Dear Governor Owens

September 2nd, 2005

Governor Bill Owens
136 State Capitol
Denver, CO 80203

This letter details a recent shopping spree in the Denver Metro area. It seems to me this type of shopping is either OK, or not OK. If it is OK, it's going to be very popular. If it's not OK, then the good guys need to act soon, before things get out of control.

Shopping Spree – Day 1

On Friday, April 15th, 2005, Shawn Tieskotter purchased the property 7273 Winter Ridge in Castle Rock, Colorado, “contract price” of $500,000. Mr. Tieskotter applied for and received 2 mortgage loans (80% first and 20% concurrent second) for a total loan of $500,000 which is 100% of the contract price. In support of this transaction, Adam Conner (license number AL40031008) produced an appraisal report which states:

“The subject [7273 Winter Ridge] is listed at $500,000....”.

This is factually incorrect because the report is dated 3/31/05, and on that date, the MLS asking price (copy attached) was $419,650. This is even more troubling because the MLS information makes it clear the seller agreed to accept $410,00.

Ask yourself this question: With a $500,000 loan and $410,000 paid to the seller, what happened to the remaining $90,000? What are the chances $90,000 found its way into the back pocket of the buyer/borrower – either directly or indirectly?

This $90,000 is sometimes called a “seller concession” or “buyer assisted down payment” – I call it a “negative down payment”. Hypothetically speaking (of course), anyone who “purchased” the property with no intention of paying off the loan would call it “income”.

On the same day, April 15th, 2005, another house was sold with a similar arrangement. Property address is 17578 E Baker Pl, Aurora, Colorado. This time the contract price was $310,000 with a $310,000 mortgage loan and a $60,000 negative down payment. I have attached copies of the MLS documents.

Shopping Spree -- Continued

Seeing 2 of these transactions on the same day is not unusual in the Denver Metro Area. These 2 stand out because the same person bought both properties. This was the beginning of a shopping spree by Shawn Tieskotter, who “purchased” 11 properties in 2 months, with over 1/2 million dollars ($532,000) of “negative down”.

The most recent known Tieskotter transaction is dated 6/24/05. It is unclear if Mr. Tieskotter has stopped – there may be more transactions in the pipeline.

Over the past 4 weeks, I called each of the 11 “lenders” and attempted to report the transaction. This was quite an eye opener. In summary, the person who I spoke with generally treated me as if I had leprosy. In most cases, I believe the “lender” has already “sold” the loan, or plans to do so. For example, Fieldstone sells their loans on Wall Street. Quoting from the Fieldstone prospectus (copy attached):

Fieldstone “has no reason to believe any borrower will default under the related Mortgage Loan (or that foreclosure will be commenced) within six months....”

This means Fieldstone has a $35,000 incentive to accept the Adam Conner appraisal and act dumb.

Wannabies

For those who may be thinking it’s a good thing this is confined to just one person (Tieskotter), I direct your attention to the attached list of 10 more people, heading “2nd List of High Risk Loans”. As you read down the list of names, be advised that since 1/1/04: Nakita Smith has purchased 4 properties, Vicki Dillard Crowe has purchased 9 properties, Mary Sides has purchased 4 properties, Dennis Sharkey has purchased 8 properties, James Allen has purchased 4 properties, and Michael Murray has purchased 5 properties.

In total, there are at least 40 more of these recent transactions – including 2 more Fieldstones and 3 more MILA (note 2). A brief review of these transactions indicates all of them follow the same basic pattern – i.e., manipulation of the “contract price” (presumably with an appraisal to match) for the sole purpose of obtaining hundreds of thousands of dollars ($100,000’s) in cash.

Now that they have the cash, what will they do with it? Will they invest it/hide it/spend it/lose it/launder it/pay off their credit cards/split for the coast/be reluctant to give it back?

Nakita Smith is already in bankruptcy and all 4 of her properties are in foreclosure. Can Shawn Tieskotter and the rest of them be thinking the same thing?

View From the Trenches:

The above examples are not selected at random – they are the biggest and the most obvious indicators of “the problem”. However, it is clear these examples are only the tip of the iceberg. MLS data indicates 67% of purchase mortgage loans in Aurora involve the same kind of hocus-pocus. Refinance loans are subject to the same type of manipulation, it is just not quite as obvious -- until the property goes into foreclosure. (note 3)

The city of Aurora has a population of about 300,000 – it is the 3rd largest city in the state of Colorado. In Arapahoe County, foreclosures are happening at a rate of 3,500 per year, and this is increasing at 7% per year (note 4).

The high rate of foreclosure is not caused by a “bad economy” (not yet anyway). The overall economy in Aurora has been OK. Not everyone wants to borrow more than the home is worth, but the option is available to anyone who wants it. They are upside down on “day one”. This is a widespread problem in Aurora and throughout the Denver Metro area. Nearly 100% of FHA purchase loans exceed the market value of the property.

The Denver Area housing market has been flat since mid 2002 (note 5), which means prices are not going up and not going down. For whatever reason, people need to move. When that day comes, the balance on the loan is $20,000 or $30,000 (or $90,000 in the case of Shawn Tieskotter) higher than what they can sell the house for – they have no choice – they walk away. The house sits vacant for 8 months and is then sold at a substantial loss.

