A Seattle-based law firm that has filed class action lawsuits on behalf of home buyers who accuse KB Home and Countrywide Financial of conspiring to inflate home appraisals in several Western states, is now trawling for plaintiffs with similar complaints in Florida, where the builder is currently selling homes from 37 communities, according to its Web site.
In May and June, the law firm Hagens Berman Sobol Shapiro submitted complaints to district courts in Arizona and California, accusing Los Angeles-based KB Home; Countrywide Financial, which has been KB’s primary lender for several years though a mortgage joint venture; and LandSafe Appraisal Services, a Countrywide subsidiary, of forming a “criminal enterprise” through an “inflated appraisal scheme” that rigged or falsified the appraised value of houses to the builder’s and lender’s benefit.
In an email sent to BUILDER today, a KB Home spokesperson said the company had no comment at this time about the lawsuits or the Florida probe.
These investigations are occurring at a time when the industry's appraisal process in general has come under more scrutiny after Fannie Mae and Freddie Mac imposed a new code of conduct for loans they purchase.
In essence, the lawsuits allege that LandSafe was “under direct instruction [by KB and Countrywide] to value homes at or above the contract price, even if it meant completing appraisals in violation of regulatory guidelines and requirements pertaining to appraisals.”
Mark Firmani, a spokesperson for the law firm, tells BUILDER that in some cases LandSafe’s appraisers were using homes that hadn’t even been completed as comps. The Arizona complaint includes the differences between LandSafe’s appraisals on three houses, and independent appraisals on those same homes, which are anywhere from $8,810 to $163,668 lower. “Conservatively assuming an average inflated appraisal of $20,000 per home, that amounts to $2.8 billion in contract prices” in Arizona and Nevada, where KB built over 14,000 homes in 2006. (That's the year on which both suits have focused.)
The lawsuits assert that the defendants had various motivations for engaging in this scheme. For KB, the alleged appraisal inflation was a way to shore up home values that were suddenly dropping along with buyer demand. For Countrywide, it was a means towards achieving its stated goal of capturing 30% of the country’s mortgage originations.
But where this scheme left home buyers, whose homes had inflated appraisals in an deteriorating market, was “underwater from the first day they closed," according to Firmani.
The lawsuits take particular aim at KB, which they allege was “a primary source in support of the tainted appraisals” because it was the only entity that knew the pending sales information that LandSafe subsequently could access. These lawsuits also dredge up other complaints against the builder, including a wrongful termination suit filed in January 2008 by Mark Zachary, a KB’s regional vice president, who alleges he was fired after calling attention to Countrywide’s practice of using a single appraiser who, in Zachary’s observation, “was being directed to inflate the appraised value of KB Home residences” that were financed through the builder and lender’s mortgage joint venture.
In California and Arizona, the law firm has petitioned the court for a jury trial. Firmani says the firm’s investigation of KB’s and Countrywide’s lending practices in Florida would probably take six months to complete. If enough buyers in that state are found to be “similarly situated” to plaintiffs in California, Arizona, and Nevada, the firm would ask a Florida judge to grant a class certification to the complaint. Firmani says that there is always the possibility, in cases like these, that a judge would demand that the plaintiffs and defendants enter into mediation to resolve their dispute. But if that doesn’t happen, the cases would probably go to trial sometime in 2011.
John Caulfield is senior editor for BUILDER magazine.