"People have tried to bribe me. I've been threatened, both verbally and with a gun," real estate appraiser Richard Hagar tells me, recounting the heady days of the Pacific Northwest's housing boom, when unscrupulous loan originators in places like Bend, Oregon would aggressively demand his work confirm a dictated appraisal value, often many tens of thousands above the actual market value. In Hagar's view, "This recession we're in was triggered by loan fraud. That's the end of it."
Situated on the northern tip of the Great Basin at the foothills of the Cascades, with lush evergreen forests to the west and high desert grasslands to the east, the small central Oregon city enjoyed a population boom through the last decade. Retirees flocked to Bend for its clean mountain air and slow pace of life, while moneyed adventurers--mostly from California--came for winter skiing and summer outdoor fun. Ranked the sixth fastest-growing metropolitan area in the country by the US Census Bureau in 2005, Bend's population increased from 50,000 residents in 2000 to nearly 80,000 today.
Now that population is contracting slightly, largely as a result of the rampant wave of foreclosures. In a community with such rapid growth, the bursting bubble reverberates powerful shock waves. By this writing, the number of mortgage defaults had more than tripled from their 2007 end-of-year total. Roughly half the properties currently on the market in Bend are either bank-owned or going through the short sell process, in which the owners close deals for less than their mortgage's value.
So much discussion about the real estate boom and bust focuses on irresponsible buyers, who overextended themselves in purchasing homes they couldn't actually afford, often with dreams of re-selling and making fortune off ever-increasing market values. But during a seminar Richard Hagar gave in Bend Tuesday evening, he pointed his expert finger at one insidious culprit: fraud.
Hagar expounded on this theme for me in a two-hour phone interview last night, after which I hung up somewhat disillusioned that most of the crooks who created the housing bubble would likely escape punishment, while their victims will struggle for years to regain footing after foreclosure, bankruptcy, and complete emotional and financial destitution.
Hagar has more than three decades of experience in the real estate industry, starting out as an agent in the mid-1970s, then becoming an appraiser in the 1980s, eventually earning the highly-prestigious SRA designation by the Appraiser's Institute. He holds real estate investments and still works as an appraiser, though much of his time over the past decade has been occupied by advising government officials on legislative efforts to regulate the mortgage industry, assisting law enforcement with fraud investigations, consulting on related legal cases, and conducting lecture tours to educate industry professionals and the public on how to identify and avoid engaging in fraud.
Real estate and mortgage fraud can manifest in various forms, but the particular variety that significantly infected the market in Bend involved mortgage brokers pressuring appraisers to overvalue properties for sale. According to Hagar, in the early 2000s he first started hearing from his law enforcement contacts about this kind of problem popping up with increasing frequency in Bend. The corruption seemed to grow a little more pervasive with each passing year, until 2004 when it accelerated rapidly. "The definition of market value is a matter of federal law," he says. "If appraisers had been following that definition throughout this growth, we would not have created the problems we now see."
"It's almost unheard of for an appraisal to 'make value,'" Hagar asserts, but throughout the housing boom in Bend, that seemed to be the norm. For the Bend appraisers, "They'd have an order coming in with a 'minimum value needed,' and if you couldn't make the value, the mortgage broker would just go down the street. He wouldn't hire you again, or wouldn't pay you." In Hagar's view, "Almost all the bubble is related to them."
"There were people here forcing monstrous" overvalued loans, Hagar says. Once buyers signed paperwork on a loan larger than the value of their new home, they entered into the new purchase already completely stripped of equity, owing more on their mortgage than the house was worth. Even before the market started to dive, these people couldn't sell their house for the amount they'd paid. At this stage, it's difficult to estimate what percentage of Bend's real estate bubble would be more appropriately described an illusion created by false valuation of properties. In an environment plagued by an inflation deliberately orchestrated by a loose conspiracy of those profiting from higher prices, the term 'fair market value' becomes almost meaningless.
According to a 2007 report from the financial service companies National City Corp and Global Insight, Bend, Oregon overtook Naples, Florida to earn a dubious distinction as the metro area with the most overvalued real estate in the nation. The median single-family house price had nearly doubled to $324,000 over the previous four years. Overall, the report estimated Bend real estate listings to run 78.7 percent over the survey's valuation price.
Mortgage brokers originated 70-90 percent of the loans, so Hagar places the largest share of blame on the unscrupulous in their ranks, though also points out many had to be complicit in order for the bubble to reach such extremes. A modicum of vigilance would have immediately recognized corruption in the process, so the banks allowed it to happen, he says. Most real estate agents wouldn't have known any better, but if they had figured it out, they wouldn't want to lose the higher commissions they enjoyed from the overvaluation.
At the request of state law enforcement officials, Hagar began making quarterly visits to Bend in 2005, offering his seminar on the basics of mortgage fraud to anyone who would attend. Unsurprisingly, many locals did not like him.
Blog postings and chain emails trying to discredit his work circulated through real estate industry networks. One time in late 2006 or early 2007, a Bend real estate agent reached him on his cellphone, launching into a full-throated tirade as soon as he answered. "She yelled, 'There's no fraud in Bend. You can't say that. We're not scammers. We wouldn't do that. You'll destroy our real estate market,'" Hagar recounts, adding his own response: "Hmmm, actually, you're destroying your market."
That real estate agent, it later turned out, was representing a major housing developer (now bankrupt), which had begun offering illegal incentives to help close deals with prospective buyers--not an uncommon practice, but also, technically, a form of fraud. Hagar guesses the woman didn't even realize she was personally engaged in fraudulent practices, ignorance being one of the primary causes for the crime's prevalence.
A legal team pursuing a mortgage brokerage accused of predatory lending in Bend recently requested Hagar review the company's files for evidence of fraud during the discovery phase of proceedings. Hagar randomly reached into cabinets and started pulling out stacks of files. He'd found his first clear example of fraud within 15 minutes. By the time he worked his way through the files, Hagar had discovered about 80% of the loans involved some form of fraud, a percentage he says is in line with what the FBI discovered in a national audit of closed loans.
Those cases could represent a wide variety of fraud, but Hagar brings it back around to the role of appraisers, estimating, "There would have been 50-70% less fraud if appraisers had done their job."
Off the top of his head, Hagar can think of at least 30 Bend residents who would deserve to be indicted, tried, and convicted for their role in the fraudulent activities that artificially inflated the local community's housing bubble. However, he says, "The reality is only about 5% will ever be caught."