Somebody is getting screwed here – but who? Every time an FHA loan goes into foreclosure, it is the American tax payer who pays. All of the Tieskotter loans are conventional (i.e., not FHA). In most cases the loan has been sold on the secondary market, and it becomes some faceless, anonymous “investor” who gets screwed. Sooner or later, the faceless anonymous people wise up or run out of money, and then what? (note 6)

What happens when it becomes common knowledge (even on Wall Street) that an appraisal from Aurora is no different than handing the borrower a blank check?

How bad does it have to get before “the authorities” get serious?

For example, see attached letter dated 9/29/04 (about a year ago) addressed to Lou Garone, Chairman of the Colorado Board of Real Estate Appraisers, and the email response from Stewart Leach. My letter cited 2 examples: 16690 E Prentice Pl in Centennial and 19836 E Dickenson Pl in Aurora. The same real estate office that helped Shawn Tieskotter was involved in both of these sales.

Example #1: 16690 E Prentice was purchased by Kevin Joe Grant. I now know that Mr. Grant purchased 5 houses in 2004, each with a similar loan package. The “lenders” were Fieldstone, Taylor Bean, Rocky Mt Mortgage Specialists and American Home Loan. Mr. Grant has not filed bankruptcy yet. Does anyone think he will make it another 12 months?

Example #2: 19836 E Dickenson Pl was purchased by Curtis Duff. Mr. Duff purchased 6 houses in 2004, each with a similar loan package. Mr. Duff recently filed bankruptcy. All 6 properties are in foreclosure. The loan amount for 19836 E Dickenson is/was $253,000. As stated in my letter dated 9/29/04, Mr. Duff skimmed $34,000 in cash off the top of that transaction. I am now able to estimate he skimmed $200,000 in total cash from these 6 transactions. What will happen to the $200,000? I predict that he will be reluctant to give it back. Meanwhile, the 6 properties will be sold for about $300,000 less than the loan balance.

The Big Picture

I wrote that letter 11 months ago. Since then, the problem has become more pervasive and the dollar amounts have gotten bigger. Figures from July 2005 MLS: In Aurora, there were 451 homes sold (not counting builder sales and condos). 20% of these were foreclosure properties. MLS data clearly shows 67% of all purchase loans included some amount of seller concession. 35 of the 38 FHA loans involved the Tieskotter type of hocus pocus.

Cash Machine

The Shawn Tieskotter team “bought” 11 houses worth $3.5M. Mr. Tieskotter pocketed $532,000, 24 real estate agents divided $113,000 (with about 1/4th paid to Kimberly White), the mortgage broker (Craig D Patterson) made $100,000, Adam Conner the appraiser made $4,000 (note 1), and by the time you take into account the “lenders” (such as Fieldstone), title company, Merrill Lynch, KPMG, the trust administrator(s), etc, etc, etc, it all adds up to a million dollars ($1.0M) of “incentive”. Everyone gets paid on commission. It's all well and good to have a corporate mission statement on the importance of integrity, but actions speak louder than words.

The industry standard is: Not doing the transaction is not an option.

My Conclusion:

I do not claim to know how much of this (if any) constitutes mortgage “fraud”, but I do know these types of transactions are bad news for the mortgage industry. Things may or may not be this bad in other cities across the country, but here in Aurora, I see the mortgage industry headed for a train wreck – sooner rather than later.

My 3 Suggestions:

First Suggestion – Colorado needs to implement licensing for Mortgage Brokers, and there needs to be an enforcement provision. Colorado is one of the few states that has no license law for mortgage brokers.

Second Suggestion – HUD needs to officially and publicly change its policy regarding seller concessions. While it is true that each of Tieskotter loans is not an FHA loan, it will be hard to make a guilty verdict stick for something that is being done 100’s of times everyday at HUD. As stated earlier, nearly 100% of FHA loans in Aurora involve the same sort of hocus-pocus.

Specifically: Mortgagee Letter 2005-02 (copy attached) addresses the issue. The carefully worded letter signals the mortgage industry that HUD is eager to make Tieskotter type loans. Once that is made clear, everyone at HUD and throughout the mortgage industry knows what to do – and make no mistake, they are doing it. Congress asked (told?) HUD not to, and Alphonso Jackson opted for an end run. What kind of example is that?

Shame on you Alphonso Jackson and John C Weicher. Clean up your act.

Third Suggestion – As long as mortgage loans are bought and sold on Wall Street, there is a need for effective enforcement of appraisers. The Colorado Board of Real Estate Appraisers (BOREA) has revoked 1 (one) license since December 2002 and there have been zero suspensions during that time.

For example, see attached documents regarding Leslie Rousseau (license # AL1317942) – three (3) cases numbered 804 5007, 804 5087, and 802 5369. The documents leave a lot of unanswered questions, but it looks like Mr. Rousseau was put on 12 months probation on 9/22/03. He violated the probation 8 months later, and the punishment was more probation (double probation?). He paid a fine(s) – but at no time was his license suspended or revoked by the State. According to the documents, Mr. Rousseau is/was training an apprentice – and BOREA allowed him to continue training the apprentice.

