officer of CLCA were ousted; the chief lending officer had his loan approval privileges removed. Chairman of the Board David Loeb suddenly and coincidentally retired at the same time. He died 5 months later.

    Interestingly enough, at about this same time, I read in the press of IMB receiving a “corporate governance” award from some organization, for having an impartial and effective board of directors.

    I had an excellent attorney. Besides suing for wrongful termination, he showed me that I could actually sue for discrimination. Many states, including California, have laws that prevent discrimination against employees who are upholding public policy, which was the very reason that got me fired. Other bank appraisers should take note of this. USPAP and OTS appraisal regulations are public policy.

    In interrogatories sent to IndyMac during the litigation, they were once again asked to demonstrate evidence of my “communication problem”. The only evidence provided was a memo from me about a borrower “trying to deceive us” and a memo from a loan officer complaining that I actually called Union Pacific Railroad concerning one of his deals, a subdivision being built close to a railroad right-of-way. I was told by the loan officer that the track was no longer used, but Union Pacific disclosed to me that it was still being used once a day during the evening hours.

    Interestingly enough, in the six months of unemployment and underemployment which followed my termination, I rented many videos, one of which was “The Insider”, the real-life story of Dr. Jeffrey Wygand, who blew the whistle on the tobacco industry to Sixty Minutes and was also fired, coincidentally, for having a “communication problem.”

    Most of this information is already publicly disclosed in my lawsuit, filed 7/15/02 in Los Angeles Superior Court, Case Number BC277619, for anyone wanting further details. As for the results of that lawsuit, the only thing I can legally say is that “the matter has been resolved to the mutual satisfaction of both parties”.
    25MM jobs in 10 years / 4% GDP Growth / Insurance for everybody / Schools flush with cash don't produce results
    Jan 2017: 4.7% U-3, 9.2% U-6, 62.7% LFPR, 5.2% Real Wages, 2.6% GDP, 19,827 DJIA, 2,271 S&P500, $2.316/gal

  • #2
    the same week that the Bush Administration laid off most of the OTS examiners
    We don't need a bunch of idiots running around watching over business!

    -TTB
    Damn these electric sex pants!

    26+31+34+42+44+46+64+67+82+06 = 10

    Bring back the death penalty for corporations!

    Comment


    • #3
      Originally posted by dredbyrd View Post
      We don't need a bunch of idiots running around watching over business!

      -TTB
      Which part of human nature are we going to ignore this week?

      Gosh, if we only had MORE GOVERNMENT these bad things would never happen.

      So wide you can't get around it......so low you can't get under it....so high you can't get over it........this is our chance....this is our chance...

      With a groove as our only guide, we shall all be moved!

      Comment


      • #4
        I guess that's two votes against public accountability.
        Damn these electric sex pants!

        26+31+34+42+44+46+64+67+82+06 = 10

        Bring back the death penalty for corporations!

        Comment


        • #5
          Originally posted by dredbyrd View Post
          I guess that's two votes against public accountability.
          There is a difference between asking for public accountability and expecting government oversight to eliminate all problems brought on by human nature.

          Bad things happen...alas!

          Government is the porthole and the enabler for corporatism, dred.

          Comment


          • #6
            Originally posted by King View Post
            There is a difference between asking for public accountability and expecting government oversight to eliminate all problems brought on by human nature.
            If I ever, in my lifetime, come across or hear of anyone in the known universe who carries such a belief, I'll be sure to let them know
            Damn these electric sex pants!

            26+31+34+42+44+46+64+67+82+06 = 10

            Bring back the death penalty for corporations!

            Comment


            • #7
              Originally posted by dredbyrd View Post
              We don't need a bunch of idiots running around watching over business!

              -TTB
              Wrong, but that's par fort the course for you. I've stated in the past there should have been more oversight in this area.

              What I bitch about is inefficiency and sloth. When it takes thousands of people and billions of dollars something is screwed up and what we have essentially created is a massive jobs programs that never adjusts and never gets rid of the dead wood.

              And this might shock you, it shocks me...but I support the life line the Congress is about to pass and that Bush will sign. Its annoying and makes my blood boil...but we can't let the idiots in our country (both the lenders and the borrowers) drag the rest of us down with them.
              TTB
              Senior Member
              Last edited by TTB; 07-27-2008, 01:18 PM.
              Go Cards ...12 in 13.


              Comment


              • #8
                Originally posted by TTB View Post
                Wrong, but that's par fort the course for you. I've stated in the past there should have been more oversight in this area.

                What I bitch about is inefficiency and sloth. When it takes thousands of people and billions of dollars something is screwed up and what we have essentially created is a massive jobs programs that never adjusts and never gets rid of the dead wood.

