A reporter friend just called me about a lawsuit recently filed in the Los Angeles Superior Court against home builder KB Homes and lender Countrywide KB Home Loans involving, what else, fraud. I've attached the press release below for your information.

Builders are in a tough spot right now and have been for the past couple years. They have standing inventory that they need to sell but the market has dropped by 30% - 40% (at least in our part of California). If they drop the price of their new homes to a salable level, they've just pissed off everybody who bought the same model in the past two years at higher prices and they'll probably get sued.

What they usually resort to is throwing in a bunch of extras like granite counters, maybe a car in the garage, a landscape allowance, cover your closing costs, etc. That way they can still justify selling the home above current market value because you're getting more ‘goodies' than previous buyers of the same property. This is particularly easy because some buyers are so myopic toward new homes they don't even know the market value of existing homes - they wouldn't even consider a 'used' home.

So it's not much trouble for a builder to palm off one of these overpriced digs because they make it sooo easy - they'll arrange financing (through their in-house lender), they'll take care of the appraisal, escrow, title (in-house & contract), throw in a washer and dryer and all you have to do is move in. But closing costs, washers & dryers, many other incentives are not considered by legitimate appraisers as adding value to the home itself, so they have to rely on inflated appraisals. And they'll probably get sued. As I said, they're in a precarious position.

If that buyer gets a job transfer in a couple months, they discover their equity has evaporated, or more likely, never existed except on paper. It's even more acute in this situation where the sales were almost identical except that one used an outside lender and appraiser and the other used the in-house lender and then they sat down and compared notes. That's why builders highly prefer you use their in-house services. You will likely see more of this type of lawsuit. What do you all think about this situation.

KB Home and Countrywide Used Fraudulent Appraisals To Prop Up Falling Home Prices, Lawsuit Alleges

Class action lawsuit alleges that KB Home builders and Countrywide Home Loans conspired with affiliated appraisers to inflate prices as the real value of new homes collapsed in the Fall of 2005.

Los Angeles, CA (February 7, 2008) - Debbie Bolden became suspicious when she learned that she paid nearly 15% more than her neighbor for the same model at the KB Home development in Live Oak, a bedroom community an hour north of Sacramento.  They had purchased virtually identical homes a couple weeks apart in the Winter of 2005/2006, so why had she paid $475,000 when her neighbor paid $408,000 for the same thing?

The reason, Ms. Bolden discovered, was the appraisal report.  Ms. Bolden's appraiser had been selected by and provided through Countrywide KB Home Loans.  The neighbor had obtained independent financing, so she got an independent appraiser, who informed her that the sales price was way too high compared to recent sales of the same model in the development.  KB conceded the point immediately, issuing the neighbor a credit for nearly $70,000 to close the sale.  Checking her appraisal report against public records, Ms. Bolden discovered that her appraiser had used false comparable sales data to generate an "at-value" report.  As Ms. Bolden dug deeper, she discovered that many of her neighbors had bogus appraisal reports too.

A class action suit filed in the Los Angeles Superior Court alleges that these fraudulent appraisal reports were part of a scheme to artificially support prices of KB houses as the California real estate market began to collapse in late 2005.  Marin County based plaintiff's law firm, Brayton Purcell LLP, is representing the proposed class of affected KB Home customers in the case entitled Debbie Bolden, et al  v. KB Home, et al.  

"We allege that as of  the Fall of 2005, no house in the KB Oak Knoll development had ever sold for more than about $410,000, and none was going to based on an honest appraisal because home values were going down," said Brayton Purcell attorney Peter Fredman.  "People like Debbie Bolden lost up to 15% before they ever opened their front doors. Our analysis indicates that the appraisals used to close those deals are complete shams."

According to the complaint, these appraisal reports included outright false statements that comparable houses had recently sold for one price when they actually sold for much less, as well as egregiously faulty methodology such as ignoring recent sales of the same model in the same development in favor of non-comparable out-of-area sales.  The inclusion of pending sale information, which could only have come from KB, and the repetition of identical misinformation by different appraisers, shows that KB was the source of the misinformation in the sham appraisals, the complaint alleges.

"We allege at least two subclasses of people affected by these unlawful practices.  The people who had the sham appraisal reports, of course, but also the subsequent purchasers whose appraisals were based on sales that were themselves based on the sham appraisals," explained Peter Fredman.  "We believe that these practices propped up falling prices into the Summer of 2006 at least."

"If you think you may be a victim of these practices, you should take a look at your appraisal report and compare the comparable sales data in there to public records available at your County Recorder's office, or contact a lawyer." 

Home buyers who want to see their appraisal reports should call or write their lender to request a copy.  Lenders are generally legally required to supply home buyer with a copy of their appraisal report, but may require the applicant to reimburse the creditor for the cost of the appraisal