Dung N. Nguyen (License # AR40036675) is learning the appraisal business and working under the supervision of Adam Conner. Leslie Rousseau and Adam Conner are training the appraisers of the future. Does anyone see a long term problem developing here?

The community of Denver appraisers perceives the consequences of a BOREA complaint will take many months (years). Denver appraisers understand that if they just act dumb, they get a stern warning and a second chance. Leslie Rousseau has 3 strikes and he is still working. How many strikes before an appraiser is out?

Even a really bad appraiser could reasonably expect it to take 4 years before they are in serious danger of losing their license. And even if it isn’t true, the perception is real. What kind of example is that?

I am not saying that every complaint should result in a license suspension and/or revocation. It requires judgment. I am saying that when zero percent of complaints result in a revocation or suspension, it means the system is badly broken.

If as little as 5% of the Colorado appraiser complaints resulted in a 30 day suspension, Shawn Tieskotter would never have gotten started. Every time BOREA gives a second chance to a bad appraiser, they put an honest/ethical/competent appraiser out of business.

Effective enforcement costs money – my point is: compared to what? To those who say it costs $xxx thousands of dollars to revoke a license, my response: it costs $532,000 not to.

In an effort to be clear, and to be fair, I am not saying that BOREA is to blame. It may be that BOREA is not getting the financial and/or political support they need. The critical first step is for the good guys to collectively admit there is a serious problem. This is not a Democrat/Republican issue. This is about the good guys vs. the bad guys. The good guys need to step up -- get together, work together and find a way to fix the problem.

IMHO

If HUD wants to make a $212,000 loan on a $200,000 property, I have no problem with that. It’s fine with me if Fieldstone (or anyone else) wants to make a $318,000 loan on a $283,000 property, and then sell the loan on Wall Street.

But call it what it is.

The FHA loan is 106% LTV and the Fieldstone loan is 112% LTV. Calling these loans 100% LTV is a lie. Everyone involved in the Tieskotter loans is telling a lie or turning a blind eye. Everyone is selling the lie. It is a stinky, dirty, shameful business.

Shame on you Michael J. Sonnenfeld. Shame on you Layne Sapp and Mark Hikel. Shame on you Graelon Brown. Shame on you Robert K Cole and Patricia Lindsay. Shame on you Michael McQuiggan. Clean up your act, all of you.

In Summary

Either:

Shut down Wall Street, or
Get serious about appraiser discipline – start suspending/revoking licenses, or
Watch the Denver Mortgage Industry train wreck.

Sincerely,

Philip G Rice
11268 E Linvale Dr
Aurora, CO 80014
720-282-3376
phil.rice@mkgappraisal.com

ps - To all who have read this far, please take a minute and think creatively about something you can do. Make a positive difference. If you need help, call me at 720-282-3376 or send an email.

End Notes

Note1: I have credible evidence which leads me to believe Adam Conner did the appraisal for all 11 of the Tieskotter transactions.

Note 2: The details (address, lender name, date, etc.) of these 40 transactions are available on request.

Note 3: 67% of Aurora purchase mortgage loans involve seller concessions – all of these are made possible by an inflated appraisal (the lipstick on the pig). Who does the appraisals on the other 33% of the sales? Answer: For the most part, the same appraisers who do the 67%. The people who make the hiring decisions (mortgage brokers) get paid on commission. Mortgage brokers tend to avoid ethical/honest appraisers – 100% of the time.

Note 4: Aurora is split into 2 counties, and these counties include people who live outside Aurora – however – I believe the cited foreclosure statistics paint a representative picture of what is going on in Aurora.

Note 5: Article in the 8/24/05 Denver Post business section states that home prices in Denver are going up at the rate of 6% per year. Independent real estate consultant Gary Bauer is quoted, “We are seeing nice appreciation. There is nothing skewing the market up or down.”

My response: Take a close look at listing #191689, property address 4608 Asbury Dr in Castle Rock. This property sold for $250,000 on 3/20/02, presumably a builder sale. MLS statistics would lead you to believe this property sold for $350,000 on 5/23/05, but this is just a pretend dollar figure. The only way to pretend this house sold for $350,000 is if you are pretending with someone else’s money.

See also listing #117567, 7273 Winter Ridge in Castle Rock. According to MLS, sold 12/31/04 for $343,500 and then 3 months later sold to Tieskotter for $500,000. I call that “skew”.

In my opinion, the market has been flat since mid 2002.

Note 6: To put this in perspective, I spoke with 2 different people at FANNIE, and offered to provide timely info that would allow them to decline loans with obvious problems. My offer was to provide this info at no charge – free!! In both cases, I was told FANNIE would buy the loan even if they knew it was bogus – they both said their system is so big they are unable to say no. They assured me that FANNIE will aggressively act once the loan has gone into foreclosure, but this is just more lip service. Right now, the real priority (read panic) at FANNIE is to re-do the 2003 and then 2004 accounting records so the stock does not get de-listed. What kind of example is that?

-- End of Letter --

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