                And this might shock you, it shocks me...but I support the life line the Congress is about to pass and that Bush will sign. Its annoying and makes my blood boil...but we can't let the idiots in our country (both the lenders and the borrowers) drag the rest of us down with them.
                Me too, it needs to be done, b/c the alternative is much worse. But is what really gets me is that Fannie/Freddie are these private government sponsored enterprises that reap all the rewards of profits to stuff their pockets and fear no losses b/c the gov't will step in to bail them out at the first sniff of trouble. They need pull these cronies back in and make them either public or relinquish their gov't sponsorship. Because right now they're having their cake and eating it too. There's some big-time executive crony payrolls over there.
                25MM jobs in 10 years / 4% GDP Growth / Insurance for everybody / Schools flush with cash don't produce results
                Jan 2017: 4.7% U-3, 9.2% U-6, 62.7% LFPR, 5.2% Real Wages, 2.6% GDP, 19,827 DJIA, 2,271 S&P500, $2.316/gal

                Comment


                • #9
                  Originally posted by TTB View Post
                  Wrong, but that's par fort the course for you. I've stated in the past there should have been more oversight in this area.
                  So you're selectively inconsistent.

                  It's a typical response you have in otherwise rational conversations about transparency and accountability in business and government.

                  You usually bleat aboot socialism and whatnot at nearly any suggestion of the above so it's an easy response to lampoon
                  Damn these electric sex pants!

                  26+31+34+42+44+46+64+67+82+06 = 10

                  Bring back the death penalty for corporations!

                  Comment


                  • #10
                    Originally posted by dredbyrd View Post
                    So you're selectively inconsistent.

                    It's a typical response you have in otherwise rational conversations about transparency and accountability in business and government.

                    You usually bleat aboot socialism and whatnot at nearly any suggestion of the above so it's an easy response to lampoon
                    Well, the gubbermint is a deserving target afterall so who can blame me?

                    I would be happy to engage in a rational conversation with you that would be around an overall smaller government with a balanced budget. I'd even throw in some tax increases if it meant we cut some waste and reduced redundencies within and between agencies.

                    I have always said Teddy Roosevelt is my favorite President and I suspect Teddy would look at the federal government today and say "what the fuck happened"?

                    I don't think I want even more rat turds in my peanut butter...so yeah...government has a role as I've always said. Let's just not make it the whole economy...or even a 1/3 of it but...I fear we are on our way to that...and to the diminishment of our overall standard of living.
                    Go Cards ...12 in 13.


                    Comment


                    • #11
                      Originally posted by marco View Post
                      Me too, it needs to be done, b/c the alternative is much worse. But is what really gets me is that Fannie/Freddie are these private government sponsored enterprises that reap all the rewards of profits to stuff their pockets and fear no losses b/c the gov't will step in to bail them out at the first sniff of trouble. They need pull these cronies back in and make them either public or relinquish their gov't sponsorship. Because right now they're having their cake and eating it too. There's some big-time executive crony payrolls over there.
                      Yeah...I didn't post it before but along with the package we need some serious review and oversight of what the hell Fannie Mae and Freddie Mac are doing. George Will suggested the big shots there work for government salaries. Ha! I loved that one.

                      This can't be allowed to happen again.

                      There are worse things then some people renting and saving for a solid down payment ...for a smaller home that they can afford....and be able to prove income. The stuff that was going on....was infuckingsane.
                      Go Cards ...12 in 13.


                      Comment


                      • #12
                        Originally posted by TTB View Post
                        Well, the gubbermint is a deserving target afterall so who can blame me?
                        No shit. But you explode like a guest computer on Star Trek when business is brought up as an equally deserving target.
                        Damn these electric sex pants!

                        26+31+34+42+44+46+64+67+82+06 = 10

                        Bring back the death penalty for corporations!

                        Comment


                        • #13
                          Originally posted by dredbyrd View Post
                          No shit. But you explode like a guest computer on Star Trek when business is brought up as an equally deserving target.
                          Sometimes ...I just like to mess with you.

                          I've said it before....are there some bad business people? Sure. If they were all angels we wouldn't need any regulation at all.

                          You could at least give me Klingon status. A guest computer? Sheesh....I get no respect.
                          Go Cards ...12 in 13.


                          Comment


                          • #14
                            Peter Schiff: 1 of 8 from two years ago:

                            25MM jobs in 10 years / 4% GDP Growth / Insurance for everybody / Schools flush with cash don't produce results
                            Jan 2017: 4.7% U-3, 9.2% U-6, 62.7% LFPR, 5.2% Real Wages, 2.6% GDP, 19,827 DJIA, 2,271 S&P500, $2.316/gal

                            Comment

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