Sounding the alarm
A few appraiser whistleblowers have reaped huge rewards - but the hurdles were steep
In my estimation, the highest paid real estate appraiser last year
was a gentleman in California who received $56 million for his
role as a whistleblower. He revealed allegedly fraudulent appraisal
practices that he both performed and witnessed other
appraisers perform at the appraisal firm where he was
employed. He was awarded the bounty in December after
the U.S. Department of Justice settled the case he initiated
for $350 million.
How did he receive such a windfall?
In 2010–11, nearly 80 percent of his valuation work at the firm involved default
and real estate-owned property appraisals; his other assignments involved
refinance and purchase loans. He claimed that he and other appraisers were
directed to follow practices in violation of Uniform Standards of Professional
Appraisal Practice and other requirements, which led to inflated appraisals being
used for loans connected with the Federal Housing Administration, the U.S.
Department of Veterans Affairs, Fannie Mae and Freddie Mac. To illustrate his
point, he showed his own appraisal work that revealed examples of the alleged
violations, including failing to perform appropriate highest and best-use analysis
of distressed properties, using AVMs to determine market-condition adjustments,
using simplistic “cost-to-cure” adjustments to address severe property
deficiencies rather than determining market-based adjustments, inappropriately
reporting appraisals to be “as is” on Fannie Mae’s Uniform Residential Appraisal
Report when the appraisals were subject to hypothetical conditions or significant
extraordinary assumptions, and generally ignoring the impact of severe property
condition problems. He said he was compelled to do these things at the direction
of management, and that when he properly performed appraisals, the
firm disregarded them and ordered new appraisals.
In 2011, his attorneys filed a whistleblower
complaint in federal court under the False
Claims Act. This federal statute enables a
person to file a complaint on behalf of the
federal government seeking damages and
penalties for conduct that financially defrauds
the government. A whistleblower who files
the complaint is referred to as a “relator.”
After the complaint is filed, the case is kept
secret under seal, but the U.S. Department of
Justice is notified and given the opportunity
to investigate the allegations and intervene
as a party in the case. Sometimes the DOJ
will intervene — as it did in this case — but
the DOJ reportedly decides against intervening
nearly 75 percent of the time. If the
government does not intervene, the relator
can still go forward with the case on his or her
own. As encouragement for whistleblowing
and as compensation for the risks involved,
whistleblowers may be awarded a portion
of the recovered funds — typically around
15–25 percent of the recovery when the DOJ
intervenes and 20–30 percent if the DOJ does
not intervene but the whistleblower successfully
prosecutes the case.
The federal False Claims Act has provided the framework for a number of other appraiser-driven whistleblower cases. A case filed in 2009
involved another
appraiser at the same firm as
the one mentioned above. This time
the employee was a review appraiser who
alleged systematic appraisal inflation relating
to FHA loans originated by Countrywide
and then later by Bank of America near the
peak of the mortgage bubble. He alleged that
the lenders conspired with his firm to inflate
appraisals to increase the size of mortgage
loans sold on the secondary mortgage market,
which led to the federal government being
harmed when loans defaulted and the FHA
had to make insurance payments on them.
In his complaint, he claimed that individual
appraisers had performed as many as 350
appraisals and reviews per month. The DOJ
intervened and settled the case in 2012 for
$75 million in damages as part of the national
mortgage settlement entered into by Bank of
America and four other large lenders that year.
The appraiser received a $14.5 million bounty
on the settlement.
Commercial Appraiser Whistleblower
There also are whistleblower cases involving
commercial appraisers, but to date, the
bounties have not been as rich as those
involving residential appraisers. The most
notable commercial appraiser case involved
a national for-profit hospital chain. In that
case, the whistleblower appraiser received
an assignment to prepare a report on the fair
rental value of a physician-owned facility being
leased by the for-profit hospital chain. Such
appraisals and rent studies often are obtained
for real estate transactions between hospitals
and physicians because of the Stark Law, which
prohibits hospitals that receive Medicare
and Medicaid funding from having certain
financial arrangements with physicians that
could create conflicts of interest. Namely, the
Stark Law aims to prevent physicians from
seeking financial gain by steering patients to a particular hospital without regard to medical
costs or the best interest of the patient.
In that case, the whistleblower alleged that
the appraiser delivered a rent study indicating
a fair rental rate that was lower than the
hospital and physician group desired. The
hospital then obtained (from a non-appraiser)
a new rental value opinion more to the parties’
liking and used the higher opinion to justify
the hospital’s payment of above-market rent
to the physician group as part of an alleged
effort to save the group from defaulting on its
loans. The appraiser brought suit under the
False Claims Act on behalf of the federal government
as a whistleblower and also on behalf
of the states of Tennessee and Georgia under
their state law counterparts. The federal
government initiated an investigation and,
in 2012, settled the alleged violations for
$16.5 million. As his bounty, the appraiser
received 18.5 percent — more than $3 million.
Other Whistleblower Laws Related to Appraisers
The federal False Claims Act is not the only
source for potential whistleblower bounties.
There are state law counterparts that also
create whistleblower incentives for reporting
fraud on state governments, and the Internal
Revenue Service operates a whistleblower
program for reporting instances of significant
underpayment of taxes. Under the Dodd-
Frank Act, there also are bounties payable
to whistleblowers who provide the U.S.
Securities and Exchange Commission with
information leading to an enforcement action
against parties under SEC supervision when
the recovery is more than $1 million — in
such cases, the whistleblower is entitled to
an award of 10–30 percent.
Appraisers as Defendants in Whistleblower Cases
Fortunately it’s very rare that appraisers themselves
become defendants in whistleblower cases, but there is at least one such case
currently pending in federal court in
Illinois. The whistleblower in this case is
a former in-house analyst (non-appraiser)
for a defunct lender. In his complaint, he
alleged that in 2005 he first noticed approximately
75 appraisals for commercial real
estate loans that were inflated and that
the bank used the inflated values in its disclosures
to the Federal Deposit Insurance
Corporation for the purpose of determining
the bank’s insurance assessments. He
alleged that the higher values resulted in
lower insurance assessments and therefore
defrauded the FDIC.
In his complaint, the whistleblower
named as defendants several of the bank’s
officers and directors, as well as the
appraiser and appraisal firm that performed
many or all of the questionable appraisals.
However, the DOJ has declined to intervene
in this case and so the whistleblower is
attempting to prosecute his claims — and
win a bounty under the False Claims Act —
with private attorneys.
While examples of rich bounties paid to
appraisers may inspire the imaginations of
would-be whistleblowers, it’s worth noting
that the whistleblower trail is difficult to
follow, painful and lonesome, and most often
ends without a bounty. At the same time, the
specter of these kinds of cases and the fact that
individual appraisers have initiated very significant
whistleblower cases should serve as
a warning to firms and lenders that they must
pay significant attention to professional grievances
regarding appraisal practice matters
and that they need to create sound, enforced
procedures for handling grievances before
they develop into whistleblower litigation.
This article originally appeared in, and is reprinted from, Peter's regular column "Rest Insured" in the Appraisal Institute’s Valuation (2nd Quarter, 2015). © 2015 by the Appraisal Institute, Chicago, Illinois. Archives of Valuation magazine, including Peter’s past columns, are available at http://www.appraisalinstitute.org/publications/valuation-magazine/